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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20803
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 74-2644120
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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1122 CAPITAL OF TEXAS HIGHWAY SOUTH, AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (512) 328-1112
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
TITLE OF CLASS
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on February 27, 1998, based on the closing
price of the Common Stock on the Nasdaq National Market on such date, was
$940,746,077.
The number of shares of the Registrant's Common Stock outstanding as of
February 27, 1998 was 31,674,484 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days of December 31, 1997 in connection with
the Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
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IXC COMMUNICATIONS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 27
Item 3. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Security Holders......... 28
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 29
Item 6. Selected Financial Data..................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 31
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 40
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 42
Signatures............................................................ 46
Glossary.............................................................. A-1
Financial Statements.................................................. F-1
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PART I
Certain of the information contained in the Registrant's Form 10-K (the
"Form 10-K"), including information regarding the Registrant'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 which involve risk and uncertainty. The Registrant's
actual results may differ significantly from the results discussed in the
forward-looking statements. For a discussion of important factors that could
cause actual results to differ materially from the matters described in the
forward-looking statements, see "Business -- Risk Factors." Certain terms used
herein are defined in the Glossary at page A-1. As used herein, unless the
context otherwise requires, the term "Company" refers to IXC Communications,
Inc. ("IXC Communications") and its subsidiaries, including predecessor
corporations.
ITEM 1. BUSINESS
OVERVIEW
The Company
The Company is a leading provider of voice and data transmission services
to communications companies and end users. The Company owns and operates one of
the newest and most advanced coast-to-coast digital communications networks (the
"Network"), which is expected to include over 11,500 route miles of digital
transmission facilities ("digital route miles") by the end of the first quarter
of 1998. Substantial additions to the Network are currently under construction,
and the Company expects the Network 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. The
Company's facilities also include seven long distance switches and 15 Frame
Relay-ATM switches, which the Company is using to capitalize on the growing
demand for Internet and electronic data transfer services. Through a combination
of its own facilities and the facilities of other carriers, the Company
originates and terminates long distance traffic in all 50 U.S. states, and
terminates long distance traffic in over 200 foreign countries. The Company's
revenues have grown rapidly, from $91.0 million in 1995 to $203.8 million in
1996 and $420.7 million in 1997.
The Company provides two principal products: transmission of voice and data
over dedicated circuits ("private lines") and transmission of long distance
traffic processed through the Company's switches ("long distance switched
services"), including Frame Relay and ATM-based switched data services. The
Company's customers include AT&T, MCI, Sprint, WorldCom, Cable & Wireless,
Excel, Frontier and over 300 other long distance companies, wireless companies,
cable television providers, Internet service providers, governmental agencies,
and, with the pending acquisition of Network Long Distance, Inc. ("NLD"), a long
distance company, small- and medium-sized businesses.
Private Line Business. The Company's private line customers include
non-facilities-based carriers requiring dedicated long distance transmission
capacity to carry their customers' long distance traffic and facilities-based
carriers that require long distance transmission capacity where they have
geographic gaps in their facilities, need additional capacity or require
geographically diverse routing. The Company has private line circuit contracts
with over 230 customers, including AT&T, MCI, Sprint, WorldCom, Cable &
Wireless, Frontier and LCI. Pursuant to these contracts, customers are required
to make fixed monthly payments, generally in advance. Many of the contracts
contain substantial "take or pay" commitments.
Long Distance Switched Services Business. The long distance switched
services that the Company provides are processed through the Company's digital
switches and carried over long distance circuits and other transmission
facilities owned or leased by the Company. The Company sells these services on a
per-call basis, charging by minutes of use ("MOUs"), with payment due monthly
after services are rendered. The Company's primary customers for switched
services include long distance resellers (both switchless resellers and switched
resellers that lack a switch in a geographic region) that use the Company's
network to provide long distance service to end-user customers. The Company has
long distance switched services contracts with over 100 long distance resellers.
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The Company provides retail switched long distance services to small- and
medium-sized businesses through Telecom One, which it acquired in July 1997. The
Company believes that its planned acquisition of NLD, which had 1997 revenues of
over $100 million, will provide an important foundation for further growth in
the business retail long distance market. The Company seeks to make additional
targeted acquisitions of resellers that provide significant network or product
synergies. The Company has also entered into a joint venture with Unidial
Communications to sell communications services using the Company's network
through a full-time, national direct sales force.
Data Services. The Company's Network, which includes 15 Frame Relay-ATM
switches, has been built with SONET technology and broadband capabilities to
provide a platform to support advanced, capacity-intensive products such as
Frame Relay, ATM, multimedia, and Internet-related applications. The Company has
recently begun marketing a full line of data transport services to its
customers. Additionally, the Company recently announced the acquisition of
Network Evolutions, Inc. ("NEI"), a company that provides data consulting
services and designs internal and external data networking solutions for
corporations. In February 1998, the Company entered into a strategic alliance
with PSINet Inc. ("PSINet"), a major Internet service provider, whereby the
Company will provide transmission capacity for PSINet and will resell PSINet's
broad spectrum of Internet services. In addition, the Company acquired 20% of
PSINet's common stock.
Fiber Sales. The Company has sold excess fiber to MCI and LCI, and expects
to continue to use its excess fibers to lower the Company's effective network
construction cost by selling or swapping such fibers. In 1997, the Company
received cash proceeds of approximately $57.0 million from such sales, but
because of its accounting policies, only recorded $0.8 million as revenue from
fiber sales during the year. Instead of recognizing fiber sale revenues
immediately, the Company records such revenues over the term of the sale/use
agreements, usually 20 years or more. In addition to fiber sales, the Company
has swapped excess fibers on certain sections of its network with other carriers
and in 1997 acquired rights to routes being constructed from Los Angeles to San
Francisco, Las Vegas to Portland, and Washington, D.C. to Houston and New York
City to Washington, D.C. in such exchanges.
International Joint Ventures. The Company is involved in a joint venture
with Telenor AS, the Norwegian national telephone company, to provide
telecommunication services to carriers and resellers in 11 European countries.
The Company also indirectly holds a minority interest in Marca-Tel, a Mexican
telecommunications provider.
The principal executive offices of IXC Communications are located at 1122
Capital of Texas Highway South, Austin, Texas, 78746 and its telephone number is
(512) 328-1112.
INDUSTRY
Development and Regulation
The development of the long distance telecommunications industry was
strongly influenced by a 1982 court decree requiring the divestiture by AT&T of
its seven RBOCs and dividing the country into approximately 200 LATAs. The seven
RBOCs were allowed to provide local telephone service, local access service to
long distance carriers and intra-LATA long distance service (service within a
LATA), but were prohibited from providing inter-LATA service (service between
LATAs). The right to provide inter-LATA service was given to AT&T and the other
interexchange carriers, including the LECs that are not RBOCs. The FCC requires
all interexchange carriers to allow the resale of their inter-LATA services to
long distance carriers, and the 1982 court decree substantially eliminated
different access arrangements as distinguishing features among long distance
carriers. These and other legislative and judicial factors have helped smaller
long distance carriers emerge as alternatives to AT&T, MCI and Sprint for long
distance services.
In 1996, the federal government enacted the Telecommunications Act of 1996
(the "Telecom Act"), which, among other things, allows the RBOCs and others such
as electric utilities and cable television companies to enter the long distance
business. The Company expects that the Telecom Act will substantially alter the
way in which the telecommunications industry is regulated. Such changes are,
however, difficult to predict accurately, because FCC proceedings and appellate
review of the numerous administrative regulations
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adopted to implement the Telecom Act, including universal service and access
charge reform, are still ongoing. Entry of the RBOCs or other entities such as
electric utilities, cable television companies or foreign companies into the
long distance business may result in reduced market shares for existing long
distance companies and additional pricing pressure on long distance providers
such as the Company. See "-- Risk Factors -- Competition," "-- Risk
Factors -- Recent Legislation and Regulatory Uncertainty" and "-- Regulation."
Market and Competition
General. The long distance market is highly competitive. Competition among
the Company's customers and other retail long distance providers for end-user
customers is based upon pricing, advertising, customer service, network quality
and value-added services. Industry observers estimate that over 400 smaller
companies have emerged to compete in the long distance business. See "-- Risk
Factors -- Competition."
Private Line Services. Long distance companies may be categorized as
facilities-based carriers and non-facilities-based carriers. Sellers of private
line services are generally facilities-based carriers that own long distance
transmission facilities, such as fiber optic cable or digital microwave
equipment. The first-tier and some second-tier long distance companies are
facilities-based carriers offering private line services nationwide.
Facilities-based carriers in the third tier of the market generally offer
private line services only in a limited geographic area. Customers using private
line services include: (i) facilities-based carriers that require long distance
transmission capacity where they have geographic gaps in their facilities, need
additional capacity or require geographically different alternative routing; and
(ii) non-facilities-based carriers requiring long distance transmission capacity
to carry their customers' long distance traffic. The Company's competitors in
the private line business include AT&T, MCI, Sprint, WorldCom, Qwest and certain
regional carriers. MCI and WorldCom have announced a planned merger, and
applications for approval of that merger are pending. If the MCI/WorldCom merger
is approved, the result would be an even larger, and potentially stronger,
entity with whom the Company would have to compete. Qwest is constructing a
coast-to-coast fiber optic network and Frontier has agreed to pay $500.0 million
for fibers in Qwest's network. Qwest is, and Frontier may become, a competitor
of the Company, in the private line business. In addition, Qwest and LCI have
also recently announced a planned merger. The Qwest/LCI merger would result in
another larger, and potentially stronger, competitor. Furthermore, Level 3, a
telecommunications and information service company, 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 the Company, 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. Important
competitive factors in the private line business are price, customer service,
network location and quality, reliability and availability. See "-- Private Line
Services."
Long Distance Switched Services. Long distance companies may be
characterized as switched or switchless carriers. Sellers of long distance
switched services are generally switched carriers, such as the Company, that own
one or more switches that direct telecommunications traffic. Facilities-based
carriers are generally switched carriers. However, many non-facilities based
carriers (e.g., many long distance resellers) have switches. The Company's
customers for switched services are switchless carriers that depend on switched
carriers to provide long distance switched services to their end users. The
Company's competitors in the long distance switched services business include
AT&T, MCI, Sprint, WorldCom and Frontier and many non-facilities-based switched
carriers. Important competitive factors in the long distance switched services
business are price, customer service (particularly with respect to speed in
delivery of computer billing records and set-up of new end users with the LECs),
ability of the network to complete calls with a minimum of network-caused busy
signals, scope of services offered, reliability and transmission quality.
Call Routing
An inter-LATA long distance telephone call begins with the caller's LEC
transmitting the call by means of its local switched network to a point of
connection with an interexchange carrier. The interexchange carrier, through its
switches and long distance transmission network, transmits the call to the
called party's LEC,
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which then completes the call over its local facilities. For each long distance
call, the originating LEC charges an access fee. The interexchange carrier also
charges a fee for its transmission of the call, a portion of which consists of a
fee charged by the LEC used to deliver the call. Under the Telecom Act, state
proceedings may in certain instances determine LEC access charge rates. Further,
ongoing access charge proceedings at the federal level may affect the access
charges long distance carriers pay to LECs. It is uncertain at this time what
effect such proceedings may have on such rates.
Technology
Long distance voice traffic generally is transmitted through digital
microwave or fiber optic systems. Long distance data traffic is generally
transmitted through fiber optic systems or satellites.
Fiber Optic Systems. Fiber optic systems use laser-generated light to
transmit voice and data in digital format through fine strands of glass. Fiber
optic systems are characterized by large circuit capacity, good sound quality,
resistance to external signal interference and direct interface with digital
switching equipment. A pair of modern fiber optic strands, using current
technology, is capable of carrying four OC-192s. Because fiber optic signals
disperse over distance, they must be regenerated at sites located along the
fiber optic cable (on older fiber optic systems the interval is 20 to 25 miles;
on newer systems that utilize modern fiber optic cable and splicing methods,
such as will be used in the expansion of the Company's digital
telecommunications network (the "Network"), it is approximately 50 to 75 miles).
Microwave Systems. Although limited in capacity in comparison with fiber
optic systems (generally, no more than 28 DS-3s can be transmitted by microwave
between two antennae), digital microwave systems offer an effective and reliable
means of transmitting voice and data signals over intermediate and longer
distances. Microwaves are very high frequency radio waves that can be reflected,
focused and beamed in a line-of-sight transmission path. Because of their
electro-physical properties, microwaves can be used to transmit signals through
the air, with relatively little power. To create a communications circuit,
microwave signals are transmitted through a focusing antenna, received by an
antenna at the next station in the network, then amplified and retransmitted.
Because microwaves attenuate as they travel through the air, this transmission
process must be repeated at repeater stations, which consist of radio equipment,
antennae and back-up power sources, located on average every 25 miles along the
transmission network.
BUSINESS STRATEGY
The Company's objective is to become the preferred provider of integrated
network-based information delivery solutions, utilizing its high-capacity,
state-of-the-art national fiber network. The Company's primary near-term goals
are to: (i) increase revenues by using the expanded Network to generate new
customers and increasing business from existing customers; (ii) improve
profitability by migrating traffic from circuits leased from other carriers onto
the Network; (iii) enter into additional cost-saving arrangements with other
carriers to reduce the cost of the existing Network construction and develop
additional Network expansion opportunities; (iv) leverage the relationship with
PSINet to generate new Internet services customers and large account customers
who require bundled voice, data and Internet transmission services; and (v)
complete the acquisition and integration of NLD, including the migration of its
traffic onto the Network.
In order to achieve these goals the Company intends to pursue the following
strategy:
Enter Into Cost-Saving Arrangements. The Company has included excess fiber
in its Network expansion which it is using to reduce the net cost of
construction through: (i) leasing or selling excess fiber to other carriers; and
(ii) exchanging excess fiber for fibers or capacity on other carriers' networks.
Additionally, the Company seeks to obtain the right to install Company-owned
fibers in new routes being constructed by other carriers along the proposed
Network expansion routes in exchange for the Company (a) sharing network
construction costs; (b) allowing the other carrier to use excess fiber along
certain routes in the Network; or (c) allowing the other carrier to add its own
fiber to certain segments of the Network.
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The Company has already entered into cost-saving agreements with other
carriers that are expected to reduce the per-route-mile cost of construction,
including:
(i) a contract with WorldCom pursuant to which each company has
constructed a fiber route approximately 1,100 miles long and placed fibers
for both companies along the route;
(ii) contracts with LCI pursuant to which LCI has agreed to purchase
an IRU in fibers from Chicago to Los Angeles for approximately $97.9
million (the "Chicago-LA LCI Fiber Sale") and from Cleveland to New York
for approximately $20.0 million (the "Cleveland-NY LCI Fiber Sale");
(iii) a contract with MCI pursuant to which MCI has agreed to purchase
an IRU in fibers from New York to Los Angeles for approximately $121.0
million (the "MCI Fiber Sale");
(iv) a contract with Vyvx to exchange the use of certain fibers on the
Company's New York to Los Angeles route for the use of fibers on an
approximately 1,760-mile route under construction by Vyvx from Washington
D.C. to Houston;
(v) joint construction agreements with LCI, DTI and CCTS allowing the
Company to share the costs of constructing certain routes in Illinois, Ohio
and Missouri;
(vi) a contract with MFS pursuant to which MFS will include fibers for
the Company in a route it is constructing from Cleveland to New York;
(vii) contracts with GST and WorldCom providing for the sale of fiber
along certain routes;
(viii) a contract with FTV to exchange the use of certain fibers on
the Company's Las Vegas to Los Angeles route for the use of fibers on FTV's
Las Vegas to Portland route;
(ix) a contract with MFN to exchange the use of certain fibers on the
Company's Chicago to New York route for the use of fibers on MFN's
Washington D.C. to New York route; and
(x) a contract with GST to exchange the use of certain fibers on the
Company's Phoenix to Los Angeles route for the use of fibers on GST's route
from Los Angeles to Oakland (near San Francisco).
Reduce Operating Costs. The Company expects to achieve substantial
operating cost savings from the Network expansion by replacing a portion of the
capacity it leases from other carriers with its own Network capacity. The
Company incurred costs of approximately $92.2 million for leased off-net fiber
optic capacity from other carriers in 1997. Although revenue growth may result
in increased future off-net usage, the Company believes the Network expansion
will result in reduced expenditures for capacity currently leased off-net (as
well as reduced expenditures for future capacity otherwise required to support
revenue growth) and increased operating cash flow, because the new fiber routes
(i) are targeted for geographic areas that the Network currently does not reach
or is capacity limited or where the Company leases off-net capacity and (ii)
will allow the Company to enter into additional exchanges of fiber capacity on
new routes with other carriers.
Increase Private Line Revenues. Geographic limitations and nearly full
utilization of the then-existing Network previously limited the Company's
ability to expand its private line business. The Network expansion has added
high-capacity new routes and substantially increased the capacity of certain
existing routes, allowing the Company to lease additional circuits to its
customers, including high-capacity, high-margin circuits such as OC-3s, OC-12s
and OC-48s. The Company has already generated significant orders for capacity on
the new routes. The Company continues to seek significant new orders over the
Network expansion routes and believes that it is well positioned to obtain such
orders.
Additionally, the Company specifically designed the Network expansion along
routes geographically diverse from those of other facilities-based carriers. In
recent years, companies such as AT&T and MCI have used the Company to provide
alternative routes to help protect their networks in the event of a service
outage. Such companies prefer routes separated geographically from their own
networks to increase the possibility that the alternative route will be
functional in the event of a natural disaster. The Company believes that the
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Network expansion greatly increases the attractiveness of the Company's Network
as an alternative routing network backup to the major carriers.
Expand the Long Distance Switched Services Business. The Company has
established itself as an alternative provider of long distance switched services
with nation-wide origination and domestic and international termination
capability with switched services revenues in 1997 of $258.3 million. The
Company currently has over 100 customers and believes that it is well positioned
to attract other long distance resellers for its long distance switched
services. The Company believes that the low embedded cost of its Network
provides a significant advantage when competing to provide long distance
switched traffic to resellers, cable companies, RBOCs, utility companies and
others which are permitted to enter the long distance business under recent
changes in telecommunications law. By the end of 1998, the Company intends to
add four additional long distance voice/data switches which, if installed, will
provide additional capacity to originate and terminate traffic. Although the
Company has not yet achieved positive EBITDA in its long distance switched
services business, the Company is seeking to improve the results in this
business by continuing to seek a more efficient customer traffic mix and by
increasing the scale and scope of traffic carried over its Network.
Specifically, the Company's focus is on (i) obtaining traffic that meets its
profitability requirements and aligns with the Company'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 the Company's Network and increase
its reach.
Expand Data and Internet Business. The Company is using advanced fiber
optic technology in its Network expansion. The expanded Network's SONET
technology and broadband capabilities provide a platform to support advanced,
capacity-intensive products such as Frame Relay, ATM, multimedia, and
Internet-related applications. The Company has equipped its network with 15 data
switches (8 more are expected by the end of 1998) and other equipment necessary
to enter into the Frame Relay and ATM transmission business. The Company has
agreed to acquire a small company with data communications expertise to increase
its data engineering capabilities. The acquisition, in which the Company will
issue approximately 42,000 shares of Common Stock, is scheduled to close in the
first half of 1998.
To enhance the Company's product and service offerings, in February 1998,
the Company consummated agreements with PSINet which allow each party to market
and sell the products and services of the other party. Under the terms of the
agreements, the Company will provide PSINet with a 20-year IRU in 10,000 miles
of OC-48 transmission capacity on its Network in exchange for approximately 10.2
million shares representing 20% (post-issuance) of PSINet's common stock.
Establish Long-Term Customer Relationships. The Company seeks to establish
a dependable revenue stream through long-term relationships with its customers.
The Company has private line contracts (generally on a long-term basis) with
over 230 long distance carriers, including AT&T, MCI, Sprint, WorldCom, Cable &
Wireless, Frontier and LCI. The Company has historically enjoyed a high customer
retention rate in its private line business. Although the Company's switches
first became fully operational in the first quarter of 1996, the Company has
already entered into contracts with over 100 long distance resellers.
Provide a Sophisticated Automated Software Interface. The Company seeks to
increase its attractiveness to existing and potential customers of switched long
distance services by providing a sophisticated automated interface to the
Company's computer system through its proprietary IXC Online software. Utilizing
IXC Online, customers are able to access up-to-date information regarding their
end-user customers and the calls made by such end-users. IXC Online is designed
to allow each of the Company's carrier customers to: (i) download call detail
records for its end-users for billing purposes; (ii) arrange with the
appropriate LEC to register the carrier as the designated long distance carrier
for its new end-users; and (iii) file trouble reports for resolution.
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THE COMPANY'S NETWORK
Facilities
As of December 31, 1997, the Network included over 10,500 digital route
miles (including over 5,500 fiber route miles). The Network is expected to
include over 11,500 digital route miles (including over 6,500 fiber route miles)
by the end of the first quarter of 1998. Prior to beginning construction of the
Network expansion in late 1995, the Company owned a digital coast-to-coast
network containing over 1,900 route miles of fiber optic cable and over 5,000
route miles of digital microwave. As of December 31, 1997, the Company had over
3,600 route miles of advanced fiber optic cable and electronics in operation.
The Company is expected to have over 5,000 route miles of advanced fiber optic
cable and electronics in operation by the end of the first quarter of 1998.
The Company's owned facilities are supplemented with approximately 240,000
equivalent DS-3 miles of fiber capacity obtained from other carriers. Of such
capacity, over 200,000 DS-3 miles are leased by the Company. Approximately
39,000 DS-3 miles of such capacity are obtained by the Company through long-
term capacity-exchange agreements with MCI and WorldCom whereby the Company
trades capacity or fibers on its fiber network for capacity on the other
carriers' networks. In addition, the Company has agreements with CCTS and LCI to
exchange OC-48 capacity on certain routes. The Company has been able to
negotiate these significant exchange agreements because of the placement of the
Company's existing Network in locations where other facilities-based carriers
require additional capacity and the comparatively large expense to such other
carriers of constructing new fiber optic facilities. Such exchange agreements
increase the scope of the Network through the addition of the exchanged capacity
while reducing the Company's cash expenditures for off-net facilities.
The Network includes seven digital long distance voice/data switches
located in Los Angeles, Dallas, Chicago, Philadelphia, Atlanta, Joplin, Missouri
and New York, New York each directly connected over either on-net or off-net
private line circuits: (i) to at least two other switching centers; (ii) to
certain of the Company's over 50 Hubs (local connection points); and (iii) to
certain LEC Central Office switches. The Company plans to install four
additional voice/data switches in 1998. The Hubs are connected (generally by
off-net circuits) to LEC Central Office switches, which in turn are connected to
end-user telephone lines. The switches utilize common channel signaling (SS7),
which reduces connect time delays. The Network also includes 15 Frame Relay-ATM
data switches located in major cities. The Company's switched operations are
supplemented by agreements with Frontier and WorldCom. Under such agreements,
Frontier and WorldCom supply switched capacity to the Company on a per-minute
basis, automatically handling calls routed through LEC Central Offices not
connected to the Company's Hubs or switches and calls which exceed the capacity
of the Company's switched network.
The capacity of the Company's switches may be expanded with processor
upgrades, additional memory and ports. The Company plans to add more ports and
other equipment for its existing switches and to add additional switches as
required to accommodate customer demand, including 8 additional Frame Relay-ATM
switches by the end of 1998.
The new fiber optic routes are being constructed with fiber capable of
supporting bi-directional SONET rings for enhanced network reliability. As each
new route is completed and placed into service, it will be equipped with an
OC-48 in order to provide initial transmission capacity. The Company is
currently in the process of equipping certain of its routes with additional
OC-48s in order to meet customer demand for its services.
Network Reliability
The Network offers a reliable means of transmitting large volumes of voice
and data signals. To assist in providing reliable and high-quality transmission
service, all important functions of the network are monitored during regular
business hours from regional operations centers in Columbus, Kansas City, Fort
Worth and Tucson. Thereafter, monitoring is conducted from the Company's
national operations center in its Austin headquarters. The national center also
provides overall system monitoring on a 24-hour basis. This system
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alerts the Company to situations which could affect customer transmission and
generally allows the Company to take remedial actions before customer service is
affected. In addition, at December 31, 1997, the Company employed approximately
83 operations personnel who are based along the Network to perform preventative
maintenance as well as repair functions on its private line network. Company
operations personnel conduct annual system performance testing and make periodic
unannounced visits to terminal sites to evaluate technician performance. At
December 31, 1997, the Company maintained a staff of 31 technicians to provide
maintenance and other technical support services for switched long distance
services.
Network Expansion
In 1995 the Company began a significant expansion of the Network. The
expanded Network is expected to deliver the following significant strategic and
financial benefits to the Company:
(i) substantial savings by allowing the Company to move on to its own
Network a significant portion of its traffic that it currently carries on
circuits which it leases from other carriers;
(ii) high-capacity new routes and substantially increased capacity on
certain existing routes, allowing the Company to increase revenues by
leasing additional circuits to its customers, including high-capacity
circuits such as OC-3s, OC-12s and OC-48s;
(iii) lower underlying transmission and network operating costs;
(iv) sufficient capacity to support increasing demand expected from
Internet and multimedia applications, Frame Relay and ATM; and
(v) reduced capital costs through sales and exchanges of excess fiber
which the Company is including in its Network expansion specifically for
that purpose.
The Network expansion is planned to add thousands of additional fiber route
miles to increase the geographic scope and capacity of the Company's previously
existing network. It will connect the Company's switches with high-capacity
private line circuits, utilizing advanced fiber optic technology capable of
efficiently transmitting capacity-intensive services, such as Internet, Intranet
and multimedia applications, Frame Relay and ATM. The routes of the Network
expansion are planned to be generally geographically diverse from the existing
fiber networks of AT&T, MCI, Sprint and WorldCom.
The Company expects that the Network expansion will produce additional cost
savings by supporting growth in its private line and long distance switched
services businesses which would otherwise require significant off-net capacity
usage. The Network expansion will enable the Company to avoid increased
expenditures for leasing off-net capacity because the new fiber routes: (i)
should carry much of the traffic that would otherwise be transmitted over
off-net circuits and (ii) may enable the Company to enter into additional
exchanges of fiber capacity with other carriers. In this way, the Company seeks
to improve cash flow through increasing revenues and reducing certain costs. The
Network expansion has already enabled the Company to obtain significant orders
for capacity on the new routes. The Company continues to seek significant new
orders over the Network expansion routes and believes that it is well positioned
to obtain such orders.
Frame Relay, ATM and Internet Services. During the first quarter of 1997,
the Company 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. To enhance the Company's product and service offerings, in
February 1998, the Company consummated agreements with PSINet which allow each
party to market and sell the products and services of the other party. Under the
terms of the agreements, the Company will provide PSINet with a 20-year IRU in
10,000 miles of OC-48 transmission capacity on its Network in exchange for
approximately 10.2 million shares representing 20% (post-issuance) of PSINet
common stock. If the value of the PSINet common stock received by the Company is
less than $240.0 million at the earlier of one year after the final delivery of
the transmission capacity (scheduled for late-1999) or four years after the
transaction's closing, PSINet, at its option, will pay the Company cash and/or
deliver additional PSINet common stock to bring the value of the Company's
investment to $240.0 million. Upon delivery of the transmission capacity to
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PSINet, the Company will begin to receive a maintenance fee which, as the full
capacity has been delivered, should increase to approximately $11.5 million per
year.
Construction. The Company has planned the Network expansion to cover, to
the greatest extent practicable, routes where one or more of the following
factors are present: (i) customer demand indicates a need for high-capacity
fiber network on the route; (ii) the route is attractive as a complement to the
routes of other carriers, which may enable the Company to lease its new capacity
on the route to other carriers or exchange a portion of its new capacity on the
route for capacity from other carriers; or (iii) the capacity will replace
capacity leased by the Company from other carriers.
Plans to complete the Network expansion along the following routes (the
routes and expected delivery dates are subject to change) are as follows:
(i) One route will consist of a fiber optic route to supplement the
Company's existing New York-Los Angeles route, which consists primarily of
digital microwave facilities which are now used to capacity. This
coast-to-coast route is to extend from New York to Los Angeles over new
fiber optic cable through upstate New York, Cleveland, Chicago, St. Louis,
Dallas, Phoenix and Las Vegas. This route, much of which is already
complete, is scheduled for completion during the first quarter of 1998.
(ii) An additional route is now under construction from Washington,
D.C. to Atlanta and then to Houston. The Washington-Atlanta portion of the
route will be constructed by Vyvx and is scheduled for completion in
mid-1998. Additions to the route, from New York to Washington, D.C. and
Houston to Dallas, are scheduled to be completed by the end of 1998.
(iii) Routes are also planned for construction from Los Angeles to San
Francisco, and to link Toledo, Detroit and Chicago.
Additional routes will be added to the Network expansion as opportunities
for advantageous cost sharing or exchange arrangements arise or as customer
demand requires.
The Company plans generally to light initially only two to four of the new
fibers in the route from New York to Los Angeles via St. Louis and the route
from New York to Houston via Atlanta. Certain of the remaining fibers will be
reserved and used as a platform to support emerging capacity-intensive data and
multimedia applications. The Company intends to light additional fibers as
needed in the future and may use the other additional fibers for sale or
exchange arrangements, such as the PSINet transaction. See "-- Business
Strategy" and "-- Risk Factors -- Risks Relating to the Network Expansion."
The Company has already entered into cost-saving agreements with other
carriers that have reduced the per-route-mile cost of construction, including:
(i) a contract with WorldCom pursuant to which each company has
constructed a fiber route approximately 1,100 miles long and placed fibers
for both companies along the route;
(ii) the Chicago-LA LCI Fiber Sale and Cleveland-NY LCI Fiber Sale;
(iii) the MCI Fiber Sale;
(iv) a contract with Vyvx to exchange the use of certain fibers on the
Company's New York to Los Angeles route for the use of fibers on a
1,600-mile route under construction by Vyvx from Washington D.C. to
Houston;
(v) joint construction agreements with LCI, DTI and CCTS allowing the
Company to share the costs of constructing certain routes in Illinois, Ohio
and Missouri;
(vi) a contract with MFS pursuant to which MFS will include fibers for
the Company in a route it is constructing from Cleveland to New York (MFS
has been acquired by WorldCom);
(vii) contracts with GST and WorldCom providing for the sale of fiber
along certain routes;
(viii) a contract with FTV to exchange the use of certain fibers on
the Company's Las Vegas to Los Angeles route for the use of fibers on FTV's
Las Vegas to Portland route;
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(ix) a contract with MFN to exchange the use of certain fibers on the
Company's Chicago to New York route for the use of fibers on MFN's
Washington D.C. to New York route; and
(x) a contract with GST to exchange the use of certain fibers on the
Company's Phoenix to Los Angeles route for the use of fibers on GST's route
from Los Angeles to Oakland (near San Francisco).
Cost. The principal components of the cost of the Network expansion will
include: (i) fiber optic cable; (ii) engineering and construction; (iii)
electronics; and (iv) rights-of-way. The rights-of-way will be provided pursuant
to long-term leases or other arrangements (some of which may provide for
substantial continuing payments) entered into with railroads, highway
commissions, pipeline owners, utilities or others. Although the Company has not
yet obtained all the necessary rights-of-way along the planned routes, the
Company anticipates that the rights-of-way will be available.
Through the WorldCom fiber construction agreement, the Vyvx fiber exchange
and the other cost-saving arrangements described above, the Company has reduced
its expected cost of the Network expansion. The Company seeks to enter into
additional cost-saving arrangements such as: (i) leasing or selling excess fiber
to other carriers; and (ii) exchanging excess fiber for fibers or capacity on
other carriers' networks. Additionally, the Company seeks to obtain the right to
install Company-owned fibers in new routes being constructed by other carriers
along the proposed Network expansion routes in exchange for the Company (a)
sharing network construction costs; (b) allowing the other carrier to use excess
fiber along certain routes in the Network; or (c) allowing the other carrier to
add its own fiber to certain segments of the Network. See "-- Risk Factors --
Negative Cash Flow and Capital Requirements." The Company has had experience
with arrangements of this type with several major carriers, including MCI,
Sprint, Cable & Wireless, WorldCom and LCI.
PRIVATE LINE SERVICES
Overview
Substantially all of the Company's 1995 revenues, approximately 49% of its
revenues in 1996 and approximately 39% of its revenues in 1997 were generated by
its private line business. The Company has over 230 active private line
customers.
Strategy
The Company is seeking to increase revenues in its private line business
through meeting these primary objectives: (i) expanding its Network to provide
additional capacity on its existing routes and high-capacity new routes to
provide access to major population centers (including routes which may be
attractive to major carriers as backup routes); (ii) providing high-quality,
reliable private line services on a fixed-cost basis at rates generally below
those currently offered by AT&T and competitive with those offered by other
carriers; and (iii) using the expanded Network as a platform to support
increased private line circuit demand which is expected to result in the future
from Frame Relay, ATM, multimedia, Internet and other capacity-intensive
applications.
The Company anticipates decreased expenses in its private line business
through the Network expansion, which will allow the Company to move traffic from
circuits leased from other carriers to its own Network.
Customers and Marketing
The Company has over 230 active private line customers, including AT&T,
MCI, Sprint, WorldCom, Cable & Wireless, Frontier and LCI. The Company's private
line contracts provide for fixed monthly payments, generally in advance. Many of
such contracts contain substantial "take or pay" commitments. The Company has
historically enjoyed a high customer retention rate in its private line
business.
The Company markets its private line circuit capacity generally to: (i)
facilities-based carriers that require private line capacity where they have
geographic gaps in their facilities, need additional capacity or require
geographically different, alternative routing; and (ii) non-facilities-based
carriers requiring private line capacity to carry their customers' long distance
traffic. The Company focuses most of its direct sales efforts on
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providing customer support services to existing customers and on adding new
customers. The Company's long-haul circuit sales force at December 31, 1997
consisted of 13 account managers based at the Company's headquarters in Austin
and at direct sales offices in or near Washington, D.C., New Haven, San
Francisco, Kansas City, Chicago, St. Louis, Houston and Sunrise Beach, Missouri.
During 1997, AT&T, Frontier and WorldCom, the Company's three largest
private line customers, accounted for approximately 6.4%, 4.2% and 4.1%,
respectively, of the Company's revenues. The five largest private line customers
during 1997 accounted for approximately 20% of the Company's total revenue. See
"-- Risk Factors -- Reliance on Major Customers."
Prices and Contracts
The Company's strategy is to offer prices generally lower than those of
AT&T and competitive with the prices of other carriers, to permit the Company's
customers, through a stable, long-term fixed pricing structure, to maintain
control over transmission costs. The Company's private line transmission
agreements with its customers generally provide for original terms of one to
three years and for monthly payment in advance on a fixed-rate basis, calculated
according to the capacity and length of the circuit. Many of such contracts
contain substantial "take or pay" commitments. Furthermore, circuit orders under
private line agreements are generally for a term of one year or more and may not
be cancelled by the customer. However, the agreements generally provide that the
customer may terminate the affected service without penalty "for cause" in the
event of substantial and prolonged outages arising from causes within the
Company's control, and for certain other defined causes. Generally, the lease
agreements further provide that the customer may terminate the agreement "for
convenience" at its discretion at any time upon notice to the Company. However,
termination for convenience generally requires either full payment of all
charges through the end of the lease term or the payment of substantial
termination fees intended to allow the Company to recover certain costs and, in
some cases, lost profits. Damages attributable to a customer's termination of
the agreement are generally reduced, however, by an offset for any income the
Company earns from re-leasing the terminated capacity during the remaining
portion of the lease term.
Competition
In providing private line capacity, the Company competes with AT&T, which
is the largest supplier of long distance voice and data transmission services in
the United States, MCI, WorldCom and Sprint, all of which have substantially
greater financial resources than the Company and a far more extensive
transmission network than the Network and numerous regional carriers. MCI and
WorldCom have announced a planned merger, and applications for approval of that
merger are pending. If the MCI/WorldCom merger is approved, the result would be
an even larger, and potentially stronger, entity with which the Company would
have to compete. In addition, as a result of the Telecom Act and an agreement
(the "WTO Agreement") announced in February 1997 by the United States Trade
Representative with the World Trade Organization countries to open world
telecommunications markets to competition which became effective on February 5,
1998, the Company and its customers will also face competition from the RBOCs,
GTE and others such as electric utilities, cable television companies and
foreign companies. Qwest is constructing a coast-to-coast fiber optic network
and Frontier has agreed to pay $500 million for fibers in Qwest's network. Qwest
is, and Frontier may become, a competitor of the Company. In addition, Qwest and
LCI have also recently announced a planned merger. The Qwest/LCI merger would
result in another larger, and potentially stronger, competitor. Furthermore,
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 the Company, 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. Important competitive factors in the long-haul business are price,
customer service, network location and quality, reliability and availability.
See "-- Private Line Services" and "-- Risk Factors -- Competition."
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LONG DISTANCE SWITCHED SERVICES
Overview
In late 1995, the Company expanded into the business of selling long
distance switched services to long distance resellers in order to complement its
private line business and to capitalize on its ability to provide long distance
switched services over its own Network. Long distance switched services are
telecommunications services that are processed through the Company's digital
switches and carried over long-haul circuits and other transmission facilities
owned or leased by the Company. During 1995, the Company set up the
infrastructure for its long distance switched services business by installing
its switches, connecting them to its Network and to the LECs, acquiring
software, hiring personnel and entering into contracts with customers. The
Company's switched network became fully operational in February 1996. The
Company sells long distance switched services on a per-call basis, charging by
MOUs, with payment due monthly after services are rendered.
Strategy
The Company seeks to rapidly increase revenues from its long distance
switched services business through: (i) long-term arrangements with significant
customers and customers the Company considers likely to grow quickly; (ii)
providing a sophisticated automated software interface with its customers; (iii)
offering pricing which is generally lower than that charged by AT&T and
competitive with that of other long distance service providers; and (iv)
acquisitions. The Company seeks to increase the profitability of its long
distance switched services business by decreasing its average cost per MOU
through efficiencies achieved with higher volumes and through reducing network
costs through the Network expansion. See "-- Business Strategy."
Customers and Marketing
The Company focuses its sales efforts on directly contacting large reseller
customers with monthly volumes of at least $1.0 million, and growing resellers
with volumes between $50,000 and $250,000 per month that the Company expects to
be reasonably likely to grow to the $1.0 million per month level. The Company's
switched-products sales force at December 31, 1997 included 18 sales executives
based at the Company's headquarters in Austin and at direct sales offices in
Atlanta, Dallas, Denver and Los Angeles. Although sales of long distance
switched services to end-user customers do not currently account for a
significant portion of the Company's switched long distance business, Telecom
One, a company which the Company acquired in July 1997, and NLD, a company which
the Company expects to acquire in 1998, each sell directly to end users. In
addition, the Company may, from time to time, consider acquiring other long
distance resellers or end-user customer bases.
Excel. Excel, the Company's largest customer of switched long distance
services, is contractually obligated to utilize at least 70 million minutes of
traffic per month. Excel's commitment continues through the earlier of the date
on which Excel has routed 4.2 billion minutes over the Network or June 30, 2001.
The minimum commitment is subject to reduction or termination: (i) if Excel
installs its own switches and invites the Company to bid along with other
carriers (to win such bids, the Company would have to be the lowest bidder) to
provide Excel with the long-haul circuits utilized by such switches (even if
this did occur, Excel would still have to meet the minimum commitment of 70
million minutes per month until June 30, 1998); or (ii) for breach of contract
by the Company or for other reasons which the Company believes should be under
its control. Although Excel's minimum commitment is 70 million minutes per
month, its usage increased substantially above the minimum commitment by
December 1996. At December 31, 1997, Excel had routed approximately 2.0 billion
minutes over the Network. The Company is Excel's main or sole supplier of 1 Plus
Switched Service in over 50 LATAs.
Customer Contracts. The Company's rates for switched long distance services
generally vary with the duration of the call, the day and the time of day the
call was made and whether the traffic is intrastate, interstate or
international. The rates charged are not affected by which facilities are
selected by the Company's switching centers for transmission of the call or by
the distance of the call. Different rates are applied to combined origination
and termination services than are applied to termination services. The
agreements
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between the Company and its customers for long distance switched services
generally provide for payment in arrears based on MOUs. The agreements generally
also provide that the customer may terminate the affected service without
penalty in the event of substantial and prolonged outages arising from causes
within the Company's control, and for certain other defined causes. Generally,
the agreements provide that the customer, in order to avoid being obligated to
pay higher rates (or, in some cases, penalties), must utilize at least a minimum
dollar amount (measured by dollars or MOUs) of long distance switched services
per month for the term of the agreement. In certain new contracts, the Company
is including provisions to provide for financial penalties for a customer's
failure to provide the expected traffic distributions.
Customer Care. The Company believes that customer support is an important
factor in attracting and retaining customers for its long distance switched
services. Customer service for long distance switched services includes
processing new accounts, responding to inquiries and disputes relating to
billing, credit adjustments and cancellations and conducting technical repair
and other support services. IXC Online is designed to allow each of the
Company's carrier customers to: (i) download current call detail records for its
end-users for billing purposes; (ii) arrange with the appropriate LEC to
register the carrier as the designated long distance carrier for its new end
users; and (iii) file trouble reports for resolution. The Company employed
approximately 65 people in its long distance switched services customer service
group as of December 31, 1997. See "-- Risk Factors -- Development Risks and
Dependence on Long Distance Switched Services Business."
Decreased Costs through Increased Volumes or Greater Efficiency
Large MOU volumes should enable the Company to spread its fixed costs over
more MOUs and to more efficiently configure its network, reducing the cost per
MOU. The Company seeks to efficiently configure the circuits available so that
calls are completed on a cost-effective basis. The Company periodically analyzes
calling patterns using mathematical formulas to determine the circuit capacity
required to cost-effectively service the expected call volume. For example, if
there is sufficient calling traffic available, the Company may upgrade
transmission circuitry in an area from DS-1 to DS-3. A similar analysis will be
made when deciding whether to install a new switch in a region. The Company is
continuing to develop procedures to better analyze its expected traffic patterns
in order to enhance Network efficiency and identifying customers generating an
unprofitable mix of traffic. The Company's strategy of enhancing profitability
through efficiency may have the effect of reducing MOU volume and gross revenue
in the long distance switched services business.
Services
The Company markets a variety of switched long distance services, including
operator services, directory assistance, international service and the
following:
1 Plus Switched Service. Provides direct-dial service over the Company's
Network.
1 Plus Dedicated Service. Provides direct-dial service over the Company's
Network for end users that have arranged to connect to the Company's nearest Hub
through a local loop. This service is less expensive than 1 Plus Switched
Service because the access charges of the end-user's LEC are reduced.
800/888 Switched Service. Provides 800/888 service over the Company's
Network.
800/888 Dedicated Service. Provides 800/888 service over the Company's
Network for end users that have arranged to connect to the Company's nearest Hub
through a local loop. This service is less expensive than 800/888 Switched
Service because the access charges of the end-user's LEC are reduced.
Calling Card Service. Provides telephone card service.
Debit Card Service. Provides prepaid telephone card service.
Switched Termination Service. Provides carrier customers having use of a
switch in one area with termination services in other areas.
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Acquisitions
As part of its growth strategy, the Company acquired Telecom One in July
1997 using shares of its Common Stock as consideration and entered into an
agreement in December 1997 to acquire NLD using shares of its Common Stock as
consideration. In addition, the Company has agreed to acquire with Common Stock
a small company with data communications expertise to increase its data
engineering capabilities. The Company may, from time to time, acquire other
businesses, assets or securities of companies which it believes provide a
strategic fit with its business and network. Although the Company currently has
no other commitments or agreements with respect to any material acquisitions, it
has reviewed potential acquisition candidates and has held preliminary
discussions with a number of these candidates. The Company may use Common Stock
as consideration for other acquisitions.
The Company has agreed to acquire NLD, a long-distance reseller with over
$100.0 million in revenue in 1997, for approximately 4.3 million shares of
Common Stock (including approximately 300,000 shares issuable with respect to
NLD options and warrants). NLD has a national direct sales force selling
primarily to small and medium-sized businesses. The Company believes it can
improve the profitability of NLD because it can lower its costs of call
transmission. This acquisition is a part of a Company strategy to expand by
acquiring select resellers on advantageous terms as opportunities arise. The
Company believes that its acquisition of NLD will provide an important
foundation for growth in the business retail long distance market, however,
there can be no assurances that the acquisition, if consummated, will have such
effect. See "-- Risk Factors -- Integration of Acquired Businesses; Business
Combinations."
Competition
The Company competes with numerous facilities-based interexchange carriers,
some of which are substantially larger, have substantially greater financial,
technical and marketing resources and utilize larger transmission systems than
the Company. AT&T is the largest supplier of long distance switched services in
the United States inter-LATA market. The Company also competes in selling long
distance switched services with: (i) other facilities-based carriers, such as
MCI, Sprint, WorldCom, Quest, The Williams Companies and certain regional
carriers, and (ii) certain non-facilities-based carriers. MCI and WorldCom have
announced a planned merger, and applications for approval of that merger are
pending. If the MCI/WorldCom merger is approved, the result would be an even
larger, and potentially stronger, entity with whom the Company would have to
compete. Frontier has agreed to pay $500.0 million for fibers in Qwest's
network. Qwest is, and Frontier may become, a competitor of the Company. In
addition, Qwest and LCI have also recently announced a planned merger. The
Qwest/LCI merger would result in another larger, and potentially stronger,
competitor. Furthermore, 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. As a
result of the Telecom Act and recent WTO Agreement, the Company will also now
face competition from the RBOCs, GTE and others such as electric utilities,
cable television companies and foreign companies. The Company believes that the
principal competitive factors affecting it are price, customer service
(particularly with respect to speed in delivery of computer billing records and
set-up of new end users with the LECs), ability of the network to complete calls
with a minimum of network-caused busy signals, scope of services offered,
reliability and transmission quality. The ability of the Company to compete
effectively will depend upon its ability to maintain high-quality services at
prices generally equal to or below those charged by its competitors. In the
United States, price competition in the long distance business has been
intensive over the last five years. In 1995, the FCC reclassified AT&T as a
"non-dominant" carrier, freeing AT&T from price regulation of its long distance
services. Since the Company believes that its customers generally price their
service offerings at or below the prices charged by AT&T for its
telecommunications services, reductions by AT&T in its rates may necessitate
similar price decreases by the Company. See "-- Risk Factors -- Competition."
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REGULATION
Certain subsidiaries of the Company operate as communications common
carriers. These subsidiaries are subject to applicable FCC regulations under the
Communications Act of 1934, as amended (the "Communications Act"), some of which
may be affected by the Telecom Act of 1996 and regulations being promulgated
thereunder. See "-- Risk Factors -- Recent Legislation and Regulatory
Uncertainty." In addition, those subsidiaries which operate the Company's
microwave Network are subject to applicable FCC regulations for use of the radio
frequencies. The FCC issues licenses to use certain radio frequency spectrum at
transmitter site locations. Each license gives the Company the right to operate
the microwave radio station for the term of the license. Currently, the Company
holds licenses to operate the microwave sites in the Network. The licenses all
expire in 2001. These licenses are renewable upon application containing a
statement that they are used in compliance with the applicable FCC rules. The
Company expects that the FCC will renew its licenses in due course. The
Communications Act currently limits ownership of an entity holding such licenses
by non-U.S. citizens, foreign corporations and foreign governments. The Company
is subject to regulation by the Federal Aviation Administration with respect to
the construction of transmission towers and to certain local zoning regulation
affecting construction of towers and other facilities.
Recent court decisions (which were issued before the Telecom Act of 1996)
require the FCC to require carriers to file tariffs. However, the FCC currently
does not actively exercise its authority to regulate such carriers' rates and
services. Moreover, the Telecom Act of 1996 gives the FCC authority to forbear
from applying certain provisions of the Communications Act, including the
requirement that carriers file tariffs. The FCC has recently issued an order
implementing a mandatory detariffing policy that eliminates the tariff
requirements for non-dominant interstate, interexchange carriers. An appeal of
the FCC's order resulted in the order being stayed. The appeal is being held in
abeyance, pending the FCC's action on motions for reconsideration. Regardless of
the outcome of the detariffing proceeding, the FCC will retain jurisdiction to
act upon complaints against any common carrier for failure to comply with its
statutory obligations as a common carrier.
The FCCs reclassification of AT&T as a non-dominant carrier may affect the
Company, because it competes with AT&T. The FCC's current and future actions
could result in decreases in the rates charged to end-user customers by AT&T and
other competitors for their services. Thus, one effect of the FCC's action may
be to further intensify price competition among long distance companies.
The FCC regulates many of the rates, charges and services provided by the
LECs. Such regulation can also affect the costs of business for the Company, its
customers and its competitors, because carriers such as the Company must
purchase local access services from LECs to originate and terminate calls. The
FCC's current price cap regulation of the RBOCs and other LECs provides them
with considerable flexibility in pricing their services. The FCC recently issued
two orders regarding access charge reform and transport rate structure and
pricing. Both orders have been appealed and in the interim, on January 1, 1998,
LEC tariffs implementing the requirements of the FCC orders went into effect.
The outcomes of the appeals, and the outcomes of any subsequent FCC rulemaking
proceedings, are impossible to predict, but future changes with respect to
access charges are likely. Although some increases in certain elements of access
charges are anticipated in mid-1998, the overall effect of access charge reform
on the Company is currently uncertain. Further, 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, the Company and its
customers may not benefit as quickly from the lower access costs that might
otherwise have resulted had competition in the provision of local access
services not been thus delayed.
The Telecom Act directed the FCC to establish a system for compensating
payphone service providers ("PSPs") on a per-call basis for calls made from
payphones, including coinless calls, such as calling card, collect, and "800"
calls. On October 9, 1997, the FCC released an order that set a $0.284 per-call
"default" rate that long distance carriers are required to pay to PSPs for
certain coinless calls. Although the FCC's order
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has gone into effect, it is being appealed, and the amount of compensation long
distance carriers will ultimately be required to pay to PSPs is currently
uncertain.
In addition, the Telecom Act allows the RBOCs and others to enter the long
distance business. Entry of the RBOCs or other entities such as electric
utilities and cable television companies into the long distance business may
have a negative impact on the Company or its customers. The Telecom Act also
establishes criteria for RBOC re-entry into in-region long distance markets, and
RBOCs are required to obtain FCC approval before they can begin providing such
services. To date, the FCC has rejected four such RBOC applications, at least
one of which is being appealed. However, on December 31, 1997, the U.S. District
Court for the Northern District of Texas ruled that the provisions of the
Telecom Act that apply specifically to RBOCs are unconstitutional. On February
11, 1998, the District Court stayed its order, and the order has been appealed.
While the outcome of the appeal is impossible to predict, if the district
court's order is upheld, the re-entry of the RBOCs into the in-region long
distance market would likely be hastened. Further, the FCC has indicated that it
is attempting to establish a "collaborative process" with the RBOCs to
facilitate the review and ultimately the approval of such applications.
The Telecom Act also provides that state proceedings may in certain
instances determine access charge rates the Company and its customers are
required to pay to the LECs. It is uncertain at this time what effect such
proceedings may have on such rates. There can be no assurance that such rates
will not be increased. Such increases could have a material adverse effect on
the Company and its customers. See "-- Risk Factors -- Recent Legislation and
Regulatory Uncertainty" and "Industry Overview."
The ability of the Company to provide long distance services within any
state is generally subject to regulation by a regulatory board in that State. As
of December 31, 1997, the Company is operating and has obtained the requisite
licenses and approvals in the 48 contiguous continental United States.
MEXICAN JOINT VENTURE
The Company is indirectly participating in the development of a long
distance network to engage in the telecommunications business in Mexico through
Marca-Tel S.A. de C.V. ("Marca Tel"). As of December 31, 1997, the Company
indirectly owned 24.5% of Marca-Tel through its ownership of 50% of Progress
International LLC ("Progress International"), which owned 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. ("Westel").
As of December 31, 1997, the Company and Westel have jointly contributed or
loaned Progress International a total of $48.7 million, of which $37.0 million
has been provided by the Company. Substantially all of such funds have been used
by Progress International to fund Marca-Tel. The Company is recognizing its
share of the Progress International losses in accordance with its pro rata share
of funds provided to Progress International. The net carrying value for the
Company's interest in Progress International was $11.6 million at December 31,
1997.
In September, 1995, Marca-Tel entered into an agreement with a third party
to construct a portion of Marca-Tel's telecommunications network in Mexico and
to provide significant financing for such construction and related equipment and
fiber purchases. Such third party has been granted security interests in all of
Marca-Tel's assets, including the telecommunications network, and the owners of
Marca-Tel, including Progress International, have pledged their interests in
Marca-Tel to collateralize payment to the third party. As of December 31, 1997,
approximately $49.1 million was owed by Marca-Tel to such third party.
In February, 1998, Marca-Tel announced that it was putting further
investment in new fiber routes on hold, awaiting more suitable regulatory and
market conditions. Because of the continuing adverse regulatory environment in
Mexico, Marca-Tel has determined to limit further investment and to reduce its
scope of operations. At the present time, the Company does not anticipate
significant additional funding to Progress International for investment in
Marca-Tel until the regulatory and market conditions in Mexico improve. The
Company is not obligated to continue to fund Progress International and the
Senior Notes Indenture and the terms of the Exchangeable Preferred Stock contain
significant limitations on the amount the Company may
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invest in Progress International and other non-majority owned entities. However,
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 the third party's security interest. The Company's
interest in Progress International, and thus its indirect interest in Marca-Tel,
therefore could be diluted or lost entirely.
The forward-looking statements set forth above with respect to the capital
needs of Progress International and of Marca-Tel and the successful completion
and operation of Marca-Tel's fiber optic system in Mexico are based on certain
assumptions as to future events. Important assumptions, which if not met, could
adversely affect Marca-Tel's ability to achieve satisfactory results include
that: (i) there will be no significant delays or cost overruns with respect to
the network expansion; (ii) the Company's contractors and partners in cost-
saving arrangements will perform their obligations; (iii) rights-of-way can be
obtained in a timely, cost-effective basis; (iv) the routes of the network
expansion are substantially completed on schedule; (v) Marca-Tel can
successfully operate its long distance switched services business on a cost
effective basis (including the provision of billing information in an accurate
and timely manner) for volumes that it has not previously handled; (vi)
Marca-Tel can obtain sufficient funds from debt or equity offerings, joint
venture arrangements, accounts, additional vendor financing, or otherwise and
(vii) regulatory and market conditions improve.
EMPLOYEES
As of December 31, 1997, the Company employed 712 people, of whom 349
provided operational and technical services, 67 provided engineering services
and the balance were engaged in administration and marketing. The Company's
employees are not represented by any labor union. The Company considers its
employee relations to be good and has not experienced any work stoppages.
RISK FACTORS
Statements contained in this Annual Report on Form 10-K regarding the
Company's expectations with respect to its network expansion, related financings
and fiber sale and cost-saving agreements, future operations and other
information, which can be identified by the use of forward-looking terminology,
such as "may," "will," "expect," "anticipate," "estimate," "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 the Company's
expectations regarding any of these matters will be fulfilled.
Negative Cash Flow and Capital Requirements
The Company's capital expenditures were $314.3 million and interest expense
and capitalized interest were $38.6 million for 1997. The Company'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. The Company 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, the Company needs and will continue to need a substantial amount of
cash from outside sources. The Company 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. The Company 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. The
Company's ability to meet the cash costs of such capital expenditures is
dependent in part upon the Company's ability to complete the construction of the
Network expansion in a timely manner and otherwise perform its obligations to
the satisfaction of each of LCI and MCI so that it can complete the Chicago-LA
LCI Fiber Sale and the MCI Fiber Sale, to enter into cost-saving arrangements
with carriers or other large users of fiber capacity, to
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otherwise raise significant capital and/or to significantly increase its cash
flow. The failure of the Company to accomplish any of the foregoing may
significantly delay or prevent such capital expenditures, which would have a
material adverse effect on the Company and the value of the Common Stock and its
other securities.
The Company's long distance switched services business will require cash to
meet operating expenses. In order to offer long distance switched services, the
Company installed switches, connected them to its Network and to the LECs (as
defined), acquired software and hired the personnel needed to establish a
national switched network. The Company's long distance switched services
business generated negative EBITDA for 1996 and 1997 and the Company believes it
may be negative during 1998, due to, among other things, access costs and uneven
traffic patterns creating high network overflow costs. Although the Company has
not yet achieved positive EBITDA in its long distance switched services
business, the Company is seeking to improve the results in this business by
increasing the scale and scope of traffic carried over its Network.
Specifically, the Company's focus is on (i) obtaining traffic that meets its
profitability requirements and aligns with the Company'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 the Company's Network and increase
its global reach. For a discussion of important factors that could cause the
Company's long distance switched services business to fail to generate positive
EBITDA, see "-- Risk Factors -- Development Risks and Dependence on Long
Distance Switched Services Business."
The Company is required to make annual interest payments of $35.6 million
with respect to the Company's outstanding $285.0 million principal amount of the
Senior Notes. The Company 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
the Company to meet its obligations under the Senior Notes and other
indebtedness, to pay cash dividends on the Convertible Preferred Stock and the
Exchangeable Preferred Stock and to access additional sources of funding, any of
which would have a material adverse effect on the Company and the value of the
Common Stock and its other securities. See "-- Risk Factors -- Risks Relating to
the Network Expansion," and "-- Risk Factors -- Development Risks and Dependence
on Long Distance Switched Services Business."
The Company anticipates that in the event it is unable to obtain vendor
financing on acceptable terms, consummate the MCI Fiber Sale and the Chicago-LA
LCI Fiber Sale, or sell additional equity and/or debt securities in order to
complete its planned Network expansion, it may be required to curtail or delay
its planned Network expansion. Furthermore, before incurring additional
indebtedness, the Company may be required to obtain the consent of, or repay,
its debtholders. The Company's failure to obtain additional financing or, in the
alternative, its decision to curtail or delay its planned network expansion
could have a material adverse effect on its business, results of operations and
financial condition.
In October 1997, the Company formed a joint venture with Telenor AS, the
Norwegian national telephone company, to provide telecommunication services to
carriers and resellers in nine European countries. The joint venture is owned 40
percent by the Company, 40 percent by Telenor Global Services AS ("Telenor"),
and 20 percent by Clarion Resources Communications Corporation, a U.S.-based
telecommunications company in which Telenor owns a controlling interest.
Although the Company cannot accurately predict the capital that will be required
to implement such joint venture (the "European Joint Venture"), the Company
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, the Company 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 the Company's
products over the Company's Network. The joint venture is owned 80 percent by
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Unidial and 20 percent by the Company. Subject to the terms of the joint venture
agreement, upon request of the President of the joint venture, the Company 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, the Company is not required
to fund any future contributions to the joint venture, but to the extent Unidial
funds such contributions, the Company'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 the Company may make. See "-- Risk
Factors -- Integration of Acquired Businesses; Business Combination."
Substantial Indebtedness
The Company is highly leveraged. As of December 31, 1997, the Company 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, the Company 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, the Company 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 the Company's interest expense.
Furthermore, the Company will become more highly leveraged if it exchanges the
Exchangeable Preferred Stock for Exchange Debentures pursuant to the terms of
the Certificate of Designation in connection with the Exchangeable Preferred
Stock.
The Company's significant debt burden could have several important
consequences to the holders of the Common Stock, including, but not limited to:
(i) all or a significant portion of the Company's cash flow from operations must
be used to service its debt instead of being used in the Company's business (in
1997, the Company's cash flow from operations was $14.3 million and interest
expense was $31.3 million); (ii) the Company's significant degree of leverage
could increase its vulnerability to changes in general economic conditions or
increases in prevailing interest rates; (iii) the Company's flexibility to
obtain additional financing in the future, as needed to continue the Network
expansion or for any other reason, may be impaired by the amount of debt
outstanding and the restrictions imposed by the covenants contained in the
Senior Notes Indenture and in agreements relating to other indebtedness; and
(iv) the Company may be more leveraged than certain of its competitors, which
may be a competitive disadvantage. There can be no assurance that the Company's
cash flow from operations will be sufficient to meet its obligations under the
Senior Notes or other indebtedness or the Convertible Preferred Stock or the
Exchangeable Preferred Stock as payments become due or that the Company will be
able to refinance the Senior Notes or other indebtedness at maturity or the
Convertible Preferred Stock or the Exchangeable Preferred Stock upon mandatory
redemption.
The Company anticipates that earnings will be insufficient to cover fixed
charges and cash dividends on preferred stock for the next several years. In
order for the Company to meet its debt and dividend service obligations, and its
dividend and redemption obligations with respect to its preferred stock, the
Company will need to substantially improve its operating results. There can be
no assurance that the Company's operating results will be sufficient to enable
the Company to meet its debt service obligations, and its dividend and
redemption obligations with respect to its preferred stock. In the absence of a
substantial improvement in operating results, the Company 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 the Company would be successful in raising such financing.
Recent and Expected Losses
The Company reported a net loss of $37.4 million for the year ended
December 31, 1996 and a net loss of $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, the Company's ability to
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generate operating income, EBITDA and net income will depend to a great extent
on demand for the private line circuits constructed in the Network expansion and
the success of the Company's switched long distance and data services. There can
be no assurance that the Company will return to profitability in the future.
Failure to generate operating income, EBITDA and net income will impair the
Company's ability to: (i) meet its obligations under the Senior Notes or other
indebtedness; (ii) pay cash dividends on the 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 the Company and the
value of the 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 the Company's
future success. The Company has, from time to time, experienced delays with
respect to the construction of certain portions of the Network expansion and may
experience similar delays in the future. These delays have postponed the
Company's ability to transfer long distance traffic from leased facilities to
owned facilities. Although the Company has made significant progress,
construction of the New York to Los Angeles via St. Louis route is not yet
complete. The Company has substantial existing commitments to purchase materials
and labor for construction of the Network expansion, and will need to obtain
additional materials and labor which may cost more than anticipated. Substantial
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 the Company's fiber in routes such carriers are constructing for their
own use. Difficulties or delays with respect to any of the foregoing may
significantly delay or prevent the completion of the Network expansion, which
would have a material adverse effect on the Company, its financial results and
the value of the Common Stock and its other securities.
The expansion of the Company's Network and its construction or acquisition
of new networks will be dependent, among other things, on its ability to acquire
rights-of-way and required permits from railroads, utilities and governmental
authorities on satisfactory terms and conditions and on its ability to finance
such expansion, acquisition and construction. Once expansion of the Network is
completed and requisite rights and permits are obtained, there can be no
assurance that the Company will be able to maintain all of its existing rights
and permits. Loss of substantial rights and permits or the failure to enter into
and maintain required arrangements for the Company's Network could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the value of the Common Stock and its other
securities.
Dependence Upon Network Infrastructure; Risk of System Failure; Security Risks
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its Network. The Company's Network and networks upon which it
depends are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security (by computer virus, break-ins or
otherwise) and other disruptions which may cause interruptions in service or
reduced capacity for customers, which could have a material adverse effect on
the Company's business, financial condition and results of operations and on the
value of the Common Stock and 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. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its services will continue to
decline over the next several years. The Company is aware that certain long
distance carriers (WorldCom, MCI, LCI, 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
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potentially stronger, competitor (or competitors) with expanded capacity.
Although the Company believes that there are significant barriers to entry for
some new entrants that may consider building a new fiber optic network, such as
substantial construction costs and the difficulty and expense of securing
appropriate rights-of-way, establishing and maintaining a sufficient customer
base, recruiting and retaining appropriate personnel and maintaining a reliable
network, certain of these barriers may not apply to some new entrants (such as
Qwest, utility companies or railroads which already have significant
rights-of-way). 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 the
Company to increase its capacity, an increase in the capacity of the Company's
competitors could adversely affect the Company's business. If industry capacity
expansion results in capacity that exceeds overall demand in general or along
any of the Company's routes, severe additional pricing pressure could develop.
As a result, certain industry observers have predicted that, within a few years,
there may be dramatic and substantial price reductions and that long distance
calls will not be materially more expensive than local calls. 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 the
Company and the value of the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
Development Risks and Dependence on Long Distance Switched Services Business
The success of the Company in the long distance switched services business
is dependent on the Company's ability to generate significant customer traffic,
to manage an efficient switched long distance network and related customer
service and the timely completion of the Network expansion. Prior to 1996 the
Company had not previously managed a switched long distance network and there
can be no assurance that its long distance switched services business can
generate positive EBITDA or net income. The failure of the Company 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 the Company. The Company's long
distance switched services business will require cash to meet its operating
expenses. The Company's long distance switched services business generated
negative EBITDA for each of the four quarters of 1996 and 1997 and the Company
believes it may be negative during 1998, due to access costs and uneven traffic
patterns creating high network overflow costs. Although the Company is
attempting to control such costs and improve EBITDA from long distance switched
services, there is no assurance it will be successful. The Company expects that
the Network expansion will result in an improvement in the gross margins and
EBITDA generated by its long distance switched services business. The Company
has experienced and expects to continue to experience difficulties in commencing
services for end users of carrier customers. Although the Company believes that
its performance with respect to these matters has met or exceeded industry
norms, such difficulties may adversely affect the Company's relationships with
its customers.
Important factors that could cause the Company's long distance switched
services business to fail to generate positive EBITDA include changes in the
businesses of the Company's reseller customers, an inability to attract new
customers or to quickly transfer new customers to its Network without problems,
the loss of existing customers, problems in the operation of the switched
network, the Company's lack of experience with long distance switched services,
increases in operating expenses or other factors affecting the Company's revenue
or expenses, including delays in the construction of the Network expansion and
increased expenses related to access charges and network overflow, not all of
which can be controlled by the Company. 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
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volume discounts with respect to local access charges, the Company may have a
cost disadvantage versus the larger carriers. Furthermore, the credit risk for
the Company's long distance switched services business is substantially greater
than the credit risk for the Company'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 the Company's private line customers. The Company'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). See "-- Switched
Long Distance Services."
Risks Inherent in Rapid Growth
Part of the Company's strategy is to achieve rapid growth through expanding
its long distance switched services business and through expanding the Network.
In addition, the Company 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 "Risk Factors -- Integration of Acquired Businesses;
Business Combinations." The Company's rapid growth has placed, and its planned
future growth will continue to place, a significant and increasing strain on the
Company's financial, management, technical, information and accounting
resources. See "-- Risk Factors -- Dependence on Billing, Customer Services and
Information Systems." Continued rapid growth would require: (i) the retention
and training of new personnel; (ii) the satisfactory performance by the
Company's customer interface and billing systems; (iii) the development and
introduction of new products; and (iv) the control of the Company's expenses
related to the expansion into the long distance switched services business and
the Network expansion. The failure by the Company to satisfy these requirements,
or otherwise to manage its growth effectively, would have a material adverse
effect on the Company and the value of the Common Stock and its other
securities.
Dependence on Billing, Customer Services and Information Systems
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company's long distance operation continues to expand, the need for
sophisticated billing and information systems will increase significantly. For
example, during the first half of 1997, the Company had negative gross margins
in its long distance switched services business, due in part to certain
customers which were using the Company's services for termination in LATAs where
the Company's prices were too low relative to access costs in such LATAs. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Failure of these vendors to deliver proposed products and services in a
timely and effective manner and at acceptable costs, failure of the Company to
adequately identify all of its information and processing needs, failure of the
Company's related processing or information systems or the failure of the
Company to upgrade systems as necessary could have a material adverse effect on
the ability of the Company to reach its objectives, on its financial condition
and on its results of operations and on the value of the Common Stock and its
other securities.
Year 2000 Risks
Certain of the Company'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. The Company 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. The Company believes that the cost of modifying those systems
that were not already scheduled for replacement for business
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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 the Company 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) the Company's suppliers and their ability to service the Company, to
accurately invoice for services rendered and to accurately process payments
received; and (ii) the Company's customers and their ability to continue to
utilize the Company's services, to collect from their customers and to pay the
Company for services received. The cumulative effect of such problems, if they
occur, could have a material adverse effect on the Company and the value of the
Common Stock and its other securities.
Integration of Acquired Businesses; Business Combinations
As part of its growth strategy, the Company 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 the Company 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 the Company, the potential diversion of
management time and attention, the impairment of relationships with and the
possible loss of key employees and customers of the acquired business, the
incurrence of amortization expenses if an acquisition is accounted for as a
purchase and dilution to the stockholders of the Company if the acquisition is
made for stock. Any acquired businesses will need to be integrated with the
Company's existing operations. This will entail, among other things, integration
of switching, transmission, technical, sales, marketing, billing, accounting,
quality control, management, personnel, payroll, regulatory compliance and other
systems and operating hardware and software, some or all of which may be
incompatible with the Company's existing systems. The Company has limited
expertise dealing with these problems. There can be no assurance that services,
technologies or businesses of acquired companies will be effectively assimilated
into the business or product offerings of the Company or that they will
contribute to the Company's revenues or earnings to any material extent. In
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
acquisitions could have a material adverse effect on the Company and the value
of the Common Stock and its other securities.
Reliance on Major Customers
The Company'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 the
Company's revenue in 1997, respectively. Excel, WorldCom and Frontier, the
Company's three largest customers in 1996, accounted for 35%, 8% and 10% of the
Company's revenues in 1996, respectively.
Most of the Company's arrangements with large customers do not provide the
Company with guarantees that customer usage will be maintained at current
levels. In addition, construction by certain of the Company's customers of their
own facilities, construction of additional facilities by competitors or further
consolidations in the telecommunications industry involving the Company's
customers would lead such customers to reduce or cease their use of the
Company's services which could have a material adverse effect on the Company and
the value of the Common Stock and its other securities.
The Company'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 the Company to fulfill its obligations to provide a
reliable switched network for use by Excel or the failure by Excel: (i) to
fulfill its obligations to utilize the Company's switched long distance services
(even though such failure could give rise in certain circumstances
23
<PAGE> 26
to claims by the Company); (ii) to utilize the volume of MOUs that the Company
expects it to utilize or (iii) to maintain and expand its business, could result
in a material adverse effect on the Company.
Dependence Upon Sole and Limited Sources of Supply
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services, network
capacity and switching and networking equipment, which, in the quantities and
quality demanded by the Company, are available only from sole or limited
sources. The Company is also dependent upon LECs to provide telecommunications
services and facilities to the Company and its customers. The Company has from
time to time experienced delays in receiving telecommunications services and
facilities, and there can be no assurance that the Company will be able to
obtain such services or facilities on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any such difficulty in
obtaining such services or additional capacity on a timely basis at an
affordable cost, or at all, would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also is dependent on its suppliers' ability to provide products and components
that comply with various Internet and telecommunications standards, interoperate
with products and components from other vendors and fulfill their intended
function as a part of the network infrastructure. Any failure of the Company's
suppliers to provide such products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Competition
The telecommunications industry is highly competitive. Many of the
Company's competitors and potential competitors have substantially greater
financial, personnel, technical, marketing and other resources than those of the
Company and a far more extensive transmission network than the Company. Such
competitors may build additional fiber capacity in the geographic areas to be
served by the Network 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 the Company, 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 the Company's reseller customers will have an increasing number of
alternative providers of switched long distance services. The Company competes
primarily on the basis of pricing, availability, transmission quality, customer
service (including the capability of making rapid additions to add end users and
access to end-user traffic records) and variety of services. The ability of the
Company to compete effectively will depend on its ability to maintain
high-quality services at prices generally equal to or below those charged by its
competitors.
An alternative method of transmitting telecommunications traffic is through
satellite transmission. Satellite transmission is superior to fiber optic
transmission for distribution communications, for example, video broadcasting.
Although satellite transmission is not preferred to fiber optic transmission for
voice traffic in most parts of the United States because it exhibits a slight
(approximately one-quarter-second) time delay, such delay is not important for
many data-oriented uses. In the event the market for data transmission grows,
the Company will compete with satellite carriers in such market. Also, at least
one satellite company, Orion Network Systems, Inc., has announced its intention
to provide Internet access services to businesses through satellite technology.
The Company competes with large and small facilities-based interexchange
carriers as well as with other coast-to-coast and regional fiber optic network
providers. There are currently four principal facilities-based long distance
fiber optic networks (AT&T, MCI, Sprint and WorldCom) and Qwest is building
another. The Company anticipates that each of Qwest and Frontier will have a
fiber network similar in geographic scope and potential operating capability to
that of the Company. The Company also sells long distance switched services to
both facilities-based carriers and nonfacilities-based carriers (switchless
resellers), competing with
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<PAGE> 27
facilities-based carriers such as AT&T, MCI, Sprint, WorldCom and certain
regional carriers. The Company competes in its markets on the basis of price,
transmission quality, network reliability and customer service and support. The
ability of the Company to compete effectively in its markets will depend upon
its ability to maintain high quality services at prices equal to or below those
charged by its competitors many of whom have extensive experience in the long
distance market. In addition, the Telecom Act of 1996 (as defined) will allow
the RBOCs and others to enter the long distance market. When RBOCs enter the
long distance market, they may acquire, or take substantial business from, the
Company's reseller customers. There can be no assurance that the Company will be
able to compete successfully with existing competitors or new entrants in its
markets. Failure by the Company to do so would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"-- Risks Related to Technological Change" and "-- Regulation."
On February 15, 1997, the United States Trade Representative designate
announced that an agreement had been reached with World Trade Organization
("WTO") countries to open world telecommunications markets to competition. The
agreement, known as the WTO Basic Telecommunications Services Agreement, 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 the Company or the Company's customers. See "-- Industry
Overview," "-- Business -- Private Line Services" and "-- Business -- Long
Distance Switched Services."
Dependence on Key Personnel
The Company's businesses are managed by a small number of key executive
officers, the loss of whom could have a material adverse effect on the Company.
The Company believes that its growth and future success will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. 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 the Company's financial, expansion, marketing and other
objectives.
Development Risks of the Frame Relay and ATM Transmission Business
The Company began offering Frame Relay, ATM and other data transmission
services during the first quarter of 1997. Although the Company has not yet
generated material revenues from this business, the Company believes that data
transmission services present a promising opportunity for the Company. To
succeed in providing these services, the Company must compete with AT&T, MCI,
Sprint, WorldCom and other large competitors. In addition, the Company expects
that it will be necessary to continue to make upgrades to its Network (in
advance of related revenues) to be competitive in providing these services. The
provision of data transmission services involves technical issues with which the
Company has very limited experience. In addition, the provision of these
services must be successfully integrated with the Company's existing businesses.
To the extent the Company does not successfully compete in providing these
services, it will not realize a return on its investment in data switches and
other equipment and it will not benefit from the growth, if any, in demand for
these services. A failure to successfully compete in data transmission services
could have a material adverse effect on the Company and the value of the Common
Stock and its other securities.
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<PAGE> 28
Recent Legislation and Regulatory Uncertainty
Certain of the Company's operations are subject to regulation by the FCC
under the Communications Act. In addition, certain of the Company's businesses
are subject to regulation by state public utility or public service commissions.
Changes in the regulation of, or the enactment or changes in interpretation of
legislation affecting, the Company's operations could have a material adverse
affect on the Company and the Common Stock. 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 the Company or its customers. The Company
anticipates that certain of such entrants will be strong competitors because,
among other reasons, they may enjoy one or more of the following advantages:
they may (i) be well capitalized; (ii) already have substantial end-user
customer bases; and/or (iii) enjoy cost advantages relating to local loops and
access charges. The introduction of additional strong competitors into the
switched long distance business would mean that the Company and its customers
would face substantially increased competition. This could have a material
adverse effect on the Company and the value of the Common Stock. 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, the
Company and its customers may not benefit as quickly from the lower access costs
that might otherwise have resulted had competition in the provision of local
access services not been thus delayed. Further, the FCC has issued orders
relating to universal service funding by interstate telecommunications carriers,
and to the access charges the Company and its customers are required to pay to
LECs. These orders have been appealed. The outcomes of the appeals, and the
outcomes of future FCC proceedings on these issues, are impossible to predict.
In addition, the Telecom Act provides that state proceedings may in certain
instances determine access charges the Company and its customers are required to
pay to the LECs. There can be no assurance that such proceedings will not result
in increases in such rates. Such increases could have a material adverse effect
on the Company or its customers. See "-- Industry Overview;" and
"-- Regulation."
Some members of Congress have expressed dissatisfaction with the FCC's
implementation of the Telecom Act, 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. However, it is
impossible to predict the scope or likelihood of success of any such possible
further legislation, or the potential impact on the Company of any such possible
further legislation.
Risks Relating to Mexican Joint Venture
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, the Company 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. The Company's carrying value for the Company's investment in
Progress International at December 31, 1997 was $11.6 million. The Company'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 the Company and the value of the Common Stock and its other
securities.
Potential Liability of Internet Access Providers
The law governing the liability of on-line services providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently is unsettled. Under the terms
26
<PAGE> 29
of the Telecom Act, 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 the Company'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 the Company. 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. The Company's
provision for service credits 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). The Company 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. The Company 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 the Company's
results of operations and financial position and on the value of the Common
Stock and its other securities.
Risks Related to Technological Change
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as Frame Relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for data communications services. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies, could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company's pursuit of necessary technological advances may require
substantial time and expense, and there can be no assurance that the Company
will succeed in adapting its telecommunications services business to alternate
access devices, conduits and protocols.
In addition, recent technological advances that show the potential to
greatly expand the capacity of existing and new fiber optic cable, which could
greatly increase supply, could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The principal properties owned by the Company consist of: (i) the portion
of the Network completed or under construction; and (ii) the coast-to-coast
microwave system, consisting of microwave transmitters,
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<PAGE> 30
receivers, towers and antennae, auxiliary power equipment, transportation
equipment, equipment shelters and miscellaneous components. Generally, the
Company's fiber optic system and microwave relay system components are standard
commercial products available from a number of suppliers.
The principal offices of the Company are located in approximately 105,000
square feet of space in Austin (the "City View Space"). The Company leases the
City View Space pursuant to the terms of a lease which expires in December 2004,
at a current annual base rental of approximately $1,680,000, and has an option
to renew the lease for two seven-year terms at the then-prevailing market rate
(but not less than the then-current rental rate) at the time of renewal. The
Company has additional offices in Austin, consisting of approximately 76,000
square feet (the "Braker Space"). The Company leases the Braker Space under an
agreement which expires in January 2003, at an annual base rental of
approximately $570,000. In addition, the Company subleases former office space
in two other locations in Austin covering approximately 44,000 square feet and
16,000 square feet. The sublease payments satisfy the Company's monthly rental
obligations under the original leases.
The Company leases sites for its switches in or near Los Angeles, Dallas,
Chicago, Atlanta, Philadelphia and Joplin, Missouri under lease agreements that
expire between 2000 and 2005. The total current rental commitments for the
switch site leases are approximately $30,000 per month. The Company's six
switches are leased under capital leases from DSC Finance Corporation over a
term of five years.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, all of which have
arisen in the ordinary course of business and some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings are likely to have a material adverse effect on the
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market (the
"NNM") under the trading symbol "IIXC." The following table sets forth, on a per
share basis for the periods indicated, the high and low closing sale prices for
the Common Stock as reported by the NNM.
<TABLE>
<CAPTION>
PRICE RANGE
------------
HIGH LOW
---- ----
<S> <C> <C>
Fiscal Year 1996
Third quarter (from July 3, 1996)......... $ 21 1/8 $ 11 1/2
Fourth quarter............................ 30 3/4 19 5/8
Fiscal Year 1997
First Quarter............................. 36 1/4 18 3/4
Second Quarter............................ 27 7/8 17
Third Quarter............................. 33 19 1/2
Fourth Quarter............................ 40 1/8 29 3/8
</TABLE>
As of March 1, 1998, there were approximately 151 holders of record of the
Common Stock.
DIVIDEND POLICY
IXC Communications has never paid any cash dividends on its Common Stock
and does not expect to pay cash dividends on its Common Stock in the foreseeable
future. The terms of the Senior Notes Indenture restrict the payment of cash
dividends. No dividends may be paid on the Common Stock until all dividends are
paid in full on the Company's Convertible Preferred Stock, the Company's 10%
Junior Series 3 Cumulation Redeemable Preferred Stock (the "Series 3 Preferred
Stock") and the Exchangeable Preferred Stock. Dividends on the Convertible
Preferred Stock and the Exchangeable Preferred Stock are payable quarterly in
cash (or on or prior to March 31, 1999 and February 15, 2001, at the option of
the Company, in additional shares of Convertible Preferred Stock or Exchangeable
Preferred Stock, respectively) in arrears at the annual rate of 7 1/4% and
12 1/2% of the aggregate liquidation preference therefore, respectively. The
Company's ability to pay cash dividends on shares of Convertible Preferred Stock
and the Exchangeable Preferred Stock is limited by the terms of the Senior Notes
Indenture and by the terms of the Series 3 Preferred Stock. As of December 31,
1997 the aggregate liquidation preference of the Series 3 Preferred Stock, the
Convertible Preferred Stock and the Exchangeable Preferred Stock was $.7
million, $105.5 million and $309.0 million respectively. Dividends on the Series
3 Preferred Stock accumulate at an annual rate of 10% (based on the liquidation
preference) plus interest. IXC Communications currently intends to retain future
earnings, if any, to finance its operations and fund the growth of its business.
Any payment of future dividends on its Common Stock will be at the discretion of
the Board of Directors of IXC Communications and will depend upon, among other
things, IXC Communications' earnings, financial condition, capital requirements,
level of indebtedness, contractual and legal restrictions with respect to the
payment of dividends and other factors that IXC Communications' Board of
Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
On October 31, 1997, the Company consummated an offer (the "Series 3 Tender
Offer") to exchange shares of the Company's common stock (the "Common Stock")
for all its issued and outstanding shares of the Series 3 Preferred Stock. Each
holder that tendered its shares of Series 3 Preferred Stock received
approximately 49.85 shares of Common Stock for each share of Series 3 Preferred
Stock tendered. An aggregate of 604,970 shares of Common Stock were issued in
the Series 3 Tender Offer. The number of shares of Common Stock issued for each
share of Series 3 Preferred Stock tendered was calculated by dividing the
aggregate per share liquidation preference, including accrued and unpaid
dividends, on one share of Series 3
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<PAGE> 32
Preferred Stock as of October 31, 1997 (the expiration date of the Series 3
Tender Offer) by $33.00 (the last reported sale price of the Common Stock on the
NNM on October 31, 1997). The aggregate liquidation preference, including
accrued and unpaid dividends, on the Series 3 Preferred Stock at October 31,
1997, was approximately $20.6 million (or $1,645 per share). The Common Stock
issued in connection with the Series 3 Tender Offer was not registered under the
Securities Act. Over 95% of the shares of Series 3 Preferred Stock were tendered
prior to the expiration of the Series 3 Tender Offer. The Common Stock issued in
the Series 3 Tender Offer was deemed to be exempt from registration under the
Securities Act in reliance upon Section 3(a)(9) thereof. No underwriters or
placement agents were employed in connection with the Series 3 Tender Offer. The
Company intends to redeem the remaining shares of Series 3 Preferred Stock in
1998.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical financial data
of the Company. The historical financial data for the Company has been derived
from the audited Consolidated Financial Statements of the Company. 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 the Company's
Consolidated Financial Statements, related notes thereto and other financial
information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue..................... $ 71,123 $ 80,663 $ 91,001 $203,761 $420,710
Operating income (loss)................... (10,596) 14,085 1,429 (14,016) (45,235)
Income (loss) before extraordinary gain
(loss)................................. (31,812) 5,017 (3,218) (37,448) (94,555)
Extraordinary gain (loss)(1).............. 8,495 2,298 (1,747) -- --
Net income (loss)......................... $(23,317) $ 7,315 $ (4,965) $(37,448) $(94,555)
Basic and diluted income (loss) per
share(2):
Before extraordinary gain (loss)....... $ (1.43) $ .13 $ (.21) $ (1.42) $ (3.75)
Extraordinary gain (loss).............. .36 .10 (.07) -- --
Net income (loss)...................... $ (1.07) $ .23 $ (.28) $ (1.42) $ (3.75)
Weighted average basic shares............. 23,332 24,310 24,335 27,525 30,961
Weighted average diluted shares........... 23,332 24,318 24,335 27,525 30,961
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 6,230 $ 6,048 $ 6,915 $ 61,340 $152,720
Total assets.............................. 94,281 105,409 336,475 459,151 917,095
Total debt and capital lease
obligations............................ 59,954 69,124 298,794 302,281 320,295
Redeemable preferred stock................ -- -- -- -- 403,368
Stockholders' equity (deficit)............ 6,871 14,189 6,858 63,479 (47,955)
OTHER FINANCIAL DATA:
EBITDA(3)................................. $ 10,465 $ 26,206 $ 18,867 $ 13,225 $ 15,513
Capital expenditures...................... 27,008 7,087 23,670 136,391 314,327
</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 No. 98. For further discussion of basic
and diluted income (loss) per share and the impact of Statement No. 128, see
note 2 to the notes to the consolidated financial statements.
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<PAGE> 33
(3) EBITDA is operating income (loss) plus depreciation and amortization. The
Company has included information concerning EBITDA because it believes that
EBITDA is used by certain investors as one measure of an issuer's historical
ability to service its debt. EBITDA is not a measurement determined in
accordance with GAAP, should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP and
is not necessarily comparable with similarly titled measures for other
companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations contains statements that constitute "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 the Company and involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company 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 the Company's control.
In addition, prospective investors should specifically consider the various
factors identified in this Form 10-K including the matters set forth under
"Business -- Risk Factors," which could cause actual results to differ
materially from those indicated by such forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, there can be no assurance that the
results referred to in forward-looking statements contained in this Form 10-K
will in fact transpire. The following discussion should be read in conjunction
with the Consolidated Financial Statements and the related Notes thereto,
included elsewhere in this Form 10-K.
OVERVIEW
The Company is a leading provider of telecommunications transmission,
switched long distance and associated services to long distance and other
communications companies. The Company's Network 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. The
Company provides two principal products: transmission of voice and data over
dedicated circuits ("private lines") and transmission of long distance traffic
processed through the Company's switches ("long distance switched services").
During the first quarter of 1997, the Company 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.
Private Line Business. Substantially all of the Company's revenue in 1995
and prior years, approximately 49% of its revenue for 1996 and 39% for 1997 was
generated by its private line business, which has historically provided positive
EBITDA and cash flow (even in years when the Company incurred net losses). The
Company provides private line service to customers generally either on a "take
or pay" long-term basis or, after contract expiration, on a month-to-month
basis. The Company's private line transmission agreements are generally
long-term leases which provide for monthly payment in advance on a fixed-rate
basis, calculated according to the capacity and length of the circuit used.
During 1997, the Company leased transmission capacity to over 230 customers,
with the five largest private line customers during that year accounting for
approximately 52% of private line revenue and approximately 20% of the Company's
total revenue. Three of the Company's largest private line customers, AT&T,
WorldCom and Frontier, accounted for approximately 6.4%, 4.2% and 4.1%,
respectively, of the Company's total revenue in 1997.
The largest component of the cost of services of the private line business
is the expense of leasing off-net capacity from other carriers to meet customer
needs which the Company cannot currently meet with its own Network due to
capacity or geographic constraints. In the normal course of business the Company
has entered
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<PAGE> 34
into capacity-exchange agreements with other carriers. Pursuant to such
agreements, the Company exchanges excess capacity on its Network with other
carriers for capacity on the other carriers' networks. Such exchange agreements
generally do not provide for cash payments to be made, but rather allow the
Company to substantially reduce the cash payments it must make for off-net
capacity from other carriers. Such exchanges are accounted for at the fair value
of the capacity exchanged, as non-cash revenue and expense in equal amounts over
the term of the agreements. In 1997, 1996 and 1995 the Company recorded revenue
and expense of $14.0 million, $14.0 million and $13.8, respectively, relating to
such exchanges.
Long Distance Switched Services Business. At the end of 1995, the Company
expanded into the business of selling long distance switched services to long
distance resellers. In 1997 and 1996, this business contributed 61% and 51%,
respectively, of the Company's total revenue. The Company sells these services
on a per-call basis, charging by the MOUs, with payment due monthly after
services are rendered. The Company's rates for calls generally vary with the
duration of the call, the day and time of day the call was made and whether the
traffic is intrastate, interstate or international. At December 31, 1997, the
Company had over 100 long distance reseller customers. The Company has achieved
significant revenue growth since it began offering long distance switched
services. The Company's largest switched services customer, Excel, accounted for
approximately 46.5% of the switched long distance business and approximately
28.6% of the Company's total revenue in 1997.
The three main components of long distance switched services business costs
are access costs with LECs and other providers, the expense of leasing off-net
capacity from other carriers, and operations and administration expenses. The
LEC access charges, which are usage-based and vary according to the LATA in
which calls originate and terminate, represent a majority of the total costs for
the long distance switched services business. Long distance network leasing
costs are incurred as the Company leases capacity to carry traffic to areas
where its Network does not reach or is already running at or near capacity. As
the Company transfers traffic onto its newly constructed network routes, the
Company expects to realize cost savings because it will be able to reduce the
amount of long distance network capacity that otherwise would be required to be
leased from other parties. However, the Company does not intend to expand its
Network to all areas of the United States. Accordingly, the Company anticipates
that it will continue to lease capacity from other carriers regardless of the
Network expansion. Because the long distance switched services business
generally has lower margins than the private line business, increases in
switched long distance volumes have caused and will continue to cause a decrease
in the Company's overall margins.
Although the Company has been successful in establishing its nationwide
long distance switched services business with significant revenue, EBITDA for
the long distance switched services business has historically been negative
through 1997 and may be negative in 1998. EBITDA losses in the long distance
switched services business were greatly reduced during the second half of 1997,
with consecutive quarter losses being reduced over 50% from the second to the
third quarter and over 25% from the third quarter to the fourth quarter. The
Company believes the improvements in operating results from long distance
switched services are the result of three major factors:
First, the Company historically priced its interstate services to customers
at a blended rate based upon the expected usage and mix of traffic between
high-access-cost and low-access-cost LATAs. During 1997 certain of the Company's
customers generated switched traffic comprised of a substantially higher mix of
minutes originating or terminating in high-access-cost LATAs than was
anticipated at the time the customer contracts were negotiated and pricing
established. During the second half of 1997, this situation improved
significantly as the Company established rates more directly related to the
customer's actual mix of traffic. However, the Company experienced substantial
negative gross profits in the fourth quarter of 1997 with respect to
international services delivered to a high-volume customer due to unfavorable
international settlement costs not adequately covered by the prices charged to
the customer. The Company no longer offers such services to the customer.
Second, the Company configures its switched network to account for the
expected traffic distribution of its customers. In certain areas during the
first half of 1997, traffic volume was higher than expected causing certain of
the Company's switches to run at capacity and requiring the Company to overflow
excess traffic onto
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<PAGE> 35
other carriers' switched networks. The Company has added ports to its existing
switches and deployed two additional switches to better manage the current and
projected volumes and mixes of traffic in order to enhance Network efficiency.
Third, the Company benefitted from the impact of the FCC mandated rate
reductions for the connection charges paid by the long distance carriers to
LEC's.
There can be no assurance that the improvements in long distance switched
services' EBITDA experienced during the last half of 1997 will continue in the
future. In addition, some increases in certain elements of access charges are
anticipated in mid-1998, although the overall effect of access charge reform on
the Company is uncertain.
The Company expects that as competition increases, prices for both private
line and long distance switched services will decline. These price declines will
effect both the Company's revenue and its cost of services.
Capital Expenditures. The Company has spent significant amounts of capital
to develop its coast-to-coast Network to service its private line, long distance
switched services and other businesses and is continuing a substantial expansion
of its Network. On a cash basis, the Company spent $314.3 million for capital
expenditures during 1997 and estimates that it will spend approximately $525.0
million in 1998. The Company expects to continue making substantial capital
expenditures thereafter for additional fiber expansion and the deployment of
additional optronics to provide capacity for revenue growth, as well as
additional voice and data switches for anticipated growth in voice and data
traffic.
Acquisition Transactions. In December 1997, the Company entered into an
agreement to acquire NLD, a provider of long distance services to businesses and
association programs, agents and other long distance carriers. NLD has
annualized revenue in excess of $100.0 million. The transaction is intended to
be a tax-free, pooling-of-interests merger in which the NLD shares will be
acquired for approximately 4.3 million shares of the Company's Common Stock. The
transaction, which requires regulatory approvals and NLD shareholder approval,
is anticipated to close in mid-1998.
Joint Ventures. Marca-Tel, a joint venture in which the Company indirectly
holds a minority interest, obtained a license from the Mexican government to
provide certain telecommunication services in Mexico. The Company has
contributed $37.0 million as of December 31, 1997 to Progress International
which owns a 49.0% interest in Marca-Tel, substantially all of which funds have
been used to fund Marca-Tel at December 31, 1997. The Company accounts for its
investment in Progress International (and indirect investment in Marca-Tel)
using the equity method and, as a result, records a percentage of Marca-Tel's
operating results (profits or losses).
In October 1997, the Company formed a joint venture with Telenor AS, the
Norwegian national telephone company, to provide telecommunication services to
carriers and resellers in nine European countries. The joint venture is owned 40
percent by the Company, 40 percent by Telenor, and 20 percent by Clarion
Resources Communications Corporation, a U.S.-based telecommunications company in
which Telenor owns a controlling interest.
In December 1997, the Company formed Unidial Communications Services, LLC,
a joint venture with Unidial. The joint venture is building a direct sales force
to market and sell Unidial's and the Company's products over the Company's
Network. The joint venture is owned 80 percent by Unidial and 20 percent by the
Company. Subject to the terms of the joint venture agreement, upon request of
the President of the joint venture, the Company is obligated to invest up to an
additional $7.5 million during 1998 and after November 1, 1998, it may be
obligated to invest up to an additional $4.0 million. After its funding
obligation is fulfilled, the Company is not required to fund any future
investments to the joint venture, but to the extent Unidial funds such
investments alone, the Company's interest in the joint venture may be diluted.
PSINet Transaction. To enhance the Company's product and service offerings,
in February 1998, the Company consummated agreements with PSINet which allow
each party to market and sell the products and services of the other party.
Under the terms of the agreements, the Company will provide PSINet with an
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<PAGE> 36
IRU in 10,000 miles of OC-48 transmission capacity on its Network over a 20-year
period in exchange for approximately 10.2 million shares representing 20%
(post-issuance) of PSINet common stock. If the value of the PSINet common stock
received by the Company is less than $240.0 million at the earlier of one year
after the final delivery of the transmission capacity (scheduled for late-1999)
or four years after the transaction's closing, PSINet, at its option, will pay
the Company cash and/or deliver additional PSINet common stock to increase the
value of the cash and Common Stock paid by PSINet to $240.0 million. Upon
delivery of the transmission capacity to PSINet, the Company will begin to
receive a maintenance fee which, as the full capacity has been delivered, should
increase to approximately $11.5 million per year. The Company will account for
its investment in PSINet using the equity method and, as a result will record a
percentage of PSINet's operating results (profits or losses).
Fiber Sales and IRUs. In connection with the Network expansion, the Company
has entered into various agreements to sell fiber usage rights. Sales of fiber
usage rights are recorded as deferred revenue and are included in other
non-current liabilities in the accompanying consolidated balance sheets. Revenue
is recognized over the terms of the related agreements. In 1997, the Company
received approximately $57.0 million in cash from these sales but recognized
only approximately $.8 million as revenue from these sales.
Financing Transactions. In October 1995, the Company issued $285.0 million
of Senior Notes primarily to finance a portion of the Network expansion.
In July 1996, the Company raised gross proceeds of approximately $83.3
million (before deducting certain expenses) through its initial public offering
of the Company's Common Stock (the "IPO") and $12.5 million from the private
placement of the Company's Common Stock with GEPT (the "GEPT Private
Placement").
In April 1997, the Company raised gross proceeds of $100 million (before
deducting discounts and certain expenses) through the sale of its Convertible
Preferred Stock.
In August 1997, the Company raised gross proceeds of $300 million (before
deducting discounts and certain expenses) through the sale of its Exchangeable
Preferred Stock.
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<PAGE> 37
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial
information for each of the Company's quarters in 1996 and 1997. This quarterly
information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Form 10-K and includes all adjustments
(which consist only of normal recurring adjustments) necessary to present fairly
the unaudited quarterly results set forth herein. The Company's quarterly
results have in the past been subject to fluctuations, and thus, the operating
results for any quarter are not necessarily indicative of results for any future
period. The Company may experience substantial fluctuations in quarterly results
in the future as a result of various factors, including customer turnover,
variations in the success of its customers' businesses and price competition. In
addition, delays in completion of the construction of new network routes could
cause quarterly results to vary.
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED
------------------------------------------------ ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ ----------- -------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net operating revenue:
Private line circuits..... $ 22,628 $ 24,003 $25,766 $27,396 $ 30,869 $ 38,494 $ 41,948 $ 51,087
Switched long distance.... 3,622 19,004 35,250 46,092 53,041 50,371 70,292 84,608
-------- -------- ------- ------- -------- -------- -------- --------
Net operating revenue....... 26,250 43,007 61,016 73,488 83,910 88,865 112,240 135,695
Operating expenses:
Cost of services.......... 15,600 31,643 43,774 52,452 68,982 74,150 83,889 98,106
Operations and
administration.......... 10,417 10,786 12,083 13,781 16,567 18,664 22,240 22,599
Depreciation and
amortization............ 6,010 6,644 7,280 7,307 10,002 13,363 19,402 17,981
-------- -------- ------- ------- -------- -------- -------- --------
Total operating
expenses.............. 32,027 49,073 63,137 73,540 95,551 106,177 125,531 138,686
-------- -------- ------- ------- -------- -------- -------- --------
Operating loss.............. $ (5,777) $ (6,066) $(2,121) $ (52) $(11,641) $(17,312) (13,291) (2,991)
======== ======== ======= ======= ======== ======== ======== ========
Net loss.................... $(11,699) $(12,067) $(5,624) $(8,058) $(19,878) $(28,810) (26,788) (19,079)
======== ======== ======= ======= ======== ======== ======== ========
Basic and diluted loss per
share(2).................. $ (.50) $ (.51) $ (.20) $ (.28) $ (.66) $ (1.01) $ (1.08) $ (.99)
======== ======== ======= ======= ======== ======== ======== ========
OTHER FINANCIAL AND
OPERATIONS DATA:
EBITDA(1)................. $ 233 $ 578 $ 5,159 $ 7,255 $ (1,639) $ (3,949) 6,111 14,990
Minutes of use
(in millions)........... 33.9 199.3 375.1 496.9 606.0 636.2 825.3 966.9
</TABLE>
- ---------------
(1) EBITDA is operating loss plus depreciation and amortization. The Company has
included information concerning EBITDA because it believes that EBITDA is
used by certain investors as one measure of an issuer's historical ability
to service its debt. EBITDA is not a measurement determined in accordance
with GAAP, should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with GAAP and is not
necessarily comparable with similarly titled measures for other companies.
(2) Basic and diluted loss per share calculations for each of the quarters were
based on the weighted average number of shares outstanding for each period,
therefore the sum of the quarters may not necessarily be equal to the full
year basic and diluted loss per share amount. The 1996 and first three
quarters of 1997 loss per share amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128, Earnings per Share and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98. See
note 2 to the consolidated financial statements.
RESULTS OF OPERATIONS
1997 Compared With 1996
Net operating revenue for 1997 increased 106.5% to $420.7 million from
$203.8 million for 1996. The increase is primarily a result of both the
increased growth of the Company's long distance switched services
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<PAGE> 38
business and private line business. Long distance switched services revenue
increased 148.5% to $258.3 million for 1997 compared to $104.0 million for 1996.
Billable MOUs were 3.03 billion in 1997, compared to 1.11 billion for 1996.
Revenue per MOU decreased from 9.3c in the fourth quarter of 1996 to 8.8c in the
fourth quarter of 1997 due to competitive price pressure, which is expected to
continue. Revenue for the Company's private line business for 1997 increased
62.7% to $162.4 million from $99.8 million for 1996. The private line increase
in revenue correlates with the additional fiber capacity available, or
anticipated to be available, on the Network.
Cost of services consists principally of access charges paid to LECs and
transmission lease payments to, and exchanges with, other carriers. Cost of
services for 1997 increased 126.6% to $325.1 million from $143.5 million for
1996. The increase is primarily a result of additional leases for transmission
capacity supporting the Company's private line and switched long distance
services businesses, MOUs provided by other carriers and access charges paid to
LECs in connection with the increased long distance switched services revenue.
Cost of services increased faster on a percentage basis than revenue principally
because switched long distance services revenues (which represent an increasing
portion of total revenues) generate substantially lower gross margins than
private line revenues and because of certain uneconomic customer contracts that
the Company had in the first two quarters of 1997 and an uneconomic customer
contract that the Company had in the fourth quarter of 1997. The Company has
historically had a relatively low cost of services as a percentage of revenue
because substantially all its revenue was derived from private line services,
generally made at a relatively low cost over its own network. Cost of services
in the switched long distance services business are substantially greater than
in the private line business due to the additional costs of LEC access charges,
leases for long distance circuits and MOUs obtained from other carriers. In July
1997 the FCC mandated rate reductions for the connection charges paid by the
long distance carriers to LEC's. The favorable impact of these rate reductions
are reflected in the financial statements. The Company expects its cost of
services as a percentage of revenue to increase over historical results as the
switched services revenue becomes a larger share of the Company's business.
Operations and administration expenses for 1997 increased 70.1% to $80.1
million from $47.1 million for 1996. This increase is primarily the result of
employee costs and other operating expenses associated with the growth in the
Company's Network. The Company anticipates that as it expands its long distance
switched services business and its fiber network, including the projected
integration of NLD's operations into the Company, operations and administration
expenses will continue to increase, but will continue to decline as a percentage
of revenue.
Depreciation and amortization for 1997 increased 123.2% to $60.7 million
from $27.2 million for 1996. The increase is primarily the result of
depreciation related to portions of the Company's Network completed during 1997.
Depreciation and amortization will increase in subsequent periods, as the
Company's continuing investment in newly constructed routes and other Network
equipment is depreciated.
Interest income for 1997 decreased from $10.2 million for 1996 to $7.7
million as proceeds from the Company's 1996 and 1997 debt and equity placements
were used to construct the Company's network and operate its business. The
decrease from 1996 was offset partially by the interest earned on the proceeds
of the Company's sale of $100.0 million of the Convertible Preferred Stock in
April 1997 and $300.0 million of the Exchangeable Preferred Stock in August
1997.
Interest expense decreased from $37.1 million in 1996 to $31.2 million in
1997. The decrease is primarily the result of additional capitalization of
interest related to the fiber network construction.
Equity in losses of unconsolidated subsidiaries for 1997 were $23.8 million
compared to $2.0 million in 1996. These losses primarily relate to the Company's
share of losses in the Mexican joint venture, which began operations during the
first quarter of 1997, while continuing to complete its network construction. At
December 31, 1997, the Company's net carrying value in its investment in the
Mexican joint venture was $11.6 million. In February 1998, Marca-Tel announced
that it was putting further investment on new fiber routes on hold, awaiting
more suitable regulatory and market conditions. Failure to provide further
significant funding to Progress International is likely to result in a default
under Marca-Tel's financing arrangements and could result in the foreclosure of
a third party's security interest in Progress International's interest in
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<PAGE> 39
Marca-Tel. The Company's interest in Progress International, and thus its
indirect interest in Marca-Tel, therefore could be diluted or lost entirely.
Income tax expense for 1997 was $1.4 million compared to a benefit of $6.0
million for 1996. The increase occurred because the Company recognized tax
benefits related to the favorable resolution of federal income tax examinations
in 1996. For accounting purposes, the Company is not recognizing any tax
benefits relating to losses incurred during both 1996 and 1997.
The Company experienced a net loss applicable to common shareholders of
$116.2 million for 1997 compared to $39.2 million for 1996 as a result of the
factors discussed above and the increase in preferred stock dividends in 1997.
The increase in preferred stock dividends of $19.9 million is the result of
issuance of the Convertible Preferred Stock in April 1997 and the Exchangeable
Preferred Stock in August 1997.
1996 Compared With 1995
Net operating revenue for 1996 increased 124.0% to $203.8 million from
$91.0 million for 1995. The increase is primarily a result of the successful
commencement of the Company's long distance switched services business
(particularly the addition of Excel as a customer). Switched long distance
services revenue were $104.0 million for 1996 (compared to $1.4 million for
1995). The vast majority of this revenue was generated in the third and fourth
quarters of 1996. Billable MOUs were 1.1 million for 1996. Revenue per MOU
decreased from 10.7c in the first quarter of 1996 to 9.3c in the fourth quarter
of 1996. This decrease resulted from competitive price pressure, which is
expected to continue. Revenue for the Company's private line business for 1996
increased 11.4% to $99.8 million from $89.6 million for 1995.
Cost of services for 1996 increased 259.6% to $143.5 million from $39.9
million for 1995. The increase is primarily a result of the addition of long
distance leases supporting the long distance switched services business, MOUs
leased from other carriers and access charges paid to LECs in connection with
the long distance switched services business. The Company did not incur any
significant expenses for the long distance switched services business during
1995.
Operations and administration expenses for 1996 increased 45.8% to $47.1
million from $32.3 million for 1995. This increase is primarily the result of
employee costs and other operating expenses associated with the Company's long
distance switched services business.
Depreciation and amortization for 1996 increased 56.3% to $27.2 million
from $17.4 million for 1995. The increase is primarily the result of
depreciation related to capital expenditures associated with the Company's
expansion and improvement of its Network.
Interest income for 1996 increased to $10.2 million from $3.0 million for
1995. The increase is primarily related to interest earned on the investment of
the proceeds from the sale of the Senior Notes issued in October 1995 and the
interest earned in 1996 on the investment of the proceeds from the IPO and the
GEPT Private Placement.
Interest expense for 1996 increased to $37.1 million from $14.6 million for
1995. The increase is primarily the result of interest expense attributable to
the Senior Notes, which were issued during the fourth quarter of 1995.
Equity in the net loss of unconsolidated subsidiaries for 1996 was $2.0
million in 1996 compared to slight income for 1995. The loss was primarily the
result of start-up losses relating to the Company's investment in its Mexican
Joint Venture.
Income taxes for 1996 resulted in a $6.0 million tax benefit compared to a
benefit of $1.7 million for 1995. The difference between the tax benefits
recorded for 1996 and the expected benefit at the federal statutory rate is
primarily due to state taxes, losses incurred (the tax benefit of which is not
recorded due to uncertainty regarding its realization), and resolution of
Federal income tax examinations which were concluded in the second and third
quarters of 1996.
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<PAGE> 40
The Company experienced a net loss of $37.4 million for 1996 compared to a
net loss of $5.0 million for 1995 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Except for the historical information contained below, the matters
discussed in this section are forward-looking statements that involve a number
of risks and uncertainties. The Company's actual liquidity needs, capital
resources and results may differ materially from the discussion set forth below
in such forward-looking statements. For a discussion of important factors that
could materially affect such matters, see "Business-Risk Factors."
Through 1995, the Company's private line operations provided positive cash
flow with adequate liquidity to meet the Company's operational needs. However,
the Company's capital expenditures and, since the issuance of the Senior Notes
in the fourth quarter of 1995, its interest expense and operating losses, have
been financed with the proceeds of debt and equity securities. For 1997 and
1996, the Company's EBITDA minus interest expense minus capital expenditures
plus the increases in working capital were negative $284.1 million and negative
$130.2 million, respectively.
Cash provided by operating activities increased $43.1 million to $14.3
million in 1997, compared to cash used in operating activities of $28.7 million
in 1996, primarily due to the current year's proceeds relating to fiber rights
sales in 1997 of $69.7 million, off-set primarily by increases in net losses.
Cash used in investing activities in 1997 was $298.4 million, primarily
from the Company's capital spending of $314.3 million and investment in
non-consolidated subsidiaries (chiefly the Mexican joint venture) of $35.5
million being partially offset by the release of $51.4 million of funds from
escrow under the Senior Notes. In 1996 cash provided by investing activities was
$3.1 million as $136.4 million in capital expenditures and $7.3 million of
investments in unconsolidated subsidiaries were offset by $146.8 million in net
release of funds from escrow under the Senior Notes.
Cash provided by financing activities was $375.5 million in 1997 compared
to $80.0 million in 1996. The year over year increase was due to $95.4 million
in net proceeds from issuing the Convertible Preferred Stock in April 1997 and
$288.0 in net proceeds from issuing the Exchangeable Preferred Stock in August
1997. In 1996, the net cash provided by financing activities was largely due to
$94.1 million from issuing common stock offset mainly by payments of debt
service.
As of February 28, 1998, the Company had approximately $106.0 million in
cash. The Company anticipates incurring a substantial amount of additional
indebtedness in 1998. The Company is in discussions with various investment
bankers, vendors and lending institutions regarding substantial additional
equity and/or debt financing for 1998 and beyond. The Company seeks to obtain
sufficient funding from these sources plus cash receipts from fiber sales and
operations for the following major uses of cash: (i) the Network expansion and
other capital expenditures; (ii) debt service; (iii) lease payments; (iv)
funding its joint ventures; and (v) working capital. Capital spending in 1998 is
projected to be approximately $525.0 million. After 1998, capital expenditures
are expected to be reduced, but continue to be substantial. There can be no
assurance that the Company will be successful in obtaining the necessary
financing to meet its needs. A failure to raise cash would delay or prevent such
capital expenditures and the construction of the Network expansion. Also, the
foregoing capital expenditure and cash requirements for 1998 do not take into
account any acquisitions.
The Company is required to make interest payments in the amount of $35.6
million on the Senior Notes each year. For 1997, EBITDA was insufficient to
cover the Company's debt service requirements under the Senior Notes. The
Company anticipates that such payments during 1998 will be made from cash on
hand. The Company is also required to make principal payments of $4.0 million on
other debt in 1998 including quarterly principal payments of $560,000 from March
31, 1998 through December 31, 1999.
In October 1997, the Company exchanged 96.7% of its Series 3 Preferred
Stock for Common Stock. Each stockholder of Series 3 Preferred Stock received
49.85 shares of Common Stock for each share of Series 3 Preferred Stock. As a
result of this exchange 12,136 shares of Series 3 Preferred Stock were retired
38
<PAGE> 41
and 604,871 shares of Common Stock were issued. At December 31, 1997, the
aggregate liquidation preference of the remaining outstanding Series 3 Preferred
Stock was $692,000. The Company expects to redeem the remaining Series 3
Preferred Stock during 1998.
The Company is required to make minimum annual lease payments for
facilities, equipment and transmission capacity used in its operations. In 1998,
1999 and 2000 the Company is currently required to make payments of
approximately $10.7 million, $10.7 million and $9.3 million, respectively, on
capital leases and $32.6 million, $8.7 million and $6.3 million, respectively,
on operating leases. The Company expects to incur additional operating and
capital lease costs in connection with the Network expansion.
In connection with its Network expansion, the Company has entered into
various construction and installation agreements with contractors. Total
commitments remaining under these agreements were approximately $77.6 million at
December 31, 1997. These commitments are expected to be paid during 1998.
In connection with the Network expansion, as of December 31, 1997, the
Company had committed to pay $42.0 million in shared construction costs for
fiber usage rights on other long distance carriers' networks. Estimates of these
shared construction costs are included in the Company's 1998 capital expenditure
estimates. Pursuant to these agreements relating to the construction of the
Network expansion, the Company has committed to pay a total of $30.4 million for
periods ranging from twenty to twenty-five years for maintenance and license
fees.
At the present time, the Company does not anticipate significant additional
funding to Progress International for investment in Marca-Tel until the
regulatory and market conditions in Mexico improve. The Company is not obligated
to continue to fund Progress International and the Senior Notes Indenture and
the terms of the Exchangeable Preferred Stock contain significant limitations on
the amount the Company may invest in Progress International and other
non-majority owned entities. However, failure to provide further significant
funding to Progress International is likely to result in a default under
Marca-Tel's financing arrangements and could result in the foreclosure of the
third party's security interest. The Company's interest in Progress
International, and thus its indirect interest in Marca-Tel, therefore could be
diluted or lost entirely. See "Business -- Mexican Joint Venture."
The forward-looking statements set forth above with respect to the
estimated cash requirements relating to capital expenditures, the Company's
ability to meet such cash requirements and the Company's ability to service its
debt are based on certain assumptions as to future events. Important
assumptions, which if not met, could adversely affect the Company's ability to
achieve satisfactory results include that: (i) there will be no significant
delays or cost overruns with respect to the Network expansion; (ii) the
Company's contractors and partners in cost-saving arrangements will perform
their obligations; (iii) rights-of-way can be obtained in a timely,
cost-effective basis; (iv) the routes of the Network expansion scheduled for
completion in 1998 are substantially completed on schedule; (v) the Company will
continue to increase traffic on its Network; and (vi) the Company can obtain
vendor financing.
Year 2000 Risks
Certain of the Company'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 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. The Company 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. The Company
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 the Company 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) the Company's suppliers and
their ability to service the Company, to accurately invoice for services
rendered and to accurately process payments received; and (ii) the Company's
customers and their ability to continue to utilize the Company's services, to
collect from
39
<PAGE> 42
their customers and to pay the Company for services received. The cumulative
effect of such problems, if they occur, could have a material adverse effect on
the Company and the value of the Common Stock and its other securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1997 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1997 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1997 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be filed with the
Commission within 120 days after December 31, 1997 and is incorporated herein by
reference.
41
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(1) Index to Financial Statements:
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets as of December 31, 1997 and F-2
1996........................................................
Consolidated Statements of Operations for the years ended F-3
December 31, 1997, 1996 and 1995............................
Consolidated Statements of Changes in Stockholders' Equity F-4
for the years ended December 31, 1997, 1996 and 1995........
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1997, 1996 and 1995............................
Notes to Consolidated Financial Statements.................. F-7
(2) Index to Financial Statement Schedules:
All Financial Statement Schedules for which provision is
made in the applicable accounting regulations of the
Commission (i) are included in the notes to the financial
statements included in this report, (ii) are not required
under the related instruction or (iii) are inapplicable and,
therefore, have been omitted.
(3)(a) Exhibits:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 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. dated as
of December 19, 1997 (incorporated by reference to Exhibit
2.1 of IXC Communications, Inc.'s Current Report on Form 8-K
dated December 19, 1997 and filed with the Commission on
December 23, 1997).
3.1+ Restated Certificate of Incorporation of IXC Communications,
Inc., as amended.
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated
by reference to Exhibit 3.2 of IXC Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 filed with the Commission on November 14,
1997 (the "September 30, 1997 10-Q")).
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 (the "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).
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.3 Form of 12 1/2% Series B Senior Notes due 2005 and
Subsidiary Guarantee (incorporated by reference to Exhibit
4.8 of Amendment No. 1 to IXC Communications, Inc.'s
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.'s 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 GEPT
(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.'s
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.'s 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 Registration Rights Agreement dated as of August 14, 1997 by
and among IXC Communications, Inc. and the purchasers named
therein (incorporated by reference to Exhibit 4.3 of the
8-K).
4.13+ First Supplemental Indenture dated as of October 23, 1997
among IXC Communications, Inc., the Guarantors, IXC
International, Inc. and IBJ Schroder Bank of Trust Company.
4.14+ Second Supplemental Indenture dated as of December 22, 1997
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International, Inc. and IBJ Schroder
Bank & Trust Company.
4.15+ Third Supplemental Indenture dated as of January 6, 1998
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International, Inc. and IBJ Schroder
Bank & Trust Company.
10.1 Office Lease dated June 21, 1989 with USAA Real Estate
Company, as amended (incorporated by reference to Exhibit
10.1 of the S-4).
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.2 Equipment Lease dated as of December 1, 1994 by and between
DSC Finance Corporation and Switched Services
Communications, L.L.C.; Assignment Agreement dated as of
December 1, 1994 by and between Switched Services
Communications, L.L.C. and DSC Finance Corporation; and
Guaranty dated December 1, 1994 made in favor of DSC Finance
Corporation by IXC Communications, Inc. (incorporated by
reference to Exhibit 10.2 of the S-4).
10.3* Amended and Restated 1994 Stock Plan of IXC Communications,
Inc., as amended (incorporated by reference to Exhibit 10.3
of the June 30, 1997 10-Q).
10.4* Form of Non-Qualified Stock Option Agreement under the 1994
Stock Plan of IXC Communications, Inc. (incorporated by
reference to Exhibit 10.4 of the S-4).
10.5 Amended and Restated Development Agreement by and between
Intertech Management Group, Inc. and IXC Long Distance, Inc.
(incorporated by reference to Exhibit 10.7 of IXC
Communications, Inc.'s and the Guarantors' Amendment No. 1
to Form S-4 filed with the Commission on May 20, 1996 (File
No. 333-2936) ("Amendment No. 1 to S-4")).
10.6 Second Amended and Restated Service Agreement dated as of
January 1, 1996 by and between Switched Services
Communications, L.L.C. and Excel Telecommunications, Inc.
(incorporated by reference to Exhibit 10.8 of the S-4).
10.7 Equipment Purchase Agreement dated as of January 16, 1996 by
and between Siecor Corporation and IXC Carrier, Inc.
(incorporated by reference to Exhibit 10.9 of the S-4).
10.8* 1996 Stock Plan of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 10.10 of IXC
Communications, Inc. Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the Commission on March
28, 1997 (the "10-K")).
10.9 IRU Agreement dated as of November 1995 between WorldCom,
Inc. and IXC Carrier, Inc. (incorporated by reference to
Exhibit 10.11 of Amendment No. 1 to the S-4).
10.10* Outside Directors' Phantom Stock Plan of IXC Communications,
Inc., as amended (incorporated by reference to Exhibit 10.12
of the 10-K).
10.11* Business Consultant and Management Agreement dated as of
March 1, 1997 by and between IXC Communications, Inc. and
Culp Communications Associates (incorporated by reference to
Exhibit 10.13 of IXC Communications, Inc.'s Registration
Statement on Form S-4 as filed with the Commission on
October 3, 1997 (File No. 333-37157) (the "EPS S-4")).
10.12* Employment Agreement dated December 28, 1995 by and between
IXC Communications, Inc. and James F. Guthrie (incorporated
by reference to Exhibit 10.14 of the S-1 Amendment).
10.13* Employment Agreement dated August 28, 1995, by and between
IXC Communications, Inc. and David J. Thomas (incorporated
by reference to Exhibit 10.15 of the S-1 Amendment).
10.14* Special Stock Plan of IXC Communications, Inc. (incorporated
by reference to Exhibit 10.16 of the 10-K).
10.15 Lease dated as of June 4, 1997 between IXC Communications,
Inc. and Carramerca Realty, L.P. (incorporated by reference
to Exhibit 10.17 of the June 30, 1997 10-Q).
10.16 Loan and Security Agreement dated as of July 18, 1997 among
IXC Communications, Inc., IXC Carrier, Inc. and NFTC Capital
Corporation ("NTFC") (incorporated by reference to Exhibit
10.18 of the June 30, 1997 10-Q).
10.17 IRU and Stock Purchase Agreement dated as of July 22, 1997
between IXC Internet Services, Inc. and PSINet Inc.
(incorporated by reference to Exhibit 10.19 of IXC
Communications, Inc.'s Amendment No. 1 to Form 10-Q/A for
the quarter ended September 30, 1997 filed with the
Commission on December 12, 1997 (the "September 30, 1997
10-Q/A")).
10.18 Joint Marketing and Services Agreement dated July 22, 1997
between IXC Internet Services, Inc. and PSINet Inc.
(incorporated by reference to Exhibit 10.20 of the September
30, 1997 10-Q/A).
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.19* Employment Agreement dated as of September 9, 1997 between
Benjamin L. Scott and IXC Communications, Inc. (incorporated
by reference to Exhibit 10.21 of IXC Communication Inc.'s
Amendment No. 1 to Registration Statement on S-4 filed with
the Commission on December 15, 1997 (File No. 333-37157)
("Amendment No. 1 to the EPS S-4")).
10.20* IXC Communications, Inc. 1997 Special Executive Stock Plan
(incorporated by reference to Exhibit 10.22 of Amendment No.
1 to the EPS S-4).
10.21+ First Amendment to Loan and Security Agreement dated as of
December 23, 1997 among IXC Communications, Inc., IXC
Carrier, Inc., NTFC and Export Development Corporation
("EDC").
10.22+ Second Amendment to Loan and Security Agreement dated as of
January 21, 1998 among IXC Communications, Inc., IXC
Carrier, Inc., NTFC and EDC.
21.1+ Subsidiaries of IXC Communications, Inc.
23.1+ Consent of Ernst & Young LLP.
23.2+ Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included as the signature page of this
Form 10-K).
27.1+ Financial Data Schedule.
99.1+ Marca-Tel Combining Financial Statements as of December 31,
1997 and 1996 together with Auditors' Report.
</TABLE>
- ---------------
* Management contract or executive compensation plan or arrangement required to
be indicated as such and filed as an exhibit pursuant to applicable rules of
the Commission.
+ Filed herewith.
(b) Reports on Form 8-K:
1. Form 8-K dated September 29, 1997 and filed with the Commission on
October 3, 1997 with respect to three press releases reporting on Benjamin L.
Scott becoming the President and Chief Executive Officer of the Company, Stuart
Coppens becoming the Vice President of Finance and Chief Accounting Officer of
the Company and Mike Jones becoming the Vice President of Construction and
Facilities Engineering.
2. Form 8-K dated October 3, 1997 and filed with the Commission on October
3, 1997 with respect to a press release reporting on the commencement of the
Company's offer (the "Series 3 Tender Offer") to exchange shares of its Common
Stock for all outstanding shares of its Series 3 Preferred Stock.
3. Form 8-K dated October 3, 1997 and filed with the Commission on October
7, 1997 with respect to information regarding an employment agreement entered
into between the Company and Benjamin L. Scott.
4. Form 8-K dated November 3, 1997 and filed with the Commission on
November 4, 1997 with respect to a press release reporting a fiber exchange
transaction with FTV Communications, LLC.
5. Form 8-K dated November 4, 1997 and filed with the Commission on
November 5, 1997 with respect to a press release announcing the Company's
results of operations for the quarter ended September 30, 1997.
6. Form 8-K dated November 6, 1997 and filed with the Commission on
November 7, 1997 with respect to a press release reporting the consummation and
results of the Series 3 Tender Offer.
7. Form 8-K dated November 7, 1997 and filed with the Commission on
November 10, 1997 with respect to a press release reporting the termination of
the Company's solicitation of consents in connection with its Senior Notes.
8. Form 8-K dated December 16, 1997 and filed with the Commission on
December 17, 1997 with respect to a press release reporting on the commencement
of the Company's offer to exchange shares of its 12 1/2% Series B Junior
Exchangeable Preferred Stock Due 2009 which have been registered under the
Securities Act for each of its outstanding shares of 12 1/2% Junior Exchangeable
Preferred Stock Due 2009.
45
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IXC COMMUNICATIONS, INC.
By: /s/ JAMES F. GUTHRIE
------------------------------------
James F. Guthrie
Executive Vice President and Chief
Financial Officer
Dated: March 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BENJAMIN L. SCOTT President, Chief Executive March 13, 1998
- ----------------------------------------------------- Officer and Director
Benjamin L. Scott (Principal Executive
Officer)
/s/ RALPH J. SWETT Chairman and Director March 13, 1998
- -----------------------------------------------------
Ralph J. Swett
/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
/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>
46
<PAGE> 49
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.
Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
Bandwidth -- The range of frequencies that can be transmitted through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium.
Broadband -- Broadband communications systems can transmit large quantities
of voice, data and video. Examples of broadband communication systems include
DS-3 fiber optic systems, which can transmit 672 simultaneous voice
conversations, or a broadcast television station signal, that transmits high
resolution audio and video signals into the home. Broadband connectivity is also
an essential element for interactive multimedia applications.
Cable & Wireless -- Cable & Wireless, P.L.C.
Capacity-intensive -- Refers to products which use comparatively large
amounts of bandwidth.
Carriers -- Companies that provide telecommunications transmission
services.
CCTS -- Consolidated Communications Telecom Services, Inc.
Central Offices -- The switching centers or central switching facilities of
the LECs.
Dedicated -- Refers to telecommunications lines dedicated or reserved for
use by particular customers along predetermined routes.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission). Both the Company's microwave and fiber optic facilities transmit
digital information.
Digital route miles -- Route miles of the Company's microwave and fiber
optic routes.
DS-1, DS-3 -- Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit rate of 64 kilobits per second
and can transmit only one voice or data transmission at a time. DS-1 service has
a bit rate of 1.544 megabits per second and can transmit 24 simultaneous voice
or data transmissions. DS-3 service has a bit rate of 45 megabits per second and
can transmit 672 simultaneous voice or data transmissions.
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
A-1
<PAGE> 50
performance prepared in accordance with GAAP and is not necessarily comparable
with similarly titled measures for other companies.
800/888 service -- A telecommunications service for businesses that allows
calls to be made to a specific location at no charge to the calling party. Use
of the "800" or "888" service code denotes calls that are to be billed to the
receiving party. A computer database in the provider's network translates the
800 or 888 number into a conventional telephone number.
Enhanced data services -- Products and services designed for the transport
and delivery of integrated information to include voice, data and video and any
combination thereof.
Excel -- EXCEL Communications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Fiber miles -- The number of fiber route miles of a fiber optic route
multiplied by the number of fiber strands in the route.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
FTV -- FTV Communications, LLC.
GAAP -- Generally Accepted Accounting Principles.
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.
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 Telecommunications Act.
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> 51
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."
MFN -- Metromedia Fiber Network Services, Inc.
MFS -- MFS Network Technologies, Inc., a subsidiary of WorldCom.
MOUs -- Minutes of use of long distance service.
Non-facilities based carrier -- Carriers that do not own transmission
facilities.
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 DS3s 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 is the
equivalent of four OC-48s.
Off-net -- Refers to circuits on transmission facilities not owned by the
Company.
On-net -- Refers to circuits on transmission facilities owned by the
Company.
Optronic -- a combination of optical and electronic equipment.
Qwest -- Qwest Communications Corporation.
RBOCs (regional Bell operating companies) -- The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
Rockwell International -- Rockwell International Corp.
Route miles -- The measure of the length of a transmission path in miles.
SONET (synchronous optical network technology) -- An electronics and
network architecture for variable-bandwidth products which enables transmission
of voice, video and data (multimedia) at very high speeds.
Sprint -- Sprint Corp.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
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> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
IXC COMMUNICATIONS, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1997, 1996
and 1995............................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 53
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
IXC Communications, Inc.
We have audited the accompanying consolidated balance sheets of IXC
Communications, Inc. and its subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of MarcaTel S.A. de C.V. (MarcaTel), a corporation in which the
Company has an indirect interest, accounted for using the equity method, as of
and for the year ended December 31, 1997. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for MarcaTel (see Note 20), is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1997, the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of IXC Communications, Inc. and
its subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Austin, Texas
February 28, 1998
F-2
<PAGE> 54
IXC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 152,720 $ 61,340
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$14,403,000 in 1997 and $4,030,000 in 1996.............. 91,730 45,102
Other..................................................... 1,556 2,466
--------- --------
93,286 47,568
Deferred tax assets......................................... 1,662 463
Prepaid expenses............................................ 1,838 1,734
--------- --------
Total current assets............................... 249,506 111,105
Property and equipment, net................................. 608,937 268,609
Escrow under Senior Notes................................... -- 51,412
Investment in unconsolidated subsidiaries................... 17,497 5,486
Deferred charges and other non-current assets............... 41,155 22,539
--------- --------
Total assets....................................... $ 917,095 $459,151
========= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable -- trade................................... $ 81,679 $ 49,856
Accrued service cost........................................ 44,705 15,067
Accrued liabilities......................................... 43,122 18,928
Current portion of long-term debt and capital lease
obligations............................................... 12,171 6,750
--------- --------
Total current liabilities.......................... 181,677 90,601
Long-term debt and capital lease obligations................ 308,124 295,531
Deferred tax liability...................................... 3,206 2,434
Unearned fiber usage revenue................................ 60,957 5,302
Other noncurrent liabilities................................ 6,253 899
Minority interest........................................... 1,465 905
7 1/4% Junior Convertible Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock
authorized; 1,055,367 shares issued and outstanding
(aggregate liquidation preference of $105,537,000 at
December 31, 1997)........................................ 101,239 --
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock
authorized; 308,958 shares issued and outstanding
(aggregate liquidation preference of $313,786,000,
including accrued dividends of $4,828,000 at December 31,
1997)..................................................... 302,129 --
Stockholders' equity (deficit):
10% Junior Series 3 Cumulative Preferred Stock; 3,000,000
shares of all classes of Preferred Stock authorized;
$.01 par value; shares issued and outstanding 414 in
1997 and 12,550 in 1996 (aggregate liquidation
preference of $692,000 at December 31, 1997 and
$19,059,000 at December 31, 1996)....................... 1 13
Common Stock, $.01 par value; 100,000,000 shares
authorized; shares issued and outstanding 31,559,691 in
1997 and 30,795,014 in 1996............................. 316 308
Additional paid-in capital................................ 106,559 123,434
Accumulated deficit....................................... (154,831) (60,276)
--------- --------
Total stockholders' equity (deficit)...................... (47,955) 63,479
--------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit).................... $ 917,095 $459,151
========= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 55
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net operating revenue:
(Net of service credit and bad debt provision of
$17,387,000, $3,060,000 and $1,505,000 during 1997,
1996, and 1995)
Private line............................................. $ 162,398 $ 99,793 $89,563
Long distance switched services.......................... 258,312 103,968 1,438
--------- -------- -------
420,710 203,761 91,001
Operating expenses:
Cost of services......................................... 325,127 143,469 39,852
Operations and administration............................ 80,070 47,067 32,282
Depreciation and amortization............................ 60,748 27,241 17,438
--------- -------- -------
Operating income (loss)............................... (45,235) (14,016) 1,429
Interest income............................................ 7,492 2,838 468
Interest income on escrow under Senior Notes............... 203 7,404 2,552
Interest expense........................................... (31,266) (37,076) (14,597)
Equity in net income (loss) of unconsolidated
subsidiaries............................................. (23,800) (1,961) 19
--------- -------- -------
Loss before income taxes, minority interest and
extraordinary loss....................................... (92,606) (42,811) (10,129)
Benefit (provision) for income taxes....................... (1,389) 5,981 1,693
Minority interest.......................................... (560) (618) 5,218
--------- -------- -------
Loss before extraordinary loss............................. (94,555) (37,448) (3,218)
Extraordinary loss on early extinguishment of debt, less
applicable provision for income taxes of $1,164,000...... -- -- (1,747)
--------- -------- -------
Net loss................................................... (94,555) (37,448) (4,965)
Dividends applicable to preferred stock.................... 21,636 1,739 1,843
--------- -------- -------
Net loss applicable to common stockholders................. $(116,191) $(39,187) $(6,808)
========= ======== =======
Basic and diluted loss per share:
Before extraordinary loss................................ $ (3.75) $ (1.42) $ (.21)
Extraordinary loss....................................... -- -- (.07)
--------- -------- -------
Net loss................................................. $ (3.75) $ (1.42) $ (.28)
========= ======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 56
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
10% JUNIOR
10% SENIOR SERIES 1 SERIES 3
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- --------------- ---------------
NUMBER NUMBER NUMBER ADDITIONAL TOTAL
OF OF OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------- ------ ------ ------ ------ ---------- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994.................... 1 $1,460 13 $ 13 24,335 $243 $ 29,430 $ (16,957) $ 14,189
Redemption of preferred
stock................. (1) (1,460) -- -- -- -- -- -- (1,460)
Net loss................ -- -- -- -- -- -- -- (4,965) (4,965)
Dividends
paid -- preferred
stock -- 10% Senior
Series 1.............. -- -- -- -- -- -- -- (505) (505)
Dividends
paid -- preferred
stock of consolidated
subsidiary............ -- -- -- -- -- -- -- (401) (401)
-- ------- --- ---- ------ ---- -------- --------- --------
Balance at December 31,
1995.................... -- -- 13 13 24,335 243 29,430 (22,828) 6,858
Issuance of common
stock................. -- -- -- -- 6,460 65 94,004 -- 94,069
Net loss................ -- -- -- -- -- -- -- (37,448) (37,448)
-- ------- --- ---- ------ ---- -------- --------- --------
Balance at December 31,
1996.................... -- -- 13 13 30,795 308 123,434 (60,276) 63,479
-- ------- --- ---- ------ ---- -------- --------- --------
Exercise of options..... -- -- -- -- 62 1 683 -- 684
Accretion of Preferred
Stock................. -- -- -- -- -- -- (724) (724)
Dividends paid in kind
and
accrued -- Preferred
Stock................. -- -- -- -- -- -- (19,323) -- (19,323)
Conversion of Series 3
Preferred Stock....... -- -- (12) (12) 605 6 5 -- (1)
Issuance of common stock
for acquisition....... -- -- -- -- 98 1 2,742 -- 2,743
Other................... -- -- -- -- -- -- (258) -- (258)
Net loss................ -- -- -- -- -- -- -- (94,555) (94,555)
-- ------- --- ---- ------ ---- -------- --------- --------
Balance at December 31,
1997.................... -- $ -- 1 $ 1 31,560 $316 $106,559 $(154,831) $(47,955)
== ======= === ==== ====== ==== ======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 57
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (94,555) $(37,448) $ (4,965)
Adjustments to reconcile net loss to cash provided (used in)
by operating activities:
Depreciation.............................................. 50,334 23,695 16,608
Amortization.............................................. 10,414 3,546 830
Amortization of debt issue costs and Senior Note
discount................................................ 1,702 1,086 858
Provision for doubtful accounts........................... 17,387 3,060 1,505
Equity in net (income) loss of unconsolidated
subsidiaries............................................ 23,800 1,961 (19)
Minority interest in net (income) loss of subsidiaries.... 560 618 (5,218)
Compensation expense on stock options and phantom stock... 349 182 --
Extraordinary loss on early extinguishment of debt........ -- -- 2,911
Other, net................................................ (803) -- --
Changes in assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable......................... (63,106) (44,309) (4,108)
Decrease (increase) in other current assets (104) 490 (1,466)
Increase in accounts payable -- trade................... 20,314 17,950 5,196
Increase in accrued liabilities and accrued service
costs................................................. 15,903 4,436 7,503
Decrease in deferred income taxes....................... (427) (5,882) (1,847)
Decrease in deferred charges and other non-current
assets................................................ (30,201) (4,538) (4,092)
Increase (decrease) in other noncurrent liabilities..... 62,768 6,466 (2,089)
--------- -------- ---------
Total adjustments..................................... 108,890 8,761 16,572
--------- -------- ---------
Net cash provided by (used in) operating
activities....................................... 14,335 (28,687) 11,607
--------- -------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Release of funds from escrow under Senior Notes............. 69,564 154,244 4,300
Deposit into escrow under Senior Notes...................... (18,152) (7,404) (202,552)
Purchase of property and equipment.......................... (314,327) (136,391) (23,670)
Investment in unconsolidated subsidiaries................... (35,497) (7,319) --
--------- -------- ---------
Net cash used in investing activities.............. (298,412) 3,130 (221,922)
--------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Notes, net of
discount.................................................. -- -- 277,148
Payment of debt issue costs................................. -- (1,301) (10,407)
Proceeds from long-term debt................................ -- -- 18,695
Payments on long-term debt and capital lease obligations.... (8,288) (12,786) (76,490)
Net proceeds from issuance of Convertible Preferred Stock... 95,354 -- --
Net proceeds from issuance of Exchangeable Preferred
Stock..................................................... 287,967 -- --
Redemption of preferred stock............................... -- -- (1,460)
Redemption of preferred stock of consolidated subsidiary
held by minority interests................................ -- -- (1,400)
Issuance of common stock.................................... -- 94,069 --
Capital contribution in subsidiary by minority
shareholders.............................................. -- -- 6,002
Other financing activities.................................. 424 -- (906)
--------- -------- ---------
Net cash provided by financing activities.......... 375,457 79,982 211,182
--------- -------- ---------
Net increase in cash and cash equivalents................... 91,380 54,425 867
Cash and cash equivalents at beginning of year.............. 61,340 6,915 6,048
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 152,720 $ 61,340 $ 6,915
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) for:
Income taxes............................................ $ 516 $ (832) $ 1,240
========= ======== =========
Interest expense net of amount capitalized.............. $ 30,174 $ 37,561 $ 4,955
========= ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 58
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
IXC Communications, Inc. and its subsidiaries (collectively referred to as
"IXC" or the "Company") is an Austin, Texas based supplier of telecommunications
services. IXC provides two principal services to long distance companies: (i)
private line voice and data circuits and (ii) long distance switched services.
Long distance companies may be categorized as facilities-based carriers or
non-facilities-based carriers. Sellers of private line services are generally
facilities-based carriers, like IXC, that own private line transmission
facilities, such as fiber optic or digital microwave transmission facilities.
Customers using private line services include: (i) facilities-based carriers
that require private line capacity where they have geographic gaps in their
facilities, need additional capacity or require geographically different
routing; and (ii) non-facilities-based carriers requiring private line capacity
to carry their customers' long distance traffic. The Company provides private
line services to customers either on a "take-or-pay" long term basis, or after
contract expiration on a month-to-month basis.
In late 1995, the Company expanded into the business of selling long
distance switched services to long distance resellers. Sellers of switched long
distance services are generally switched carriers, like IXC, that own one or
more switches that direct telecommunications traffic or switchless carriers that
depend on switched carriers to provide long distance services to their users.
The Company sells switched long distance services on a per-call basis, with
payment due monthly after services are rendered.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
IXC, a Delaware corporation, was incorporated in 1992 and, through a series
of transactions through 1994, acquired various wholly-owned and majority-owned
subsidiaries which are included in the consolidated financial statements. The
consolidated financial statements of IXC include the accounts of IXC
Communications, Inc. and its wholly-owned and majority-owned subsidiaries. The
Company has a 50% interest in Progress International L.L.C. ("Progress"), a 40%
interest in a European Joint Venture, and a 20% interest in Unidial
Communications Services, L.L.C. ("Unidial"), all of which are accounted for
using the equity method. Progress has a 49% interest in Marca-Tel S.A. de C.V.
("Marca-Tel"), a telecommunications company located in Mexico. Significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Any difference between the amount at which the investment
is being carried and the amount of the underlying equity in the net assets of
the equity investee is being amortized over its expected life.
Revenues
Private line voice and data circuit revenues are generated primarily by
providing capacity on the Company's fiber optic and microwave transmission
network at rates established under long-term contractual arrangements or on a
month-to-month basis after contract expiration. Revenue is recognized as
services are provided.
Switched long-distance service revenues are generated primarily by
providing voice and data communication services. Revenue is recognized as
services are provided.
The Company accounts for capacity exchange agreements with other carriers
by recognizing the fair value of the revenue earned and expense incurred under
the respective agreements. Exchange agreements accounted for noncash revenue and
expense (in equal amounts) of $14.0 million in 1997, $14.0 million in 1996, and
$13.8 million in 1995.
F-7
<PAGE> 59
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and all
investments with an initial maturity of three months or less. All cash
equivalents are recorded at cost and classified as available for sale.
Short-term investments held in the Company's escrow related to the Senior Notes
(see Note 4) were not included as a cash equivalent.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the various assets,
ranging from three to twenty years. Maintenance and repairs are charged to
operations as incurred. Property and equipment recorded under capital leases is
included with the Company's owned assets. Amortization of assets recorded under
capital leases is included in depreciation expense.
Costs associated with uncompleted portions of the fiber optic network are
classified as construction in progress in the accompanying consolidated balance
sheets. Upon completion, the costs will be classified as transmission systems
and depreciated over their useful lives.
In accordance with FASB Statement No. 121, the Company reviews its
long-lived assets by comparing the undiscounted cash flows estimated to be
generated by those assets with the related carrying amount of the assets. Upon
an indication of an impairment, a loss is recorded if the discounted cash flows
projected for the assets is less than the assets' carrying value.
Fiber Exchange Agreements
In connection with its fiber optic network expansion, the Company has
entered into various agreements to purchase, sell or exchange fiber usage
rights. Purchases of fiber usage rights from other carriers are recorded at cost
as a separate component of property and equipment. The recorded assets are
amortized over the lesser of the term of the related agreement or the estimated
life of the fiber optic cable. Sales of fiber usage rights are recorded as
unearned revenue. Revenue is recognized over the terms of the related
agreements. Non-monetary exchanges of fiber usage rights (swaps of fiber usage
rights with other long distance carriers) are recorded at the cost of the asset
transferred or, if applicable, the fair value of the asset received.
Capitalization of Interest
Interest is capitalized as part of the cost of constructing the Company's
fiber optic network and for amounts invested in companies or joint ventures
accounted for using the equity method during pre-operating periods. Interest
capitalized during construction periods are computed by determining the average
accumulated expenditures for each interim capitalization period and applying the
interest rate related to the specific borrowings associated with each
construction project. Total interest incurred during the years ended December
31, 1997, 1996 and 1995 was $38.6 million, $40.0 million, and $15.0 million,
respectively, of which, $7.3 million, $2.9 million, and $0.4 million was
capitalized.
Income Taxes
The Company accounts for income taxes using the liability method as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes.
Deferred income taxes are provided for net operating losses and for
temporary differences between the basis of assets and liabilities for financial
reporting and income tax reporting. Investment tax credits are accounted for by
the flow-through method.
F-8
<PAGE> 60
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Deferred Charges and Other Non-current Assets
Costs incurred in connection with obtaining long-term financing have been
deferred and are being amortized as interest expense over the terms of the
related debt agreements. Deferred costs relating to long-term financing at
December 31, 1997 and 1996 were $28.1 million and $11.4 million, respectively.
Accumulated amortization of these costs at December 31, 1997 and 1996 were $3.3
million and $1.4 million, respectively.
Certain costs incurred in connection with installation of the switched long
distance network have been deferred and are being amortized on a straight-line
basis over two years. Deferred network costs at December 31, 1997 and 1996 were
$7.6 million and $5.0 million, with accumulated amortization of $3.4 million and
$1.0 million, respectively.
The acquisition cost of customer accounts obtained through an outside sales
organization have been deferred and amortized over two years. Acquisition costs
of customer accounts at December 31, 1997 and 1996 were $15.2 million and $2.3
million with accumulated amortization of $5.3 million and $0.7 million.
Stock-Based Compensation
The Company has elected to account for its employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations, because, the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options (Note 9). Under APB 25 compensation
expense is recognized when the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
grant.
Basic and Diluted Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, funds held
in escrow and trade receivables. The Company places its cash equivalents and
funds held in escrow in quality investments with reputable financial
institutions. Trade receivables include significant balances due from a small
number of customers. At December 31, 1997, $23.7 million in trade receivables
from the Company's private line services are due from ten customers. Switched
long distance services receivables are also concentrated, with $40.5 million in
trade receivables due from six customers, including $22.6 million from Excel
Communications, Inc. ("Excel"). If any of these
F-9
<PAGE> 61
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
individually significant customers are unable to meet their financial
obligations, results of operations of the Company could be adversely affected.
The Company performs ongoing credit evaluations of its customers' financial
condition. IXC has not experienced significant losses from sales to any of its
significant customers (See Note 11).
Reclassifications
Certain amounts for prior years have been reclassified to conform to the
1997 presentation.
3. PROPERTY AND EQUIPMENT
The following table details the Company's property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and right of ways................................ $ 4,151 $ 2,345
Buildings and improvements............................ 21,451 5,048
Transmission systems.................................. 440,738 181,170
Furniture and other................................... 6,776 4,629
Fiber usage rights.................................... 34,991 38,533
Construction in progress.............................. 216,481 106,017
--------- --------
724,588 337,742
Less: Accumulated depreciation and amortization....... (115,651) (69,133)
--------- --------
Property and equipment, net........................... $ 608,937 $268,609
========= ========
</TABLE>
4. ESCROW UNDER SENIOR NOTES
Under the terms of the Company's Senior Notes, issued in October 1995, the
Company was required to place $200 million of Senior Notes proceeds in an escrow
account, under which the proceeds and the earnings thereon were restricted in
their use to network expansion, capital expenditures, certain interest,
principal and other payments on the Senior Notes and other permitted uses (see
Note 6). Such funds were invested in short-term, investment-grade,
interest-bearing securities as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Overnight investments.................................... $ -- $14,201
U.S. Government securities............................... -- 37,211
------- -------
$ -- $51,412
======= =======
</TABLE>
The escrow account was subject to a security interest under the Company's
Senior Notes. The investments in the escrow account at December 31, 1996 were
all due in three months or less and classified as available for sale.
F-10
<PAGE> 62
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. ACCRUED LIABILITIES
The following table details the Company's accrued liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued taxes............................................ $ 4,814 $ 2,750
Deferred revenue......................................... 4,510 3,044
Accrued interest......................................... 8,906 8,906
Deposits................................................. 12,873 --
Other.................................................... 12,019 4,228
------- -------
$43,122 $18,928
======= =======
</TABLE>
6. LONG-TERM DEBT
Long-term debt and capital lease obligations of IXC consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes -- 12.5%, net of unamortized discount of
$6,862,000 and $7,344,000 at December 31, 1997 and
1996, respectively................................... $278,138 $277,656
Capital lease obligations.............................. 36,217 17,862
Other debt............................................. 5,940 6,763
-------- --------
Total long-term debt and capital lease
obligations................................ 320,295 302,281
Less current portion................................... (12,171) (6,750)
-------- --------
Long-term debt and capital lease obligations........... $308,124 $295,531
======== ========
</TABLE>
Senior Notes
On October 5, 1995, the Company issued $285 million of 12 1/2% Senior Notes
(effective rate 12.8%) due October 1, 2005, with interest payable semi-annually.
The Senior Notes may be redeemed at the option of the Company, in whole or
in part, on or after October 1, 2000 at a premium declining to zero in 2004. At
any time prior to October 1, 1998, the Company may redeem Senior Notes with an
aggregate principal amount of up to $100 million at a redemption price of 112.5%
of the principal amount from the net proceeds of a sale of capital stock of the
Company, provided that at least $100 million in aggregate principal amount of
Senior Notes remains outstanding immediately after the occurrence of such
redemption and that the redemption occurs within 35 days of the date of the
closing of the offering of such equity securities. Also, the Senior Notes
contain provisions that, in the event of a Change in Control (which meets the
definition set forth in the Indenture) of the Company, provide their holders the
right to require the Company to repurchase all or any part of the Senior Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest.
Of the net proceeds of approximately $277 million, $200 million was
deposited into an escrow account primarily restricted for the construction of a
major network expansion program (see Note 4). Approximately $53.7 million of the
net proceeds was used to repay or repurchase certain previously-existing
indebtedness of the Company, including $22.7 million paid to certain
stockholders. This resulted in an extraordinary loss on
F-11
<PAGE> 63
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
early extinguishment of debt of $1.7 million in 1995, net of applicable income
tax benefit of $1.2 million. In addition, approximately $3.8 million was used to
redeem certain preferred stock.
As of December 31, 1997, the Senior Notes are senior unsecured obligations
of the Company and are guaranteed on a senior unsecured basis by certain wholly
owned direct and indirect subsidiaries of IXC. The obligations of each guarantor
are limited to the minimum extent necessary to prevent the guarantee from
violating or becoming voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally. See Note 24 for financial information for guarantor and
non-guarantor subsidiaries.
The Senior Notes contain certain covenants that restrict the ability of the
Company and its subsidiaries to incur additional indebtedness and issue certain
preferred stock, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company or its subsidiaries, issue or sell equity
interests of the Company's subsidiaries or enter into certain mergers and
consolidations.
In 1997, the Company entered into a secured equipment financing facility
with NTFC Capital Corporation under which the Company has available financing of
up to $28 million (as of December 31, 1997 approximately $18 million of which
had been borrowed).
Annual maturities of long-term debt at December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998...................................................... $ 3,765
1999...................................................... 2,175
2005...................................................... 285,000
--------
290,940
Less discount on Senior Notes............................. (6,862)
--------
$284,078
========
</TABLE>
7. CAPITAL AND OPERATING LEASES
The Company leases certain facilities, equipment and transmission capacity
used in its operations under noncancellable capital and operating leases. Future
minimum annual lease payments under these lease agreements at December 31, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998............................................ $10,696 $35,585
1999............................................ 10,725 8,679
2000............................................ 9,328 6,257
2001............................................ 6,793 4,855
2002............................................ 4,766 4,593
-------
42,308
Less amounts related to interest................ (6,091)
-------
Present value of capital lease obligations...... 36,217
Less current portion............................ (8,195)
-------
Long-term capital lease obligations............. $28,022
=======
</TABLE>
F-12
<PAGE> 64
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The gross amount of assets recorded under capital leases at December 31,
1997 and 1996 was $38.1 million and $22.2 million, respectively. The related
accumulated amortization was $17.1 million and $5.9 million at December 31, 1997
and 1996, respectively.
Lease expense relating to facilities, equipment and transmission capacity
leases, excluding amortization of fiber exchange agreements, was approximately
$98.0 million, $49.9 million and $29.1 million for the years ended December 31,
1997, 1996 and 1995, respectively.
8. REDEEMABLE PREFERRED STOCK
In April 1997, the Company issued $100 million (1,000,000 shares) of 7 1/4%
Junior Convertible Preferred Stock Due 2007 ("Convertible Preferred Stock"). The
net proceeds of approximately $95.4 million from the offering were used to fund
capital expenditures, investments in the Company's unconsolidated subsidiaries
and general corporate purposes. The Convertible Preferred Stock and the common
stock issuable upon conversion thereof were registered under the Securities Act
of 1933, as amended (the "Securities Act") in August 1997 in compliance with the
registration rights agreement entered into by the Company with the initial
purchasers of the Convertible Preferred Stock. The Convertible Preferred Stock
is convertible at the option of the holder into shares of common stock at a
conversion rate of 4.263 shares of common stock for each share of Convertible
Preferred Stock. On March 31, 2007, the Convertible Preferred Stock must be
redeemed by the Company at a price equal to the liquidation preference ($100 per
share) plus accrued and unpaid dividends; thus it is "mandatorily redeemable"
and is not included in stockholders' equity. Dividends payable prior to or on
June 30, 1999 are, at the option of the Company, payable in cash or through the
issuance of additional shares of Convertible Preferred Stock equal to the
dividend amount divided by the liquidation preference of such additional shares.
After March 31, 1999, to the extent and for so long as the Company is not
permitted to pay cash dividends on the Convertible Preferred Stock by the terms
of any then outstanding indebtedness or any other agreement or instrument to
which the Company is subject, the Company will be required to pay dividends,
which shall accrue at the rate per annum of 8 3/4%, through the issuance of
additional shares of Convertible Preferred Stock. Payment of cash dividends on
the Convertible Preferred Stock is not currently permitted under the indenture
for the Company's 12 1/2% Senior Notes due 2005 until certain financial
conditions have been met. During 1997, the Company issued approximately 55,367
additional shares of Convertible Preferred Stock in satisfaction of its 1997
dividend requirements. Any difference between the carrying value and the
redemption amount of the Convertible Preferred Stock is accreted to additional
paid-in-capital for all periods through the mandatory redemption date.
In August 1997, the Company issued $300 million (300,000 shares) of 12 1/2%
Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred
Stock"). The net proceeds of approximately $288.0 million from the offering are
being used to fund capital expenditures, investments in the Company's
unconsolidated subsidiaries and general corporate purposes. The Exchangeable
Preferred Stock was registered under the Securities Act of 1933, as amended (the
"Securities Act") in December 1997 in compliance with the registration rights
agreement entered into by the Company with the initial purchasers of the
Exchangeable Preferred Stock. The Company may exchange all of the shares of
Exchangeable Preferred Stock for 12 1/2% Subordinated Exchange Debentures Due
2009 ("Exchange Debentures") in a principle amount equal to the liquidation
preference of the Exchangeable Preferred Stock at the time of the exchange. If
exchanged, the Exchange Debentures will bear interest at the rate of 12 1/2% per
annum, payable semiannually on February 15 and August 15, commencing with the
first of such dates to occur after the date of such exchange. The Exchange
Debentures will be general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and to all indebtedness and other liabilities of the Company's subsidiaries. On
August 15, 2009, the Exchangeable Preferred Stock must be redeemed by the
Company at a price equal to the liquidation preference ($1,000 a share) plus
accrued and unpaid dividends; thus it is "mandatorily redeemable" and is not
included in stockholders' equity. Dividends on the Exchangea-
F-13
<PAGE> 65
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
ble Preferred Stock will accrue at a rate of 12 1/2% per annum of the
liquidation preference thereof (including unpaid dividends) and will be payable
quarterly in arrears on February 15, May 15, August 15, and November 15 of each
year commencing November 15, 1997. Dividends payable prior to or on August 15,
2000 are, at the option of the Company, payable in cash or through issuance of
additional shares of Exchangeable Preferred Stock equal to the dividend amount
divided by the liquidation preference of such additional shares. After February
15, 2001, interest on the Exchangeable Preferred Stock may be paid only in cash.
Payment of cash dividends on the Exchangeable Preferred Stock is not currently
permitted under the indenture for the Company's 12 1/2% Senior Notes due 2005
until certain financial conditions have been met. During 1997, the Company
issued approximately 8,958 additional shares of Exchangeable Preferred Stock in
satisfaction of its 1997 dividend requirements. Any difference between the
carrying value and the redemption amount of the Exchangeable Preferred Stock is
accreted by a charge to additional paid-in-capital for all periods through the
mandatory redemption date.
9. COMMON AND PREFERRED STOCK
Preferred Stock
The 10% Junior Series 3 Cumulative Redeemable Preferred Stock ("Series 3
Preferred Stock") votes as a single class with IXC's common stock except in
matters impacting the rights of the Series 3, is entitled to elect one director
and may be redeemed at the Company's option in whole or in part at any time,
subject to certain debt covenants, at a price of $1,000 per share, plus
accumulated and unpaid dividends and accrued interest. The Series 3 Preferred
Stock is nonparticipatory and has no mandatory redemption requirements.
Dividends are payable at the determination of the Board of Directors, subject to
debt covenants. Interest accrues on unpaid dividends at an annual rate of 10%.
On October 31, 1997, the Company consummated its offer to exchange shares
of its Common Stock for its Series 3 Preferred Stock. Holders of approximately
96.7% of its Series 3 Preferred Stock accepted such offer. Each holder that
tendered shares of Series 3 Preferred Stock received approximately 49.85 shares
of Common Stock for each share of Series 3 Preferred Stock tendered prior to the
expiration date. The conversion rate was calculated by dividing the aggregate
per share liquidation preference of, and the accrued and unpaid dividend on, one
share of Series 3 Preferred Stock as of October 31, 1997 by $33.00 (the last
reported sales price of the Company's Common Stock on the Nasdaq National Market
on October 31, 1997). The aggregate liquidation preference and accrued and
unpaid dividends on the Series 3 Preferred Stock at October 31, 1997, was
approximately $20.6 million ($1,645 per share for the 12,550 shares
outstanding). Cumulative preferred dividends in arrears, including interest, at
December 31, 1997 and 1996 were $277,614 ($670.64 per share) and $6.5 million
($518.65 per share), respectively.
IXC's 10% Senior Series 1 Cumulative Redeemable Preferred Stock was
non-voting and was redeemed on October 6, 1995 from the proceeds of the Senior
Notes for $2.0 million, including cumulative dividends in arrears and related
interest of $505,000.
During 1993, an indirect subsidiary of IXC issued 1,400 shares of 10%
Senior Series 1 Cumulative Redeemable Preferred Stock (the "ILHI Series 1
Preferred Stock") at $1,000 per share to stockholders of IXC. The ILHI Series 1
Preferred Stock was redeemed on October 6, 1995 from the proceeds of the Senior
Notes for $1.8 million, including cumulative dividends in arrears and related
interest of $401,000.
See also Note 8 for Redeemable Preferred Stock.
Common Stock
During 1996, the Company issued 6,440,000 shares of Common Stock in an
initial public offering and a private placement, resulting in net proceeds of
$94.1 million.
At December 31, 1997, the Company has reserved approximately 8,319,000
shares for future issuance under stock option plans and the Convertible
Preferred Stock.
F-14
<PAGE> 66
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Stock Option and Award Plans
In November 1994, the Company adopted the IXC Communications, Inc. Stock
Plan, as amended (the "1994 Stock Plan"), which provides for the issuance of
restricted stock or the granting of stock options for up to 1,212,450 shares of
common stock to key employees and others. Awards under the 1994 Stock Plan are
given at the discretion of the Board of Directors and include common stock
options with exercise prices at least equal to the fair market value at the date
of grant. Options granted may be either "incentive stock options," within the
meaning of Section 422(a) of the Internal Revenue Code, or non-qualified
options. The options expire after 10 years and generally vest at rates of 25%
and 33% per year commencing one year after the date of grant, with the exception
of two grants covering 84,871 shares which were 100% vested upon grant.
In 1996, the Company adopted the IXC Communications, Inc. 1996 Stock Plan,
as amended (the "1996 Stock Plan"), which provides for the issuance of
restricted stock or the granting of stock options for up to 2,121,787 shares of
common stock to key employees and others. Awards under the 1996 Stock Plan are
granted at the discretion of the Board of Directors and include common stock
options with exercise prices at least equal to the fair market value at the date
of grant. Options granted may be either "incentive stock options," within the
meaning of Section 422(a) of the Internal Revenue Code, or non-qualified
options. The options expire after 10 years and generally vest at rates of 25%
and 33% per year commencing one year after the date of grant. During 1997 and
1996, 744,900 and 476,600 options were granted, respectively, under the 1996
Stock Plan.
The Company has not issued any restricted stock under the 1994 Stock Plan
or the 1996 Stock Plan. All options granted under the 1994 Stock Plan and the
1996 Stock Plan were granted at estimated market value at the date of grant. In
the event of a change of control of the Company, the options outstanding
immediately following the consummation of such change of control fully vest, and
the options may be exercised in full to purchase the total number of shares
covered by the option.
In October 1996, the Company adopted a stock incentive plan (the "Special
Stock Plan") covering 67,900 shares of common stock. Any employee, director or
other person providing services to the Company is eligible to receive awards
under the Special Stock Plan, at the Board's discretion. Awards available under
the Special Stock Plan include common stock purchase options and restricted
common stock. All available options to acquire stock under the Special Stock
Plan were granted in 1996 at exercise prices less than market value at the date
of grant and vest over three to four years. In 1997 and 1996, the Company
recognized $247,000 and $182,000 in compensation expense respectively, related
to grants under the Special Stock Plan.
On May 14, 1996 the Company adopted the IXC Communications, Inc. Outside
Directors' Phantom Stock Plan (the "Directors' Plan"), pursuant to which $20,000
per year of outside director's fees for certain directors is deferred and
treated as if it were invested in shares of the Company's common stock. No
shares of common stock will be actually purchased and the participants will
receive cash benefits equal to the value of the shares that they are deemed to
have purchased under the Directors' Plan, with such value to be determined on
the date of distribution. Distribution of benefits generally will occur three
years after the deferral. Compensation expense is determined based on the market
price of the shares deemed to have been purchased and is charged to expense over
the related period. In 1997 and 1996, the Company recognized $102,000 and
$60,000 as compensation expense related to the Directors' Plan.
In September 1997, the Company adopted the 1997 Special Executive Stock
Plan, a stock incentive plan covering 500,000 shares of common stock. The
purposes of the new plan were to promote the interests of the Company and its
stockholders by enabling it to offer grants of stock to better attract, retain
and reward key executives and, to strengthen the mutuality of interests between
an executive and the Company's stockholders by providing an executive with a
proprietary interest in pursuing the Company's long-term growth and financial
success. The terms and conditions of the 1997 Special Executive Stock Plan were
essentially the same as those of the 1994 and 1996 Plans. All available options
to acquire stock under the 1997 Special
F-15
<PAGE> 67
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Executive Stock Plan were granted in 1997 at market value at the date of grant.
The options granted will vest over a five year period.
Stock Based Compensation
The Company has elected to account for its employee stock options under APB
25. As a result, pro forma information regarding net loss and loss per share is
required by SFAS No. 123, which requires that the information be determined as
if the Company had accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates
ranging from 5.17% to 6.22%, 5.25% to 6.73% and 5.74% to 5.95%; no dividend
yield; volatility factor of the expected market price of the Company's common
stock of .551 in 1997 and .523 for 1996 and 1995; and a weighted-average
expected life of the options of approximately 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for loss per share
information):
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Pro forma loss applicable to common stockholders... $(120,151) $(39,805) $(6,871)
Pro forma basic and diluted loss per share......... $ (3.88) $ (1.45) $ (0.28)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year................. 1,700,573 $ 9.05 645,880 $ 3.01 206,113 $3.01
Granted................... 1,244,900 25.06 1,138,351 12.04 439,767 3.01
Exercised................. (62,226) 10.98 (19,702) 3.01 -- --
Forfeited................. (31,001) 17.89 (63,956) 3.01 -- --
---------- ------ ---------- ------ ------- -----
Outstanding -- end of
year.................... 2,852,246 $15.90 1,700,573 $ 9.05 645,880 $3.01
========== ====== ========== ====== ======= =====
Exercisable at end of
year.................... 687,041 257,527 121,243
========== ========== =======
Weighted-average fair
value of options granted
during the year......... $ 14.55 $ 7.34 $ 1.51
</TABLE>
F-16
<PAGE> 68
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The following table summarizes outstanding options at December 31, 1997 by
price range:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------- ----------------------
WEIGHTED- WEIGHTED-AVERAGE WEIGHTED-
NUMBER AVERAGE REMAINING NUMBER AVERAGE
OF RANGE OF EXERCISE CONTRACTUAL OF EXERCISE
OPTIONS EXERCISE PRICE PRICE LIFE OF OPTIONS OPTIONS PRICE
- --------- --------------- --------- ---------------- ------- ---------
<S> <C> <C> <C> <C> <C>
1,036,095 $ 3.01 $ 3.01 7.8 536,604 $3.01
1,045,651 15.38 to 26.25 19.69 9.0 150,437 19.87
770,500 27.50 to 36.88 28.10 9.7 -- --
- --------- --------------- ------ ------- -----
2,852,246 $3.01 to $36.88 $15.90 8.8 687,041 $6.70
========= =============== ====== ======= =====
</TABLE>
10. LOSS PER SHARE
Loss per share data for the years ended December 31, 1997, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C>
For the Year Ended 1997:
Net loss............................... $ 94,555
Less: Preferred stock dividends........ 21,636
========
Basic and diluted loss per share....... $116,191 30,961 $(3.75)
======== ====== ======
</TABLE>
Options to purchase 2,852,246 shares of common stock and 1,055,367 shares
of Convertible Preferred Stock (each share convertible into 4.263 shares of
common stock) were outstanding at December 31, 1997, but were not included in
the computation of diluted loss per share because they would have been
anti-dilutive due to the Company's net loss.
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C>
For the Year Ended 1996:
Net loss............................... $(37,448)
Less: Preferred stock dividends........ (1,739)
========
Basic and diluted loss per share....... $(39,187) 27,525 $(1.42)
======== ====== ======
</TABLE>
Options to purchase 1,700,573 shares of common stock were outstanding at
December 31, 1996, but were not included in the computation of diluted loss per
share because they would have been anti-dilutive due to the Company's net loss.
F-17
<PAGE> 69
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C>
For the Year Ended 1995:
Net loss............................... $(4,965)
Less: Preferred stock dividends........ (1,843)
-------
Basic and diluted loss per share....... $(6,808) 24,335 $(0.28)
======= ====== ======
</TABLE>
Options to purchase 645,880 shares of common stock were outstanding at
December 31, 1995, but were not included in the computation of diluted loss per
share because they would have been anti-dilutive due to the Company's net loss.
11. MAJOR CUSTOMERS
Prior to 1996, substantially all of the Company's revenues were earned from
private line services. Private line services generally are provided to carriers
under long-term contractual arrangements or on a month-to-month basis after
contract expiration. In late 1995, the Company expanded into the business of
selling long distance switched services to long distance resellers. Excel
Communications is the Company's largest long distance switched service customer.
Only sales to Excel exceeded 10% of total revenues for each of the years ended
December 31, 1997 and 1996. The percentages of revenue for customers with 10% or
more of the Companys' business in any one year are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Excel Communications, Inc........................... 29% 35% --
Frontier Communications............................. 4% 10% 21%
WorldCom, Inc. ..................................... 4% 8% 20%
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement and 401(k) savings plan
which covers all full-time employees with one year of service. The Company
contributes 6% of eligible compensation, as defined in the plan, and matches 50%
of the employee's contributions up to a maximum of 6% of the employee's
compensation. Employees vest in the Company's contribution over five years.
Benefit expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $1,263,000, $779,000 and $522,000, respectively.
F-18
<PAGE> 70
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
13. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards............................... $ 2,068 $ 2,068
Net operating loss carryforwards....................... 37,363 22,240
Investment in joint venture............................ 9,465 794
Deferred revenue....................................... 19,787 --
Bad debts.............................................. 5,761 1,612
Accrued expenses....................................... 3,273 750
-------- --------
Gross deferred tax assets...................... 77,717 27,464
Valuation allowance............................ (54,793) (17,264)
-------- --------
Net deferred tax assets.................................. 22,924 10,200
-------- --------
Deferred tax liabilities:
Tax over book depreciation............................. (23,635) (10,372)
Other liability accruals............................... (833) (1,799)
-------- --------
Gross deferred tax liabilities................. (24,468) (12,171)
-------- --------
Net deferred tax liability............................... $ (1,544) $ (1,971)
======== ========
As recorded in the consolidated balance sheets:
Current deferred tax assets............................ $ 1,662 $ 463
Non current deferred tax liability..................... (3,206) (2,434)
-------- --------
$ (1,544) $ (1,971)
======== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $93.4 million for income tax purposes that expire through 2012.
The Company has minimum tax and investment tax credit carryforwards at December
31, 1997 of approximately $0.7 million and $1.4 million, respectively. The
minimum tax credits can be carried forward indefinitely and the investment tax
credits expire in 2001.
Valuation allowances of $54.8 million and $17.3 million were established to
offset a portion of the Company's deferred tax assets at December 31, 1997 and
1996, respectively. The valuation allowance is related to deferred tax assets,
primarily net operating losses, that may not be realizable. During the years
ended December 31, 1997 and 1996, the valuation allowance was increased by $37.5
million and $17.3 million, respectively.
F-19
<PAGE> 71
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Significant components of the benefit (provision) for income taxes
(excluding the effect attributable to extraordinary items) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ 829 $ 381
State............................................... (1,816) (250) --
-------- ------- ------
Total current......................................... (1,816) 579 381
Deferred:
Federal............................................. 363 4,136 1,144
State............................................... 64 1,266 168
-------- ------- ------
Total deferred........................................ 427 5,402 1,312
-------- ------- ------
Benefit (provision) for income taxes.................. $ (1,389) $ 5,981 $1,693
======== ======= ======
</TABLE>
The reconciliation of income tax benefit (provision) attributable to
continuing operations computed at the U.S. federal statutory tax rates to income
tax benefit (provision) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at federal statutory rates............... $ 32,608 $ 14,766 $1,670
State income tax benefit (provision) net of federal
effect............................................. 3,690 3,106 302
Net operating losses and other deferred tax assets
not benefited...................................... (37,529) (17,264) --
Resolution of tax examinations....................... -- 3,511 --
Permanent and other differences...................... (158) 1,862 (279)
-------- -------- ------
Benefit (provision) for income taxes................. $ (1,389) $ 5,981 $1,693
======== ======== ======
</TABLE>
14. RELATED PARTY TRANSACTIONS
A law firm, of which a director and stockholder of the Company was a
principal, provided certain legal services to the Company and charged fees and
costs incurred to the Company in the amount of approximately $4.3 million in
1997, $3.5 million in 1996 and $2.6 million in 1995.
F-20
<PAGE> 72
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the
balance sheets for cash and cash equivalents approximates fair value.
Accounts receivable and accounts payable: The carrying amounts
reported in the balance sheets for accounts receivable and accounts payable
approximate fair value.
Escrow under Senior Notes: The carrying amount reported in the
balance sheets for restricted short-term investments held in escrow
approximates fair value.
Long-term debt: The fair value of the Senior Notes is estimated at
$330 million based on the last trading price of the Senior Notes in 1997.
Redeemable preferred stock: The fair value of the Convertible and
Exchangeable Preferred Stock has not been determined due to the
impracticability of such a calculation based on the limited market of the
preferred stock and the lack of an actively quoted price.
16. COMMITMENTS AND CONTINGENCIES
In connection with its fiber optic network expansion, the Company has
entered into various construction and installation agreements with contractors.
Total commitments under these agreements are approximately $77.6 million at
December 31, 1997.
In connection with its fiber expansion agreements, the Company has
committed to pay $42.0 million for fiber usage rights on other long distance
carriers' networks, $8.4 million of which was paid by December 31, 1997.
Pursuant to the same agreements, the Company has committed to pay a total of
$30.4 million, in periodic installments for twenty to twenty-five years related
to maintenance and license fees. Several of these agreements require the Company
to share network construction costs with the other party. The exact amounts of
these construction costs are not specified in the related agreements and are
thus excluded from the figures above.
The Company is from time to time involved in various legal proceedings, all
of which have arisen in the ordinary course of business and some of which are
covered by insurance. In the opinion of the Company's management, none of the
claims relating to such proceedings will have a material adverse effect on the
financial condition or results of operations of the Company.
17. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts and service
credits was as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT OTHER BALANCE
BEGINNING CHARGED TO CHARGES TO AT END OF
FOR THE YEARS ENDED OF PERIOD REVENUE REVENUE DEDUCTIONS PERIOD
------------------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997............ $4,030 $17,387 $4,936 $11,950 $14,403
December 31, 1996............ $1,769 $ 3,060 $ -- $ 799 $ 4,030
December 31, 1995............ $ 762 $ 1,505 $ -- $ 498 $ 1,769
</TABLE>
F-21
<PAGE> 73
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
18. QUARTERLY RESULTS (UNAUDITED)
The Company's unaudited quarterly results are as follows:
<TABLE>
<CAPTION>
FOR THE 1997 QUARTER ENDED:
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net operating revenues.............. $ 83,910 $ 88,865 $112,240 $135,695
Gross profit........................ 14,928 14,715 28,351 37,589
Net loss............................ (19,878) (28,810) (26,788) (19,079)
Basic and diluted loss per share.... $ (0.66) $ (1.01) $ (1.08) $ (0.99)
</TABLE>
<TABLE>
<CAPTION>
FOR THE 1996 QUARTER ENDED:
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net operating revenues.............. $ 26,250 $ 43,007 $ 61,016 $ 73,488
Gross profit........................ 10,650 11,364 17,242 21,036
Net loss............................ (11,699) (12,067) (5,624) (8,058)
Basic and diluted loss per share.... $ (0.50) $ (0.51) $ (0.20) $ (0.28)
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have
been restated immaterially to comply with Statement of Financial Accounting
Standards No. 128, Earnings per Share and the Securities and Exchange Commission
Staff Accounting Bulletin 98.
19. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of Statement 131, but anticipates that the adoption of
Statement 131 will not affect results of operations or financial position, but
may affect the disclosure of segment information. Under applicable accounting
literature effective prior to the adoption of FAS 131, the Company considers its
operations to be exclusively within a single industry.
20. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
As of December 31, 1997, the Company indirectly owned 24.5% of Marca-Tel
S.A. de C.V. (Marca-Tel) through its ownership of 50% of Progress International
LLC, which owned 49% of Marca-Tel. The remaining 51% of Marca-Tel is owned by a
Mexican individual and Formento Radio Beep, S.A. de C.V. The other 50% of
Progress International is owned by Westel International, Inc.
F-22
<PAGE> 74
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The following are summarized financial information for Marca-Tel for the
years ending December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
INCOME STATEMENT DATA:
Net revenue............................................. $ 5,786 $ --
Gross profit (loss)..................................... (4,556) (3,110)
Net loss................................................ (25,395) (3,120)
BALANCE SHEET DATA:
Current assets.......................................... $ 10,123 $ 4,381
Non-current assets...................................... 80,351 34,733
Current liabilities..................................... 18,431 26,665
Non-current liabilities................................. 51,831 2,871
</TABLE>
Marca-Tel is included in the financial statements of the Company as of and
for the years ended December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
------ -----
(IN MILLIONS)
<S> <C> <C>
Investment in unconsolidated subsidiaries................... $ 11.6 $ 5.3
Equity in net income (loss) of unconsolidated
subsidiaries.............................................. $(23.6) $(1.8)
</TABLE>
21. JOINT VENTURES AND ACQUISITIONS
In October 1997, the Company formed a joint venture with Telenor AS, the
Norwegian national telephone company, to provide telecommunication services to
carriers and resellers in nine European countries. The joint venture is owned 40
percent by the Company, 40 percent by Telenor Global Services AS, and 20 percent
by Clarion Resources Communications Corporation, a U.S.-based telecommunications
company in which Telenor owns a controlling interest. Under the terms of the
agreement, the Company has two seats on the joint venture's board. Approximately
$5.8 million was invested in this joint venture in 1997.
In December 1997, the Company entered into an agreement to exchange
approximately 4,000,000 shares of its common stock for all of the outstanding
common stock of Network Long Distance, Inc, a switchless reseller to
small/medium size companies. The Company intends to structure the transaction to
qualify for pooling of interests accounting and to qualify as a tax-free
reorganization. Under the terms of the agreement, Network Long Distance
shareholders will receive 0.2998 IXC common shares for each Network Long
Distance share at the close of the transaction. The transaction is expected to
close in the second quarter of 1998, subject to Network Long Distance
shareholder and regulatory approvals and other normal closing conditions.
In December 1997, the Company announced a joint venture with UniDial
Communications to sell UniDial products exclusively over the Company's network.
The joint venture will be known as UniDial Communications Services, LLC, and
will offer UniDial's full suite of wireless, voicemail, and paging products over
the Company's network backbone. The Company will provide the joint venture with
its full range of voice, video, Internet, and data services to be private
labeled under the UniDial name. The products will be marketed through a
full-time national sales force of UniDial network consultants. No amounts were
invested in this joint venture in 1997.
F-23
<PAGE> 75
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
22. SUBSEQUENT EVENTS
PSINet Transaction. To enhance the Company's product and service offerings,
in February 1998, the Company consummated the agreements with PSINet which allow
each party to market and sell the products and services of the other party.
Under the terms of the agreements, the Company will provide PSINet with an IRU
in 10,000 miles of OC-48 transmission capacity on its Network over a 20-year
period in exchange for approximately 10.2 million shares representing 20%
(post-issuance) of PSINet common stock. If the value of the PSINet common stock
received by the Company is less than $240 million at the earlier of one year
after the final delivery of the transmission capacity (scheduled for late-1999)
or four years after the transaction's closing, PSINet, at its option, will pay
the Company cash and/or deliver additional PSINet common stock to increase the
value of the cash and common stock paid by PSINet to $240.0 million. Upon
delivery of the transmission capacity to PSINet, the Company will begin to
receive a maintenance fee which, as the full capacity has been delivered, should
increase to approximately $11.5 million per year.
23. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
IXC conducts a significant portion of its business through subsidiaries.
The Senior Notes are unconditionally guaranteed, jointly and severally, by
certain wholly-owned direct and indirect subsidiaries (the "Subsidiary
Guarantors"). The obligations of each Guarantor are limited to the minimum
extent necessary to prevent the guarantee from violating or becoming voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally. Certain IXC
subsidiaries do not guarantee the Senior Notes (the "Non-Guarantor
Subsidiaries"). The claims of creditors of Non-Guarantor Subsidiaries have
priority over the rights of IXC to receive dividends or distributions from such
subsidiaries.
Presented below is condensed consolidating financial information for IXC,
the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995.
The equity method has been used by IXC with respect to investments in
subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors.
Eliminations represents intercompany transactions, receivables, payables
and investments among the companies comprising the consolidated Company's
financial statements. These amounts must be eliminated in order to report the
Company on a consolidated basis.
F-24
<PAGE> 76
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The following table sets forth the Guarantor and Non-Guarantor
subsidiaries:
<TABLE>
<CAPTION>
GUARANTOR SUBSIDIARIES NON-GUARANTOR SUBSIDIARIES
---------------------- --------------------------
<S> <C>
Broadband Services, Inc. Mutual Signal Holding Corp.
IXC Carrier, Inc. Mutual Signal Corporation
Atlantic States Microwave Mutual Signal Corporation of
Transmission Company Michigan
Central States Microwave MSM Associates, Limited Partnership
Transmission Company Switched Services Communications, L.L.C.
Rio Grande Transmission, Inc.
Telecom Engineering, Inc.
Tower Communications System Corp.
West Texas Microwave Company
Western States Microwave Company
IXC Long Distance, Inc.
Link Net International, Inc.
IXC International , Inc.
IXC Internet Services, Inc.
</TABLE>
F-25
<PAGE> 77
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...... $ 122,572 $ 27,249 $ 2,899 $ -- $ 152,720
Accounts receivable and other,
net......................... 507 71,497 21,282 -- 93,286
Other current assets........... 1,310 1,546 644 -- 3,500
--------- --------- -------- --------- ---------
Total current assets... 124,389 100,292 24,825 -- 249,506
Property and equipment, net...... 8,246 543,506 57,445 (260) 608,937
Investments in and due from
affiliate...................... 512,535 255,797 -- (750,835) 17,497
Other assets..................... 17,330 10,638 16,621 (3,434) 41,155
--------- --------- -------- --------- ---------
Total assets........... $ 662,500 $ 910,233 $ 98,891 $(754,529) $ 917,095
========= ========= ======== ========= =========
Current liabilities:
Accounts payable and other
current liabilities......... $ 27,777 $ 97,191 $ 44,538 $ -- $ 169,506
Current portion of long-term
debt and lease
obligations................. 118 4,276 7,777 -- 12,171
--------- --------- -------- --------- ---------
Total current
liabilities.......... 27,895 101,467 52,315 -- 181,677
Long-term debt and capital lease
obligations.................... 278,427 18,156 11,541 -- 308,124
Deferred tax liability........... -- 10,583 -- (7,377) 3,206
Due to affiliate/parent.......... -- 882,885 83,259 (966,144) --
Other noncurrent liabilities..... -- 67,210 -- 67,210
Minority interest................ -- -- -- 1,465 1,465
Convertible Preferred Stock...... 101,239 101,239
Exchangeable Preferred Stock..... 302,129 -- 302,129
Stockholders' equity:
Preferred stock................ 1 -- 2,585 (2,585) 1
Common stock................... 316 3 -- (3) 316
Additional paid-in capital..... 106,559 42,553 23,848 (66,401) 106,559
Accumulated deficit............ (154,066) (212,624) (74,657) 286,516 (154,831)
--------- --------- -------- --------- ---------
Total stockholders' equity....... (47,190) (170,068) (48,224) 217,527 (47,955)
--------- --------- -------- --------- ---------
Total liabilities and
stockholders
equity............... $ 662,500 $ 910,233 $ 98,891 $(754,529) $ 917,095
========= ========= ======== ========= =========
</TABLE>
F-26
<PAGE> 78
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues............... $ 43 $ 325,096 $ 247,693 $(152,122) $ 420,710
Operating expenses:
Cost of services................... 7 229,402 246,540 (150,822) 325,127
Operations and administration...... 6 57,638 23,726 (1,300) 80,070
Depreciation and amortization...... 4,341 45,401 11,102 (96) 60,748
--------- --------- --------- --------- ---------
(4,311) (7,345) (33,675) 96 (45,235)
Interest income...................... 6,418 942 335 -- 7,695
Intercompany interest income
(expense).......................... 85,376 (75,306) (10,070) -- --
Interest expense..................... (36,126) 7,112 (2,252) -- (31,266)
Equity in net loss of unconsolidated
subsidiaries....................... (146,471) (67,751) -- 190,422 (23,800)
--------- --------- --------- --------- ---------
Loss before income taxes and minority
interest........................... (95,114) (142,348) (45,662) 190,518 (92,606)
Benefit (provision) for income
taxes.............................. 559 (4,217) 2,269 -- (1,389)
Minority interest.................... -- -- -- (560) (560)
--------- --------- --------- --------- ---------
Net loss............................. $ (94,555) $(146,565) $ (43,393) $ 189,958 $ (94,555)
========= ========= ========= ========= =========
</TABLE>
F-27
<PAGE> 79
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............... $ (14,347) $ (71,592) $(16,600) $116,874 $ 14,335
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of funds from escrow under
Senior Notes....................... 69,564 -- -- -- 69,564
Deposit into escrow under Senior
Notes.............................. (18,152) -- -- -- (18,152)
Purchase of property and equipment... (8,238) (239,495) (20,098) (46,496) (314,327)
Investment in unconsolidated
subsidiaries....................... 85,373 (35,497) -- (85,373) (35,497)
--------- --------- -------- -------- ---------
Net cash provided by (used in)
investing activities............... 128,547 (274,992) (20,098) (131,869) (298,412)
--------- --------- -------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on long-term debt and
capital lease obligations.......... 289 (43,952) (9,104) 44,479 (8,288)
Net proceeds from Convertible
Preferred Stock.................... 95,354 -- -- -- 95,354
Net proceeds from Exchangeable
Preferred Stock ................... 287,967 -- -- -- 287,967
Other Financing, net................. (172) -- -- 596 424
Advances to affiliates............... (440,429) 427,240 44,090 (30,901) --
--------- --------- -------- -------- ---------
Net cash provided by (used in)
financing activities............... (56,991) 383,288 34,986 14,174 375,457
--------- --------- -------- -------- ---------
Net increase (decrease) in cash and
cash equivalents................... 57,209 36,704 (1,712) (821) 91,380
Cash and cash equivalents at
beginning of period................ 65,363 (9,455) 4,611 821 61,340
--------- --------- -------- -------- ---------
Cash and cash equivalents at end of
period............................. $ 122,572 $ 27,249 $ 2,899 $ -- $ 152,720
========= ========= ======== ======== =========
</TABLE>
F-28
<PAGE> 80
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 65,363 $ (9,455) $ 4,611 $ 821 $ 61,340
Accounts receivable and other,
net.............................. 111 28,657 32,363 (13,563) 47,568
Other current assets................ 937 3,765 549 (3,054) 2,197
-------- -------- -------- --------- --------
Total current assets........ 66,411 22,967 37,523 (15,796) 111,105
Property and equipment, net........... 8 231,514 37,347 (260) 268,609
Escrow under Senior Notes............. 51,412 -- -- -- 51,412
Due from affiliate.................... 225,093 40,742 6,574 (272,409) --
Other assets.......................... 8,429 6,527 13,049 20 28,025
-------- -------- -------- --------- --------
Total assets................ $351,353 $301,750 $ 94,493 $(288,445) $459,151
-------- -------- -------- --------- --------
Current liabilities:
Accounts payable and other current
liabilities...................... $ 10,077 $ 70,207 $ 16,909 $ (13,342) $ 83,851
Due to affiliate.................... 141 523 40 (704) --
Current portion of long-term debt
and lease obligations............ -- 2,469 6,024 (1,743) 6,750
-------- -------- -------- --------- --------
Total current liabilities... 10,218 73,199 22,973 (15,789) 90,601
Long-term debt and capital lease
obligations......................... 277,656 1,487 21,548 (5,160) 295,531
Deferred tax liability................ -- 7,484 -- (5,050) 2,434
Due to affiliate/parent............... -- 231,666 40,743 (272,409) --
Other noncurrent liabilities.......... -- 6,201 749 (749) 6,201
Minority interest..................... -- -- -- 905 905
Stockholders' equity:
Preferred stock..................... 13 -- 2,585 (2,585) 13
Common stock........................ 308 4 2 (6) 308
Additional paid-in capital.......... 123,434 30,053 36,249 (66,302) 123,434
Accumulated deficit................. (60,276) (48,344) (30,356) 78,700 (60,276)
-------- -------- -------- --------- --------
Total stockholders'
equity.................... 63,479 (18,287) 8,480 9,807 63,479
-------- -------- -------- --------- --------
Total liabilities and
stockholders' equity...... $351,353 $301,750 $ 94,493 $(288,445) $459,151
======== ======== ======== ========= ========
</TABLE>
F-29
<PAGE> 81
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues................ $ 66 $148,692 $104,156 $(49,153) $203,761
Operating expenses:
Cost of services.................... -- 86,929 103,912 (47,372) 143,469
Operations and administration....... 3,955 36,711 7,558 (1,157) 47,067
Depreciation and amortization....... 58 18,055 9,453 (325) 27,241
-------- -------- -------- -------- --------
(3,947) 6,997 (16,767) (299) (14,016)
Interest income....................... 17,572 6,738 596 (22,068) 2,838
Interest income on escrow under Senior
Notes............................... 7,404 -- -- -- 7,404
Interest expense...................... (38,181) (15,936) (5,027) 22,068 (37,076)
Equity in net income (loss) of
unconsolidated subsidiaries......... (26,277) (23,688) -- 48,004 (1,961)
-------- -------- -------- -------- --------
Loss before income taxes and minority
interest............................ (43,429) (25,889) (21,198) 47,705 (42,811)
Benefit (provision) for income
taxes............................... 5,981 2,915 2,344 (5,259) 5,981
Minority interest..................... -- -- -- (618) (618)
-------- -------- -------- -------- --------
Net loss.............................. $(37,448) $(22,974) $(18,854) $ 41,828 $(37,448)
======== ======== ======== ======== ========
</TABLE>
F-30
<PAGE> 82
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR IXC
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............. $ (25,099) $ 49,161 $(40,627) $(12,122) $ (28,687)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Release of funds from escrow under
Senior Notes...................... 154,244 -- -- -- 154,244
Deposit into escrow under Senior
Notes............................. (7,404) -- -- -- (7,404)
Purchase of property and
equipment......................... (9) (169,498) (7,259) 40,375 (136,391)
Investment in unconsolidated
subsidiaries...................... 12,422 (44,714) -- 24,973 (7,319)
--------- --------- -------- -------- ---------
Net cash provided by (used in)
investing activities.............. 159,253 (214,212) (7,259) 65,348 3,130
CASH FLOW FROM FINANCING ACTIVITIES:
Payment of debt issue costs......... (1,301) -- -- -- (1,301)
Payments on long-term debt and
capital lease obligations......... -- (9,018) (583) (3,185) (12,786)
Issuance of preferred stock......... -- -- 2,585 (2,585) --
Issuance of common stock............ 81,581 -- 15,500 (3,012) 94,069
Advances to affiliates.............. (150,489) 161,282 33,253 (44,046) --
--------- --------- -------- -------- ---------
Net cash provided by (used in)
financing activities.............. (70,209) 152,264 50,755 (52,828) 79,982
--------- --------- -------- -------- ---------
Net increase (decrease) in cash and
cash equivalents.................. 63,945 (12,787) 2,869 398 54,425
Cash and cash equivalents at
beginning of period............... 1,418 3,332 1,742 423 6,915
--------- --------- -------- -------- ---------
Cash and cash equivalents at end of
period............................ $ 65,363 $ (9,455) $ 4,611 $ 821 $ 61,340
========= ========= ======== ======== =========
</TABLE>
F-31
<PAGE> 83
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 1,418 $ 3,332 $ 1,742 $ 423 $ 6,915
Accounts receivable and other, net............ -- 6,717 1,148 (1,546) 6,319
Other current assets.......................... 6,565 4,481 358 (8,589) 2,815
-------- -------- ------- --------- --------
Total current assets............................ 7,983 14,530 3,248 (9,712) 16,049
Property and equipment, net..................... -- 76,804 29,910 (315) 106,399
Escrow under Senior Notes....................... 198,266 -- -- -- 198,266
Due from affiliate.............................. 74,604 3,351 568 (78,523) --
Other assets.................................... 12,707 16,948 4,191 (18,085) 15,761
-------- -------- ------- --------- --------
Total assets.................................... $293,560 $111,633 $37,917 $(106,635) $336,475
======== ======== ======= ========= ========
Current liabilities:
Accounts payable and other current
liabilities................................ $ 8,984 $ 13,922 $ 2,720 $ (4,528) $ 21,098
Due to affiliate.............................. 258 6,458 1,832 (8,548) --
Current portion of long-term debt and lease
obligations................................ -- 1,511 3,023 -- 4,534
-------- -------- ------- --------- --------
Total current liabilities....................... 9,242 21,891 7,575 (13,076) 25,632
Long-term debt and capital lease obligations.... 277,238 3,207 17,215 (3,400) 294,260
Deferred tax liability.......................... 222 10,997 -- (2,916) 8,303
Due to affiliate/parent......................... -- 70,384 3,878 (74,262) --
Other noncurrent liabilities.................... -- 469 -- -- 469
Minority interest............................... -- 1 -- 952 953
Stockholders' equity:
Preferred stock............................... 13 -- -- -- 13
Common stock.................................. 243 3 1 (4)(b) 243
Additional paid-in capital.................... 29,430 30,051 20,750 (50,801) 29,430
Accumulated deficit........................... (22,828) (25,370) (11,502) 36,872 (22,828)
-------- -------- ------- --------- --------
Total stockholders' equity............ 6,858 4,684 9,249 (13,933) 6,858
-------- -------- ------- --------- --------
Total liabilities and stockholders'
equity.............................. $293,560 $111,633 $37,917 $(106,635) $336,475
======== ======== ======= ========= ========
</TABLE>
F-32
<PAGE> 84
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net operating revenues............................ $ 404 $89,339 $ 12,155 $(10,897) $ 91,001
Operating expenses:
Cost of services................................ -- 38,950 10,075 (9,173) 39,852
Operations and administration................... 1,116 26,155 6,322 (1,311) 32,282
Depreciation and amortization................... 57 12,728 4,653 -- 17,438
------- ------- -------- -------- --------
(769) 11,506 (8,895) (413) 1,429
Interest income................................... 3,766 399 67 (3,764) 468
Interest income on escrow under Senior Notes...... 2,552 -- -- -- 2,552
Interest expense.................................. (10,982) (5,838) (1,541) 3,764 (14,597)
Equity in net income (loss) of unconsolidated
subsidiaries.................................... (1,474) (7,678) -- 9,171 19
------- ------- -------- -------- --------
Loss before income taxes, minority interests and
extraordinary loss.............................. (6,907) (1,611) (10,369) 8,758 (10,129)
Benefit (provision) for income taxes.............. 2,246 546 (1,099) -- 1,693
Minority interests................................ -- -- -- 5,218 5,218
------- ------- -------- -------- --------
Loss before extraordinary items................... (4,661) (1,065) (11,468) 13,976 (3,218)
Extraordinary loss, net of taxes.................. (304) (1,309) (134) -- (1,747)
------- ------- -------- -------- --------
Net loss.......................................... $(4,965) $(2,374) $(11,602) $ 13,976 $ (4,965)
======= ======= ======== ======== ========
</TABLE>
F-33
<PAGE> 85
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR IXC
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ (8,324) $ 24,272 $(8,333) $ 3,992 $ 11,607
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of funds from escrow under Senior
Notes........................................ 4,300 -- -- -- 4,300
Purchase of restricted short-term
investments.................................. (202,552) -- -- -- (202,552)
Purchase of property and equipment............. -- (14,282) (9,565) 177 (23,670)
--------- -------- ------- -------- ---------
Net cash used in investing activities.......... (198,252) (14,282) (9,565) 177 (221,922)
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Senior Notes, net
of discount.................................. 277,148 -- -- -- 277,148
Payment of debt issue costs.................... (10,407) -- -- -- (10,407)
Payments from (advances to) affiliates, net.... (50,827) 50,827 -- -- --
Proceeds from long-term debt................... -- 17,150 1,545 -- 18,695
Payments on long-term debt and capital lease
obligations.................................. (5,700) (63,606) (3,089) (4,095) (76,490)
Redemption of preferred stock.................. (1,460) (1,400) -- -- (2,860)
Capital contribution in subsidiary by minority
shareholders................................. -- (14,248) 20,250 -- 6,002
Dividend payments.............................. (906) -- -- -- (906)
--------- -------- ------- -------- ---------
Net cash provided by (used in) financing
activities................................... 207,848 (11,277) 18,706 (4,095) 211,182
--------- -------- ------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 1,272 (1,287) 808 74 867
Cash and cash equivalents at beginning of
year......................................... 146 4,619 934 349 6,048
--------- -------- ------- -------- ---------
Cash and cash equivalents at end of year....... $ 1,418 $ 3,332 $ 1,742 $ 423 $ 6,915
========= ======== ======= ======== =========
</TABLE>
F-34
<PAGE> 86
EXHIBIT INDEX
<TABLE>
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<S> <C> <C>
2.1 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. dated as
of December 19, 1997 (incorporated by reference to Exhibit
2.1 of IXC Communications, Inc.'s Current Report on Form 8-K
dated December 19, 1997 and filed with the Commission on
December 23, 1997)..........................................
3.1+ Restated Certificate of Incorporation of IXC Communications,
Inc., as amended............................................
3.2 Bylaws of IXC Communications, Inc., as amended (incorporated
by reference to Exhibit 3.2 of IXC Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 filed with the Commission on November 14,
1997 (the "September 30, 1997 10-Q")).......................
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 (the "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 Amendment No. 1 to IXC Communications, Inc.'s
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.'s 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 GEPT
(incorporated by reference to Exhibit 4.14 of the March 31,
1997 10-Q)..................................................
</TABLE>
<PAGE> 87
<TABLE>
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SEQUENTIALLY
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- ------- ----------- ------------
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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.'s
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.'s 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 Registration Rights Agreement dated as of August 14, 1997 by
and among IXC Communications, Inc. and the purchasers named
therein (incorporated by reference to Exhibit 4.3 of the
8-K)........................................................
4.13+ First Supplemental Indenture dated as of October 23, 1997
among IXC Communications, Inc., the Guarantors, IXC
International, Inc. and IBJ Schroder Bank of Trust
Company.....................................................
4.14+ Second Supplemental Indenture dated as of December 22, 1997
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International, Inc. and IBJ Schroder
Bank & Trust Company........................................
4.15+ Third Supplemental Indenture dated as of January 6, 1998
among IXC Communications, Inc., the Guarantors, IXC Internet
Services, Inc., IXC International, Inc. and IBJ Schroder
Bank & Trust Company........................................
10.1 Office Lease dated June 21, 1989 with USAA Real Estate
Company, as amended (incorporated by reference to Exhibit
10.1 of the S-4)............................................
10.2 Equipment Lease dated as of December 1, 1994 by and between
DSC Finance Corporation and Switched Services
Communications, L.L.C.; Assignment Agreement dated as of
December 1, 1994 by and between Switched Services
Communications, L.L.C. and DSC Finance Corporation; and
Guaranty dated December 1, 1994 made in favor of DSC Finance
Corporation by IXC Communications, Inc. (incorporated by
reference to Exhibit 10.2 of the S-4).......................
10.3* Amended and Restated 1994 Stock Plan of IXC Communications,
Inc., as amended (incorporated by reference to Exhibit 10.3
of the June 30, 1997 10-Q)..................................
10.4* Form of Non-Qualified Stock Option Agreement under the 1994
Stock Plan of IXC Communications, Inc. (incorporated by
reference to Exhibit 10.4 of the S-4).......................
10.5 Amended and Restated Development Agreement by and between
Intertech Management Group, Inc. and IXC Long Distance, Inc.
(incorporated by reference to Exhibit 10.7 of IXC
Communications, Inc.'s and the Guarantors' Amendment No. 1
to Form S-4 filed with the Commission on May 20, 1996 (File
No. 333-2936) ("Amendment No. 1 to S-4"))...................
10.6 Second Amended and Restated Service Agreement dated as of
January 1, 1996 by and between Switched Services
Communications, L.L.C. and Excel Telecommunications, Inc.
(incorporated by reference to Exhibit 10.8 of the S-4)......
</TABLE>
<PAGE> 88
<TABLE>
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10.7 Equipment Purchase Agreement dated as of January 16, 1996 by
and between Siecor Corporation and IXC Carrier, Inc.
(incorporated by reference to Exhibit 10.9 of the S-4)......
10.8* 1996 Stock Plan of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 10.10 of IXC
Communications, Inc. Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the Commission on March
28, 1997 (the "10-K"))......................................
10.9 IRU Agreement dated as of November 1995 between WorldCom,
Inc. and IXC Carrier, Inc. (incorporated by reference to
Exhibit 10.11 of Amendment No. 1 to the S-4)................
10.10* Outside Directors' Phantom Stock Plan of IXC Communications,
Inc., as amended (incorporated by reference to Exhibit 10.12
of the 10-K)................................................
10.11* Business Consultant and Management Agreement dated as of
March 1, 1997 by and between IXC Communications, Inc. and
Culp Communications Associates (incorporated by reference to
Exhibit 10.13 of IXC Communications, Inc.'s Registration
Statement on Form S-4 as filed with the Commission on
October 3, 1997 (File No. 333-37157) (the "EPS S-4")).......
10.12* Employment Agreement dated December 28, 1995 by and between
IXC Communications, Inc. and James F. Guthrie (incorporated
by reference to Exhibit 10.14 of the S-1 Amendment).........
10.13* Employment Agreement dated August 28, 1995, by and between
IXC Communications, Inc. and David J. Thomas (incorporated
by reference to Exhibit 10.15 of the S-1 Amendment).........
10.14* Special Stock Plan of IXC Communications, Inc. (incorporated
by reference to Exhibit 10.16 of the 10-K)..................
10.15 Lease dated as of June 4, 1997 between IXC Communications,
Inc. and Carramerca Realty, L.P. (incorporated by reference
to Exhibit 10.17 of the June 30, 1997 10-Q).................
10.16 Loan and Security Agreement dated as of July 18, 1997 among
IXC Communications, Inc., IXC Carrier, Inc. and NFTC Capital
Corporation ("NTFC") (incorporated by reference to Exhibit
10.18 of the June 30, 1997 10-Q)............................
10.17 IRU and Stock Purchase Agreement dated as of July 22, 1997
between IXC Internet Services, Inc. and PSINet Inc.
(incorporated by reference to Exhibit 10.19 of IXC
Communications, Inc.'s Amendment No. 1 to Form 10-Q/A for
the quarter ended September 30, 1997 filed with the
Commission on December 12, 1997 (the "September 30, 1997
10-Q/A"))...................................................
10.18 Joint Marketing and Services Agreement dated July 22, 1997
between IXC Internet Services, Inc. and PSINet Inc.
(incorporated by reference to Exhibit 10.20 of the September
30, 1997 10-Q/A)............................................
10.19* Employment Agreement dated as of September 9, 1997 between
Benjamin L. Scott and IXC Communications, Inc. (incorporated
by reference to Exhibit 10.21 of IXC Communication Inc.'s
Amendment No. 1 to Registration Statement on S-4 filed with
the Commission on December 15, 1997 (File No. 333-37157)
("Amendment No. 1 to the EPS S-4")).........................
10.20* IXC Communications, Inc. 1997 Special Executive Stock Plan
(incorporated by reference to Exhibit 10.22 of Amendment No.
1 to the EPS S-4)...........................................
10.21+ First Amendment to Loan and Security Agreement dated as of
December 23, 1997 among IXC Communications, Inc., IXC
Carrier, Inc., NTFC and Export Development Corporation
("EDC").....................................................
</TABLE>
<PAGE> 89
<TABLE>
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SEQUENTIALLY
EXHIBIT NUMBERED
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10.22+ Second Amendment to Loan and Security Agreement dated as of
January 21, 1998 among IXC Communications, Inc., IXC
Carrier, Inc., NTFC and EDC.................................
21.1+ Subsidiaries of IXC Communications, Inc.....................
23.1+ Consent of Ernst & Young LLP................................
23.2+ Consent of Arthur Andersen LLP..............................
24.1 Powers of Attorney (included as the signature page of this
Form 10-K)..................................................
27.1+ Financial Data Schedule.....................................
99.1+ Marca-Tel Combining Financial Statements as of December 31,
1997 and 1996 together with Auditors' Report.
</TABLE>
- ---------------
* Management contract or executive compensation plan or arrangement required to
be indicated as such and filed as an exhibit pursuant to applicable rules of
the Commission.
+ Filed herewith.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE
OF
INCORPORATION, AS AMENDED
Fiber Optic Communications, Inc., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of this corporation is Fiber Optic Communications,
Inc. Fiber Optic Communications, Inc. was originally incorporated under the
same name. The original Certificate of Incorporation of this corporation was
filed with the Secretary of State of the State of Delaware on July 27, 1992.
2. Pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware, this Restated Certificate of Incorporation has
been duly adopted and restates, integrates and further amends the provisions of
the Certificate of Incorporation of this corporation.
3. This Restated Certificate of Incorporation was duly consented
to, and adopted by, the holders of (i) a majority of the outstanding shares of
common stock, par value $.01 per share, of the Corporation and 10% Senior
Series 1 Cumulative Redeemable Preferred Stock, par value $.01 per share, of
this corporation ("Series 1 Preferred Stock"), consenting together as a class
and by (ii) over three-fourths (3/4s) of the outstanding shares of Series 1
Preferred Stock, acting without a meeting by unanimous written consent pursuant
to Section 228 of the General Corporation Law of the State of Delaware.
4. The text of the Restated Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
FIRST: The name of this corporation (the "Corporation") is "IXC
Communications, Inc."
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle, Delaware 19801. The name of its
registered agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may now or hereafter be organized under the
General Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is one hundred and three million (103,000,000)
consisting of (i) one
1
<PAGE> 2
hundred million (100,000,000) shares of common stock, par value $.01 per share,
and (ii) three million (3,000,000) shares of preferred stock, par value $.01
per share. The preferred stock may be issued at any time, and from time to
time, in one or more series pursuant hereto or to a resolution or resolutions
providing for such issue duly adopted by the board of directors (the "Board")
of the Corporation (authority to do so being hereby expressly vested in the
Board), and such resolution or resolutions shall also set forth the voting
powers, full or limited, or none, of each such series of preferred stock and
shall fix the designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions of each
such series of preferred stock.
Upon the filing of this Second Amendment to Restated
Certificate of Incorporation which amends Article FOURTH to read as set forth
above, and without any further action on the part of the holders thereof, each
issued and outstanding share of common stock will be reclassified and changed
into 0.8083 shares of common stock.
FIFTH: The business and affairs of the Corporation shall be managed
by and under the direction of the Board. The exact number of directors of the
Corporation shall be fixed by or in the manner provided in the Bylaws of the
Corporation (the "Bylaws").
SIXTH: In furtherance and not in limitation of the powers conferred
by statute, the Board is expressly authorized:
(a) to adopt, repeal, rescind, alter or amend in any respect the
Bylaws, and to confer in the Bylaws powers and authorities upon the directors
of the Corporation in addition to the powers and authorities expressly
conferred upon them by statute;
(b) from time to time to set apart out of any funds or assets of
the Corporation available for dividends an amount or amounts to be reserved as
working capital or for any other lawful purpose and to abolish any reserve so
created and to determine whether any, and, if any, what part, of the surplus of
the Corporation or its net profits applicable to dividends shall be declared in
dividends and paid to its stockholders, and all rights of the holders of stock
of the Corporation in respect of dividends shall be subject to the power of the
Board so to do;
(c) subject to the laws of the State of Delaware, from time to
time to sell, lease or otherwise dispose of any part or parts of the properties
of the Corporation and to cease to conduct the business connected therewith or
again to resume the same, as it may deem best; and
(d) in addition to the powers and authorities hereinbefore and by
the laws of the State of Delaware conferred upon the Board, to execute all such
powers and to do all acts and things as may be exercised or done by the
Corporation; subject, nevertheless, to the express provisions of such laws, of
the Restated Certificate of Incorporation of the Corporation and its Bylaws.
2
<PAGE> 3
SEVENTH: Meetings of stockholders of the Corporation may be held
within or without the State of Delaware, as the Bylaws provide. The books
of the Corporation may be kept (subject to any provision of applicable law)
outside the State of Delaware at such place or places as may be designated
from time to time by the Board or in the Bylaws.
EIGHTH: The Corporation reserves the right to adopt, repeal, rescind,
alter or amend in any respect any provision contained in this Restated
Certificate of Incorporation in the manner now or hereafter prescribed by
applicable laws, and all rights conferred on stockholders herein are granted
subject to this reservation.
NINTH: The Corporation is to have perpetual existence.
TENTH: A director of this Corporation shall not be personally liable
to the Corporation or its stockholder for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, as the same exists or hereafter may be amended, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the Delaware General Corporation Law hereafter is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended Delaware Corporation Law. No amendment to or repeal
of this Article Tenth shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
ELEVENTH:
A. Designation of Two Series of Preferred Stock. There are
hereby provided two series of preferred stock designated and to be known as
"10% Senior Series 1 Cumulative Redeemable Preferred Stock" and "10% Junior
Series 3 Cumulative Redeemable Preferred Stock."
B. Definitions. As used in this Eleventh Article, the following
terms shall have the meanings indicated:
1. "Common Stock" shall mean the common stock, $.01 par
value per share, issued or to be issued by the Corporation.
2. "Original Issue Date" shall mean, with respect to any
share of Series Preferred Stock, the date of the original issuance of such
shares.
3
<PAGE> 4
3. "Preferred Stock" shall mean the preferred stock,
$.01 par value per share, issued or to be issued by the Corporation.
4. "Series 1 Preferred Stock" shall mean the 10% Senior
Series 1 Cumulative Redeemable Preferred Stock, $.01 par value per share,
issued or to be issued by the Corporation.
5. "Series 3 Preferred Stock" shall mean the 10% Junior
Series 3 Cumulative Redeemable Preferred Stock, $.01 par value per share,
issued or to be issued by the Corporation.
6. "Series Preferred Stock" shall mean, collectively,
the Series 1 Preferred Stock and the Series 3 Preferred Stock.
C. Number of Shares. The number of shares constituting the
Series 1 Preferred Stock shall be 2,000. The number of shares constituting the
Series 3 Preferred Stock shall be 12,550.
D. Rights, Preferences, Privileges and Restrictions. The voting
powers and relative rights, preferences, restrictions and other mattes relating
to the Series Preferred Stock are as follows:
1. Dividends.
(a) The holders of shares of Series 1 Preferred
Stock then outstanding shall be entitled to receive, prior to the payment of any
dividend on any other Preferred Stock of the Corporation or the Common Stock of
the Corporation, when, as and if declared by the Board, out of funds legally
available for the payment of dividends, cumulative dividends in an annual amount
equal to $100 per share, plus an amount determined by applying a 10% annual
rate, compounded annually, to any accrued but unpaid dividend amount from the
last day of the period when such dividend accrues to the actual date of payment
of such dividend, and no more. The holders of shares of Series 3 Preferred
Stock then outstanding shall be entitled to receive, prior to the payment of any
dividend on any other Preferred Stock of the Corporation (other than the Series
1 Preferred Stock) or the Common Stock of the Corporation, when as and if
declared by the Board, out of funds legally available for the payment of
dividends, cumulative dividends in an annual amount equal to $100 per share,
plus an amount determined by applying a 10% annual rate, compounded annually, to
any accrued but unpaid dividend amount from the last day of the period when such
dividend accrues to the actual date of payment of such dividend, and no more;
provided, however, that (i) the Corporation may pay dividends on the
Corporation's 7-1/4% Junior Convertible Preferred Stock Due 2007 ("Convertible
Preferred Stock") with additional shares of Convertible Preferred Stock and (ii)
the Corporation may pay dividends on the Corporation's 12-1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Initial Exchangeable Preferred
Stock") and 12-1/2% Series B Junior Exchangeable Preferred Stock Due 2009 (the
"Series B Stock") with additional shares of Initial Exchangeable Preferred Stock
and Series B Stock, respectively. Such dividends on the outstanding shares of
Series Preferred Stock shall be payable on such date as the Board may from time
to time determine (each such date being a "dividend payment date"). The Board
may fix a record date for the determination of holders of shares of Series
Preferred Stock entitled to receive payment of a dividend declared thereon,
which record date shall not be more than sixty (60) days prior to the date fixed
for
4
<PAGE> 5
the payment thereof. Each such annual dividend shall be fully cumulative and
shall accrue from day to day (whether or not declared) from the first day of
each period in which such dividend may be payable as herein provided, except
that the first annual dividend with respect to each share of Series Preferred
Stock shall accrue from the Original Issue Date of such share or such other
date as determined by the Board, except that dividends with respect to each
share of Series 3 Preferred Stock shall accrue from August 14, 1992.
Dividends, when, as and if declared, shall be payable in cash.
(b) The holder of each outstanding fractional
share of Series Preferred Stock shall be entitled to a ratably proportionate
amount of all dividends accruing with respect to each outstanding share of
Series Preferred Stock with the same Original Issue Date and all such dividends
with respect to each such outstanding fractional share shall be fully
cumulative and shall accrue (whether or not declared) and shall be payable in
the same manner and at such times as provided for in Section 1(a).
(c) All dividends paid with respect to the
outstanding shares of Series Preferred Stock pursuant to Section 1(a) shall be
paid pro rata to the holders of each class entitled thereto. Each Series 1
Preferred Stock holder's pro rata share of such dividends shall be calculated
by multiplying the total dividends to be paid by the percentage of (i) the
aggregate accrued but unpaid dividends to the date such payment is made on all
issued and outstanding shares of Series 1 Preferred Stock represented by (ii)
the aggregate accrued but unpaid dividends to the date such payment is made on
all shares (including fractional shares) of Series 1 Preferred Stock held by
such holder, and no more. Each Series 3 Preferred Stock holder's pro rata
share of such dividends shall be calculated by multiplying the total dividends
to be paid by the percentage of (i) the aggregate accrued but unpaid dividends
to the date such payment is made on all issued and outstanding shares of Series
3 Preferred Stock represented by (ii) the aggregate accrued but unpaid
dividends to the date such payment is made on all shares (including fractional
shares) of Series 3 Preferred Stock held by such holder, and no more.
2. Liquidation Rights of Series Preferred Stock:
(a) In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of outstanding shares of Series Preferred Stock shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders, whether such assets are capital, surplus, or earnings, before any
payment or declaration and setting apart for payment of any amount shall be
made in respect of the outstanding shares of any other Preferred Stock of the
Corporation or Common Stock of the Corporation, an amount equal to $1,000 per
share of Series Preferred Stock then outstanding, plus all accrued but unpaid
dividends thereon to the date such payment is actually made, and no more. If
upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of the
outstanding shares of Series Preferred Stock shall be insufficient to permit
the payment to such stockholders of the full preferential amounts set forth
above, then
5
<PAGE> 6
the entire assets of the Corporation to be distributed shall be distributed (i)
first, ratably among the holders of outstanding shares of Series 1 Preferred
Stock based on the full preferential amounts for the number of outstanding
shares of Series 1 Preferred Stock held by each holder and (ii) second, ratably
among the holders of outstanding shares of Series 3 Preferred Stock based on
the full preferential amounts for the number of outstanding shares of Series 3
Preferred Stock held by each holder. The Corporation will mail written notice
of such liquidation, dissolution or winding up, not less than sixty (60) days
prior to the payment date stated therein, to each record holder of Series
Preferred Stock.
(b) A consolidation or merger of the Corporation
with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Corporation shall not be deemed to be a
liquidation, dissolution, or winding up of the Corporation as those terms are
used in this Section 2 unless such consolidation, merger or sale shall be in
connection with a dissolution or winding up of the Corporation.
(c) The payment of preferential amounts pursuant
to this Section 2 with respect to each outstanding fractional share of Series 1
Preferred Stock shall be equal to a ratably proportionate amount of the
preferential amount payable with respect to each outstanding share of Series 1
Preferred Stock with the same Original Issue Date. The payment of preferential
amounts pursuant to this Section 2 with respect to each outstanding fractional
share of Series 3 Preferred Stock shall be equal to the ratably proportionate
amount of the preferential amount payable with respect to each outstanding
share of Series 3 Preferred Stock with the same Original Issue Date.
3. Voluntary Redemption by the Corporation.
(a) The Corporation, at the option of the Board,
may at any time or from time to time redeem the outstanding shares of Series 1
Preferred Stock in whole or in part from any source of funds legally available
therefor. The Corporation, at the option of the Board, may at any time or from
time to time redeem the outstanding shares of Series 3 Preferred Stock in whole
or in part from any source of funds legally available therefor, provided that
there shall then be no outstanding shares of Series 1 Preferred Stock.
(b) The redemption price for each outstanding
share of Series Preferred Stock shall be equal to $1,000 plus an amount equal
to any accrued and unpaid dividends on such share through the Redemption Date
(as defined below), whether or not declared (the "Redemption Price").
(c) In the event of a redemption of only a part
of the outstanding shares of a class of Series Preferred Stock, the Corporation
shall effect such redemption pro rata according to the number of shares held by
each holder of outstanding shares of such class of Series Preferred Stock.
6
<PAGE> 7
(d) At least ten (10) days and not more than
sixty (60) days prior to the date fixed for any redemption of shares of a class
of Series Preferred Stock (the "Redemption Date"), written notice (the
"Redemption Notice," and the class of Series Preferred Stock referenced in such
Redemption Notice shall be referred to herein as the "Redeemed Stock") shall be
sent, by registered mail, to each holder of record of the outstanding shares of
Redeemed Stock at his or her mailing address last shown on the records of the
Corporation. Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
received the notice, and failure duly to give the notice by mail, or any defect
in the notice, to any holder of shares of such class of Series Preferred Stock
designated for redemption shall not affect the validity of the proceedings for
the redemption of any other shares of such class of Series Preferred Stock.
The Redemption Notice shall state:
(i) whether all or less than all of the
outstanding shares of the class of Series Preferred Stock are to be redeemed
and the total number of shares being redeemed;
(ii) the number of outstanding shares of
Redeemed Stock held by the holder which the Corporation intends to redeem;
(iii) the Redemption Date and the
Redemption Price;
(iv) that from and after the Redemption
Date, dividends shall cease to accrue; and
(v) that the holder is to surrender to
the Corporation, in the manner and at the place designated, the certificate or
certificates representing the outstanding shares of Redeemed Stock to be
redeemed.
(e) On or before the Redemption Date, each holder
of outstanding shares of Redeemed Stock shall surrender the certificate or
certificates representing such shares to the Corporation, in the manner and at
the place designated in the Redemption Notice, and thereupon the Redemption
Price for such shares shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof, and each
surrendered certificate shall be cancelled and retired. In the event less than
all of the shares represented by any such certificate or certificates are
redeemed, a new certificate or certificates shall be issued representing the
unredeemed shares. All shares of the class of Series Preferred Stock called
for redemption will cease to accrue dividends as of the Redemption Date. After
the Redemption Date, holders of such class of Series Preferred Stock shall no
longer be treated as stockholders of the Corporation with respect to the shares
of Series Preferred Stock being redeemed, except with respect to the right to
receive the Redemption Price, without interest, upon the surrender of their
respective certificates.
7
<PAGE> 8
(f) The Corporation may, at its option, on or
prior to the Redemption Date, deposit with its transfer agent or other
redemption agent selected by the Board of Directors of the Corporation, as a
trust fund, a sum sufficient to redeem the shares called for redemption, with
irrevocable instructions and authority to such transfer agent or other
redemption agent to give or complete the Redemption Notice and to pay to the
respective holders of such shares, as evidenced by a list of such holders
certified by an officer of the Corporation, the Redemption Price upon
surrender of their respective share certificates. Such deposit shall be
deemed to constitute full payment of such shares to their holders. In case
the holders of any shares shall not, within five (5) years after such deposit,
claim the amount deposited for redemption thereof, such transfer agent or
other redemption agent shall, upon demand, pay over to the Corporation the
balance of such amount so deposited and shall thereupon be relieved of all
responsibility to the holders thereof. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time
to time on demand.
(g) All shares of Series 1 Preferred Stock which
shall have been redeemed pursuant to this Section 3 shall thereupon be
restored to the status of authorized but unissued shares of Series 1 Preferred
Stock.
(h) All shares of Series 3 Preferred Stock which
shall have been redeemed pursuant to this Section 3 shall thereupon be
restored to the status of authorized but unissued shares of Series 3 Preferred
Stock.
4. Voting Rights. Except as otherwise provided herein or by the
General Corporation Law of the State of Delaware, holders of outstanding shares
of Series 1 Preferred Stock shall have no voting rights. At all meetings of
the stockholders of the Corporation and in the case of any actions of
stockholders in lieu of a meeting, each share of Series 3 Preferred Stock shall
entitle the holder thereof to one vote. Except as otherwise provided herein or
by the General Corporation Law of the State of Delaware, the holders of Common
Stock and Series 3 Preferred Stock shall vote together as a single class, and
neither the Common Stock nor Series 3 Preferred Stock shall be entitled to vote
as a separate class on any matter to be voted on by shareholders of the
Corporation, except that the holders of the Series 3 Preferred Stock shall be
entitled to vote as a separate class to elect one member of the Board of
Directors of the Corporation.
5. Restrictions and Limitations. Except as otherwise provided by
the General Corporation Law of the State of Delaware, no amendment to this
Restated Certificate of Incorporation shall be made by the Corporation which
would change any of the terms, rights, preferences, privileges or restrictions
provided herein so as to affect adversely any shares of Series Preferred Stock
without the prior written consent of the holders of at least a majority of each
of the Series 1 Preferred Stock and the Series 3 Preferred Stock entitled to
vote thereon and outstanding at the time such action is taken; provided that no
amendment will change (i) the rate or times at which or the manner in which
dividends on any series of the Series Preferred Stock accrue or become payable,
(ii) the preferences with
8
<PAGE> 9
respect to dividends and liquidation payments set forth in Section 1 and 2 or
(iii) the percentage of the holders of the Series Preferred Stock required to
approve any changes described in clauses (i) or (ii) above, without the prior
written consent of the holders of at least three-fourths (3/4s) of each of the
Series 1 Preferred Stock and the Series 3 Preferred Stock, as applicable, then
outstanding; and, provided further, that no change in the terms hereof may be
accomplished by merger or consolidation of the Corporation with another
corporation unless the Corporation has obtained the prior written consent of
the holders of the applicable percentages of the Series 1 Preferred Stock and
the Series 3 Preferred Stock then outstanding.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed and attested by its duly authorized
officers this 31st day of January 1994.
/s/ Ralph J. Swett
-------------------------------
Ralph J. Swett, President
Attest:
/s/ John J. Willingham
- -----------------------------
John J. Willingham, Secretary
9
<PAGE> 10
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
IXC CARRIER GROUP, INC.
INTO
IXC COMMUNICATIONS, INC.
(PURSUANT TO SECTION 253 OF THE GENERAL
CORPORATION LAW OF DELAWARE)
IXC Communications, Inc., a Delaware corporation (the "Corporation"),
does hereby certify:
FIRST: That the Corporation is incorporated pursuant to the General
Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of each
class of the capital stock of IXC Carrier Group, Inc., a Delaware corporation
(the "Merging Corporation").
THIRD: That the Corporation, by the following resolutions of its Board
of Directors, duly adopted on the 6th day of October 1995, determined to merge
into itself the Merging Corporation on the conditions set forth in such
resolutions:
"RESOLVED, that the Corporation merge into itself its
subsidiary, IXC Carrier Group, Inc., a Delaware corporation, and assume
all of said subsidiary's liabilities and obligations;
FURTHER RESOLVED, that the President and Secretary of the
Corporation be, and they hereby are, directed to make, execute and
acknowledge a certificate of ownership and merger setting forth a copy
of the resolutions to merge IXC Carrier Group, Inc. into the
Corporation and to assume said subsidiary's liabilities and obligations
and the date of adoption thereof and to file the same in the office of
the Secretary of State of the State of Delaware and a certified copy
thereof in the Office of the Recorder of Deeds of New Castle County;
and
FURTHER RESOLVED, that the effective date of such merger is
November 30, 1995."
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed and this certificate to be signed by Ralph J. Swett, its President, and
John J. Willingham, its Secretary, this 28th day of November 1995.
IXC COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Ralph J. Swett
--------------------------------
Ralph J. Swett, President
ATTEST:
By: /s/ John J. Willingham
---------------------------------
John J. Willingham, Secretary [SEAL]
<PAGE> 11
EXECUTION COPY
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 7 1/4% JUNIOR
CONVERTIBLE PREFERRED STOCK DUE 2007 AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
- ----------------------------------------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
- ----------------------------------------------------------------------------
IXC Communications, Inc. (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the board of
directors of the Corporation (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Section 151
of the General Corporation Law of the State of Delaware, said Board of
Directors, at a meeting duly called and held on March 28, 1997, duly approved
and adopted the following resolution (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board of Directors by
its Certificate of Incorporation, the Board of Directors does hereby create,
authorize and provide for the issuance of 7 1/4% Junior Convertible Preferred
Stock Due 2007, par value $.01 per share, with a stated value initially of
$100 per share, consisting of up to 1,400,000 shares having the designation,
preferences, relative, participating, optional and other special rights and
the qualifications, limitations and restrictions thereof that are set forth
in the Restated Certificate of Incorporation and in this Resolution as
follows:
(a) Designation. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Company a series of Preferred Stock
designated as the "7 1/4% Junior Convertible Preferred Stock Due 2007" (the
"Convertible Preferred Stock"). The number of shares constituting the
Convertible Preferred Stock shall be 1,400,000. The liquidation preference of
the Convertible Preferred Stock shall be $100 per share (the "Liquidation
Preference").
<PAGE> 12
(b) Rank. The Convertible Preferred Stock will, with respect to dividend
rights and rights on liquidation, winding-up and dissolution, rank (i) senior
to all classes of common stock and to each other class of Capital Stock or
series of Preferred Stock established hereafter by the Board of Directors of
the Company, the terms of which do not expressly provide that it ranks senior
to, or on a parity with, the Convertible Preferred Stock as to dividend rights
and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all classes of common stock of the
Company, as "Junior Stock"); (ii) on a parity with each other class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors of the Company, the terms of which expressly provide that such class
or series will rank on a parity with the Convertible Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Stock"); and (iii) junior to each share of
Series 3 Preferred Stock now or hereafter outstanding and junior to each class
of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors of the Company, the terms of which hereafter established
classes or series expressly provide that such class or series will rank senior
to the Convertible Preferred Stock as to dividend rights or rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to as "Senior Stock"). The Company may not authorize, create or increase the
authorized amount of any class or series of Senior Stock without the approval
of the holders of at least two-thirds of the shares of Convertible Preferred
Stock then outstanding, voting or consenting, as the case may be, as one class.
All claims of the holders of the Convertible Preferred Stock, including claims
with respect to dividend payments, redemption payments, mandatory repurchase
payments or rights upon liquidation, winding-up or dissolution, shall rank
junior to the claims of the holders of any debt of the Company and all other
creditors of the Company.
(c) Dividends. (i) Holders of the outstanding shares of Convertible
Preferred Stock will be entitled to receive, when, as and if declared by the
Board of Directors of the Company, out of funds legally available therefor,
dividends on each share of the Convertible Preferred Stock at a rate per annum
equal to 7 1/4% of the Liquidation
2
<PAGE> 13
Preference of such share payable quarterly (each such quarterly period being
herein called a "Dividend Period"). In addition to the dividends described in
the preceding sentence, holders of outstanding shares of Convertible Preferred
Stock which are Transfer Restricted Securities will be entitled to additional
dividends (the "Additional Dividends"), when, as and if declared by the Board
of Directors of the Company, out of funds legally available therefor, with
respect to the shares of Convertible Preferred Stock, which Additional
Dividends shall accrue as follows if any of the following events occur (each
such event in clauses (A) and (B) below being herein called a "Registration
Default"): (A) if by August 31, 1997, the Shelf Registration Statement has not
been declared effective by the Commission; or (B) if after the Shelf
Registration Statement is declared effective (1) the Shelf Registration
Statement thereafter ceases to be effective; or (2) the Shelf Registration
Statement or the related prospectus ceases to be usable (in each case except as
permitted below) in connection with resales of Transfer Restricted Securities
in accordance with and during the periods specified herein because either (I)
any event occurs as a result of which the related prospectus forming part of
such Shelf Registration Statement would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under which they were made
not misleading, or (II) it shall be necessary to amend such Shelf Registration
Statement or supplement the related prospectus, to comply with the Securities
Act or the Exchange Act or the respective rules thereunder.
Additional Dividends shall accrue on the shares of Convertible Preferred
Stock which are Transfer Restricted Securities from and including the date on
which any such Registration Default shall occur, to but excluding the date on
which all such Registration Defaults have been cured, at a rate of 7 3/4% per
annum.
A Registration Default referred to in clause (B) of paragraph (c)(i) shall
be deemed not to have occurred and be continuing in relation to the Shelf
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to the Shelf Registration Statement to incorporate annual audited
financial information with respect to the Company where such post-effective
amendment is not yet effective and needs to be
3
<PAGE> 14
declared effective to permit Holders to use the related prospectus or (y) other
material events with respect to the Company that would need to be described in
the Shelf Registration Statement or the related prospectus and (ii) in the case
of clause (y), the Company proceeds promptly and in good faith to amend or
supplement the Shelf Registration Statement and related prospectus to describe
such events unless the Company has determined in good faith that there are
material legal or commercial impediments in doing so; provided, however, that
in any case if such Registration Default occurs for a continuous period in
excess of 45 days, Additional Dividends shall be payable in accordance with the
immediately preceding paragraphs of this paragraph (c)(i) from the day such
Registration Default initially occurs until such Registration Default is cured.
Any amounts of Additional Dividends due pursuant to clauses (A) or (B) of
this paragraph (c)(i) or pursuant to the proviso contained in the preceding
sentence will be payable on the regular dividend payment dates with respect to
the Convertible Preferred Stock and on the same terms and conditions and
subject to the same limitations as pertain at such time for the payment of
regular dividends. The amount of Additional Dividends will be determined by
multiplying the applicable Additional Dividends rate by the aggregate
liquidation preference of the outstanding shares of Convertible Preferred
Stock, multiplied by a fraction, the numerator of which is the number of days
such Additional Dividend rate was applicable during such period (determined on
the basis of a 360-day year comprised of twelve 30-day months), and the
denominator of which is 360.
All dividends on the Convertible Preferred Stock, including Additional
Dividends, to the extent accrued, shall be cumulative, whether or not earned or
declared, on a daily basis from the Issue Date or, in the case of additional
shares of Convertible Preferred Stock issued in payment of a dividend, from the
date of issuance of such additional shares of Convertible Preferred Stock, and
shall be payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each a "Dividend Payment Date"), commencing on June
30, 1997 to holders of record on the March 15, June 15, September 15 and
December 15 immediately preceding the relevant Dividend Payment Date. Any
dividend on the Convertible Preferred Stock payable pursuant to this paragraph
(c)(i) on or prior to March 31, 1999 shall be, at the option of the Company,
payable (1) in cash or (2) through the issuance of a number of additional
shares
4
<PAGE> 15
(rounded to the nearest whole share) of Convertible Preferred Stock (the
"Additional Shares") equal to the dividend amount divided by the Liquidation
Preference of such Additional Shares. With respect to dividends accrued after
March 31, 1999, all dividends shall be payable in cash; provided, however, that
to the extent and for so long as the Company is prohibited by the terms of any
of its indebtedness then outstanding or by the terms of the Series 3 Preferred
Stock of the Company or any agreement or instrument to which the Company is
then subject, from paying cash dividends on the Convertible Preferred Stock,
such dividends will accrue on each share at the rate per annum equal to 8 3/4%
of the Liquidation Preference per share (instead of the 7 1/4% rate set forth
in the first paragraph of this paragraph (c)(i)) (together with any Additional
Dividends then payable, which for purposes of this paragraph shall be payable
at a rate of 0.50% over and above the 8 3/4% rate) payable through the issuance
of a number of Additional Shares (rounded to the nearest whole share) equal to
the dividend amount on such share divided by the Liquidation Preference of such
Additional Shares on the relevant Dividend Payment Date. Except as provided
herein, accrued and unpaid dividends, if any, will not bear interest or bear
dividends thereon.
(ii) All dividends paid with respect to shares of the Convertible Preferred
Stock pursuant to paragraph (c)(i) shall be paid pro rata to the holders
entitled thereto.
(iii) No full dividends may be declared or paid or set apart for the
payment of dividends by the Company on any Parity Stock for any period unless
full cumulative dividends in respect of each Dividend Period ending on or
before such period shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash,
a sum in cash sufficient for such payment set apart for such payment on the
Convertible Preferred Stock. If full dividends are not so paid, the
Convertible Preferred Stock will share dividends pro rata with the Parity
Stock.
(iv) The Company will not (A) declare, pay or set apart funds for the
payment of any dividend or other distribution with respect to any Junior Stock
or (B) redeem, purchase or otherwise acquire for consideration any Junior Stock
through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Convertible Preferred Stock and any Parity Stock
at the time such
5
<PAGE> 16
dividends are payable have been paid or funds have been set apart for payment
of such dividends and (2) sufficient funds have been paid or set apart for the
payment of the dividend for the current dividend period with respect to the
Convertible Preferred Stock and any Parity Stock. As used herein, the term
"dividend" does not include dividends payable solely in shares of Junior Stock
on Junior Stock or in options, warrants or rights to holders of Junior Stock to
subscribe or purchase any Junior Stock.
(v) Dividends on account of arrears for any past Dividend Period and
dividends in connection with any optional redemption may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to holders
of record on such date, not more than 45 days prior to the payment thereof, as
may be fixed by the Board of Directors of the Company.
(vi) Dividends payable on the Convertible Preferred Stock for any period
other than a Dividend Period shall be computed on the basis of a 360-day
consisting year of twelve 30-day months and the actual number of days elapsed
in the period for which payable. Dividends payable on the Convertible
Preferred Stock for a full Dividend Period will be computed by dividing the per
annum dividend rate by four.
(vii) Certificates of Common Stock relating to Convertible Preferred Stock
surrendered for conversion by a registered Holder during the period from the
close of business on any regular record date next preceding any Dividend
Payment Date to the opening of business on such Dividend Payment Date (except
Convertible Preferred Shares called for redemption on a Redemption Date within
such period) must be accompanied by payment in cash of an amount equal to the
accrued but unpaid dividends thereon which such registered Holder is to receive
on such Dividend Payment Date with respect to the Convertible Preferred Stock
so surrendered.
(d) Liquidation Preference. (i) Upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, holders of Convertible
Preferred Stock will be entitled to be paid, out of the assets of the Company
available for distribution to its stockholders, the Liquidation Preference of
the outstanding shares of Convertible Preferred Stock, plus, without
duplication, an amount in cash equal to all accumulated and unpaid dividends
6
<PAGE> 17
(whether or not earned or declared and including Additional Dividends, if any,)
thereon to the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last Dividend
Payment Date to the date fixed for liquidation, dissolution or winding-up that
would have been payable had the Convertible Preferred Stock been the subject of
an Optional Redemption on such date) before any distribution is made on any
Junior Stock. If, upon any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the amounts payable with respect to the
Convertible Preferred Stock and all Parity Stock are not paid in full, the
Convertible Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective amounts that would be payable on such shares
of Convertible Preferred Stock and the Parity Stock, respectively, if all
amounts payable thereon had been paid in full) in any distribution of assets of
the Company to which each is entitled. After payment of the full amount of the
Liquidation Preference of the outstanding shares of Convertible Preferred Stock
(and, if applicable, an amount equal to a prorated dividend), the holders of
shares of Convertible Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up
of the Company.
(e) Redemption. (i) Optional Redemption. (A) The Convertible Preferred
Stock shall not be redeemable prior to April 3, 2000. On or after April 3,
2000, each share of the Convertible Preferred Stock may be redeemed (subject to
the legal availability of funds therefor) at any time, in whole or in part, at
the option of the Company, at the redemption prices (expressed as a percentage
of the Liquidation Preference of such share) set forth below, plus, without
duplication, an amount in cash equal to all accrued and unpaid Liquidated
Damages and all accrued and unpaid dividends to the date fixed for redemption
(the "Optional Redemption Date") (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Optional Redemption Date) (the
7
<PAGE> 18
"Optional Redemption Price"). Notwithstanding the foregoing, prior to April 1,
2002, the Company shall only have the option to redeem shares of Convertible
Preferred Stock if, during the period of 30 consecutive Trading Days ending on
the Trading Day immediately preceding the date that the Redemption Notice is
mailed to holders, the Closing Bid Price for the Common Stock exceeded 150% of
the Conversion Price effective on the date of such Redemption Notice for at
least 20 of such Trading Days. If redeemed during the 12-month period
beginning April 1 of each of the years set forth below (or in the case of the
year 2000, April 3), the Optional Redemption Price per share shall be the
applicable percentage of the Liquidation Preference of such share set forth
below plus, without duplication, in each case, an amount in cash equal to all
accrued and unpaid Liquidated Damages and all accrued and unpaid dividends
(including an amount equal to a prorated dividend from the immediately
preceding Dividend Payment Date to the Optional Redemption Date), if any, to
the Optional Redemption Date:
<TABLE>
<CAPTION>
Year in which redemption occurs Percentage
------------------------------- ----------
<S> <C>
2000 . . . . . . . . . . . . . 104.83%
2001 . . . . . . . . . . . . . 104.03%
2002 . . . . . . . . . . . . . 103.22%
2003 . . . . . . . . . . . . . 102.42%
2004 . . . . . . . . . . . . . 101.61%
2005 . . . . . . . . . . . . . 100.81%
2006 . . . . . . . . . . . . . 100.00%
</TABLE>
(B) In the event of a redemption of only a portion of the then outstanding
shares of Convertible Preferred Stock, the Company shall effect such redemption
on a pro rata basis, except that the Company may redeem all of the shares held
by holders of fewer than 100 shares (or all of the shares held by holders who
would hold less than 100 shares as a result of such redemption), as may be
determined by the Company.
(ii) Mandatory Redemption. Each share of the Convertible Preferred Stock
(if not earlier redeemed or converted) shall be subject to mandatory redemption
in whole (to the extent of lawfully available funds therefor) on March 31, 2007
(the "Mandatory Redemption Date") at a price equal to 100% of the Liquidation
Preference of such share, plus, without duplication, all accrued and unpaid
Liquidated Damages and accrued and unpaid dividends thereon (including
8
<PAGE> 19
an amount equal to a prorated dividend thereon from the immediately preceding
Dividend Payment Date to the Mandatory Redemption Date), if any, to the
Mandatory Redemption Date (the "Mandatory Redemption Price").
(iii) Procedure for Redemption. (A) On and after the Optional Redemption
Date or the Mandatory Redemption Date, as the case may be (the "Redemption
Date"), unless the Company defaults in the payment of the applicable redemption
price, dividends will cease to accumulate on shares of Convertible Preferred
Stock called for redemption and all rights of holders of such shares will
terminate except for the right to receive the Optional Redemption Price or the
Mandatory Redemption Price, as the case may be, without interest; provided,
however, that if a notice of redemption shall have been given as provided in
paragraph (iii)(B) and the funds necessary for redemption (including an amount
in respect of all dividends that will accrue to the Redemption Date) shall have
been segregated and irrevocably set apart by the Company, in trust for the
benefit of the holders of the shares called for redemption, then dividends
shall cease to accumulate on the Redemption Date on the shares to be redeemed
and, at the close of business on the day on which such funds are segregated and
set apart, the holders of the shares to be redeemed shall, with respect to the
shares to be redeemed, cease to be stockholders of the Company and shall be
entitled only to receive the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be, for such shares without interest from the
Redemption Date.
(B) With respect to a redemption pursuant to paragraph (e)(i) or (e)(ii),
the Company will send a written notice of redemption by first class mail to
each holder of record of shares of Convertible Preferred Stock, not fewer than
15 days nor more than 60 days prior to the Redemption Date at its registered
address (the "Redemption Notice"); provided, however, that no failure to give
such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Convertible Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
(1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii)
hereof;
9
<PAGE> 20
(2) the Optional Redemption Price or the Mandatory Redemption Price, as
the case may be;
(3) whether all or less than all the outstanding shares of the Convertible
Preferred Stock are to be redeemed and the total number of shares of the
Convertible Preferred Stock being redeemed;
(4) the Redemption Date;
(5) that the holder is to surrender to the Company, in the manner, at the
place or places and at the price designated, his certificate or certificates
representing the shares of Convertible Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Convertible Preferred Stock to be
redeemed shall cease to accumulate on such Redemption Date unless the Company
defaults in the payment of the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be.
(C) Each holder of Convertible Preferred Stock shall surrender the
certificate or certificates representing such shares of Convertible Preferred
Stock to the Company, duly endorsed (or otherwise in proper form for transfer,
as determined by the Company), in the manner and at the place designated in the
Redemption Notice, and on the Redemption Date the full Optional Redemption
Price or Mandatory Redemption Price, as the case may be, for such shares shall
be payable in cash to the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
canceled and retired. In the event that less than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(f) Voting Rights. (i) The holders of Convertible Preferred Stock, except
as otherwise required under Delaware law or as set forth in paragraphs (ii) and
(iii) below, shall not be entitled or permitted to vote on any matter required
or permitted to be voted upon by the stockholders of the Company.
(ii) (A) If (1) dividends on the Convertible Preferred Stock are in
arrears and unpaid for six or more Dividend Periods (whether or not
consecutive) (a "Dividend
10
<PAGE> 21
Default"); or (2) the Company fails to redeem the Convertible Preferred Stock on
March 31, 2007, or fails to otherwise discharge any redemption obligation with
respect to the Convertible Preferred Stock, then the number of directors
constituting the Board of Directors of the Company will be increased by two and
the Holders of the then outstanding shares of Convertible Preferred Stock
(together with the holders of Parity Stock upon which like rights have been
conferred and are exercisable), voting separately and as a class, shall have the
right and power to elect such two additional directors. Each such event
described in clauses (1) or (2) above is a "Voting Rights Triggering Event". A
Voting Rights Triggering Event shall not be deemed to have occurred if at the
time of such event there are less than 200,000 shares of Convertible Preferred
Stock then outstanding.
(B) The voting rights set forth in subparagraph (f)(ii)(A) above will
continue until such time as (x) in the case of a Dividend Default, all
dividends in arrears on the Convertible Preferred Stock are paid in full in
cash, (y) in all other cases, any failure, breach or default giving rise to
such Voting Rights Triggering Event is remedied or waived by the Holders of at
least two-thirds of the shares of Convertible Preferred Stock then outstanding
or (z) at any time there are less than 200,000 shares of Convertible Preferred
Stock outstanding, at which time the term of any directors elected pursuant to
the provisions of subparagraph (f)(ii)(A) above shall terminate and the number
of directors constituting the Board of Directors shall be decreased by two
(until the occurrence of any subsequent Voting Rights Triggering Event). At
any time after voting power to elect directors shall have become vested and be
continuing in the holders of Convertible Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) pursuant to subparagraph (f)(ii)(A) hereof, or if vacancies shall
exist in the offices of directors elected by such holders, a proper officer of
the Company may, and upon the written request of the holders of record of at
least 25% of the shares of Convertible Preferred Stock then outstanding or the
holders of 25% of the shares of Parity Stock then outstanding upon which like
rights have been confirmed and are exercisable addressed to the secretary of
the Company shall, call a special meeting of the Holders of Convertible
Preferred Stock and the holders of such Parity Stock for the purpose of
electing the directors which such holders are entitled to elect pursuant to the
terms hereof;
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provided, however, that no such special meeting shall be called if the next
annual meeting of stockholders of the Company is to be held within 60 days
after the voting power to elect directors shall have become vested, in which
case such meeting shall be deemed to have been called for such next annual
meeting. If such meeting shall not be called by a proper officer of the
Company within 20 days after personal service to the secretary of the Company
at its principal executive offices, then the Holders of record of at least 25%
of the outstanding shares of Convertible Preferred Stock or the holders of 25%
of the shares of Parity Stock upon which like rights have been confirmed and
are exercisable may designate in writing one of their members to call such
meeting at the expense of the Company, and such meeting may be called by the
person so designated upon the notice required for the annual meetings of
stockholders of the Company and shall be held at the place for holding the
annual meetings of stockholders. Any holder of Convertible Preferred Stock or
such Parity Stock so designated shall have, and the Company shall provide,
access to the lists of holders of Convertible Preferred Stock and the holders
of such Parity Stock to be called pursuant to the provisions hereof. If no
special meeting of the Holders of Convertible Preferred Stock and the holders
of such Parity Stock is called as provided in this paragraph (f)(ii), then such
meeting shall be deemed to have been called for the next annual meeting of
stockholders of the Company or special meeting of the holders of any other
capital stock of the Company.
(C) At any meeting held for the purposes of electing directors at which the
Holders of Convertible Preferred Stock (together with the holders of Parity
Stock upon which like rights have been conferred and are exercisable) shall
have the right, voting together as a separate class, to elect directors as
aforesaid, the presence in person or by proxy of the holders of at least a
majority in voting power of the outstanding shares of Convertible Preferred
Stock (and such Parity Stock) shall be required to constitute a quorum thereof.
(D) Any vacancy occurring in the office of a director elected by the
Holders of Convertible Preferred Stock (and such Parity Stock) may be filled by
the remaining director elected by the Holders of Convertible Preferred Stock
(and such Parity Stock) unless and until such vacancy shall be filled by the
Holders of Convertible Preferred Stock (and such Parity Stock).
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<PAGE> 23
(iii) (A) So long as any shares of the Convertible Preferred Stock are
outstanding, the Company will not authorize, create or increase the authorized
amount of any class or series of Senior Stock without the affirmative vote or
consent of holders of at least two-thirds of the shares of Convertible
Preferred Stock then outstanding, voting or consenting, as the case may be, as
one class, given in person or by proxy, either in writing or by resolution
adopted at an annual or special meeting (except that no such vote or consent
shall be required for the issuance of additional shares of Series 3 Preferred
Stock to be paid as dividends on such Series 3 Preferred Stock pursuant to the
terms of such Series 3 Preferred Stock).
(B) So long as any shares of the Convertible Preferred Stock are
outstanding, the Company will not amend this Certificate of Designation so as
to affect adversely the specified rights, preferences, privileges or voting
rights of Holders of shares of Convertible Preferred Stock or to authorize the
issuance of any additional shares of Convertible Preferred Stock (except to
authorize the issuance of additional shares of Convertible Preferred Stock to
be paid as dividends on the Convertible Preferred Stock, for which no consent
shall be necessary) without the affirmative vote or consent of Holders of at
least two-thirds of the issued and outstanding shares of Convertible Preferred
Stock, voting or consenting, as the case may be, as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting.
(C) Except as set forth in paragraph (f)(iii)(A) or (B) above, (x) the
creation, authorization or issuance of any shares of any Junior Stock, Parity
Stock or Senior Stock, including the designation of a series of Convertible
Preferred Stock, or (y) the increase or decrease in the amount of authorized
Capital Stock of any class, including Preferred Stock, shall not require the
consent of Holders of Convertible Preferred Stock and shall not be deemed to
affect adversely the rights, preferences, privileges or voting rights of shares
of Convertible Preferred Stock.
(iv) In any case in which the Holders of Convertible Preferred Stock shall
be entitled to vote pursuant to this paragraph (f) or pursuant to Delaware law,
each Holder of Convertible Preferred Stock entitled to vote with respect to
such matters shall be entitled to one vote for each share of Convertible
Preferred Stock held.
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<PAGE> 24
(v) Except as required by law, the Holders of the Convertible Preferred
Stock will not be entitled to vote on any merger or consolidation involving the
Company or a sale of all or substantially all the assets of the Company.
(g) Conversion. (i) At any time after 60 days from the Issue Date, at the
option of the Holder thereof, any share of Convertible Preferred Stock may be
converted at the Liquidation Preference thereof into fully paid and
nonassessable Common Stock (calculated as to each conversion to the nearest
1/100 of a share), at the Conversion Price, determined as hereinafter provided,
in effect at the time of conversion. Such conversion right shall expire at the
close of business on the Mandatory Redemption Date. In case a share of
Convertible Preferred Stock is called for optional redemption, such conversion
right in respect of the share of Convertible Preferred Stock so called shall
expire at the close of business on the applicable Optional Redemption Date,
unless the Company defaults in making the payment due upon redemption.
The price at which Common Stock shall be delivered upon conversion (herein
called the "Conversion Price") shall be initially $23.46 per share of Common
Stock. The Conversion Price shall be adjusted in certain instances as provided
in paragraph (g)(iv) and paragraph (g)(v).
(ii) In order to exercise the conversion privilege, the Holder of any share
of Convertible Preferred Stock to be converted shall surrender the certificate
for such share of Convertible Preferred Stock, duly endorsed or assigned to the
Company or in blank, at the office of the Transfer Agent or at any office or
agency of the Company maintained for that purpose, accompanied by written
notice to the Company in the form of Exhibit B that the Holder elects to
convert such share of Convertible Preferred Stock or, if fewer than all of the
shares of Convertible Preferred Stock represented by a single share certificate
are to be converted, the number of shares represented thereby to be converted.
Except as provided in paragraph (c)(viii), no payment or adjustment shall be
made upon any conversion on account of any dividends accrued on the shares of
Convertible Preferred Stock surrendered for conversion or on account of any
dividends on the Common Stock issued upon conversion. Such notice shall also
contain the office or the address to which the Company should deliver shares of
Common Stock issuable upon conversion (and any other payments or certificates
related thereto). Except as
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<PAGE> 25
provided in paragraph (c)(viii), in no event shall the Company be obligated to
pay any converting Holder any unpaid dividend, whether or not in arrears, on
converted shares or any dividends on the shares of Common Stock issued upon
such conversion.
Shares of Convertible Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of surrender of such
shares of Convertible Preferred Stock for conversion in accordance with the
foregoing provisions, and at such time the rights of the Holders of such shares
of Convertible Preferred Stock as Holders shall cease, and the person or
persons entitled to receive the Common Stock issuable upon conversion shall be
treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver to such office or agency as the
converting Holder shall have designated in its written notice to the Company a
certificate or certificates for the number of full Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in paragraph (g)(iii) hereof.
In the case of any conversion of fewer than all the shares of Convertible
Preferred Stock evidenced by a certificate, upon such conversion the Company
shall execute and the Transfer Agent shall authenticate and deliver to the
Holder thereof (at the address designated by such Holder), at the expense of
the Company, a new certificate or certificates representing the number of
unconverted shares of Convertible Preferred Stock.
(iii) No fractional Common Stock shall be issued upon the conversion of a
share of Convertible Preferred Stock. If more than one share of Convertible
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares of Common Stock which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate shares of
Convertible Preferred Stock so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon conversion of any share of
Convertible Preferred Stock, the Company shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction of the closing price
(as defined in paragraph (g)(iv)(7)) per share of Common Stock at the close of
business on the Business Day prior to the day of conversion.
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<PAGE> 26
(iv) The Conversion Price shall be adjusted from time to time by the
Company as follows:
(1) If the Company shall hereafter pay a dividend or make a distribution in
Common Stock to all holders of any outstanding class or series of Common
Stock of the Company, the Conversion Price in effect at the opening of
business on the date following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date (as defined in paragraph (g)(iv)(7))
fixed for such determination and the denominator shall be the sum of such
number of outstanding shares and the total number of shares constituting such
dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the Record
Date. If any dividend or distribution of the type described in this
paragraph (g)(iv)(i) is declared but not so paid or made, the Conversion
Price shall again be adjusted to the Conversion Price which would then be in
effect if such dividend or distribution had not been declared.
(2) If the Company shall offer or issue rights or warrants to all holders
of its outstanding Common Stock entitling them to subscribe for or purchase
Common Stock at a price per share less than the Current Market Price (as
defined in paragraph (g)(iv)(7)) on the Record Date fixed for the
determination of shareholders entitled to receive such rights or warrants,
the Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect at the opening of
business on the date after such Record Date by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Record Date plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares of
Common Stock subject to such rights or warrants would purchase at such
Current Market Price and of which the denominator shall be the number of
shares of Common Stock outstanding at the close of business on the Record
Date plus the total number of additional shares of Common Stock subject to
such
16
<PAGE> 27
rights or warrants for subscription or purchase. Such adjustment shall
become effective immediately after the opening of business on the day
following the Record Date fixed for determination of shareholders entitled to
purchase or receive such rights or warrants. To the extent that shares of
Common Stock are not delivered pursuant to such rights or warrants, upon the
expiration or termination of such rights or warrants the Conversion Price
shall again be adjusted to be the Conversion Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made on the basis of delivery of only the number of shares of Common
Stock actually delivered. If such rights or warrants are not so issued, the
Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such date fixed for the determination of
shareholders entitled to receive such rights or warrants had not been fixed.
In determining whether any rights or warrants entitle the holders to
subscribe for or purchase Common Stock at less than such Current Market
Price, and in determining the aggregate offering price of such shares of
Common Stock, there shall be taken into account any consideration received
for such rights or warrants, with the value of such consideration, if other
than cash, to be determined by the Board of Directors.
(3) If the outstanding shares of Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and,
conversely, if the outstanding shares of Common Stock shall be combined into
a smaller number of shares of Common Stock, the Conversion Price in effect at
the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(4) If the Company shall, by dividend or otherwise, distribute to all
holders of its shares of Common Stock shares of any class of capital stock of
the Company (other than any dividends or distributions
17
<PAGE> 28
to which paragraph (g)(iv)(1) applies) or evidences of its indebtedness, cash
or other assets (including securities, but excluding any rights or warrants
of a type referred to in paragraph (g)(iv)(2) and excluding dividends and
distributions paid exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a merger or
consolidation to which paragraph (g)(v) applies) (the foregoing hereinafter
in this paragraph (g)(iv)(4) called the "Distributed Securities"), then, in
each such case, the Conversion Price shall be reduced so that the same shall
be equal to the price determined by multiplying the Conversion Price in
effect immediately prior to the close of business on the Record Date (as
defined in paragraph (g)(iv)(7)) with respect to such distribution by a
fraction of which the numerator shall be the Current Market Price (determined
as provided in paragraph (g)(iv)(7)) of the Common Stock on such date less
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the Board
of Directors) on such date of the portion of the Distributed Securities so
distributed applicable to one share of Common Stock and the denominator shall
be such Current Market Price, such reduction to become effective immediately
prior to the opening of business on the day following the Record Date;
provided, however, that, in the event the then fair market value (as so
determined) of the portion of the Distributed Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Current Market Price on the Record Date, in lieu of the foregoing adjustment,
adequate provision shall be made so that each holder of Convertible Preferred
Stock shall have the right to receive upon conversion of a share of
Convertible Preferred Stock (or any portion thereof) the amount of
Distributed Securities such holder would have received had such holder
converted such share of Convertible Preferred Stock (or portion thereof)
immediately prior to such Record Date. If such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or
distribution had not been declared. If the Board of Directors determines the
fair market value of any distribution for purposes of this paragraph
(g)(iv)(4) by reference to the actual or when issued trading market for any
securities comprising all
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<PAGE> 29
or part of such distribution, it must in doing so consider the prices in such
market over the same period used in computing the Current Market Price
pursuant to paragraph (g)(iv)(7) to the extent possible.
Rights or warrants distributed by the Company to all holders of Common Stock
entitling the holders thereof to subscribe for or purchase shares of the
Company's capital stock (either initially or under certain circumstances),
which rights or warrants, until the occurrence of a specified event or events
("Dilution Trigger Event"): (i) are deemed to be transferred with such
Common Stock; (ii) are not exercisable; and (iii) are also issued in respect
of future issuances of Common Stock, shall be deemed not to have been
distributed for purposes of this paragraph (g)(iv)(4) (and no adjustment to
the Conversion Price under this paragraph (g)(iv)(4) shall be required) until
the occurrence of the earliest Dilution Trigger Event, whereupon such rights
and warrants shall be deemed to have been distributed and an appropriate
adjustment to the Conversion Price under this paragraph (g)(iv)(4) shall be
made. If any such rights or warrants, including any such existing rights or
warrants distributed prior to the date hereof, are subject to subsequent
events, upon the occurrence of each of which such rights or warrants shall
become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such event shall be
deemed to be such date of issuance and record date with respect to new rights
or warrants (and a termination or expiration of the existing rights or
warrants without exercise by the holder thereof). In addition, in the event
of any distribution (or deemed distribution) of rights or warrants, or any
Dilution Trigger Event with respect thereto, that was counted for purposes of
calculating a distribution amount for which an adjustment to the Conversion
Price under this paragraph (g)(iv)(4) was made, (1) in the case of any such
rights or warrants which shall all have been redeemed or repurchased without
exercise by any holders thereof, the Conversion Price shall be readjusted
upon such final redemption or repurchase to give effect to such distribution
or Dilution Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price received
by a holder or holders of Common Stock with respect to such rights or
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<PAGE> 30
warrants (assuming such holder had retained such rights or warrants), made to
all holders of Common Stock as of the date of such redemption or repurchase,
and (2) in the case of such rights or warrants which shall have expired or
been terminated without exercise by any holders thereof, the Conversion Price
shall be readjusted as if such rights and warrants had not been issued.
Notwithstanding any other provision of this paragraph (g)(iv)(4) to the
contrary, capital stock, rights, warrants, evidences of indebtedness, other
securities, cash or other assets (including, without limitation, any rights
distributed pursuant to any shareholder rights plan) shall be deemed not to
have been distributed for purposes of this paragraph (g)(iv)(4) if the
Company makes proper provision so that each holder of shares of Convertible
Preferred Stock who converts a share of Convertible Preferred Stock (or any
portion thereof) after the date fixed for determination of shareholders
entitled to receive such distribution shall be entitled to receive upon such
conversion, in addition to the Common Stock issuable upon such conversion,
the amount and kind of such distributions that such holder would have been
entitled to receive if such holder had, immediately prior to such
determination date, converted such share of Convertible Preferred Stock into
Common Stock.
For purposes of this paragraph (g)(iv)(4) and paragraphs (g)(iv)(1) and (2),
any dividend or distribution to which this paragraph (g)(iv)(4) is
applicable that also includes Common Stock, or rights or warrants to
subscribe for or purchase Common Stock to which paragraph (g)(iv)(2) applies
(or both), shall be deemed instead to be (1) a dividend or distribution of
the evidences of indebtedness, cash, assets, shares of capital stock, rights
or warrants other than (A) such shares of Common Stock or (B) rights or
warrants to which paragraph (g)(iv)(2) applies (and any Conversion Price
reduction required by this paragraph (g)(iv)(4) with respect to such dividend
or distribution shall then be made) immediately followed by (2) a dividend or
distribution of such Common Stock or such rights or warrants (and any further
Conversion Price reduction required by paragraph (g)(iv)(1) and (2) with
respect to such dividend or distribution shall then be made), except that (1)
the Record Date of such
20
<PAGE> 31
dividend or distribution shall be substituted as "the Record Date fixed for
the determination of stockholders entitled to receive such dividend or other
distribution", "Record Date fixed for such determination" and "Record Date"
within the meaning of paragraph (g)(iv)(1) and as "the Record Date fixed for
the determination of shareholders entitled to receive such rights or
warrants", "the date fixed for the determination of the shareholders entitled
to receive such rights or warrants" and "such Record Date" within the meaning
of paragraph (g)(iv)(2), and (2) any share of Common Stock included in such
dividend or distribution shall not be deemed "outstanding at the close of
business on the date fixed for such determination" within the meaning of
paragraph (g)(iv)(1).
(5) If the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock cash (excluding any cash that is distributed upon
a merger or consolidation to which paragraph (g)(v) applies or as part of a
distribution referred to in paragraph (g)(iv)) in an aggregate amount that,
combined together with (1) the aggregate amount of any other such
distributions to all holders of its Common Stock made exclusively in cash
within the 12 months preceding the date of payment of such distribution, and
in respect of which no adjustment pursuant to this paragraph (g)(iv)(5) has
been made, and (2) the aggregate of any cash plus the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors) of consideration
payable in respect of any tender offer by the Company or a Subsidiary of the
Company for all or any portion of the Common Stock concluded within the 12
months preceding the date of payment of such distribution, and in respect of
which no adjustment pursuant to paragraph (g)(iv)(4) has been made, exceeds
12.5% of the product of the Current Market Price (determined as provided in
paragraph (g)(iv)(7)) on the Record Date with respect to such distribution
times the number of shares of Common Stock outstanding on such date, then,
and in each such case, immediately after the close of business on such date,
the Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on
21
<PAGE> 32
such Record Date by a fraction (i) the numerator of which shall be equal to
the Current Market Price on the Record Date less an amount equal to the
quotient of (x) the excess of such combined amount over such 12.5% amount
divided by (y) the number of shares of Common Stock outstanding on the Record
Date and (ii) the denominator of which shall be equal to the Current Market
Price on such Record Date; provided, however, that, if the portion of the
cash so distributed applicable to one share of Common Stock is equal to or
greater than the Current Market Price of the Common Stock on the Record Date,
in lieu of the foregoing adjustment, adequate provision shall be made so that
each holder of Convertible Preferred Stock shall have the right to receive
upon conversion of a share of Convertible Preferred Stock (or any portion
thereof) the amount of cash such holder would have received had such holder
converted such share of Convertible Preferred Stock (or portion thereof)
immediately prior to such Record Date. If such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or
distribution had not been declared.
(6) If a tender or exchange offer made by the Company or any of its
Subsidiaries for all or any portion of the Common Stock expires and such
tender or exchange offer (as amended upon the expiration thereof) requires
the payment to shareholders (based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares (as defined
below)) of an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors) that, combined
together with (1) the aggregate of the cash plus the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors), as of the
expiration of such tender offer, of consideration payable in respect of any
other tender offers, by the Company or any of its Subsidiaries for all or any
portion of the Common Stock expiring within the 12 months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to this paragraph (g)(iv)(6) has been made and (2) the aggregate
amount of any distributions to all holders of
22
<PAGE> 33
the Common Stock made exclusively in cash within 12 months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to paragraph (g)(iv)(5) has been made, exceeds 12.5% of the product
of the Current Market Price (determined as provided in paragraph (g)(iv)(7))
as of the last time (the "Expiration Time") tenders could have been made
pursuant to such tender offer (as it may be amended) times the number of
shares of Common Stock outstanding (including any tendered shares) at the
Expiration Time, then, and in each such case, immediately prior to the
opening of business on the day after the date of the Expiration Time, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on the date of the Expiration Time by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time multiplied by the
Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time and the denominator shall be the sum of (x) the fair
market value (determined as aforesaid) of the aggregate consideration payable
to shareholders based on the acceptance (up to any maximum specified in the
terms of the tender offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the product of
the number of shares of Common Stock outstanding (less any Purchased Shares)
at the Expiration Time and the Current Market Price of the Common Stock on
the Trading Day next succeeding the Expiration Time, such reduction (if any)
to become effective immediately prior to the opening of business on the day
following the Expiration Time. If the Company is obligated to purchase
shares pursuant to any such tender offer, but the Company is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such tender offer had
not been made. If the application of this paragraph (g)(iv)(6) to any tender
offer would result in an increase in the Conversion Price, no adjustment
shall be made for such tender offer under this paragraph (g)(iv)(6).
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<PAGE> 34
(7) For purposes of this paragraph (g)(iv), the following terms shall have
the meaning indicated:
"closing price" with respect to any securities on any day means the closing
price on such day or, if no such sale takes place on such day, the average of
the reported high and low prices on such day, in each case on The Nasdaq
National Market or the New York Stock Exchange, as applicable, or, if such
security is not listed or admitted to trading on such national market or
exchange, on the principal national securities exchange or quotation system
on which such security is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national securities exchange
or quotation system, the average of the high and low prices of such security
on the over-the-counter market on the day in question as reported by the
National Quotation Bureau Incorporated or a similar generally accepted
reporting service, or, if not so available, in such manner as furnished by
any New York Stock Exchange member firm selected from time to time by the
Board of Directors for that purpose, or a price determined in good faith by
the Board of Directors, whose determination shall be conclusive and described
in a resolution of the Board of Directors.
"Current Market Price" means the average of the daily closing prices per
share of Common Stock for the 10 consecutive trading days immediately prior
to the date in question; provided, however, that (A) if the "ex" date (as
hereinafter defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion
Price pursuant to paragraphs (g)(iv)(1), (2), (3), (4), (5) or (6) occurs
during such 10 consecutive trading days, the closing price for each trading
day prior to the "ex" date for such other event shall be adjusted by
multiplying such closing price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, (B) if
the "ex" date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion
Price pursuant to paragraphs (g)(iv)(1), (2), (3), (4), (5) or (6) occurs on
or after the "ex" date for the issuance or distribution requiring such
computation and prior to the day in question, the closing price for each
trading day on and after the
24
<PAGE> 35
"ex" date for such other event shall be adjusted by multiplying such closing
price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event and (C) if the "ex"
date for the issuance or distribution requiring such computation is prior to
the day in question, after taking into account any adjustment required
pursuant to clause (A) or (B) of this proviso, the closing price for each
trading day on or after such "ex" date shall be adjusted by adding thereto
the amount of any cash and the fair market value (as determined by the Board
of Directors in a manner consistent with any determination of such value for
purposes of paragraphs (g)(iv)(4) or (5), whose determination shall be
conclusive and described in a resolution of the Board of Directors) of the
evidence of indebtedness, shares of capital stock or assets being distributed
applicable to one Common Stock as of the close of business on the day before
such "ex" date. For purposes of any computation under paragraph (g)(vi), the
Current Market Price on any date shall be deemed to be the average of the
daily closing prices per share of Common Stock for such day and the next two
succeeding trading days; provided, however, that, if the "ex" date for any
event (other than the tender offer requiring such computation) that requires
an adjustment to the Conversion Price pursuant to paragraph (g)(iv)(1), (2),
(3), (4), (5) or (6) occurs on or after the Expiration Time for the tender or
exchange offer requiring such computation and prior to the day in question,
the closing price for each trading day on and after the "ex" date for such
other event shall be adjusted by multiplying such closing price by the
reciprocal of the fraction by which the Conversion Price is so required to be
adjusted as a result of such other event. For purposes of this paragraph,
the term "ex" date (I) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades regular
way on the relevant exchange or in the relevant market from which the closing
price was obtained without the right to receive such issuance or
distribution, (II) when used with respect to any subdivision or combination
of Common Stock, means the first date on which the Common Stock trades
regular way on such exchange or in such market after the time at which such
subdivision or combination becomes effective and (III) when used with respect
to any tender or exchange offer means the first date on which the Common
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Stock trades regular way on such exchange or in such market after the
Expiration Time of such offer. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to this
paragraph (g)(iv), such adjustments shall be made to the Current Market Price
as may be necessary or appropriate to effectuate the intent of this paragraph
(g)(iv) and to avoid unjust or inequitable results, as determined in good
faith by the Board of Directors.
"fair market value" shall mean the amount which a willing buyer would pay a
willing seller in an arm's-length transaction.
"Record Date" shall mean, with respect to any dividend, distribution or other
transaction or event in which the holders of Common Stock have the right to
receive any cash, securities or other property or in which the Common Stock
(or other applicable security) is exchanged for or converted into any
combination of cash, securities or other property, the date fixed for
determination of shareholders entitled to receive such cash, securities or
other property (whether such date is fixed by the Board of Directors or by
statute, contract or otherwise).
(8) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in such
price; provided, however, that any adjustments which by reason of this
paragraph (g)(iv)(8) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
paragraph (g)(iv)(8) shall be made by the Company and shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
No adjustment need be made for a change in the par value or no par value of
the Common Stock.
(9) Whenever the Conversion Price is adjusted as herein provided, the
Company shall promptly file with the Transfer Agent an Officers' Certificate
setting forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment. Promptly after
delivery of such certificate, the Company shall prepare a notice of such
adjustment of the Conversion Price setting forth the
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<PAGE> 37
adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion
Price to each holder of Convertible Preferred Stock at such holder's last
address appearing on the register of holders maintained for that purpose
within 20 days of the effective date of such adjustment. Failure to deliver
such notice shall not affect the legality or validity of any such adjustment.
(10) In any case in which this paragraph (g)(iv) provides that an
adjustment shall become effective immediately after a Record Date for an
event, the Company may defer until the occurrence of such event issuing to
the holder of any share of Convertible Preferred Stock converted after such
Record Date and before the occurrence of such event the additional Common
Stock issuable upon such conversion by reason of the adjustment required by
such event over and above the Common Stock issuable upon such conversion
before giving effect to such adjustment.
(11) For purposes of this paragraph (g)(iv), the number of shares of Common
Stock at any time outstanding shall not include shares held in the treasury
of the Company but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of Common Stock. The Company shall
not pay any dividend or make any distribution on Common Stock held in the
treasury of the Company.
(v) In case of any consolidation of the Company with, or merger of the
Company into, any other corporation, or in case of any merger of another
corporation into the Company (other than a merger which does not result in
any reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock of the Company), or in case of any conveyance or
transfer of the properties and assets of the Company substantially as an
entirety, the holder of each share of Convertible Preferred Stock then
outstanding shall have the right thereafter, during the period such
Convertible Preferred Stock shall be convertible as specified in paragraph
(g)(i), to convert such share of Convertible Preferred Stock only into the
kind and amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance or transfer by a holder of the number of
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<PAGE> 38
shares of Common Stock of the Company into which such share of Convertible
Preferred Stock might have been converted immediately prior to such
consolidation, merger, conveyance or transfer, assuming such holder of Common
Stock of the Company failed to exercise his rights of election, if any, as to
the kind or amount of securities, cash and other property receivable upon
such consolidation, merger, conveyance or transfer (provided that, if the
kind or amount of securities, cash and other property receivable upon such
consolidation, merger, conveyance or transfer is not the same for each share
of Common Stock of the Company in respect of which such rights of election
shall not have been exercised ("nonelecting share"), then for the purpose of
this paragraph (g)(v) the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, conveyance or transfer
by each nonelecting share shall be deemed to be the kind and amount so
receivable per share by a plurality of the nonelecting shares). Such
securities shall provide for adjustments which, for events subsequent to the
effective date of the triggering event, shall be as nearly equivalent as may
be practicable to the adjustments provided for in this paragraph (g)(v). The
above provisions of this Section shall similarly apply to successive
consolidations, mergers, conveyances or transfers.
(vi) In case:
(1) the Company shall declare a dividend (or any other distribution) on its
Common Stock payable otherwise than in cash out of its earned surplus; or
(2) the Company shall authorize the granting to all holders of its Common
Stock of rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any other rights; or
(3) of any reclassification of the Common Stock of the Company (other than a
subdivision or combination of its outstanding Common Stock), or of any
consolidation or merger to which the Company is a party and for which approval
of any shareholders of the Company is required, or the sale or transfer of all
or substantially all the assets of the Company; or
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<PAGE> 39
(4) of the voluntary or involuntary dissolution, liquidation or winding up
of the Company;
then the Company shall cause to be filed with the Transfer Agent and at each
office or agency maintained for the purpose of conversion of the Convertible
Preferred Stock, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the Convertible Preferred Stock Register, at
least 20 days (or 10 days in any case specified in clause (1) or (2) above)
prior to the applicable date hereinafter specified, a notice stating (x) the
date on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up. Failure to give the notice requested
by this Section or any defect therein shall not affect the legality or validity
of any dividend, distribution, right, warrant, reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up, or the vote
upon any such action.
(vii) The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued shares of Common Stock
(or out of its authorized shares of Common Stock held in the treasury of the
Company), for the purpose of effecting the conversion of the Convertible
Preferred Stock, the full number of Common Stock then issuable upon the
conversion of all outstanding shares of Convertible Preferred Stock.
(viii) The Company will pay any and all document, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of
Common Stock on conversion of the Convertible Preferred Stock pursuant hereto.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that of the holder of the share of
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<PAGE> 40
Convertible Preferred Stock or the shares of Convertible Preferred Stock to be
converted, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to the Company the amount of any such
tax, or has established to the satisfaction of the Company that such tax has
been paid.
(ix) (1) Notwithstanding any other provision in the preceding paragraphs
to the contrary, if any Change in Control occurs then, if the Company does not
elect to make a Change in Control Offer, the Conversion Price in effect shall
be adjusted immediately after such Change in Control as described below. In
addition, in the event of a Common Stock Change in Control (as defined in this
paragraph (g)(ix)), each share of the Convertible Preferred Stock shall be
convertible solely into common stock of the kind received by holders of Common
Stock as the result of such Common Stock Change in Control. For purposes of
calculating any adjustment to be made pursuant to this paragraph in the event
of a Change in Control, immediately after such Change in Control:
(A) in the case of a Non-Stock Change in Control (as defined in this
paragraph (g)(ix)), the Conversion Price shall thereupon become the lower of
(x) the Conversion Price in effect immediately prior to such Non-Stock Change
in Control, but after giving effect to any other prior adjustments, and (y)
the result obtained by multiplying the greater of the Applicable Price (as
defined in this paragraph (g)(ix)) or the then applicable Reference Market
Price (as defined in this paragraph (g)(ix)) by a fraction of which the
numerator shall be $100.00 and the denominator shall be the then current
Optional Redemption Price per share; and
(B) in the case of a Common Stock Change in Control, the Conversion Price in
effect immediately prior to such Common Stock Change in Control, but after
giving effect to any prior adjustments, shall thereupon be adjusted by
multiplying such Conversion Price by a fraction, of which the numerator shall
be the Purchaser Stock Price (as defined in this paragraph (g)(ix)) and the
denominator shall be the Applicable Price; provided, however, that in the
event of a Common Stock Change in Control in which (x) 100% of the value of
the consideration received by a holder of Common Stock is common stock of the
successor, acquiror, or other third
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<PAGE> 41
party (and cash, if any, is paid with respect to any fractional interests in
such common stock resulting from such Common Stock Change in Control) and (y)
all of the Common Stock will have been exchanged for, converted into, or
acquired for, common stock (and cash with respect to fractional interests) of
the successor, acquiror or other third party, the Conversion Price in effect
immediately prior to such Common Stock Change in Control shall thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator shall be one (1) and the denominator shall be the number of shares
of common stock of the successor, acquiror, or other third party received by
a holder of one share of Common Stock as a result of such Common Stock Change
in Control.
(3) For purposes of this paragraph (ix), the following terms shall have the
meanings indicated:
"Applicable Price" means (i) in the event of a Non-Stock Change in Control
in which the holders of the Common Stock receive only cash, the amount of
cash received by the holder of one share of Common Stock and (ii) in the
event of any other Non-Stock Change in Control or any Common Stock Change in
Control, the average of the Closing Bid Prices for the Common Stock during
the ten Trading Days prior to and including the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Non-Stock Change
in Control or Common Stock Change in Control or, if there is no such record
date, the date upon which the holders of the Common Stock shall have the
right to receive such cash, securities, property or other assets, in each
case, as adjusted in good faith by the Board of Directors to appropriately
reflect any of the events referred to in paragraph (g)(iv)(1) through (6).
"Common Stock Change in Control" means any Change in Control in which more
than 50% of the value (as determined in good faith by the Board of Directors
of the Company) of the consideration received by holders of Common Stock
consists of common stock that for each of the ten consecutive Trading Days
referred to in the preceding paragraph has been admitted for listing or
admitted for listing subject to notice of issuance on a national securities
exchange or quoted on The Nasdaq
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National Market; provided, however, that a Change in Control shall not be a
Common Stock Change in Control unless either (i) the Company continues to
exist after the occurrence of such Change in Control and the outstanding
shares of Convertible Preferred Stock continue to exist as outstanding shares
of Convertible Preferred Stock, or (ii) not later than the occurrence of such
Change in Control, the outstanding shares of Convertible Preferred Stock are
converted into or exchanged for shares of convertible preferred stock of a
corporation succeeding to the business of the Company, which convertible
preferred stock has powers, preferences and relative, participating, optional
or other rights, and qualifications, limitations and restrictions,
substantially similar to those of the Convertible Preferred Stock.
"Non-Stock Change in Control" means any Change in Control other than a
Common Stock Change in Control.
"Purchaser Stock Price" means, with respect to any Common Stock Change in
Control, the product of (i) the number of shares of common stock received in
such Common Stock Change of Control for each share of Common Stock, and (ii)
the average of the per share Closing Prices for the common stock received in
such Common Stock Change in Control for the ten consecutive Trading Days
prior to and including the record date for the determination of the holders
of Common Stock entitled to receive such common stock, or if there is no such
record date, the date upon which the holders of the Common Stock shall have
the right to receive such common stock, in each case, as adjusted in good
faith by the Board of Directors to appropriately reflect any of the events
referred to in paragraph (g)(iv)(1) through (6); provided, however, that if
no such Closing Prices exist, then the Purchaser Stock Price shall be set at
a price determined in good faith by the Board of Directors of the Company.
"Reference Market Price" shall initially mean $13.50 (which is an amount
equal to 66-2/3% of the reported last sale price for the Common Stock on The
Nasdaq National Market on March 25, 1997), and in the event of any adjustment
to the conversion prices other than as a result of a Change in Control, the
Reference Market Price shall also be adjusted so that the ratio of the
Reference Market Price to the Conversion Price
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after giving effect to any such adjustment shall always be the same as the
ratio of $13.50 to the initial Conversion Price set forth in paragraph
(g)(i).
(h) Change in Control. (i) Upon the occurrence of a Change of Control
(the date of such occurrence being the "Change in Control Date"), the Company
shall be obligated to (1) purchase all or a portion of each holder's
Convertible Preferred Stock in cash pursuant to the offer described in
paragraph (h)(iii) (the "Change of Control Offer") at a purchase price equal to
100% of the Liquidation Preference, plus, without duplication, all accrued and
unpaid Liquidated Damages and all accrued and unpaid dividends, if any, to the
Change of Control Payment Date, including an amount in cash equal to a prorated
dividend for the period from the Dividend Payment Date immediately prior to the
Change of Control Payment Date to the Change of Control Payment Date or (2)
adjust the conversion price as provided under paragraph (g)(ix).
Notwithstanding the foregoing, the Company shall, prior to electing to make a
Change of Control Offer, make an offer to redeem all outstanding shares of
Series 3 Preferred Stock.
(ii) Prior to the mailing of the notice referred to in paragraph (h)(iii),
but in any event within 15 days following the date on which the Company knows
or reasonably should have known that a Change in Control has occurred, the
Company covenants that it shall promptly determine if the purchase of the
Convertible Preferred Stock would violate or constitute a default under the
Indenture or other indebtedness of the Company.
(iii) Within 15 days following the date on which the Company knows or
reasonably should have known that a Change in Control has occurred, the Company
must send, by first-class mail, postage prepaid, a notice to each holder of
Convertible Preferred Stock. Such notice shall state whether the Change of
Control Offer would be permitted under the Indenture or other indebtedness of
the Company, and if permitted, such notice shall contain all instructions and
materials necessary to enable such holders to tender Convertible Preferred
Stock pursuant to the Change of Control Offer. If the Change of Control Offer
would be permitted under the Indenture or other indebtedness of the Company,
such notice shall state:
(A) that a Change of Control has occurred, that the Change of Control Offer
is being made pursuant to
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this paragraph (h) and that all Convertible Preferred Stock validly tendered
and not withdrawn will be accepted for payment;
(B) the purchase price (including the amount of accrued dividends, if any)
and the purchase date (which must be no earlier than 30 days nor later than
75 days from the date such notice is mailed, other than as may be required by
law) (the "Change of Control Payment Date");
(C) that any shares of Convertible Preferred Stock not tendered will
continue to accrue dividends;
(D) that, unless the Company defaults in making payment therefor, any share
of Convertible Preferred Stock accepted for payment pursuant to the Change of
Control Offer shall cease to accrue dividends after the Change of Control
Payment Date;
(E) that holders electing to have any shares of Convertible Preferred Stock
purchased pursuant to a Change of Control Offer will be required to surrender
such shares of Convertible Preferred Stock, properly endorsed for transfer,
together with such other customary documents as the Company and the Transfer
Agent may reasonably request to the Transfer Agent and registrar for the
Convertible Preferred Stock at the address specified in the notice prior to
the close of business on the Business Day prior to the Change of Control
Payment Date;
(F) that holders will be entitled to withdraw their election if the Company
receives, not later than five Business Days prior to the Change of Control
Payment Date, a telegram, a telex, facsimile transmission or letter setting
forth the name of the holder, the number of shares of Convertible Preferred
Stock the holder delivered for purchase and a statement that such holder is
withdrawing his election to have such shares of Convertible Preferred Stock
purchased;
(G) that holders whose shares of Convertible Preferred Stock are purchased
only in part will be issued a new certificate representing the unpurchased
shares of Convertible Preferred Stock; and
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(H) the circumstances and relevant facts regarding such Change of Control.
If the Change of Control Offer would not be permitted under the Indenture
or other indebtedness of the Company, such notice shall state the Conversion
Price as adjusted pursuant to paragraph (g)(ix).
(iv) The Company will comply with any tender offer rules under the Exchange
Act which then may be applicable, including Rules 13e-4 and 14e-1, in
connection with any offer required to be made by the Company to repurchase the
shares of Convertible Preferred Stock as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this Certificate of Designation, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Certificate of Designation by virtue
thereof.
(v) On the Change of Control Payment Date the Company shall (A) accept for
payment the shares of Convertible Preferred Stock validly tendered pursuant to
the Change of Control Offer, (B) pay to the holders of shares so accepted the
purchase price therefor in cash and (C) cancel and retire each surrendered
certificate. Unless the Company defaults in the payment for the shares of
Convertible Preferred Stock tendered pursuant to the Change of Control Offer,
dividends will cease to accrue with respect to the shares of Convertible
Preferred Stock tendered and all rights of holders of such tendered shares will
terminate, except for the right to receive payment therefor, on the Change of
Control Payment Date.
(vi) To accept the Change of Control Offer, the holder of a share of
Convertible Preferred Stock shall deliver, on or before the 10th day prior to
the Change of Control Payment Date, written notice to the Company (or an agent
designated by the Company for such purpose) of such holder's acceptance,
together with certificates evidencing the shares of Convertible Preferred Stock
with respect to which the Change of Control Offer is being accepted, duly
endorsed for transfer.
(i) Reissuance of Convertible Preferred Stock. Shares of Convertible
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged, shall not be reissued as shares of
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<PAGE> 46
Convertible Preferred Stock and shall (upon compliance with any applicable
provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Convertible Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof.
(j) Business Day. If any payment, redemption or exchange shall be required
by the terms hereof to be made on a day that is not a Business Day, such
payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
(k) Limitation on Mergers and Asset Sales. The Company may not consolidate
with or merge with or into, or convey, transfer or lease all or substantially
all its assets to, any person unless: (1) the successor, transferee or lessee
(if not the Company) is organized and existing under the laws of the United
States of America or any State thereof or the District of Columbia and the
Convertible Preferred Stock shall be converted into or exchanged for and shall
become shares of such successor, transferee or lessee, having in respect of
such successor, transferee or lessee substantially the same powers, preference
and relative participating, optional or other special rights and the
qualifications, limitations or restrictions thereon, that the Convertible
Preferred Stock had immediately prior to such transaction; and (2) the Company
delivers to the Transfer Agent an Officers' Certificate and an Opinion of
Counsel stating that such consolidation, merger or transfer complies with this
Certificate of Designation. The successor, transferee or lessee will be the
successor company.
(l) Certificates. (i) Form and Dating. The Convertible Preferred Stock
and the Transfer Agent's certificate of authentication shall be substantially
in the form of Exhibit A, which is hereby incorporated in and expressly made a
part of this Certificate of Designation. The Convertible Preferred Stock
certificate may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the Company). Each Convertible Preferred Stock certificate shall be dated
the date of its authentication. The terms of the Convertible
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<PAGE> 47
Preferred Stock certificate set forth in Exhibit A are part of the terms of
this Certificate of Designation.
(A) Global Convertible Preferred Stock. The Convertible Preferred Stock
sold in reliance on Rule 144A shall be issued initially in the form of one or
more fully registered global certificates with the global securities legend and
restricted securities legend set forth in Exhibit A hereto (the "Global
Convertible Preferred Stock"), which shall be deposited on behalf of the
purchasers represented thereby with the Transfer Agent, at its New York office,
as custodian for DTC (or with such other custodian as DTC may direct), and
registered in the name of DTC or a nominee of DTC, duly executed by the Company
and authenticated by the Transfer Agent as hereinafter provided. The number of
shares of Convertible Preferred Stock represented by Global Convertible
Preferred Stock may from time to time be increased or decreased by adjustments
made on the records of the Transfer Agent and DTC or its nominee as hereinafter
provided.
(B) Book-Entry Provisions. In the event Global Convertible Preferred Stock
is deposited with or on behalf of DTC, the Company shall execute and the
Transfer Agent shall authenticate and deliver initially one or more Global
Convertible Preferred Stock certificates that (a) shall be registered in the
name of DTC for such Global Convertible Preferred Stock or the nominee of DTC
and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's
instructions or held by the Transfer Agent as custodian for DTC.
Members of, or participants in, DTC ("Agent Members") shall have no rights
under this Certificate of Designation with respect to any Global Convertible
Preferred Stock held on their behalf by DTC or by the Transfer Agent as the
custodian of DTC or under such Global Convertible Preferred Stock, and DTC may
be treated by the Company, the Transfer Agent and any agent of the Company or
the Transfer Agent as the absolute owner of such Global Convertible Preferred
Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Transfer Agent or any agent of the
Company or the Transfer Agent from giving effect to any written certification,
proxy or other authorization furnished by DTC or impair, as between DTC and its
Agent Members, the operation of customary practices of DTC governing the
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exercise of the rights of a holder of a beneficial interest in any Global
Convertible Preferred Stock.
(C) Certificated Convertible Preferred Stock. Convertible Preferred Stock
initially sold to certain "accredited investors" (as defined in Rule 501(a)(1),
(2), (3), (4), (5), (6) or (7) under the Securities Act) or sold in offshore
transactions pursuant to Regulation S under the Securities Act will be issued
in fully registered certificated form ("Certificated Convertible Preferred
Stock").
Except as provided in this paragraph (l)(i) or in paragraph (l)(iii), owners
of beneficial interests in Global Convertible Preferred Stock will not be
entitled to receive physical delivery of Certificated Convertible Preferred
Stock.
After a transfer of any Convertible Preferred Stock during the period of the
effectiveness of a Shelf Registration Statement with respect to such
Convertible Preferred Stock, all requirements pertaining to legends on such
Convertible Preferred Stock will cease to apply, the requirements requiring
that any such Convertible Preferred Stock issued to Holders be issued in global
form will cease to apply, and Certificated Convertible Preferred Stock without
legends will be available to the transferee of the Holder of such Convertible
Preferred Stock upon exchange of such transferring Holder's Convertible
Preferred Stock or directions to transfer such Holder's interest in the Global
Convertible Preferred Stock, as applicable.
(ii) Execution and Authentication. Two Officers shall sign the Convertible
Preferred Stock for the Company by manual or facsimile signature. The
Company's seal shall be impressed, affixed, imprinted or reproduced on the
Convertible Preferred Stock and may be in facsimile form.
If an Officer whose signature is on Convertible Preferred Stock no longer
holds that office at the time the Transfer Agent authenticates the Convertible
Preferred Stock, the Convertible Preferred Stock shall be valid nevertheless.
A Convertible Preferred Stock shall not be valid until an authorized
signatory of the Transfer Agent manually signs the certificate of
authentication on the Convertible Preferred Stock. The signature shall be
conclusive evidence
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that the Convertible Preferred Stock has been authenticated under this
Certificate of Designation.
The Transfer Agent shall authenticate and deliver 1,000,000 shares of
Convertible Preferred Stock for original issue upon a written order of the
Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. In addition, the Transfer
Agent shall authenticate and deliver, from time to time, Additional Shares for
original issue upon order of the Company signed by two Officers or by an
Officer or either an Assistant Treasurer or Assistant Secretary of the Company.
Such orders shall specify the number of shares of Convertible Preferred Stock
to be authenticated and the date on which the original issue of Convertible
Preferred Stock is to be authenticated.
The Transfer Agent may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Convertible Preferred Stock. Unless limited
by the terms of such appointment, an authenticating agent may authenticate
Convertible Preferred Stock whenever the Transfer Agent may do so. Each
reference in this Certificate of Designation to authentication by the Transfer
Agent includes authentication by such agent. An authenticating agent has the
same rights as the Transfer Agent or agent for service of notices and demands.
(iii) Transfer and Exchange. (A) Transfer and Exchange of Certificated
Convertible Preferred Stock. When Certificated Convertible Preferred Stock is
presented to the Transfer Agent with a request to register the transfer of such
Certificated Convertible Preferred Stock or to exchange such Certificated
Convertible Preferred Stock for an equal number of shares of Certificated
Convertible Preferred Stock of other authorized denominations, the Transfer
Agent shall register the transfer or make the exchange as requested if its
reasonable requirements for such transaction are met; provided, however, that
the Certificated Convertible Preferred Stock surrendered for transfer or
exchange:
(1) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Transfer
Agent, duly executed by the Holder thereof or its attorney duly authorized in
writing; and
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(2) in the case of Transfer Restricted Securities that are Certificated
Convertible Preferred Stock, are being transferred or exchanged pursuant to
an effective registration statement under the Securities Act or pursuant to
clause (I), (II) or (III) below, and are accompanied by the following
additional information and documents, as applicable:
(I) if such Transfer Restricted Securities are being delivered to the
Transfer Agent by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect in
substantially the form of Exhibit C hereto; or
(II) if such Transfer Restricted Securities are being transferred to the
Company or to a "qualified institutional buyer" ("QIB") in accordance with
Rule 144A under the Securities Act or pursuant to an exemption from
registration in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in substantially the form of
Exhibit C hereto); or
(III) if such Transfer Restricted Securities are being transferred to an
"accredited investor" as described in Rule 501(a)(1), (2), (3), (4), (5),
(6) or (7) under the Securities Act that is acquiring the Securities for its
own account, or for the account of such an accredited investor, in each case
in a minimum principal amount of $100,000 for investment purposes and not
with a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act, or in reliance on another exemption from
the registration requirements of the Securities Act: a certification to that
effect in substantially the form of Exhibit C hereto, and if the Company or
the Transfer Agent so requests, evidence reasonably satisfactory to them as
to the compliance with the restrictions set forth in the legend set forth in
paragraph (l)(iii)(G)(1) below.
(B) Restrictions on Transfer of Certificated Convertible Preferred Stock
for a Beneficial Interest in Global Convertible Preferred Stock. Certificated
Convertible Preferred Stock may not be exchanged for a
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<PAGE> 51
beneficial interest in Global Convertible Preferred Stock except upon
satisfaction of the requirements set forth below. Upon receipt by the
Transfer Agent of Certificated Convertible Preferred Stock, duly endorsed or
accompanied by appropriate instruments of transfer, in form satisfactory to
the Transfer Agent, together with:
(1) if such Certificated Convertible Preferred Stock is a Transfer
Restricted Security, certification that such Certificated Convertible
Preferred Stock is being transferred to a QIB in accordance with Rule 144A
under the Securities Act; and
(2) whether or not such Certificated Convertible Preferred Stock is a
Transfer Restricted Security, written instructions directing the Transfer
Agent to make, or to direct DTC to make, an adjustment on its books and
records with respect to such Global Convertible Preferred Stock to reflect an
increase in the number of shares of Convertible Preferred Stock represented
by the Global Convertible Preferred Stock,
then the Transfer Agent shall cancel such Certificated Convertible Preferred
Stock and cause, or direct DTC to cause, in accordance with the standing
instructions and procedures existing between DTC and the Transfer Agent, the
number of shares of Convertible Preferred Stock represented by the Global
Convertible Preferred Stock to be increased accordingly. If no Global
Convertible Preferred Stock is then outstanding, the Company shall issue and
the Transfer Agent shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Convertible Preferred Stock
representing the appropriate number of shares.
(C) Transfer and Exchange of Global Convertible Preferred Stock. The
transfer and exchange of Global Convertible Preferred Stock or beneficial
interests therein shall be effected through DTC, in accordance with this
Certificate of Designation (including applicable restrictions on transfer set
forth herein, if any) and the procedures of DTC therefor.
(D) Transfer of a Beneficial Interest in Global Convertible Preferred Stock
for a Certificated Convertible Preferred Stock.
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<PAGE> 52
(1) Any person having a beneficial interest in Convertible Preferred
Stock that is being transferred or exchanged pursuant to an effective
registration statement under the Securities Act or pursuant to clause (I),
(II) or (III) below may upon request, and if accompanied by the information
specified below, exchange such beneficial interest for Certificated
Convertible Preferred Stock representing the same number of shares of
Convertible Preferred Stock. Upon receipt by the Transfer Agent of written
instructions or such other form of instructions as is customary for DTC from
DTC or its nominee on behalf of any person having a beneficial interest in
Global Convertible Preferred Stock and upon receipt by the Transfer Agent of
a written order or such other form of instructions as is customary for DTC
or the person designated by DTC as having such a beneficial interest in a
Transfer Restricted Security only, and upon the following additional
information and documents (all of which may be submitted by facsimile):
(I) if such beneficial interest is being transferred to the person
designated by DTC as being the owner of a beneficial interest in Global
Convertible Preferred Stock, a certification from such person to that
effect (in substantially the form of Exhibit C hereto);
(II) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act or pursuant to an
exemption from registration in accordance with Rule 144 or Regulation S
under the Securities Act, a certification to that effect (in substantially
the form of Exhibit C hereto); or
(III) if such beneficial interest is being transferred to an "accredited
investor" as described in Rule 501(a)(1), (2), (3), (4), (5), (6) or (7)
under the Securities Act that is acquiring the security for its own
account, or for the account of such an accredited investor, in each case in
a minimum principal amount of $100,000 for investment purposes and not with
a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act, or in reliance on another exemption from
the registration requirements of the Securities Act, a
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<PAGE> 53
certification to that effect from the transferor (in substantially the form
of Exhibit C hereto), and if the Company or the Transfer Agent so requests,
evidence reasonably satisfactory to them as to the compliance with the
restrictions set forth in the legend set forth in paragraph (l)(iii)(G)(1)
below;
then, the Transfer Agent or DTC, at the direction of the Transfer Agent, will
cause, in accordance with the standing instructions and procedures existing
between DTC and the Transfer Agent, the number of shares of Convertible
Preferred Stock represented by Global Convertible Preferred Stock to be reduced
on its books and records and, following such reduction, the Company will
execute and the Transfer Agent will authenticate and deliver to the transferee
Certificated Convertible Preferred Stock.
(2) Certificated Convertible Preferred Stock issued in exchange for a
beneficial interest in a Global Convertible Preferred Stock pursuant to this
paragraph (l)(iii)(D) shall be registered in such names and in such
authorized denominations as DTC, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Transfer Agent. The
Transfer Agent shall deliver such Certificated Convertible Preferred Stock to
the persons in whose names such Convertible Preferred Stock are so registered
in accordance with the instructions of DTC.
(E) Restrictions on Transfer and Exchange of Global Convertible Preferred
Stock. Notwithstanding any other provisions of this Certificate of Designation
(other than the provisions set forth in paragraph (l)(iii)(F)), Global
Convertible Preferred Stock may not be transferred as a whole except by DTC to
a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by
DTC or any such nominee to a successor depository or a nominee of such
successor depository.
(F) Authentication of Certificated Convertible Preferred Stock. If at any
time:
(1) DTC notifies the Company that DTC is unwilling or unable to continue as
depository for the Global Convertible Preferred Stock and a successor
depository for the Global Convertible Preferred Stock is not appointed by the
Company within 90 days after delivery of such notice;
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<PAGE> 54
(2) DTC ceases to be a clearing agency registered under the Exchange Act;
(3) there shall have occurred and be continuing a Voting Rights Triggering
Event; or
(4) the Company, in its sole discretion, notifies the Transfer Agent in
writing that it elects to cause the issuance of Certificated Convertible
Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a
written order of the Company signed by two Officers or by an Officer and either
an Assistant Treasurer or an Assistant Secretary of the Company requesting the
authentication and delivery of Certificated Convertible Preferred Stock to the
persons designated by the Company, will authenticate and deliver Certificated
Convertible Preferred Stock equal to the number of shares of Convertible
Preferred Stock represented by the Global Convertible Preferred Stock, in
exchange for such Global Convertible Preferred Stock.
(G) Legend. (1) Except as permitted by the following paragraph (2), each
certificate evidencing the Global Convertible Preferred Stock and the
Certificated Convertible Preferred Stock (and all Convertible Preferred Stock
issued in exchange therefor or substitution thereof) shall bear a legend in
substantially the following form:
"THE SECURITY EVIDENCED HEREBY (OR ITS PREDECESSOR) (AND THE COMMON STOCK
INTO WHICH THIS SECURITY IS CONVERTIBLE) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED IN ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED
HEREBY (OR THE COMMON STOCK INTO WHICH THIS SECURITY IS CONVERTIBLE) IS
HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY (AND OF THE COMMON
STOCK INTO WHICH THIS SECURITY IN CONVERTIBLE) AGREES FOR THE
44
<PAGE> 55
BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY (AND THE COMMON STOCK INTO
WHICH THIS SECURITY IS CONVERTIBLE) MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE
SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), (4) TO THE COMPANY OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES."
(2) Upon any sale or transfer of a Transfer Restricted Security (including
any Transfer Restricted Security represented by Global Convertible Preferred
Stock) pursuant to Rule 144 under the Securities Act or an effective
registration statement under the Securities Act:
(I) in the case of any Transfer Restricted Security that is a Certificated
Convertible Preferred Stock, the Transfer Agent shall permit the Holder
thereof to exchange such Transfer Restricted Security for a Certificated
Convertible Preferred Stock that does not bear the legend set forth above
and rescind any restriction on the transfer of such Transfer Restricted
Security; and
(II) in the case of any Transfer Restricted Security that is represented
by a Global Convertible Preferred Stock, the Transfer Agent shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Certificated Convertible Preferred Stock Security that does not bear the
legend set forth above and rescind any restriction on the transfer of such
Transfer Restricted Security, if the Holder's request for such exchange was
made in reliance on Rule 144 and the Holder certifies to that effect in
writing to the Transfer Agent (such certification to be in the form set
forth on the reverse of the Transfer Restricted Security).
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<PAGE> 56
(H) Cancellation or Adjustment of Global Convertible Preferred Stock. At
such time as all beneficial interests in Global Convertible Preferred Stock
have either been exchanged for Certificated Convertible Preferred Stock,
redeemed, repurchased or canceled, such Global Convertible Preferred Stock
shall be returned to DTC for cancellation or retained and canceled by the
Transfer Agent. At any time prior to such cancellation, if any beneficial
interest in Global Convertible Preferred Stock is exchanged for Certificated
Convertible Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Convertible Preferred Stock represented by such Global Convertible
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Convertible
Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.
(I) Obligations with Respect to Transfers and Exchanges of Convertible
Preferred Stock. (1) To permit registrations of transfers and exchanges, the
Company shall execute and the Transfer Agent shall authenticate Certificated
Convertible Preferred Stock and Global Convertible Preferred Stock as required
pursuant to the provisions of this paragraph (iii).
(2) All Certificated Convertible Preferred Stock and Global Convertible
Preferred Stock issued upon any registration of transfer or exchange of
Certificated Convertible Preferred Stock or Global Convertible Preferred
Stock shall be the valid obligations of the Company, entitled to the same
benefits under this Certificate of Designation as the Certificated
Convertible Preferred Stock or Global Convertible Preferred Stock surrendered
upon such registration of transfer or exchange.
(3) Prior to due presentment for registration of transfer of any shares of
Convertible Preferred Stock, the Transfer Agent and the Company may deem and
treat the person in whose name such shares of Convertible Preferred Stock are
registered as the absolute owner of such Convertible Preferred Stock and
neither the Transfer Agent nor the Company shall be affected by notice to the
contrary.
(4) No service charge shall be made to a Holder for any registration of
transfer or exchange upon surrender of any Convertible Preferred Stock
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<PAGE> 57
Certificate at the office of the Transfer Agent maintained for that purpose.
However, the Company may require payment of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection with any
registration of transfer or exchange of Convertible Preferred Stock
Certificates.
(5) Upon any sale or transfer of shares of Convertible Preferred Stock
(including any Convertible Preferred Stock represented by a Global
Convertible Preferred Stock Certificate) pursuant to an effective
registration statement under the Securities Act, pursuant to Rule 144 under
the Securities Act or pursuant to an opinion of counsel reasonably
satisfactory to the Company that no legend is required:
(A) in the case of any Certificated Convertible Preferred Stock, the
Transfer Agent shall permit the holder thereof to exchange such
Convertible Preferred Stock for Certificated Convertible Preferred
Stock that does not bear the legend set forth in paragraph (iii)(G)
above and rescind any restriction on the transfer of such Convertible
Preferred Stock; and
(B) in the case of any Global Convertible Preferred Stock, such
Convertible Preferred Stock shall not be required to bear the legend
set forth in paragraph (iii)(G) above but shall continue to be subject
to the provisions of paragraph (iii)(D) hereof; provided, however,
that with respect to any request for an exchange of Convertible
Preferred Stock that is represented by Global Convertible Preferred
Stock for Certificated Convertible Preferred Stock that does not bear
the legend set forth in paragraph (iii)(G) above in connection with a
sale or transfer thereof pursuant to Rule 144 (and based upon an
opinion of counsel if the Company so requests), the Holder thereof
shall certify in writing to the Transfer Agent that such request is
being made pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit C hereto).
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<PAGE> 58
(iv) Replacement Certificates. If a mutilated Convertible Preferred
Stock certificate is surrendered to the Transfer Agent or if the Holder of a
Convertible Preferred Stock certificate claims that the Convertible Preferred
Stock certificate has been lost, destroyed or wrongfully taken, the Company
shall issue and the Transfer Agent shall countersign a replacement
Convertible Preferred Stock certificate if the reasonable requirements of the
Transfer Agent and of Section 8-405 of the Uniform Commercial Code as in
effect in the State of New York are met. If required by the Transfer Agent
or the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Transfer Agent to protect the Company and the
Transfer Agent from any loss which either of them may suffer if a Convertible
Preferred Stock certificate is replaced. The Company and the Transfer Agent
may charge the Holder for their expenses in replacing a Convertible Preferred
Stock certificate.
(v) Temporary Certificates. Until definitive Convertible Preferred Stock
certificates are ready for delivery, the Company may prepare and the Transfer
Agent shall countersign temporary Convertible Preferred Stock certificates.
Temporary Convertible Preferred Stock certificates shall be substantially in
the form of definitive Convertible Preferred Stock certificates but may have
variations that the Company considers appropriate for temporary Convertible
Preferred Stock certificates. Without unreasonable delay, the Company shall
prepare and the Transfer Agent shall countersign definitive Convertible
Preferred Stock certificates and deliver them in exchange for temporary
Convertible Preferred Stock certificates.
(vi) Cancellation. (A) In the event the Company shall purchase or
otherwise acquire Certificated Convertible Preferred Stock, the same shall
thereupon be delivered to the Transfer Agent for cancellation.
(B) At such time as all beneficial interests in Global Convertible
Preferred Stock have either been exchanged for Certificated Convertible
Preferred Stock, redeemed, repurchased or canceled, such Global Convertible
Preferred Stock shall thereupon be delivered to the Transfer Agent for
cancellation.
(C) The Transfer Agent and no one else shall cancel and destroy all
Convertible Preferred Stock certificates surrendered for transfer, exchange,
replacement
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<PAGE> 59
or cancellation and deliver a certificate of such destruction to the Company
unless the Company directs the Transfer Agent to deliver canceled Convertible
Preferred Stock certificates to the Company. The Company may not issue new
Convertible Preferred Stock certificates to replace Convertible Preferred Stock
certificates to the extent they evidence Convertible Preferred Stock which the
Company has purchased or otherwise acquired.
(m) Additional Rights of Holders. In addition to the rights provided to
Holders under this Certificate of Designation, Holders shall have the rights
set forth in the Registration Rights Agreement.
(o) Certain Definitions. As used in this Certificate of Designation, the
following terms shall have the following meanings (and (1) terms defined in the
singular have comparable meanings when used in the plural and vice versa, (2)
"including" means including without limitation, (3) "or" is not exclusive and
(4) an accounting term not otherwise defined has the meaning assigned to it in
accordance with United States generally accepted accounting principles as in
effect on the Issue Date and all accounting calculations will be determined in
accordance with such principles), unless the content otherwise requires:
"Business Day" means each day which is not a Legal Holiday.
"capital stock" of any person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such person, including any Preferred Stock,
but excluding any debt securities convertible into or exchangeable for such
equity.
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<PAGE> 60
"Change in Control" or "Change of Control" means: (i) the sale, lease,
transfer, conveyance other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), (other than officers, directors and stockholders
of the Company and their affiliates on the date of this Certificate of
Designation), becomes the beneficial owner (as determined in accordance with
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more
than 50% of the voting stock of the Company or (iv) the first day on which a
majority of the members of the board of directors (excluding the directors
elected pursuant to paragraph (f) are not Continuing Directors.
"Closing Bid Price" means on any day the last reported bid price on such
day, or in case no bid takes place on such day, the average of the reported
closing bid and asked prices, in each case on the Nasdaq National Market or, if
the Common Stock is not quoted on such system, on the principal national
securities exchange on which such stock is listed or admitted to trading, or if
not listed or admitted to trading on any national securities exchange, the
average of the closing bid and asked prices as furnished by any independent
registered broker-dealer firm, selected by the Company for that purpose.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
date of this Certificate of Designation or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board of Directors at the time of
such nomination or election.
"Default" means any event which is, or after notice or passage of time or
both would be, a Voting Rights Triggering Event.
"DTC" means The Depository Trust Company.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holders" means the registered holders from time to time of the Convertible
Preferred Stock.
"Indenture" means the Indenture dated as of October 5, 1995 between the
Company and IBJ Schroder Bank & Trust Company.
"Issue Date" means the date on which the Convertible Preferred Stock is
initially issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Liquidated Damages" means, with respect to any share of Convertible
Preferred Stock, the Additional Dividends then accrued, if any, on such share
pursuant to paragraph (c).
"Officer" means the Chairman of the Board of Directors, the President, any
Vice President, the Treasurer, the Secretary or any Assistant Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Transfer Agent. The counsel may be an employee of or counsel
to the Company or the Transfer Agent.
"person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
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<PAGE> 62
"Registration Rights Agreement" means the Registration Rights Agreement
dated March 25, 1997 among the Company, Credit Suisse First Boston Corporation
and Dillon, Read & Co. Inc. with respect to the Convertible Preferred Stock.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933.
"Series 3 Preferred Stock" means the 10% Junior Series 3 Preferred Stock of
the Company.
"Shelf Registration Statement" means a shelf registration statement filed
with the SEC to cover resales of Transfer Restricted Securities by holders
thereof, as required by the Registration Rights Agreement.
"Subsidiary" means any corporation, association, partnership, limited
liability company or other business entity of which more than 50% of the total
voting power of shares of capital stock or other interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company, the Company and one or more
Subsidiaries or one or more Subsidiaries and any partnership the sole general
partner or the managing partner of which the Company or any Subsidiary or the
only general partners of which are the Company and one or more Subsidiaries or
one or more Subsidiaries.
"Trading Day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any
day on which securities are not traded on the applicable securities exchange or
in the applicable securities market.
"Transfer Agent" means the transfer agent for the Convertible Preferred
Stock appointed by the Company, which initially shall be ChaseMellon
Shareholder Services, L.L.C.
"Transfer Restricted Securities" means each share of Convertible Preferred
Stock (or the shares of Common Stock into which such share of Convertible
Preferred Stock is convertible) (including additional shares of Convertible
Preferred Stock issued in payment of dividends on the
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<PAGE> 63
Convertible Preferred Stock, if any, as permitted in accordance with the terms
hereof) until (i) the date on which such security has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement or (ii) the date on which such security is
distributed to the public pursuant to Rule 144 under the Securities Act or is
saleable pursuant to Rule 144(k) under the Securities Act (or any successor
rule thereof) or would be saleable pursuant to Rule 144(k) under the Securities
Act had it not been held by, or had it never been held by, an affiliate of the
Company.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
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IN WITNESS WHEREOF, said IXC Communications, Inc., has caused this
Certificate of Designation to be signed by John J. Willingham, its Senior Vice
President and Chief Financial Officer, this 31st day of March, 1997.
IXC COMMUNICATIONS, INC.,
by /s/ John J. Willingham
----------------------------------
Name: John J. Willingham
Title: Senior Vice President
and Chief Financial Officer
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<PAGE> 65
EXHIBIT A
FORM OF CONVERTIBLE PREFERRED STOCK
FACE OF SECURITY
[THE SECURITY EVIDENCED HEREBY (OR ITS PREDECESSOR) (AND THE COMMON STOCK
INTO WHICH THIS SECURITY IS CONVERTIBLE) WAS ORIGINALLY ISSUED IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED IN ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY (OR THE COMMON
STOCK INTO WHICH THIS SECURITY IS CONVERTIBLE) IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY (AND OF THE COMMON STOCK INTO WHICH THIS SECURITY IS
CONVERTIBLE) AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY (AND
THE COMMON STOCK INTO WHICH THIS SECURITY IS CONVERTIBLE) MAY BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) TO A PERSON WHO THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE
904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), (4) TO THE COMPANY OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE STATES OF THE UNITED STATES.]*
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK,
TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OF PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON
__________________________________
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
<PAGE> 66
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST
HEREIN.]**
[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
CERTIFICATE OF DESIGNATION REFERRED TO BELOW.]**
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH REGISTRAR AND
TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES
WITH THE FOREGOING RESTRICTIONS.
Number of Shares of Convertible
Certificate Number Preferred Stock
[ ] [ ]
CUSIP NO.: [ ]
7 1/4% Junior Convertible Preferred Stock Due 2007
(par value $0.01) (liquidation preference $100
per share of Convertible Preferred Stock)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the "Company"), hereby
certifies that [ ] (the "Holder") is the registered owner of fully paid
and non-assessable preferred securities of the Company designated the 7 1/4%
Junior Convertible Preferred Stock Due 2007 (par value $0.01) (liquidation
preference $100 per share of Convertible Preferred Stock) (the "Convertible
Preferred Stock"). The shares of Convertible Preferred Stock are transferable
on the books and records of the Registrar, in person or by a duly authorized
attorney, upon surrender of this certificate duly endorsed and in proper form
for transfer. The designation, rights, privileges,
__________________________________
** Subject to removal if not a global security.
2
<PAGE> 67
restrictions, preferences and other terms and provisions of the Convertible
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation dated March [ ],
1997, as the same may be amended from time to time (the "Certificate of
Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The Company will provide
a copy of the Certificate of Designation to a Holder without charge upon
written request to the Company at its principal place of business.
Reference is hereby made to select provisions of the Convertible Preferred
Stock set forth on the reverse hereof, and to the Certificate of Designation,
which select provisions and the Certificate of Designation shall for all
purposes have the same effect as if set forth at this place.
Upon receipt of this certificate, the Holder is bound by the Certificate of
Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication hereon has been
properly executed, these shares of Convertible Preferred Stock shall not be
entitled to any benefit under the Certificate of Designation or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate this [ ] day
of [ ], [ ].
IXC COMMUNICATIONS, INC.,
By:
-------------------------------
Name:
Title:
[Seal]
By:
-------------------------------
Name:
Title:
3
<PAGE> 68
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Convertible Preferred Stock referred to in the within
mentioned Certificate of Designation.
Dated: [ ], [ ]
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
as Transfer Agent,
By:
---------------------------
Authorized Signatory
4
<PAGE> 69
REVERSE OF SECURITY
Dividends on each share of Convertible Preferred Stock shall be payable at a
rate per annum set forth in the face hereof or as provided in the Certificate
of Designation (including Additional Dividends).
The shares of Convertible Preferred Stock shall be redeemable as provided in
the Certificate of Designation. The shares of Convertible Preferred Stock
shall be convertible into the Company's Common Stock in the manner and
according to the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to any Holder upon
request and without charge, a full summary statement of the designations,
voting rights preferences, limitations and special rights of the shares of each
class or series authorized to be issued by the Company so far as they have been
fixed and determined and the authority of the Board of Directors to fix and
determine the designations, voting rights, preferences, limitations and special
rights of the class and series of shares of the Company.
5
<PAGE> 70
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of
Convertible Preferred Stock evidenced hereby to:
------------------------------
- -------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- -------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
agent to transfer the shares of Convertible Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute
another to act for him or her.
Date:
------------------------------
Signature:
-------------------------
(Sign exactly as your name appears on the other side of this Convertible
Preferred Stock Certificate)
Signature Guarantee:***
------------------------------------------------------
- ------------------------
*** (Signature must be guaranteed by an "eligible guarantor institution" that
is, a bank, stockbroker, savings and loan association or credit union
meeting the requirements of the Registrar, which requirements include
membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature guarantee program" as may be
determined by the Registrar in addition to, or in substitution for, STAMP,
all in accordance with the Securities Exchange Act of 1934, as amended.)
6
<PAGE> 71
EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Convertible, Preferred Stock)
The undersigned hereby irrevocably elects to convert (the "Conversion") shares
of 7 1/4% Junior Convertible Preferred Stock (the "Convertible Preferred
Stock"), represented by stock certificate No(s). _______________ (the
"Convertible Preferred Stock Certificates") into shares of common stock
("Common Stock") of IXC Communications, Inc. (the "Company") according to the
conditions of the Certificate of Designations, Preferences and Rights of the
Convertible Preferred Stock (the "Certificate of Designation"), as of the date
written below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates. No fee will be
charged to the holder for any conversion, except for transfer taxes, if any. A
copy of each Convertible Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Convertible Preferred Stock shall be made pursuant to
registration of the Common Stock under the Securities Act of 1933 (the "Act"),
or pursuant to any exemption from registration under the Act.
Any holder, upon the exercise of its conversion rights in accordance with the
terms of the Certificate of Designation and the Convertible Preferred Stock,
agrees to be bound by the terms of the Registration Rights Agreement.
Capitalized terms used but not defined herein shall have the meanings ascribed
thereto in or pursuant to the Certificate of Designation.
Date of Conversion: ________________________
Applicable Conversion Price: _______________
Number of shares of Convertible
Preferred Stock to be Converted: ____________
<PAGE> 72
Number of shares of
Common Stock to be Issued: _________________
Signature: _________________________________
Name: ______________________________________
Address:** _________________________________
Fax No.: ___________________________________
- -----------------------------
* The Company is not required to issue shares of Common Stock until the
original Convertible Preferred Stock Certificate(s) (or evidence of loss,
theft or destruction thereof) to be converted are received by the Company or
its Transfer Agent. The Company shall issue and deliver shares of Common
Stock to an overnight courier not later than three business days following
receipt of the original Convertible Preferred Stock Certificate(s) to be
converted.
** Address where shares of Common Stock and any other payments or certificates
shall be sent by the Company.
2
<PAGE> 73
EXHIBIT C
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF CONVERTIBLE PREFERRED STOCK
Re: 7 1/4% Junior Convertible Preferred Stock Due 2007 (the "Convertible
Preferred Stock") of IXC Communications, Inc. (the "Company")
This Certificate relates to ____ shares of Convertible Preferred Stock held
in [ ] */ book-entry or [ ] */ definitive form by _______________ (the
"Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in exchange
for its beneficial interest in the Convertible Preferred Stock held by the
depository shares of Convertible Preferred Stock in definitive, registered form
equal to its beneficial interest in such Convertible Preferred Stock (or the
portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Convertible Preferred Stock.
In connection with such request and in respect of such Convertible Preferred
Stock, the Transferor does hereby certify that the Transferor is familiar with
the Certificate of Designation relating to the above captioned Convertible
Preferred Stock and that the transfer of this Convertible Preferred Stock does
not require registration under the Securities Act of 1933 (the "Securities
Act") because */:
[ ] Such Convertible Preferred Stock is being acquired for the Transferor's
own account without transfer.
[ ] Such Convertible Preferred Stock is being transferred to the Company.
[ ] Such Convertible Preferred Stock is being transferred (i) to a qualified
institutional buyer (as defined in Rule 144A under the Securities Act), in
reliance on Rule 144A or (ii) pursuant to an exemption from registration in
accordance with Rule 904 under the Securities Act (and, in the case of clause
(ii), based on an opinion of counsel if the Company so requests and together
__________________________________
*/Please check applicable box.
<PAGE> 74
with a certification in substantially the form of Exhibit E to the
Certificate of Designation).
[ ] Such Convertible Preferred Stock is being transferred to an accredited
investor within the meaning of Rule 501(a)(1), (2), (3), (4), (5), (6) or (7)
under the Securities Act pursuant to a private placement exemption from the
registration requirements of the Securities Act (together with a certification
in substantially the form of Exhibit D to the Certificate of Designation).
[ ] Such Convertible Preferred Stock is being transferred in reliance on and
in compliance with another exemption from the registration requirements of the
Securities Act (and based on an opinion of counsel if the Company so requests).
-------------------------------
[INSERT NAME OF TRANSFEROR]
Date: By
------------------------------- -------------------------------
2
<PAGE> 75
EXHIBIT D
FORM OF CERTIFICATE
TO BE DELIVERED BY ACCREDITED INVESTORS
_____________, _____
ChaseMellon Shareholder Services, L.L.C.
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed purchase of certain 7 1/4% Junior
Convertible Preferred Stock Due 2007 (the "Convertible Preferred Stock"), of
IXC Communications, Inc., a Delaware corporation (the "Company"), we represent
that:
(i) we are an "accredited investor" within the meaning of Rule
501(a)(1),(2),(3),(4),(5),(6) or (7) under the Securities Act of 1933 (the
"Securities Act") (an "Accredited Investor"), or an entity in which all of
the equity owners are Accredited Investors;
(ii) any purchase of Convertible Preferred Stock will be for our own account
or for the account of one or more other Accredited Investors as to which we
exercise sole investment discretion;
(iii) we have such knowledge and experience in financial and business
matters that we are capable of evaluating the merits and risks of purchasing
Convertible Preferred Stock and we and any accounts for which we are acting
are able to bear the economic risks of our or their investment;
(iv) we are not acquiring Convertible Preferred Stock with a view to any
distribution thereof in a transaction that would violate the Securities Act
or the securities laws of any State of the United States or any other
applicable jurisdiction; provided that the disposition of our property and
the property of any accounts for which we are acting as fiduciary shall
remain at all times without our control; and
(v) we acknowledge that we have had access to such financial and other
information, and have been afforded the opportunity to ask such questions of
representatives of the Company and receive answers
<PAGE> 76
thereto, as we deem necessary in connection with our decision to purchase
Convertible Preferred Stock.
We understand that the Convertible Preferred Stock has not been registered
under the Securities Act, and we agree, on our own behalf and on behalf of each
account for which we acquire any Convertible Preferred Stock, that such
Convertible Preferred Stock may be offered, resold, pledged or otherwise
transferred only (i) to a person whom we reasonably believe to be a qualified
institutional buyer (as defined in Rule 144A under the Securities Act) in a
transaction meeting the requirements of Rule 144A, in a transaction meeting the
requirements of Rule 144 under the Securities Act, outside the United States to
a foreign person in a transaction meeting the requirements of Rule 904 under
the Securities Act (and, unless such transfer occurs in a transaction meeting
the requirements of Rule 144A, based upon an opinion of counsel, if the Company
so requests), (ii) to the Company or (iii) pursuant to an effective
registration statement, and, in each case, in accordance with any applicable
securities laws of any State of the United States or any other applicable
jurisdiction. We understand that the registrar will not be required to accept
for registration of transfer any shares of Convertible Preferred Stock, except
upon presentation of evidence satisfactory to the Company that the foregoing
restrictions on transfer have been complied with. We further understand that
the Convertible Preferred Stock purchased by us will bear a legend reflecting
the substance of this paragraph. We further agree to provide to any person
acquiring any of the Convertible Preferred Stock from us a notice advising such
person that resales of the Convertible Preferred Stock are restricted as stated
herein.
We acknowledge that you, the Company and others will rely upon our
confirmations, acknowledgements and agreements set forth herein, and we agree
to notify you promptly in writing if any of our representations or warranties
herein ceases to be accurate and complete.
2
<PAGE> 77
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK.
Very truly yours,
-------------------------------
(Name of Transferee)
By:
---------------------------
Name:
Title:
Address:
3
<PAGE> 78
EXHIBIT E
FORM OF CERTIFICATE TO BE DELIVERED IN
CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
__________, ____
ChaseMellon Shareholder Services, L.L.C.
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed sale of certain 7 1/4% Junior Convertible
Preferred Stock Due 2007 (the "Convertible Preferred Stock") of IXC
Communications, Inc., a Delaware corporation ("the "Company"), we represent
that:
(i) the offer of the Convertible Preferred Stock was not made to a person
in the United States;
(ii) at the time the buy order was originated, the transferee was outside
the United States or we and any person acting on our behalf reasonably
believed that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S under the Securities Act of 1933 (the "Securities Act"), as
applicable; and
(iv) the transaction is not part of a plan or scheme by us to evade the
registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and you are
irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with
<PAGE> 79
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
----------------------------------
(Name of Transferor)
By:
-------------------------------
Name:
Title:
Address:
2
<PAGE> 80
IXC COMMUNICATIONS, INC.
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
AND OTHER SPECIAL RIGHTS OF 12 1/2% JUNIOR
EXCHANGEABLE PREFERRED STOCK DUE 2009 AND 12 1/2% SERIES B
JUNIOR EXCHANGEABLE PREFERRED STOCK DUE 2009 AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
IXC Communications, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, does hereby certify that (i) pursuant to authority conferred upon the
board of directors of the Company (the "Board of Directors") by its Restated
Certificate of Incorporation (hereinafter referred to as the "Restated
Certificate of Incorporation"), and pursuant to the provisions of Sections
141(c)(2) and 151 of the General Corporation Law of the State of Delaware, said
Board of Directors is authorized to issue Preferred Stock of the Company in one
or more series and has authorized a committee of the Board of Directors (the
"Placement Committee") to adopt the resolution set forth below and (ii) the
Placement Committee duly approved and adopted the following resolution on August
14, 1997 (the "Resolution"):
RESOLVED that, pursuant to the authority vested in the Board
of Directors by its Restated Certificate of Incorporation, and the
authority vested by such Board of Directors in a committee of the Board
(the "Placement Committee"), all the members of which are members of
such Board, the Placement Committee does hereby create, authorize and
provide for the issuance of 12 1/2% Junior Exchangeable Preferred Stock
Due 2009, par value $0.01 per share, with a stated value of $1000 per
share, initially consisting of up to 450,000 shares and 12 1/2% Series
B Junior Exchangeable Preferred Stock Due 2009, par value $0.01 per
share, with a stated value of $1,000
<PAGE> 81
2
per share, initially consisting of up to 450,000 shares (collectively,
the "Exchangeable Preferred Stock") having the designation,
preferences, relative, participating, optional and other special rights
and the qualifications, limitations and restrictions thereof that are
set forth in the Restated Certificate of Incorporation and in this
Resolution as follows:
(a) Designation. There is hereby created out of the authorized
and unissued shares of Preferred Stock of the Company (i) a series of Preferred
Stock designated as the "12 1/2% Junior Exchangeable Preferred Stock Due 2009"
(the "Initial Exchangeable Preferred Stock") and (ii) a series of Preferred
Stock designated as the "12 1/2% Series B Junior Exchangeable Preferred Stock
Due 2009" (the "Series B Stock"). The number of shares constituting the Initial
Exchangeable Preferred Stock shall be 450,000, and the number of shares
constituting the Series B Stock shall be 450,000. The Initial Exchangeable
Preferred Stock and the Series B Stock are referred to as the Exchangeable
Preferred Stock. The liquidation preference of the Exchangeable Preferred Stock
shall be $1000 per share (the "Liquidation Preference").
(b) Rank. The Exchangeable Preferred Stock will, with respect
to dividend rights and rights on liquidation, winding-up and dissolution, rank
(i) senior to all classes of common stock and to each other class of Capital
Stock or series of Preferred Stock established hereafter by the Board of
Directors of the Company, the terms of which do not expressly provide that it
ranks senior to, or on a parity with, the Exchangeable Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company (collectively referred to, together with all classes of common stock of
the Company, as "Junior Stock"); (ii) on a parity with each share of Convertible
Preferred Stock now or hereafter outstanding and on a parity with each other
class of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors of the
<PAGE> 82
3
Company, the terms of which expressly provide that such class or series will
rank on a parity with the Exchangeable Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Stock"); and (iii) junior to each share of Series 3 Preferred Stock now
or hereafter outstanding and junior to each class of Capital Stock or series of
Preferred Stock established hereafter by the Board of Directors of the Company,
the terms of which hereafter established classes or series expressly provide
that such class or series will rank senior to the Exchangeable Preferred Stock
as to dividend rights or rights on liquidation, winding-up and dissolution of
the Company (collectively referred to as "Senior Stock"). All claims of the
holders of the Exchangeable Preferred Stock, including claims with respect to
dividend payments, redemption payments, mandatory repurchase payments or rights
upon liquidation, winding-up or dissolution, shall rank junior to the claims of
the holders of any debt of the Company and all other creditors of the Company.
(c) Dividends. (i) Holders of the outstanding shares of
Exchangeable Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, cumulative preferential dividends on each share of the
Exchangeable Preferred Stock at a rate per annum equal to 12 1/2% of the
Liquidation Preference of such share payable quarterly (each such quarterly
period being herein called a "Dividend Period"). In addition to the dividends
described in the preceding sentence, holders of outstanding shares of
Exchangeable Preferred Stock will be entitled to additional dividends (the
"Additional Dividends"), when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, with respect to the shares
of Exchangeable Preferred Stock, which Additional Dividends shall accrue as
follows if any of the following events occur (each such event in clauses (A),
(B) and (C) below being herein called a "Registration Default"): (A) if by
October 6, 1997, neither the Exchange Offer Registration Statement nor the Shelf
Registration Statement has been filed with the SEC; (B) if by January 19, 1998,
neither the Registered Exchange Offer is consummated nor the Shelf
<PAGE> 83
4
Registration Statement declared effective by the SEC; or (C) if after January
19, 1998 and after either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration Statement
thereafter ceases to be effective (in each case except as permitted below) in
connection with resales of Exchangeable Preferred Stock in accordance with and
during the periods specified herein.
Additional Dividends shall accrue on the shares of
Exchangeable Preferred Stock from and including the date on which any such
Registration Default shall occur, to but excluding the date on which all such
Registration Defaults have been cured, at a rate of .50% per annum.
A Registration Default referred to in clause (C) of paragraph
(c)(i) shall be deemed not to have occurred and be continuing in relation to a
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to the Registration Statement to incorporate annual audited financial
information with respect to the Company where such post-effective amendment is
not yet effective and needs to be declared effective to permit Holders to use
the related prospectus or (y) other material events with respect to the Company
that would need to be described in the Registration Statement or the related
prospectus and (ii) in the case of clause (y), the Company proceeds promptly and
in good faith to amend or supplement the Registration Statement and related
prospectus to describe such events unless the Company has determined in good
faith that there are material legal or commercial impediments in doing so;
provided, however, that in any case if such Registration Default occurs for a
continuous period in excess of 45 days, Additional Dividends shall be payable in
accordance with the immediately preceding paragraphs of this paragraph (c)(i)
from the day such Registration Default initially occurs until such Registration
Default is cured.
Any amounts of Additional Dividends due pursuant to clauses
(A), (B) or (C) of this paragraph (c)(i) or pursuant to the proviso contained in
the preceding sentence will be payable on the regular dividend payment dates
with
<PAGE> 84
5
respect to the Exchangeable Preferred Stock and on the same terms and
conditions and subject to the same limitations as pertain at such time for the
payment of regular dividends. The amount of Additional Dividends will be
determined by multiplying the applicable Additional Dividends rate by the
aggregate liquidation preference of the outstanding shares of Exchangeable
Preferred Stock, multiplied by a fraction, the numerator of which is the number
of days such Additional Dividend rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
All dividends on the Exchangeable Preferred Stock, including
Additional Dividends, to the extent accrued, shall be cumulative, whether or not
earned or declared, on a daily basis from the Issue Date or, in the case of
additional shares of Exchangeable Preferred Stock issued in payment of a
dividend, from the date of issuance of such additional shares of Exchangeable
Preferred Stock, and shall be payable quarterly in arrears on each February 15,
May 15, August 15 and November 15 (each, a "Dividend Payment Date"), commencing
on November 15, 1997, to holders of record on the February 1, May 1, August 1
and November 1 immediately preceding the relevant Dividend Payment Date. Any
dividend on the Exchangeable Preferred Stock payable pursuant to this paragraph
(c)(i) on or prior to February 15, 2001 shall be, at the option of the Company,
payable (1) in cash or (2) through the issuance of a number of additional shares
(including fractional shares) of Exchangeable Preferred Stock (the "Additional
Shares") equal to the dividend amount divided by the Liquidation Preference of
such Additional Shares. With respect to dividends accrued after February 15,
2001, all dividends shall be payable in cash.
Any dividend accruing after February 15, 2001 that is not paid
in cash on the relevant Dividend Payment Date shall accrue interest at a rate
per annum equal to the then applicable dividend rate per annum from such
Dividend Payment Date to the date of payment of such dividend. Such interest, if
any, shall be payable in cash on each Dividend Payment Date. Any accrued
interest not paid on a Dividend Payment Date shall accrue interest on such
interest pursuant to this paragraph. Any references herein to the payment of
<PAGE> 85
6
accrued and unpaid dividends shall be deemed to include any such interest.
(ii) In the event the Company notifies the holders of
Exchangeable Preferred Stock of its election not to make a Change of Control
Offer (as defined in paragraph (h)(i)) pursuant to paragraph (h)(iii), then,
within 60 days of the occurrence of the applicable Change of Control, holders of
a majority of the outstanding shares of the Exchangeable Preferred Stock will
designate an Independent Financial Advisor to determine, within 20 days of such
designation, in the opinion of such firm, the appropriate dividend rate that the
Exchangeable Preferred Stock should bear so that, after such reset, the
Exchangeable Preferred Stock would have a market value of 101% of the
Liquidation Preference; provided, however, that no such reset shall be required
to be made if such Independent Financial Advisor determines that the
Exchangeable Preferred Stock has a market value of 101% or greater. If within 5
days of the designation of an Independent Financial Advisor by the Holders, the
Company determines that such Independent Financial Advisor is reasonably
unacceptable to the Company, the Company shall designate a second Independent
Financial Advisor to determine, within 15 days of such designation, in its
opinion, such an appropriate reset dividend rate for the Exchangeable Preferred
Stock. In the event that the two Independent Financial Advisors cannot agree,
within 25 days of the designation of an Independent Financial Advisor by the
Holders of a majority of the outstanding shares of the Exchangeable Preferred
Stock, on the appropriate reset dividend rate, the two Independent Financial
Advisors shall, within 10 days of such 25th day, designate a third Independent
Financial Advisor, which, within 15 days of designation, will determine, in its
opinion, an appropriate reset dividend rate which is between the two rates
selected by the first two Independent Financial Advisors. Upon the determination
of the reset rate, the Exchangeable Preferred Stock shall accrue and accumulate
dividends at the reset rate as of the date of occurrence of the Change of
Control; provided, however, that the reset rate shall in no event be less than
12 1/2% per annum or greater than 15% per annum. The reasonable fees and
expenses including reasonable fees and expenses of legal counsel, if any, and
customary
<PAGE> 86
7
indemnification of each of the three above-referenced Independent Financial
Advisors, shall be borne by the Company.
(iii) All dividends paid with respect to shares of the
Exchangeable Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata
to the holders entitled thereto.
(iv) No dividend may be declared or paid or set apart for the
payment of dividends by the Company on any Parity Stock for any period unless
full cumulative dividends in respect of each Dividend Period ending on or before
such period shall have been or contemporaneously are declared and paid (or are
deemed declared and paid) in full or declared and, if payable in cash, a sum in
cash sufficient for such payment set apart for such payment on the Exchangeable
Preferred Stock. If full dividends are not so paid, the Exchangeable Preferred
Stock will share dividends pro rata with the Parity Stock.
(v) The Company will not (A) declare, pay or set apart funds
for the payment of any dividend or other distribution with respect to any Junior
Stock or (B) redeem, purchase or otherwise acquire for consideration any Junior
Stock through a sinking fund or otherwise, unless (1) all accrued and unpaid
dividends with respect to the Exchangeable Preferred Stock and any Parity Stock
at the time such dividends are payable have been paid or funds have been set
apart for payment of such dividends and (2) sufficient funds have been paid or
set apart for the payment of the dividend for the current dividend period with
respect to the Exchangeable Preferred Stock and any Parity Stock. As used
herein, the term "dividend" does not include dividends payable solely in shares
of Junior Stock on Junior Stock or in options, warrants or rights to holders of
Junior Stock to subscribe or purchase any Junior Stock.
(vi) Dividends on account of arrears for any past Dividend
Period and dividends in connection with any optional redemption may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
holders of record on such date, not more than 45 days prior
<PAGE> 87
8
to the payment thereof, as may be fixed by the Board of Directors of the
Company.
(vii) Dividends payable on the Exchangeable Preferred Stock
for any period other than a Dividend Period shall be computed on the basis of a
360-day consisting year of twelve 30-day months and the actual number of days
elapsed in the period for which payable. Dividends payable on the Exchangeable
Preferred Stock for a full Dividend Period will be computed by dividing the per
annum dividend rate by four.
(d) Liquidation Preference. (i) Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Company, holders of
Exchangeable Preferred Stock will be entitled to be paid, out of the assets of
the Company available for distribution to its stockholders, the Liquidation
Preference of the outstanding shares of Exchangeable Preferred Stock, plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends (whether or not earned or declared and including Additional Dividends,
if any,) thereon to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or
winding-up that would have been payable had the Exchangeable Preferred Stock
been the subject of an Optional Redemption on such date) before any distribution
is made on any Junior Stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Exchangeable Preferred Stock and all Parity Stock are not paid in full, the
Exchangeable Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective amounts that would be payable on such shares of
Exchangeable Preferred Stock and the Parity Stock, respectively, if all amounts
payable thereon had been paid in full) in any distribution of assets of the
Company to which each is entitled. After payment of the full amount of the
Liquidation Preference of the outstanding shares of Exchangeable Preferred Stock
(and, if applicable, an amount equal to a prorated dividend), the holders of
shares of Exchangeable Preferred Stock will not be entitled to any
<PAGE> 88
9
further participation in any distribution of assets of the Company.
(ii) For the purposes of this paragraph (d), neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
other entities shall be deemed to be a liquidation, dissolution or winding-up of
the Company.
(e) Redemption. (i) Optional Redemption. (A) Except as set
forth in clause (B) below, the Exchangeable Preferred Stock shall not be
redeemable at the option of the Company prior to August 15, 2002. On or after
August 15, 2002, each share of the Exchangeable Preferred Stock may be redeemed
(subject to the legal availability of funds therefor) at any time, in whole or
in part, at the option of the Company, at the redemption prices (expressed as a
percentage of the Liquidation Preference of such share) set forth below, plus,
without duplication, an amount in cash equal to all accrued and unpaid dividends
to the date fixed for redemption (the "Optional Redemption Date") (including an
amount in cash equal to a prorated dividend for the period from the Dividend
Payment Date immediately prior to the Optional Redemption Date) (the "Optional
Redemption Price"), if redeemed during the 12-month period beginning August 15
of each of the years set forth below:
<TABLE>
<CAPTION>
Year in which redemption
occurs Percentage
------ ----------
<S> <C>
2002.................................. 106.250%
2003.................................. 105.000
2004.................................. 103.750
2005.................................. 102.500
2006.................................. 101.250
2007 and thereafter................... 100.000
</TABLE>
(B) At any time and from time to time prior to August 15,
2000, the Company may redeem in the aggregate up to 35% of the outstanding
shares of Exchangeable Preferred
<PAGE> 89
10
Stock with the proceeds of one or more Public Equity Offerings at a redemption
price (expressed as a percentage of the Liquidation Preference thereof) of
112.500% plus accrued and unpaid dividends, if any, to the redemption date
(including an amount in cash equal to a prorated dividend for any partial
dividend period); provided, however, that at least $195 million aggregate
Liquidation Preference of the Exchangeable Preferred Stock remains outstanding
after each such redemption.
(C) In the event of a redemption of only a portion of the then
outstanding shares of Exchangeable Preferred Stock, the Company shall effect
such redemption on a pro rata basis, except that the Company may redeem all of
the shares held by holders of fewer than 100 shares (or all of the shares held
by holders who would hold less than 100 shares as a result of such redemption),
as may be determined by the Company.
(ii) Mandatory Redemption. Each share of the Exchangeable
Preferred Stock (if not earlier redeemed or converted) shall be subject to
mandatory redemption in whole (to the extent of lawfully available funds
therefor) on August 15, 2009 (the "Mandatory Redemption Date") at a price equal
to 100% of the Liquidation Preference of such share, plus, without duplication,
all accrued and unpaid dividends thereon (including an amount equal to a
prorated dividend thereon from the immediately preceding Dividend Payment Date
to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the
"Mandatory Redemption Price").
(iii) Procedure for Redemption. (A) On and after the Optional
Redemption Date or the Mandatory Redemption Date, as the case may be (the
"Redemption Date"), unless the Company defaults in the payment of the applicable
redemption price, dividends will cease to accumulate on shares of Exchangeable
Preferred Stock called for redemption and all rights of holders of such shares
will terminate except for the right to receive the Optional Redemption Price or
the Mandatory Redemption Price, as the case may be, without interest; provided,
however, that if a notice of redemption shall have been given as provided in
subparagraph (iii)(B) and the funds necessary for redemption (including an
amount
<PAGE> 90
11
in respect of all dividends that will accrue to the Redemption Date) shall have
been segregated and irrevocably set apart by the Company, in trust for the
benefit of the holders of the shares called for redemption, then dividends shall
cease to accumulate on the Redemption Date on the shares to be redeemed and, at
the close of business on the day on which such funds are segregated and set
apart, the holders of the shares to be redeemed shall, with respect to the
shares to be redeemed, cease to be stockholders of the Company and shall be
entitled only to receive the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be, for such shares without interest from the
Redemption Date.
(B) With respect to a redemption pursuant to paragraph (e)(i)
or (e)(ii), the Company will send a written notice of redemption by first class
mail to each holder of record of shares of Exchangeable Preferred Stock, not
fewer than 30 days nor more than 60 days prior to the Redemption Date at its
registered address (the "Redemption Notice"); provided, however, that no failure
to give such notice nor any deficiency therein shall affect the validity of the
procedure for the redemption of any shares of Exchangeable Preferred Stock to be
redeemed except as to the holder or holders to whom the Company has failed to
give said notice or except as to the holder or holders whose notice was
defective. The Redemption Notice shall state:
(1) whether the redemption is pursuant to
paragraph (e)(i) or (e)(ii) hereof;
(2) the Optional Redemption Price or the Mandatory
Redemption Price, as the case may be;
(3) whether all or less than all the outstanding shares of the
Exchangeable Preferred Stock are to be redeemed and the total number of
shares of the Exchangeable Preferred Stock being redeemed;
(4) the Redemption Date;
(5) that the holder is to surrender to the Company, in the
manner, at the place or places and at
<PAGE> 91
12
the price designated, his certificate or certificates representing the
shares of Exchangeable Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Exchangeable Preferred
Stock to be redeemed shall cease to accumulate on such Redemption Date
unless the Company defaults in the payment of the Optional Redemption
Price or the Mandatory Redemption Price, as
the case may be.
(C) Each holder of Exchangeable Preferred Stock shall
surrender the certificate or certificates representing such shares of
Exchangeable Preferred Stock to the Company, duly endorsed (or otherwise in
proper form for transfer, as determined by the Company), in the manner and at
the place designated in the Redemption Notice, and on the Redemption Date the
full Optional Redemption Price or Mandatory Redemption Price, as the case may
be, for such shares shall be payable in cash to the person whose name appears on
such certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(f) Voting Rights. (i) The holders of Exchangeable Preferred
Stock, except as otherwise required under Delaware law or as set forth in
paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter
required or permitted to be voted upon by the stockholders of the Company.
(ii) (A) If (1) dividends on the Exchangeable Preferred Stock
are in arrears and unpaid for six or more Dividend Periods (whether or not
consecutive) (a "Dividend Default"); (2) the Company fails to redeem the
Exchangeable Preferred Stock on August 15, 2009, or fails to otherwise discharge
any redemption obligation with respect to the Exchangeable Preferred Stock; (3)
a breach or violation of any of the provisions set forth under paragraph (l)
(Certain Additional Provisions) occurs and the breach or violation continues for
a period of 30 days or more after the Company
<PAGE> 92
13
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Exchangeable Preferred Stock then outstanding; or (4) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Indebtedness of the Company or any
Significant Subsidiary (other than any Permitted PSINet Non-Recourse Debt) or
the final maturity of any such Indebtedness is accelerated because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $5
million, then the number of directors constituting the Board of Directors of the
Company will, subject to paragraph (f)(ii)(E), be increased by two and the
Holders of the then outstanding shares of Exchangeable Preferred Stock (together
with the holders of Parity Stock upon which like rights have been conferred and
are exercisable), voting separately and as a class, shall have the right and
power to elect such two additional directors. Each such event described in
clauses (1),(2),(3) or (4) above is a "Voting Rights Triggering Event".
(B) The voting rights set forth in paragraph (f)(ii)(A) above
will continue until such time as (x) in the case of a Dividend Default, all
dividends in arrears on the Exchangeable Preferred Stock are paid in full in
cash or (y) in all other cases, any failure, breach or default giving rise to
such Voting Rights Triggering Event is remedied or waived by the Holders of at
least a majority of the outstanding shares of Exchangeable Preferred Stock then
outstanding, at which time the term of any directors elected pursuant to the
provisions of paragraph (f)(ii)(A) above (subject to the right of holders of any
other preferred stock to elect directors) shall terminate forthwith and the
number of directors constituting the Board of Directors shall be decreased by
two (until the occurrence of any subsequent Voting Rights Triggering Event). At
any time after voting power to elect directors shall have become vested and be
continuing in the holders of Exchangeable Preferred Stock (together with the
holders of Parity Stock upon which like rights have been conferred and are
exercisable) pursuant to paragraph (f)(ii)(A) hereof, or if vacancies shall
exist in the offices of directors elected by such holders, a proper officer of
the Company may, and upon the written request of the holders of record of at
least 25%
<PAGE> 93
14
of the shares of Exchangeable Preferred Stock then outstanding or the holders of
25% of the shares of Parity Stock then outstanding upon which like rights have
been confirmed and are exercisable addressed to the secretary of the Company
shall, call a special meeting of the Holders of Exchangeable Preferred Stock and
the holders of such Parity Stock for the purpose of electing the directors which
such holders are entitled to elect pursuant to the terms hereof; provided,
however, that no such special meeting shall be called if the next annual meeting
of stockholders of the Company is to be held within 60 days after the voting
power to elect directors shall have become vested, in which case such meeting
shall be deemed to have been called for such next annual meeting. If such
meeting shall not be called by a proper officer of the Company within 20 days
after personal service to the secretary of the Company at its principal
executive offices, then the Holders of record of at least 25% of the outstanding
shares of Exchangeable Preferred Stock or the holders of 25% of the shares of
Parity Stock upon which like rights have been confirmed and are exercisable may
designate in writing one of their members to call such meeting at the expense of
the Company, and such meeting may be called by the person so designated upon the
notice required for the annual meetings of stockholders of the Company and shall
be held at the place for holding the annual meetings of stockholders. Any holder
of Exchangeable Preferred Stock or such Parity Stock so designated shall have,
and the Company shall provide, access to the lists of holders of Exchangeable
Preferred Stock and the holders of such Parity Stock to be called pursuant to
the provisions hereof. If no special meeting of the Holders of Exchangeable
Preferred Stock and the holders of such Parity Stock is called as provided in
this paragraph (f)(ii), then such meeting shall be deemed to have been called
for the next annual meeting of stockholders of the Company or special meeting of
the holders of any other capital stock of the Company.
(C) At any meeting held for the purposes of electing directors
at which the Holders of Exchangeable Preferred Stock (together with the holders
of Parity Stock upon which like rights have been conferred and are exercisable)
shall have the right, voting together as a
<PAGE> 94
15
separate class, to elect directors as aforesaid, the presence in person or by
proxy of the holders of at least a majority in voting power of the outstanding
shares of Exchangeable Preferred Stock (and such Parity Stock) shall be required
to constitute a quorum thereof.
(D) Any vacancy occurring in the office of a director elected
by the Holders of Exchangeable Preferred Stock (and such Parity Stock) may be
filled by the remaining director elected by the Holders of Exchangeable
Preferred Stock (and such Parity Stock) unless and until such vacancy shall be
filled by the Holders of Exchangeable Preferred Stock (and such Parity Stock).
(E) In the event that an event occurs at any time which
results in the holders of any Parity Stock having voting rights to elect
directors to the Board of Directors, holders of Exchangeable Preferred Stock
shall, whether or not such event otherwise constitutes a Voting Rights
Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set
forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed
(for purposes of this paragraph (f) only) to constitute a Voting Rights
Triggering Event. In addition, in the event that during a time in which
directors elected by the holders of Exchangeable Preferred Stock pursuant to
this paragraph (f)(ii) are serving on the Board of Directors ("Previously-
Elected Directors") an event occurs which results in holders of Parity Stock
having voting rights to elect (voting together with the holders of Exchangeable
Preferred Stock) at least two directors to the Board of Directors, the holders
of Exchangeable Preferred Stock shall vote together with the holders of such
Parity Stock to elect such new directors, and upon the election of the new
directors the Previously-Elected Directors shall (unless such Previously-
Elected Directors are elected as new directors) cease to serve on the Board of
Directors.
(iii) (A) So long as any shares of the Exchangeable Preferred
Stock are outstanding, the Company will not authorize, create or increase the
authorized amount of any class or series of Senior Stock without the affirmative
vote or consent of holders of at least
<PAGE> 95
16
two-thirds of the shares of Exchangeable Preferred Stock then outstanding,
voting or consenting, as the case may be, as one class, given in person or by
proxy, either in writing or by resolution adopted at an annual or special
meeting (except that no such vote or consent shall be required for the issuance
of additional shares of Series 3 Preferred Stock to be paid as dividends on such
Series 3 Preferred Stock pursuant to the terms of such Series 3 Preferred
Stock).
(B) So long as any shares of the Exchangeable Preferred Stock
are outstanding, the Company will not amend this Certificate of Designation so
as to affect adversely the specified rights, preferences, privileges or voting
rights of Holders of shares of Exchangeable Preferred Stock or to authorize the
issuance of any additional shares of Exchangeable Preferred Stock (except to
authorize the issuance of additional shares of Exchangeable Preferred Stock to
be paid as dividends on the Exchangeable Preferred Stock, for which no consent
shall be necessary) without the affirmative vote or consent of Holders of at
least a majority of the issued and outstanding shares of Exchangeable Preferred
Stock, voting or consenting, as the case may be, as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting.
(C) Except as set forth in paragraph (f)(iii)(A) or (B) above,
(x) the creation, authorization or issuance of any shares of any Junior Stock,
Parity Stock or Senior Stock, including the designation of a series of
Exchangeable Preferred Stock, or (y) the increase or decrease in the amount of
authorized Capital Stock of any class, including Preferred Stock, shall not
require the consent of Holders of Exchangeable Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges or voting rights
of shares of Exchangeable Preferred Stock.
(D) Prior to the exchange of Exchangeable Preferred Stock for
Exchange Debentures, the Company shall not amend or modify the Exchange
Indenture (except as expressly provided therein in respect of amendments without
the consent of holders of Exchange Debentures) without
<PAGE> 96
17
the affirmative vote or consent of holders of at least a majority of the shares
of Exchangeable Preferred Stock then outstanding, voting or consenting, as the
case may be, as one class, given in person or by proxy, either in writing or by
resolution adopted at an annual or special meeting.
(iv) In any case in which the Holders of Exchangeable
Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or
pursuant to Delaware law, each Holder of Exchangeable Preferred Stock entitled
to vote with respect to such matters shall be entitled to one vote for each
share of Exchangeable Preferred Stock held.
(g) Exchange. (i) Exchange for Debentures. (A) The Company
may, at its option, on any scheduled Dividend Payment Date, exchange the
Exchangeable Preferred Stock, in whole but not in part, for the Exchange
Debentures; provided however, that (1) on the date of such exchange there are no
accumulated and unpaid dividends on the Exchangeable Preferred Stock (including
the dividends payable on such date) or other contractual impediment to such
exchange; (2) there shall be funds legally available sufficient therefor; (3)
immediately after giving effect to such exchange, no Default (as defined in the
Exchange Indenture) shall have occurred and be continuing, and (iv) the Company
shall have delivered to the Trustee under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Exchange
Debentures.
(B) Upon any exchange pursuant to this paragraph (g)(i),
holders of outstanding shares of Exchangeable Preferred Stock will be entitled
to receive $1.00 principal amount of Exchange Debentures for each $1.00 of
liquidation preference of Exchangeable Preferred Stock held by them. Exchange
Debentures issued in exchange for Exchangeable Preferred Stock will be issued in
principal amounts of $1,000 and integral multiples thereof to the extent
possible, and will also be issued in principal amounts less than $1,000 so that
each holder of Exchangeable Preferred Stock will receive certificates
representing the entire amount of Exchange Debentures to which such holder's
shares of Exchangeable Preferred Stock entitle such holder;
<PAGE> 97
18
provided, however, that the Company may pay cash in lieu of issuing an Exchange
Debenture in a principal amount less than $1,000.
(ii) Procedures. (A) The Company will send a written notice of
exchange (the "Exchange Notice") by mail to each holder of record of shares of
Exchangeable Preferred Stock not fewer than 30 days nor more than 60 days before
the date fixed for such exchange (the "Exchange Date"); provided, however, that
no failure to give such notice nor any deficiency therein shall affect the
validity of the procedure for the exchange of any shares of Exchangeable
Preferred Stock to be exchanged except as to the holder or holders to whom the
Company has failed to give said notice or except as to the holder or holders
whose notice was defective. The Exchange Notice shall state:
(1) the Exchange Date;
(2) that the holder is to surrender to the Company, in the
manner and at the place or places designated, his certificate or
certificates representing the shares of Exchangeable Preferred Stock to
be exchanged;
(3) that dividends on the shares of Exchangeable Preferred
Stock to be exchanged shall cease to accrue on such Exchange Date
whether or not certificates for shares of Exchangeable Preferred Stock
are surrendered for exchange on such Exchange Date unless the Company
shall default in the delivery of Exchange Debentures; and
(4) that interest on the Exchange Debentures shall accrue from
the Exchange Date whether or not certificates for shares of
Exchangeable Preferred Stock are surrendered for exchange on such
Exchange Date.
(B) On and after the Exchange Date, dividends will cease to
accrue on the outstanding shares of Exchangeable Preferred Stock, and all rights
of the holders of Exchangeable Preferred Stock (except the right to receive
Exchange Debentures, an amount in cash, to the extent
<PAGE> 98
19
applicable, equal to the accumulated and unpaid dividends to the Exchange Date
and, if the Company so elects, cash in lieu of any Exchange Debenture that is in
a principal amount that is not an integral multiple of $1,000) will terminate.
The person entitled to receive the Exchange Debentures issuable upon such
exchange will be treated for all purposes as the registered holder of such
Exchange Debentures.
(C) On or before the Exchange Date, each holder of
Exchangeable Preferred Stock shall surrender the certificate or certificates
representing such shares of Exchangeable Preferred Stock, in the manner and at
the place designated in the Exchange Notice. The Company shall cause the
Exchange Debentures to be executed on the Exchange Date and, upon surrender in
accordance with the Exchange Notice of the certificates for any shares of
Exchangeable Preferred Stock so exchanged, duly endorsed (or otherwise in proper
form for transfer, as determined by the Company), such shares shall be exchanged
by the Company into Exchange Debentures. The Company shall pay interest on the
Exchange Debentures at the rate and on the dates specified therein from the
Exchange Date.
(iii) No Exchange in Certain Cases. Notwithstanding the
foregoing provisions of this paragraph (g), the Company shall not be entitled to
exchange the Exchangeable Preferred Stock for Exchange Debentures if such
exchange, or any term or provision of the Exchange Indenture or the Exchange
Debentures, or the performance of the Company's obligations under the Exchange
Indenture or the Exchange Debentures, shall materially violate or conflict with
any applicable law or agreement or instrument then binding on the Company or if,
at the time of such exchange, the Company is insolvent or if it would be
rendered insolvent by such exchange.
(iv) Exchange of Initial Exchangeable Preferred Stock for
Series B Stock. The Series B Stock will be issued by the Company only in
connection with an exchange offer, on a share for share basis, for the Initial
Exchangeable Preferred Stock as required pursuant to the Registration Rights
Agreement. Each share of Series B Stock issued in exchange for a share of
Initial Exchangeable Preferred Stock
<PAGE> 99
20
will be deemed to have the same liquidation preference and accrued and unpaid
dividends as the share of Initial Exchangeable Preferred Stock so exchanged.
(h) Change of Control. (i) Upon the occurrence of a Change of
Control (the date of such occurrence being the "Change of Control Date"), the
Company shall either (1) offer to purchase each holder's Exchangeable Preferred
Stock in cash pursuant to the offer described in paragraph (h)(iii) (the "Change
of Control Offer") at a purchase price equal to 101% of the Liquidation
Preference thereof, plus, without duplication, all accrued and unpaid dividends,
if any, to the Change of Control Payment Date, including an amount in cash equal
to a prorated dividend for the period from the Dividend Payment Date immediately
prior to the Change of Control Payment Date to the Change of Control Payment
Date or (2) notify each holder of the Company's election not to make an offer as
described in clause (1) above, in which case the dividend rate on the
Exchangeable Preferred Stock shall be subject to reset pursuant to paragraph
(c)(ii).
(ii) Prior to the mailing of the notice referred to in
paragraph (h)(iii), but in any event within 30 days following the date on which
the Company knows or reasonably should have known that a Change in Control has
occurred, the Company covenants that it shall promptly determine if the purchase
of the Exchangeable Preferred Stock would violate or constitute a default under
the indebtedness of the Company.
(iii) Within 30 days following the date on which the Company
knows or reasonably should have known that a Change in Control has occurred, the
Company must send, by first-class mail, postage prepaid, a notice to each holder
of Exchangeable Preferred Stock. Such notice shall state whether the Company has
elected to make an offer to purchase shares of Exchangeable Preferred Stock and
if it has so elected, such notice shall contain all instructions and materials
necessary to enable such holders to tender Exchangeable Preferred Stock pursuant
to the Change of
<PAGE> 100
21
Control Offer. If the Company has elected to make a Change of Control Offer,
such notice shall state:
(A) that a Change of Control has occurred, that a Change of
Control Offer is being made pursuant to this paragraph (h) and that all
Exchangeable Preferred Stock validly tendered and not withdrawn will be
accepted for payment;
(B) the purchase price (including the amount of accrued
dividends, if any) and the purchase date (which must be no earlier than
30 days nor later than 60 days from the date such notice is mailed,
other than as may be required by law) (the "Change of Control Payment
Date");
(C) that any shares of Exchangeable Preferred Stock not
tendered will continue to accrue dividends;
(D) that, unless the Company defaults in making payment
therefor, any share of Exchangeable Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to accrue
dividends after the Change of Control Payment Date;
(E) that holders electing to have any shares of Exchangeable
Preferred Stock purchased pursuant to a Change of Control Offer will be
required to surrender stock certificates representing such shares of
Exchangeable Preferred Stock, properly endorsed for transfer, together
with such other customary documents as the Company and the Transfer
Agent may reasonably request to the Transfer Agent and registrar for
the Exchangeable Preferred Stock at the address specified in the notice
prior to the close of business on the Business Day prior to the Change
of Control Payment Date;
(F) that holders will be entitled to withdraw their election
if the Company receives, not later than five Business Days prior to the
Change of Control Payment Date, a telegram, a telex, facsimile
transmission or letter setting forth the name of the
<PAGE> 101
22
holder, the number of shares of Exchangeable Preferred Stock the holder
delivered for purchase and a statement that such holder is withdrawing
his election to have such shares of Exchangeable Preferred Stock
purchased;
(G) that holders whose shares of Exchangeable Preferred Stock
are purchased only in part will be issued a new certificate
representing the unpurchased shares of Exchangeable Preferred Stock;
and
(H) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to such Change
of Control).
If the Company elects not to make a Change of Control Offer,
such notice shall state that the dividend rate on the Exchangeable Preferred
Stock is subject to adjustment pursuant to paragraph (c)(ii).
(iv) The Company will comply with any tender offer rules under
the Exchange Act which then may be applicable, including Rules 13e-4 and 14e-1,
in connection with any offer made by the Company to repurchase the shares of
Exchangeable Preferred Stock as a result of a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of this Certificate of Designation, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Certificate of Designation by virtue
thereof.
(v) On the Change of Control Payment Date the Company shall
(A) accept for payment the shares of Exchangeable Preferred Stock validly
tendered pursuant to the Change of Control Offer, (B) pay to the holders of
shares so accepted the purchase price therefor in cash and (C) cancel each
surrendered certificate and retire the shares represented thereby. Unless the
Company defaults in the payment for the shares of Exchangeable Preferred Stock
tendered pursuant to the Change of Control Offer, dividends will cease to accrue
with respect to the shares of
<PAGE> 102
23
Exchangeable Preferred Stock tendered and all rights of holders of such tendered
shares will terminate, except for the right to receive payment therefor, on the
Change of Control Payment Date.
(vi) To accept the Change of Control Offer, the holder of a
share of Exchangeable Preferred Stock shall deliver, on or before the 10th day
prior to the Change of Control Payment Date, written notice to the Company (or
an agent designated by the Company for such purpose) of such holder's
acceptance, together with certificates evidencing the shares of Exchangeable
Preferred Stock with respect to which the Change of Control Offer is being
accepted, duly endorsed for transfer.
(i) Conversion or Exchange. Except as otherwise provided
herein, the holders of shares of Exchangeable Preferred Stock shall not have any
rights hereunder to convert such shares into or exchange such shares for shares
of any other class or classes or of any other series of any class or classes of
Capital Stock of the Company.
(j) Reissuance of Exchangeable Preferred Stock. Shares of
Exchangeable Preferred Stock that have been issued and reacquired in any manner,
including shares purchased or redeemed or exchanged, shall not be reissued as
shares of Exchangeable Preferred Stock and shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Exchangeable Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof.
(k) Business Day. If any payment, redemption or exchange shall
be required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.
<PAGE> 103
24
(l) Certain Additional Provisions. The Company covenants and
agrees for the benefit of the Holders as follows:
(i) SEC Reports. The Company shall file with the Trustee and
provide Holders, within 15 days after it files them with the SEC, copies of its
annual report and the information, documents and other reports which the Company
is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall continue to file with the SEC and provide the Trustee and Holders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
(ii) Limitation on Indebtedness. (A) The Company shall not
Incur, and shall not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness unless, on the date of such Incurrence and after
giving pro forma effect thereto (including pro forma application of the net
proceeds therefrom) and to any other Indebtedness Incurred or repaid since the
end of the period referred to below and the receipt and application of the
proceeds thereof, either (i) the Indebtedness to Operating Cash Flow Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
Indebtedness is Incurred would have been not more than 5.0 to 1.0, or (ii) the
Company's Consolidated Capital Ratio as of the end of the most recent fiscal
quarter for which internal financial statements are available immediately
preceding the date on which such Indebtedness is Incurred is less than 2.0 to
1.0.
<PAGE> 104
25
(B) Notwithstanding the foregoing paragraph (a), the Company
and its Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to one or more Credit
Agreements; provided, however, that, after giving effect to any such
Incurrence, the aggregate principal amount of such Indebtedness then
outstanding does not exceed the greater of (A) $150,000,000 and (B) 85%
of the book value of the Accounts Receivables of the Company and its
Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a
Restricted Subsidiary; provided, however, that any subsequent issuance
or transfer of any Capital Stock which results in any Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(3) the Exchange Debentures (including Exchange Debentures
issued in lieu of cash interest payments with respect to Exchange
Debentures);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this paragraph
(l)(ii)(B));
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (l)(ii)(A) pursuant to clause (3) or (4)
of this paragraph (l)(ii)(B) or this clause (5);
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to this Certificate of
Designation.
(7) Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money
<PAGE> 105
26
obligations, in each case Incurred for the purpose of financing all or
any part of the purchase price or cost of construction or improvement
of property used in the business of the Company or such Restricted
Subsidiary;
(8) In the event that the PSINet Shares are held by the
Company or a Restricted Subsidiary, the Incurrence by the Company or
such Restricted Subsidiary of Permitted PSINet Non-Recourse Debt; and
(9) Indebtedness in an aggregate principal amount at any time
outstanding which, together with the amount of all other Indebtedness
of the Company and its Restricted Subsidiaries outstanding on the date
of such Incurrence (other than Indebtedness permitted by clauses (1)
through (8) of this paragraph (l)(ii)(B) and paragraph (l)(ii)(A)),
does not exceed 5% of Consolidated Tangible Assets.
(C) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to paragraph (l)(ii)(B) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Exchange Debentures to at least the
same extent as such Subordinated Obligations.
(D) For purposes of determining compliance with this paragraph (l)(ii),
(1) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(2) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(iii) Limitation on Restricted Payments. (A) The Company shall
not, and shall not permit any Restricted
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27
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment:
(1) a Voting Rights Triggering Event shall have occurred and
be continuing (or would result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness under paragraph (l)(ii)(A); or
(3) the aggregate amount of such Restricted Pay ment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(I) an amount equal to the Cumulative Operating Cash
Flor for the period (taken as one accounting period) from the
beginning of the first full fiscal quarter commencing after
the Issue Date to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment less 1.50
times the Company's Cumulative Consolidated Interest Expense
for such period;
(II) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Parity Stock and
Junior Stock (in each case other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of the Company and other than an issuance or
sale to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees);
(III) the amount by which Indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Parity Stock or Junior
Stock (in each case other than Disqualified
<PAGE> 107
28
Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company
upon such conversion or exchange); and
(IV) an amount equal to the sum of (x) the net
reduction in Investments in any Person resulting from
dividends, repayments of loans or advances or other transfers
of assets (but excluding such interest, dividends, repayments,
advances or other transfers of assets to the extent any such
item increases Consolidated Net Income), in each case to the
Company or any Restricted Subsidiary from any Person
(including, without limitation, from Unrestricted
Subsidiaries), and (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is designated a
Restricted Subsidiary; provided, however, that the foregoing
sum shall not exceed, in the case of any Person (including any
Unrestricted Subsidiary), the amount of Investments previously
made (and treated as a Restricted Payment) by the Company or
any Restricted Subsidiary in such Person.
(B) The provisions of paragraph (l)(iii)(A) shall not
prohibit:
(1) any Restricted Payment made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Parity
Stock or Junior Stock of the Company made by exchange for, other Parity
Stock or Junior Stock, as the case may be, of the Company (in each case
other than Disqualified Stock and other than Parity Stock or Junior
Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided,
however, that (I) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (II) the Net Cash
Proceeds from such sale shall be excluded from the
<PAGE> 108
29
calculation of amounts under paragraph (l)(iii)(A)(3)(II);
(2) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with paragraph (l)(iii); provided, however, that at the
time of payment of such dividend, no other Voting Rights Triggering
Event shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; or
(3) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including
employment agreements) or plans (or amendments thereto) approved by the
Board of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases and
other acquisitions shall not exceed $1,000,000 in any calendar year;
provided further, however, that such repurchases and other acquisitions
shall be excluded in the calculation of the amount of Restricted
Payments.
(iv) Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (A) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the
<PAGE> 109
30
Company, (B) make any loans or advances to the Company or (C) transfer any of
its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue
Date;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this paragraph (l)(iv) or
this clause (3) or contained in any amendment to an agreement referred
to in clause (1) or (2) of this paragraph (l)(iv) or this clause (3);
provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the holders of
Exchangeable Preferred Stock than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such predecessor
agreements;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
<PAGE> 110
31
(5) in the case of clause (C) above, restrictions contained in
IRU Agreements, security agreements or mortgages securing Indebtedness
or other obligations of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition; and
(7) any such encumbrance or restriction contained
in the PSINet Agreement.
(v) Limitation on Affiliate Transactions. (A) The Company
shall not, and shall not permit any Restricted Subsidiary to, enter into or
permit to exist any transaction (including the purchase, sale, lease or exchange
of any property, employee compensation arrangements or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless
(1) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (2) the Company delivers to the Transfer
Agent (I) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1,000,000 a resolution of the Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (II) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $10,000,000, other than transactions with GE Capital
Communication and Excluded PSINet Transactions, an opinion as to the fairness to
the Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing.
<PAGE> 111
32
(B) The provisions of the foregoing paragraph (l)(v)(A) shall
not prohibit (1) any Restricted Payment permitted to be paid pursuant to
paragraph (l)(iii), (2) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved by the
Board of Directors, (3) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved by the Board
of Directors, (4) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $500,000 in the aggregate
outstanding at any one time, (5) any employment or consulting arrangement or
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (6) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (7) any Affiliate Transaction
between the Company and a Restricted Subsidiary or between Restricted
Subsidiaries, (8) transactions in connection with Permitted Businesses between
the Company and GE Capital Communication, (9) transactions between the Company
or any Restricted Subsidiary specifically contemplated by the PSINet Agreement
and (10) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company. Notwithstanding the foregoing, Affiliate Transactions
shall not include any transaction involving the sale, purchase, repurchase,
redemption, transfer, exchange or other acquisition or disposition of Senior
Notes, Exchangeable Preferred Stock or Convertible Preferred Stock by or from,
or the payment of principal of, premium, if any, and interest on, or liquidation
preference of and dividend on, any Senior Notes, Exchangeable Preferred Stock or
Convertible Preferred Stock, as the case may be, to any Affiliate of the Company
or any Affiliate of a Restricted Subsidiary of the Company; provided, however,
that such transaction is offered substantially concurrently to all other holders
of Senior Notes, Exchangeable Preferred Stock or Convertible Preferred Stock, as
the case may be, on the same terms and conditions;
<PAGE> 112
33
provided further, however, that such transaction is approved by a majority of
the disinterested members of the Board of Directors, other than transactions in
connection with the payment of principal of, premium, if any, and interest on,
or liquidation preference of and dividends on, Senior Notes, Exchangeable
Preferred Stock or Convertible Preferred Stock, as the case may be, pursuant to
the provisions of the indenture or certificate of designation governing the
payment of interest and principal, dividends and liquidation preference,
optional redemption, repurchases from the proceeds of an asset disposition and
repurchases upon a change of control.
(vi) When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, all or substantially all its
assets to, any Person, unless: (1) the resulting, surviving or transferee Person
(the "Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) shall expressly assume
all the obligations of the Company under the Exchangeable Preferred Stock; (2)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (3) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (l)(ii)(A); (4)
immediately after giving effect to such transaction, the Successor Company shall
have Consolidated Net Worth in an amount that is not less than the Consolidated
Net Worth of the Company immediately prior to such transaction; and (5) the
Company shall have delivered to the Trustee an Officers' Certificate, stating
that such consolidation, merger or transfer and such assumption (if any) comply
with this Certificate of Designation.
<PAGE> 113
34
(m) Certificates. (i) Form and Dating. The Exchangeable
Preferred Stock and the Transfer Agent's certificate of authentication shall be
substantially in the form of Exhibit A, which is hereby incorporated in and
expressly made a part of this Certificate of Designation. The Exchangeable
Preferred Stock certificate may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Exchangeable Preferred Stock certificate shall
be dated the date of its authentication. The terms of the Exchangeable Preferred
Stock certificate set forth in Exhibit A are part of the terms of this
Certificate of Designation.
(A) Global Exchangeable Preferred Stock. The Exchangeable
Preferred Stock sold in reliance on Rule 144A shall be issued initially in the
form of one or more fully registered global certificates with the global
securities legend and restricted securities legend set forth in Exhibit A hereto
(the "Global Exchangeable Preferred Stock"), which shall be deposited on behalf
of the purchasers represented thereby with the Transfer Agent, at its New York
office, as custodian for DTC (or with such other custodian as DTC may direct),
and registered in the name of DTC or a nominee of DTC, duly executed by the
Company and authenticated by the Transfer Agent as hereinafter provided. Subject
to the terms hereof and to the requirements of applicable law, the number of
shares of Exchangeable Preferred Stock represented by Global Exchangeable
Preferred Stock may from time to time be increased or decreased by adjustments
made on the records of the Transfer Agent and DTC or its nominee as hereinafter
provided.
(B) Book-Entry Provisions. In the event Global Exchangeable
Preferred Stock is deposited with or on behalf of DTC, the Company shall execute
and the Transfer Agent shall authenticate and deliver initially one or more
Global Exchangeable Preferred Stock certificates that (a) shall be registered in
the name of DTC for such Global Exchangeable Preferred Stock or the nominee of
DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's
<PAGE> 114
35
instructions or held by the Transfer Agent as custodian for DTC.
Members of, or participants in, DTC ("Agent Members") shall
have no rights under this Certificate of Designation with respect to any Global
Exchangeable Preferred Stock held on their behalf by DTC or by the Transfer
Agent as the custodian of DTC or under such Global Exchangeable Preferred Stock,
and DTC may be treated by the Company, the Transfer Agent and any agent of the
Company or the Transfer Agent as the absolute owner of such Global Exchangeable
Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Transfer Agent or any agent of the
Company or the Transfer Agent from giving effect to any written certification,
proxy or other authorization furnished by DTC or impair, as between DTC and its
Agent Members, the operation of customary practices of DTC governing the
exercise of the rights of a holder of a beneficial interest in any Global
Exchangeable Preferred Stock.
(C) Certificated Exchangeable Preferred Stock. Exchangeable
Preferred Stock initially sold in offshore transactions pursuant to Regulation S
under the Securities Act will be issued in fully registered certificated form
("Certificated Exchangeable Preferred Stock").
Except as otherwise provided by applicable law or as provided
in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial
interests in Global Exchangeable Preferred Stock will not be entitled to receive
physical delivery of Certificated Exchangeable Preferred
Stock.
After a transfer of any Initial Exchangeable Preferred Stock
during the period of the effectiveness of a Shelf Registration Statement with
respect to such Initial Exchangeable Preferred Stock, all requirements
pertaining to legends on such Initial Exchangeable Preferred Stock will cease to
apply, the requirements requiring that any such Initial Exchangeable Preferred
Stock issued to Holders be issued in global form will cease to apply, and
Certificated Exchangeable Preferred Stock without legends will be
<PAGE> 115
36
available to the transferee of the Holder of such Initial Exchangeable Preferred
Stock upon exchange of such transferring Holder's Initial Exchangeable Preferred
Stock or directions to transfer such Holder's interest in the Global
Exchangeable Preferred Stock, as applicable. Upon the consummation of a
Registered Exchange Offer with respect to the Initial Exchangeable Preferred
Stock pursuant to which Holders of such Initial Exchangeable Preferred Stock are
offered Series B Stock in exchange for their Initial Exchangeable Preferred
Stock, all requirements that Initial Exchangeable Preferred Stock be issued in
global form will cease to apply and Certificated Exchangeable Preferred Stock
with the restricted securities legend set forth in Exhibit A hereto will be
available to Holders of such Initial Exchangeable Preferred Stock that do not
exchange their Initial Exchangeable Preferred Stock, and Series B Stock in
certificated form will be available to Holders that exchange such Initial
Exchangeable Preferred Stock in such Registered Exchange Offer.
(ii) Execution and Authentication. Two Officers shall sign the
certificates representing Exchangeable Preferred Stock for the Company by manual
or facsimile signature. The Company's seal shall be impressed, affixed,
imprinted or reproduced on the Exchangeable Preferred Stock and may be in
facsimile form.
If an Officer whose signature is on certificates representing
Exchangeable Preferred Stock no longer holds that office at the time the
Transfer Agent authenticates the Exchangeable Preferred Stock evidenced thereby,
the shares of Exchangeable Preferred Stock evidenced thereby shall be valid
nevertheless.
A certificate representing Exchangeable Preferred Stock shall
not be valid until an authorized signatory of the Transfer Agent manually signs
the certificate of authentication on the Exchangeable Preferred Stock. The
signature shall be conclusive evidence that the Exchangeable Preferred Stock has
been authenticated under this Certificate of Designation.
<PAGE> 116
37
The Transfer Agent shall authenticate and deliver: (1) 300,000
shares of Initial Exchangeable Preferred Stock for original issue and (2)
300,000 shares of Series B Stock for issue only in a Registered Exchange Offer
pursuant to the Registration Rights Agreement, in each case upon a written order
of the Company signed by two Officers or by an Officer and either an Assistant
Treasurer or an Assistant Secretary of the Company. In addition, the Transfer
Agent shall authenticate and deliver, from time to time, Additional Shares for
original issue upon order of the Company signed by two Officers or by an Officer
or either an Assistant Treasurer or Assistant Secretary of the Company. Such
orders shall specify the number of shares of Exchangeable Preferred Stock to be
authenticated and the date on which the original issue of Exchangeable Preferred
Stock is to be authenticated and whether the Exchangeable Preferred Stock is to
be Initial Exchangeable Preferred Stock or Series B Stock.
The Transfer Agent may appoint an authenticating agent
reasonably acceptable to the Company to authenticate the Exchangeable Preferred
Stock. Unless limited by the terms of such appointment, an authenticating agent
may authenticate Exchangeable Preferred Stock whenever the Transfer Agent may do
so. Each reference in this Certificate of Designation to authentication by the
Transfer Agent includes authentication by such agent. An authenticating agent
has the same rights as the Transfer Agent or agent for service of notices and
demands.
(iii) Transfer and Exchange. (A) Transfer and Exchange of
Certificated Exchangeable Preferred Stock. When Certificated Exchangeable
Preferred Stock is presented to the Transfer Agent with a request to register
the transfer of such Certificated Exchangeable Preferred Stock or to exchange
such Certificated Exchangeable Preferred Stock for an equal number of shares of
Certificated Exchangeable Preferred Stock of other authorized denominations, the
Transfer Agent shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the
<PAGE> 117
38
Certificated Exchangeable Preferred Stock surrendered for transfer or exchange:
(1) shall be duly endorsed or accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company
and the Transfer Agent, duly executed by the Holder thereof or its
attorney duly authorized in writing; and
(2) in the case of Transfer Restricted Securities that are
Certificated Exchangeable Preferred Stock, are being transferred or
exchanged pursuant to an effective registration statement under the
Securities Act or pursuant to clause (I) or (II) below, and are
accompanied by the following additional information and documents, as
applicable:
(I) if such Transfer Restricted Securities are being
delivered to the Transfer Agent by a Holder for registration
in the name of such Holder, without transfer, a certification
from such Holder to that effect in substantially the form of
Exhibit B hereto; or
(II) if such Transfer Restricted Securities are being
transferred to the Company or to a "qualified institutional
buyer" ("QIB") in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto).
(B) Restrictions on Transfer of Certificated Exchangeable
Preferred Stock for a Beneficial Interest in Global Exchangeable Preferred
Stock. Certificated Exchangeable Preferred Stock may not be exchanged for a
beneficial interest in Global Exchangeable Preferred Stock except upon
satisfaction of the requirements set forth below. Upon receipt by the Transfer
Agent of Certificated Exchangeable Preferred Stock, duly endorsed or accompanied
<PAGE> 118
39
by appropriate instruments of transfer, in form satisfactory to the Transfer
Agent, together with:
(1) if such Certificated Exchangeable Preferred Stock is a
Transfer Restricted Security, certification that such Certificated
Exchangeable Preferred Stock is being transferred to a QIB in
accordance with Rule 144A under the Securities Act; and
(2) whether or not such Certificated Exchangeable Preferred
Stock is a Transfer Restricted Security, written instructions directing
the Transfer Agent to make, or to direct DTC to make, an adjustment on
its books and records with respect to such Global Exchangeable
Preferred Stock to reflect an increase in the number of shares of
Exchangeable Preferred Stock represented by the Global Exchangeable
Preferred Stock,
then the Transfer Agent shall cancel such Certificated Exchangeable Preferred
Stock and cause, or direct DTC to cause, in accordance with the standing
instructions and procedures existing between DTC and the Transfer Agent, the
number of shares of Exchangeable Preferred Stock represented by the Global
Exchangeable Preferred Stock to be increased accordingly. If no Global
Exchangeable Preferred Stock is then outstanding, the Company shall issue and
the Transfer Agent shall authenticate, upon written order of the Company in the
form of an Officers' Certificate, a new Global Exchangeable Preferred Stock
representing the appropriate number of shares.
(C) Transfer and Exchange of Global Exchangeable Preferred
Stock. The transfer and exchange of Global Exchangeable Preferred Stock or
beneficial interests therein shall be effected through DTC, in accordance with
this Certificate of Designation (including applicable restrictions on transfer
set forth herein, if any) and the procedures of DTC therefor.
(D) Transfer of a Beneficial Interest in Global Exchangeable
Preferred Stock for a Certificated Exchangeable Preferred Stock.
<PAGE> 119
40
(1) Any person having a beneficial interest in Exchangeable
Preferred Stock that is being transferred or exchanged pursuant to an
effective registration statement under the Securities Act or pursuant
to clause (I) or (II) below may upon request, and if accompanied by the
information specified below, exchange such beneficial interest for
Certificated Exchangeable Preferred Stock representing the same number
of shares of Exchangeable Preferred Stock. Upon receipt by the Transfer
Agent of written instructions or such other form of instructions as is
customary for DTC from DTC or its nominee on behalf of any person
having a beneficial interest in Global Exchangeable Preferred Stock and
upon receipt by the Transfer Agent of a written order or such other
form of instructions as is customary for DTC or the person designated
by DTC as having such a beneficial interest in a Transfer Restricted
Security only, and upon the following additional information and
documents (all of which may be submitted by facsimile):
(I) if such beneficial interest is being transferred
to the person designated by DTC as being the owner of a
beneficial interest in Global Exchangeable Preferred Stock, a
certification from such person to that effect (in
substantially the form of Exhibit B hereto); or
(II) if such beneficial interest is being transferred
to a QIB in accordance with Rule 144A under the Securities Act
or pursuant to an exemption from registration in accordance
with Rule 144 or Regulation S under the Securities Act, a
certification to that effect (in substantially the form of
Exhibit B hereto);
then, the Transfer Agent or DTC, at the direction of the Transfer Agent, will
cause, in accordance with the standing instructions and procedures existing
between DTC and the Transfer Agent, the number of shares of Exchangeable
Preferred Stock represented by Global Exchangeable Preferred Stock to be reduced
on its books and records and, following such reduction, the Company will execute
and the Transfer
<PAGE> 120
41
Agent will authenticate and deliver to the transferee Certificated Exchangeable
Preferred Stock.
(2) Certificated Exchangeable Preferred Stock issued in
exchange for a beneficial interest in a Global Exchangeable Preferred
Stock pursuant to this paragraph (m)(iii)(D) shall be registered in
such names and in such authorized denominations as DTC, pursuant to
instructions from its direct or indirect participants or otherwise,
shall instruct the Transfer Agent. The Transfer Agent shall deliver
such Certificated Exchangeable Preferred Stock to the persons in whose
names such Exchangeable Preferred Stock are so registered in accordance
with the instructions of DTC.
(E) Restrictions on Transfer and Exchange of Global
Exchangeable Preferred Stock. Notwithstanding any other provisions of this
Certificate of Designation (other than the provisions set forth in paragraph
(m)(iii)(F)), Global Exchangeable Preferred Stock may not be transferred as a
whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any such nominee to a successor depository or a
nominee of such successor depository.
(F) Authentication of Certificated Exchangeable
Preferred Stock. If at any time:
(1) DTC notifies the Company that DTC is unwilling or unable
to continue as depository for the Global Exchangeable Preferred Stock
and a successor depository for the Global Exchangeable Preferred Stock
is not appointed by the Company within 90 days after delivery of such
notice;
(2) DTC ceases to be a clearing agency registered
under the Exchange Act;
(3) there shall have occurred and be continuing a
Voting Rights Triggering Event; or
<PAGE> 121
42
(4) the Company, in its sole discretion, notifies the Transfer
Agent in writing that it elects to cause the issuance of Certificated
Exchangeable Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company requesting the
authentication and delivery of Certificated Exchangeable Preferred Stock to the
persons designated by the Company, will authenticate and deliver Certificated
Exchangeable Preferred Stock equal to the number of shares of Exchangeable
Preferred Stock represented by the Global Exchangeable Preferred Stock, in
exchange for such Global Exchangeable Preferred Stock.
(G) Legend. (1) Except as permitted by the following paragraph
(2), each certificate evidencing the Global Exchangeable Preferred Stock and the
Certificated Exchangeable Preferred Stock (and all Exchangeable Preferred Stock
issued in exchange therefor or substitution thereof) shall bear a legend in
substantially the following form:
"THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
"THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (i) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A,
(ii) IN AN
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OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR (v) TO THE COMPANY, IN EACH OF CASES (i) THROUGH (iv) IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE
RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.
"BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT") OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS
SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.
(2) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by Global
Exchangeable Preferred Stock) pursuant to Rule 144 under the Securities Act or
an effective registration statement under the Securities Act:
(I) in the case of any Transfer Restricted Security
that is a Certificated Exchangeable Preferred Stock, the
Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock that does not bear the legend set
forth above and rescind any restriction on the transfer of
such Transfer Restricted Security;
(II) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Certificated
Exchangeable Preferred Stock Security that does not bear the
legend set forth above and rescind any restriction on the
transfer of such Transfer Restricted Security, if the Holder's
request for
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44
such exchange was made in reliance on Rule 144 and the Holder
certifies to that effect in writing to the Transfer Agent
(such certification to be in the form set forth on the reverse
of the Transfer Restricted Security); and
(III) in the case of any Transfer Restricted Security
that is represented by a Global Exchangeable Preferred Stock,
the Transfer Agent shall permit the Holder thereof to exchange
such Transfer Restricted Security (in connection with the
offer to exchange Series B Stock for Initial Exchangeable
Preferred Stock pursuant to the Registration Rights Agreement)
for another Global Exchangeable Preferred Stock that does not
bear the legend set forth above.
(H) Cancelation or Adjustment of Global Exchangeable Preferred
Stock. At such time as all beneficial interests in Global Exchangeable Preferred
Stock have either been exchanged for Certificated Exchangeable Preferred Stock,
redeemed, repurchased or canceled, such Global Exchangeable Preferred Stock
shall be returned to DTC for cancelation or retained and canceled by the
Transfer Agent. At any time prior to such cancelation, if any beneficial
interest in Global Exchangeable Preferred Stock is exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Exchangeable Preferred Stock represented by such Global Exchangeable
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Exchangeable
Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction.
(I) Obligations with Respect to Transfers and Exchanges of
Exchangeable Preferred Stock. (1) To permit registrations of transfers and
exchanges, the Company shall execute and the Transfer Agent shall authenticate
Certificated Exchangeable Preferred Stock and Global Exchangeable Preferred
Stock as required pursuant to the provisions of this paragraph (iii).
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45
(2) All Certificated Exchangeable Preferred Stock and Global
Exchangeable Preferred Stock issued upon any registration of transfer
or exchange of Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock shall be the valid obligations of the
Company, entitled to the same benefits under this Certificate of
Designation as the Certificated Exchangeable Preferred Stock or Global
Exchangeable Preferred Stock surrendered upon such registration of
transfer or exchange.
(3) Prior to due presentment for registration of transfer of
any shares of Exchangeable Preferred Stock, the Transfer Agent and the
Company may deem and treat the person in whose name such shares of
Exchangeable Preferred Stock are registered as the absolute owner of
such Exchangeable Preferred Stock and neither the Transfer Agent nor
the Company shall be affected by notice to the contrary.
(4) No service charge shall be made to a Holder for any
registration of transfer or exchange upon surrender of any Exchangeable
Preferred Stock Certificate at the office of the Transfer Agent
maintained for that purpose. However, the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or
exchange of Exchangeable Preferred Stock Certificates.
(5) Upon any sale or transfer of shares of Exchangeable
Preferred Stock (including any Exchangeable Preferred Stock represented
by a Global Exchangeable Preferred Stock Certificate) pursuant to an
effective registration statement under the Securities Act, pursuant to
Rule 144 under the Securities Act or pursuant to an opinion of counsel
reasonably satisfactory to the Company that no legend is required:
(A) in the case of any Certificated Exchangeable
Preferred Stock, the Transfer Agent shall
permit the holder thereof to exchange such
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46
Exchangeable Preferred Stock for Certificated
Exchangeable Preferred Stock that does not
bear the legend set forth in
paragraph (iii)(G) above and rescind any
restriction on the transfer of such
Exchangeable Preferred Stock; and
(B) in the case of any Global Exchangeable Preferred
Stock, such Exchangeable Preferred Stock shall not be
required to bear the legend set forth in paragraph
(iii)(G) above but shall continue to be subject to
the provisions of paragraph (iii)(D) hereof;
provided, however, that with respect to any request
for an exchange of Exchangeable Preferred Stock that
is represented by Global Exchangeable Preferred Stock
for Certificated Exchangeable Preferred Stock that
does not bear the legend set forth in paragraph
(iii)(G) above in connection with a sale or transfer
thereof pursuant to Rule 144 (and based upon an
opinion of counsel if the Company so requests), the
Holder thereof shall certify in writing to the
Transfer Agent that such request is being made
pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit B hereto).
(iv) Replacement Certificates. If a mutilated Exchangeable
Preferred Stock certificate is surrendered to the Transfer Agent or if the
Holder of a Exchangeable Preferred Stock certificate claims that the
Exchangeable Preferred Stock certificate has been lost, destroyed or wrongfully
taken, the Company shall issue and the Transfer Agent shall countersign a
replacement Exchangeable Preferred Stock certificate if the reasonable
requirements of the Transfer Agent and of Section 8-405 of the Uniform
Commercial Code as in effect in the State of New York are met. If required by
the Transfer Agent or the Company, such Holder shall furnish an indemnity bond
sufficient in the judgment of the Company and the Transfer Agent to protect the
Company and the Transfer Agent from any loss which
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47
either of them may suffer if a Exchangeable Preferred Stock certificate is
replaced. The Company and the Transfer Agent may charge the Holder for their
expenses in replacing a Exchangeable Preferred Stock certificate.
(v) Temporary Certificates. Until definitive Exchangeable
Preferred Stock certificates are ready for delivery, the Company may prepare and
the Transfer Agent shall countersign temporary Exchangeable Preferred Stock
certificates. Temporary Exchangeable Preferred Stock certificates shall be
substantially in the form of definitive Exchangeable Preferred Stock
certificates but may have variations that the Company considers appropriate for
temporary Exchangeable Preferred Stock certificates. Without unreasonable delay,
the Company shall prepare and the Transfer Agent shall countersign definitive
Exchangeable Preferred Stock certificates and deliver them in exchange for
temporary Exchangeable Preferred Stock certificates.
(vi) Cancelation. (A) In the event the Company shall purchase
or otherwise acquire Certificated Exchangeable Preferred Stock, the same shall
thereupon be delivered to the Transfer Agent for cancelation.
(B) At such time as all beneficial interests in Global
Exchangeable Preferred Stock have either been exchanged for Certificated
Exchangeable Preferred Stock, redeemed, repurchased or canceled, such Global
Exchangeable Preferred Stock shall thereupon be delivered to the Transfer
Agent for cancelation.
(C) The Transfer Agent and no one else shall cancel and
destroy all Exchangeable Preferred Stock certificates surrendered for transfer,
exchange, replacement or cancelation and deliver a certificate of such
destruction to the Company unless the Company directs the Transfer Agent to
deliver canceled Exchangeable Preferred Stock certificates to the Company. The
Company may not issue new Exchangeable Preferred Stock certificates to replace
Exchangeable Preferred Stock certificates to the extent they evidence
Exchangeable Preferred Stock which the Company has purchased or otherwise
acquired.
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48
(m) Additional Rights of Holders. In addition to the rights
provided to Holders under this Certificate of Designation, Holders shall have
the rights set forth in the Registration Rights Agreement.
(n) Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (and (1)
terms defined in the singular have comparable meanings when used in the plural
and vice versa, (2) "including" means including without limitation, (3) "or" is
not exclusive and (4) an accounting term not otherwise defined has the meaning
assigned to it in accordance with United States generally accepted accounting
principles as in effect on the Issue Date and all accounting calculations will
be determined in accordance with such principles), unless the content otherwise
requires:
"Accounts Receivable" means, with respect to any Person, all
accounts receivable of such Person net of allowances for uncollectible accounts,
discounts, refunds and all other allowances as determined in accordance with
GAAP.
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings
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49
correlative to the foregoing. For purposes of paragraphs (l)(iii) and (l)(v)
only, "Affiliate" shall also mean any beneficial owner of Capital Stock
representing 10% or more of the total voting power of the Voting Stock (on a
fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Swap" means an exchange of assets by the Company or any
of its Restricted Subsidiaries for one or more Permitted Businesses, assets to
be used in a Permitted Business, or for a controlling equity interest in any
Person whose assets consist primarily of one or more Permitted Businesses.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
dividend rate borne by the Exchangeable Preferred Stock compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determina tion, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multi plied by the amount of such payment by (ii) the sum of all
such payments.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
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50
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capital lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.
"Change of Control" means the occurrence of any of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that for purposes of this clause (i)
such person shall be deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time, and
except that any person that is deemed to have beneficial ownership of
shares solely as a result of being part of a group pursuant to Rule
13d-5(b)(1) shall not be deemed to have beneficial ownership of any
shares held by a Permitted Holder forming a part of such group),
directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock
of a specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting
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51
power of the Voting Stock of such parent corporation and the Permitted
Holders beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the board of directors of such parent corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company then still in office who were either directors at the beginning
of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority
of the Board of Directors then in office; provided, however, that any
directors elected by holders of Preferred Stock of the Company pursuant
to any voting rights provisions included in the certificate of
designation relating to such Preferred Stock shall be excluded in
making any determination pursuant to this clause (ii); or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at
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52
least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation.
Notwithstanding the foregoing, a Change of Control shall not
be deemed to have occurred if, after such event that otherwise would constitute
a Change of Control, the Securities are rated Investment Grade by Moody's or
Standard & Poor's on the 30th day following the event that otherwise would
constitute a Change of Control (the "Change of Control Determination Date");
provided, however, that to the extent there is a "rating watch" with respect to
the Exchangeable Preferred Stock or other rating agency review on such 30th day,
then the Change of Control Determination Date shall be the first Business Day
thereafter on which the Exchangeable Preferred Stock is not subject to a "rating
watch" or other rating agency review by either Moody's or Standard & Poor's. The
term "Investment Grade", for such purpose, means a rating of Baa3 or higher in
the case of Moody's, or BBB- or higher in the case of Standard & Poor's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Certificate of
Designation until a successor replaces it and, thereafter, means the successor.
"Consolidated Capital Ratio" of any Person as of any date
means the ratio of (i) the aggregate consolidated principal amount of
Indebtedness of such Person then outstanding to (ii) the greater of either (a)
the aggregate consolidated paid-in capital of such Person as of such date or (b)
the stockholders' equity as of such date as shown on the consolidated balance
sheet of such Person determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by the Company or its Restricted Subsidiaries,
without duplication, (i) interest expense attributable to capital leases and the
interest expense
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53
attributable to leases constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) noncash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all (A)
Preferred Stock of Restricted Subsidiaries and (B) Preferred Stock of the
Company that is Disqualified Stock, in each case held by Persons other than the
Company or a Restricted Subsidiary, (viii) interest incurred in connection with
Investments in discontinued operations, (ix) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by (or secured by the assets of) the Company or any Restricted Subsidiary and
(x) the cash contributions to any employee stock ownership plan or similar trust
to the extent such contributions are used by such plan or trust to pay interest
or fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net
income of the Company and its consolidated Subsidi aries; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that subject to the
exclusion contained in clause (iv) below, the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as
a dividend or other distribution (subject, in the case of a dividend or
other distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
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54
(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that subject to the exclusion contained in clause (iv) below,
the net income of any such Restricted Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the limitation
contained in this clause);
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated Subsidiaries
or any other Person (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in account
ing principles.
Notwithstanding the foregoing, for the purpose of paragraph (l)(iii) only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from any Person (including any
Unrestricted Subsidiary) to the Company or a Restricted Subsidiary to the extent
such dividends, repayments or transfers increase the amount of Restricted
Payments permitted under paragraph (l)(iii) (A)(3)(IV) thereof.
"Consolidated Net Worth" means, with respect to any Person as
of any date, the sum of: (i) the consolidated
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55
equity of the common stockholders of such Person and its consolidated
Subsidiaries as of such date plus (ii) the respective amounts reported on such
Person's balance sheet as of such date with respect to any series of preferred
stock (other than Disqualified Stock) that by its terms is not entitled to the
payment of dividends unless such dividends may be declared and paid only out of
net earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Issue Date in the book value of any asset owned by such Person
or a consolidated Subsidiary of such Person, (y) all investments as of such date
in unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" means, with respect to any
Person as of any date, the sum of the consolidated gross book value as reflected
in accounting books and records of such Person of all its property, both real
and personal, less (i) the net book value of all its licenses, patents, patent
applications, copyrights, trademarks, tradenames, goodwill, non-compete
agreements or organizational expenses and other like intangibles, (ii)
unamortized debt discount and expenses, (iii) all reserves for depreciation,
obsolescence, depletion and amortization of its properties and (iv) all other
proper reserves which should be provided in connection with the business
conducted by such Person, all of the foregoing as determined in accordance with
GAAP.
"Convertible Preferred Stock" means the Company's 7 1/4%
Junior Convertible Preferred Stock Due 2007.
"Credit Agreements" means one or more debt facilities or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit
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56
loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Cumulative Consolidated Interest Expense" means, with respect
to any Person, as of any date of determination, Consolidated Interest Expense
for the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Issue Date to the end of such Person's most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"Cumulative Operating Cash Flow" means, as of any date of
determination, Operating Cash Flow for the Company and its Restricted
Subsidiaries for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement designed
to protect such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage
of time or both would be, a Voting Rights Triggering Event.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first
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57
anniversary of the Stated Maturity of the Exchangeable Preferred Stock;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the first anniversary of
the Stated Maturity of the Securities shall not constitute Disqualified Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are not more favorable to the holders of such Capital Stock than the
comparable provisions of the Exchange Indenture; provided further, however, that
the Company's Convertible Preferred Stock outstanding on the Issue Date (and any
shares of Convertible Preferred Stock issued as payment of a dividend on
Convertible Preferred Stock) shall be deemed not to constitute Disqualified
Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Date" means the date on which the Securities are
exchanged for the Exchangeable Preferred Stock.
"Exchange Debentures" means the debentures issuable pursuant
to the Exchange Indenture.
"Exchange Offer Registration Statement" means a registration
statement filed with the SEC with respect to a Registered Exchange Offer.
"Exchange Indenture" means the Indenture dated as of August
15, 1997, by and between the Company and The Bank of New York, as Trustee,
governing the Exchange Debentures.
"Excluded PSINet Transactions" means any transaction between
the Company or any of its Restricted Subsidiaries with PSINet Inc., so long as
at the time of engaging in, or contracting to engage in, such transaction, the
Company and its Subsidiaries have not acquired shares of PSINet Common Stock
other than the PSINet Shares.
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"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Certificate of Designation shall be
computed in conformity with GAAP.
"GE Capital Communications" means GE Capital Communications
Services Corporation.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any Person
and any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such Person or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" means the Person in whose name a share of
Exchangeable Preferred Stock is registered on the Transfer Agent's books.
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"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of principal
of a non-interest bearing or other discount security shall be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person
on any date of determination (without duplication):
(i) the principal in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable, including, in each case, any
premium on such indebtedness to the extent such premium has become due
and payable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, and all obligations of such Person
under any title retention agreement (but excluding trade accounts
payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on
the letter of credit);
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(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends) of such Subsidiary
(which will constitute Indebtedness Incurred by such Subsidiary and not
Indebtedness Incurred by such Person);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indebtedness to Operating Cash Flow Ratio" means, as of any
date of determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such
date on a consolidated basis, plus the aggregate liquidation preference of all
outstanding Preferred Stock of the Restricted Subsidiaries of such Person as of
such date (excluding any such Preferred Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person), plus the
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61
aggregate liquidation preference or redemption amount of all Disqualified Stock
of such Person (excluding any Disqualified Stock held by such Person or a Wholly
Owned Restricted Subsidiary of such Person) as of such date to (b) Operating
Cash Flow of such Person and its Restricted Subsidiaries for the most recent
four-quarter period for which internal financial statements are available,
determined on a pro forma basis after giving effect to all acquisitions and
dispositions of assets (notwithstanding clause (ii) of the definition of
"Consolidated Net Income" and including Asset Swaps) made by such Person and its
Restricted Subsidiaries since the beginning of such four-quarter period through
such date as if such acquisitions and dispositions had occurred at the beginning
of such four-quarter period through such date as if such acquisitions and
dispositions had occurred at the beginning of such four-quarter period.
"Independent Financial Advisor" means a United States
investment banking firm of national standing in the United States which does
not, and whose directors, officers and employees or affiliates do not, have a
direct or indirect financial interest in the Company.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect
advance, loan or any other extensions of credit (other than advances, loans or
other extensions of credit to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet of the lender and other
than commission, travel, relocation and similar advances to directors, officers
and employees made in the ordinary course of business) (including by way of
Guarantee or similar arrangement) or capital contribution to any Person (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of such Person), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar
<PAGE> 141
62
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and paragraph
(l)(iii), (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors;
provided further, however, that an acquisition of assets, Capital Stock or other
securities by the Company or any of its Restricted Subsidiaries shall not be
deemed to be an Investment to the extent the consideration for such Capital
Stock or other securities consists of common equity securities of the Company.
"IRU" means an indefeasible right to use fiber or
telecommunications capacity.
"IRU Agreement" means an agreement pursuant to which an
interest in an IRU is sold or leased or otherwise transferred.
"Issue Date" means the date on which the Initial Exchangeable
Preferred Stock is originally issued.
"IXC Internet Capital Contribution" means the contribution by
the Company to IXC Internet Services, Inc. (so long as IXC Internet Services,
Inc. is a Subsidiary) of $10 million in cash, an IRU in two excess fibers in the
Company's network (including two fibers in network routes to be built or
acquired in the future) and space in certain points of
<PAGE> 142
63
presence, in each case as contemplated in connection with the transactions
contemplated by the PSINet Agreement.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. or its
successor.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Operating Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period, (A) plus
(i) extraordinary net losses, net losses on sales of assets outside the ordinary
course of business during such period and noncash charges relating to
write-downs of property and equipment, to the extent such losses and charges
were deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
Consolidated Interest Expense of such Person and its
<PAGE> 143
64
Restricted Subsidiaries for such period, to the extent that any such expense
was deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) and other noncash charges (excluding any such noncash charge to the
extent that it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other noncash charges were
deducted in computing such Consolidated Net Income and (B) less all noncash
income for such period (excluding any such noncash income to the extent it
represents an accrual of cash income in any future period or amortization of
cash income received in a period). Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other noncash charges of, a Restricted Subsidiary of the referent Person shall
be added to Consolidated Net Income to compute Operating Cash Flow only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person for such period and only if and to the extent such Restricted Subsidiary
could have paid such amount at the date of determination as a dividend or
similar distribution to the referent Person by such Restricted Subsidiary
without prior governmental approval (that has not been obtained), pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Business" means (i) any communications business and
(ii) any business reasonably related or ancillary thereto.
<PAGE> 144
65
"Permitted Holders" means the officers and directors of the
Company, and Trustees of General Electric Pension Trust, Grumman Hill
Associates, Inc. and Grumman Hill Investments, L.P., and each of their
respective officers and directors and their Related Parties.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such Person's primary business is
a Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
the Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel, commission and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) the
IXC Internet Capital Contribution; (ix) the Investment in PSINet Inc.
contemplated by the PSINet Agreement, including the Investment in shares of
PSINet Common Stock purchased pursuant to the PSINet Agreement and the $240
million value protection right provided for by the PSINet Agreement; and (x)
other Investments in any Person that in the aggregate do not exceed $30 million
(without regard to increases and decreases in the value of the Investments).
<PAGE> 145
66
"Permitted PSINet Non-Recourse Debt" means Indebtedness where
(i) the holders of such Indebtedness expressly agree that they will look solely
to the shares of PSINet Common Stock held by the issuer of such Indebtedness for
payment on or in respect of such Indebtedness and expressly waive any recourse
they may have on or with respect to such Indebtedness to the Company or any
Restricted Subsidiary, (ii) neither the Company nor any Restricted Subsidiary
(A) provides credit support (whether or not in the form of an undertaking,
agreement or instrument which would constitute Indebtedness), other than the
pledge by the issuer of such Indebtedness of shares of PSINet Common Stock, or
(B) is directly or indirectly liable and (iii) no default with respect to such
Indebtedness (including any rights which the holders thereof may have to take
enforcement action against the shares of PSINet Common Stock securing such
Indebtedness) would permit (upon notice, lapse of time or both) any holder of
any other Indebtedness of the Company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"principal" of any debt security means the principal of the
Security plus the premium, if any, payable on the Security which is due or
overdue or is to become due at the relevant time.
<PAGE> 146
67
"PSINet Agreement" means the IRU and Stock Purchase Agreement
dated as of July 22, 1997, between IXC Internet Services, Inc. and PSINet Inc.
and the related documents executed in connection therewith, in each case as in
effect as of the Issue Date.
"PSINet Common Stock" means the common stock of PSINet, Inc.
"PSINet Shares" means the shares of PSINet Common Stock
acquired by the Company or any Subsidiary pursuant to the terms of the PSINet
Agreement.
"Public Equity Offering" means an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue other Indebtedness in exchange or replacement for, such indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with this Certificate of Designation,
including Indebtedness that Refinances Refinancing Indebtedness; provided,
however, that (i) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced, (ii) such
Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the Average Life of
the Indebtedness being Refinanced and (iii) such Refinancing Indebtedness has an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus accrued interest on the principal
amount of Indebtedness Refinanced, and fees and
<PAGE> 147
68
expenses, including any premium and defeasance costs) under the Indebtedness
being Refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company (unless such Subsidiary was obligated under, or a guarantor of, the
Indebtedness being Refinanced) or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Registered Exchange Offer" means the offer by the Company,
pursuant to the Registration Rights Agreement, to holders of Initial
Exchangeable Preferred Stock to issue and deliver to such holders, in exchange
for the Initial Exchangeable Preferred Stock, a like aggregate liquidation
preference of Series B Stock registered under the Securities Act.
"Registration Rights Agreement" means the Registration Rights
Agreement dated August 14, 1997, among the Company and Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley and Co. Incorporated.
"Related Business" means any Permitted Business, the
businesses conducted by the Company and the Restricted Subsidiaries on the Issue
Date and any business related, ancillary or complementary to such businesses
conducted by the Company and the Restricted Subsidiaries on the Issue Date.
"Related Party" with respect to any Permitted Holder means (i)
any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or (ii)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Permitted Holder or such other
Persons referred to in the immediately preceding clause (i).
<PAGE> 148
69
"Representative" means any trustee, agent or representative
(if any) for an issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of, in the case of the Company, any Junior Stock or, in the case of
any Restricted Subsidiary, any Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or similar
payment to the direct or indirect holders of such Stock (other than dividends or
distributions payable solely in Junior Stock (other than Disqualified Stock) and
dividends or distributions to the extent paid to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Restricted Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of a Subsidiary
that is an entity other than a corporation)), (ii) the purchase, redemption or
other acquisition or retirement for value of any Junior Stock of the Company or
Capital Stock of any direct or indirect parent of the Company or (iii) the
making of any Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of
the Company secured by a Lien.
"Senior Notes" means the Company's 12 1/2% Senior
Notes Due 2005.
<PAGE> 149
70
"Series 3 Preferred Stock" means the Company's 10%
Junior Series 3 Cumulative Redeemable Preferred Stock.
"Shelf Registration Statement" means a registration statement
filed with the SEC covering resales of Exchangeable Preferred Stock.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Company within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Standard & Poor's" means Standard & Poor's Ratings Group, or
its successor.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Indebtedness" means the Exchange Debentures and
any other Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Exchange Debentures in right of
payment and is not subordinated by its terms to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness (as defined in the
Exchange Debenture).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Exchange Debentures pursuant to
a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the
<PAGE> 150
71
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
(i) such Person, (ii) such Person and one or more Subsidiaries of such Person or
(iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or any
agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard
<PAGE> 151
72
& Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"Trustee" means the party named as such in the Exchange
Indenture until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien (excluding Liens incurred to secure obligations in respect of an IRU) on
any property of, the Company or any Restricted Subsidiary; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, the Investment
resulting from such designation would be permitted under paragraph (l)(iii). The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (l)(iii)(A) and (y) no Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
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73
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned Restricted Subsidiary" means a Restricted
Subsidiary all the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or one or more Wholly Owned Subsidiaries.
<PAGE> 153
IN WITNESS WHEREOF, said IXC Communications, Inc., has caused
this Certificate of Designation to be signed by James F. Guthrie, its
Chief Financial Officer and Executive Vice President, this 19th day of
August, 1997.
IXC COMMUNICATIONS, INC.,
By: /s/ JAMES F. GUTHRIE
----------------------------------
Name: James F. Guthrie
Title: Chief Financial Officer and
Executive Vice President
<PAGE> 154
EXHIBIT A
FORM OF EXCHANGEABLE PREFERRED STOCK
FACE OF SECURITY
[THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF
1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE
SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF
SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF
THIS SECURITY AGREES FOR THE BENEFIT OF THE ISSUER THAT (A) THIS SECURITY MAY BE
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (II) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (v) TO THE
ISSUER, IN EACH OF CASES (i) THROUGH (iv) IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY
FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.]*
[BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN
AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S.]*/
- --------
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
<PAGE> 155
2
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN.]**
[TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN THE CERTIFICATE OF DESIGNATION REFERRED TO BELOW.]**
Certificate Number Number of Shares of Convertible
Preferred Stock
[ ] [ ]
CUSIP NO.: [ ]
12 1/2% Junior Exchangeable Preferred Stock Due 2009
(par value $0.01) (liquidation preference $1000
per share)
of
IXC Communications, Inc.
IXC Communications, Inc., a Delaware corporation (the
"Company"), hereby certifies that [ ] (the
- --------
** Subject to removal if not a global security.
<PAGE> 156
3
"Holder") is the registered owner of fully paid and non-assessable preferred
securities of the Company designated the 12 1/2% [Series B] Junior Exchangeable
Preferred Stock Due 2009 (par value $0.01) (liquidation preference $1000 per
share) (the "Exchangeable Preferred Stock"). The shares of Exchangeable
Preferred Stock are transferable on the books and records of the Registrar, in
person or by a duly authorized attorney, upon surrender of this certificate duly
endorsed and in proper form for transfer. The designation, rights, privileges,
restrictions, preferences and other terms and provisions of the Exchangeable
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation dated August [ ],
1997, as the same may be amended from time to time (the "Certificate of
Designation"). Capitalized terms used herein but not defined shall have the
meaning given them in the Certificate of Designation. The ompany will provide a
copy of the Certificate of Designation to a Holder without charge upon written
request to the Company at its principal place of business.
Reference is hereby made to select provisions of the
Exchangeable Preferred Stock set forth on the reverse hereof, and to the
Certificate of Designation, which select provisions and the Certificate of
Designation shall for all purposes have the same effect as if set forth at this
place.
Upon receipt of this certificate, the Holder is bound by the
Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication
hereon has been properly executed, these shares of Exchangeable Preferred Stock
shall not be entitled to any benefit under the Certificate of Designation or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has executed this certificate
this [ ] day of [ ], [ ].
IXC COMMUNICATIONS, INC.,
<PAGE> 157
4
By:
----------------------------------
Name:
Title:
[Seal]
By:
----------------------------------
Name:
Title:
<PAGE> 158
5
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the Exchangeable Preferred Stock referred to in
the within mentioned Certificate of Designation.
Dated: [ ], [ ]
THE BANK OF NEW YORK
as Transfer Agent,
By:
----------------------------------
Authorized Signatory
<PAGE> 159
6
REVERSE OF SECURITY
Dividends on each share of Exchangeable Preferred Stock shall
be payable at a rate per annum set forth in the face hereof or as provided in
the Certificate of Designation (including Additional Dividends).
The shares of Exchangeable Preferred Stock shall be redeemable
as provided in the Certificate of Designation. The shares of Exchangeable
Preferred Stock shall be exchangeable at the Company's option into the Company's
12-1/2% Subordinated Exchange Debentures Due 2009 in the manner and according to
the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to
any Holder upon request and without charge, a full summary statement of the
designations, voting rights preferences, limitations and special rights of the
shares of each class or series authorized to be issued by the Company so far as
they have been fixed and determined and the authority of the Board of Directors
to fix and determine the designations, voting rights, preferences, limitations
and special rights of the class and series of shares of the Company.
<PAGE> 160
7
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Exchangeable Preferred Stock evidenced hereby to:
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
agent to transfer the shares of Exchangeable Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute another
to act for him or her.
Date:
-----------------------
Signature:
---------------------------------
(Sign exactly as your name appears on the other side of this Exchangeable
Preferred Stock Certificate)
Signature Guarantee:***
--- ---------------------------------------------
- ------------------
*** (Signature must be guaranteed by an "eligible guarantor
institution" that is, a bank, stockbroker, savings and loan association or
credit union meeting the requirements of the Registrar, which requirements
include membership or participation in the Securities Transfer Agents Medallion
Program ("STAMP") or such other "signature
<PAGE> 161
8
- ------------
guarantee program" as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.)
<PAGE> 162
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF EXCHANGEABLE PREFERRED STOCK
Re: 12 1/2% Junior Exchangeable Preferred Stock Due 2009 (the "Exchangeable
Preferred Stock") of IXC Communications, Inc. (the "Company")
This Certificate relates to ____ shares of Exchangeable
Preferred Stock held in [ ] */ book-entry or [ ] */ definitive form by
_______________ (the "Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in
exchange for its beneficial interest in the Exchangeable Preferred Stock held by
the depository shares of Exchangeable Preferred Stock in definitive, registered
form equal to its beneficial interest in such Exchangeable Preferred Stock (or
the portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Exchangeable Preferred Stock.
In connection with such request and in respect of such
Exchangeable Preferred Stock, the Transferor does hereby certify that the
Transferor is familiar with the Certificate of Designation relating to the above
captioned Exchangeable Preferred Stock and that the transfer of this
Exchangeable Preferred Stock does not require registration under the Securities
Act of 1933 (the "Securities Act") because */:
[ ] Such Exchangeable Preferred Stock is being acquired for the
Transferor's own account without transfer.
[ ] Such Exchangeable Preferred Stock is being transferred to the
Company.
- -------- * /Please check applicable box.
<PAGE> 163
2
[ ] Such Exchangeable Preferred Stock is being transferred (i) to a
qualified institutional buyer (as defined in Rule 144A under the Securities
Act), in reliance on Rule 144A or (ii) pursuant to an exemption from
registration in accordance with Rule 904 under the Securities Act (and, in the
case of clause (ii), based on an opinion of counsel if the Company so requests
and together with a certification in substantially the form of Exhibit C to the
Certificate of Designation).
[ ] Such Exchangeable Preferred Stock is being transferred in reliance
on and in compliance with another exemption from the registration requirements
of the Securities Act (and based on an opinion of counsel if the Company so
requests).
[INSERT NAME OF TRANSFEROR]
Date: by
------------------ -----------------------------------
<PAGE> 164
EXHIBIT C
FORM OF CERTIFICATE TO BE DELIVERED IN
CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
----------, ----
The Bank of New York
Attention: [ ]
Ladies and Gentlemen:
In connection with our proposed sale of certain 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock") of
IXC Communications, Inc., a Delaware corporation ("the "Company"), we represent
that:
(i) the offer of the Exchangeable Preferred Stock was not made
to a person in the United States;
(ii) at the time the buy order was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States;
(iii) no directed selling efforts have been made by us in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S under the Securities Act of 1933 (the
"Securities Act"), as applicable; and
(iv) the transaction is not part of a plan or scheme by us to
evade the registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and
you are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with
<PAGE> 165
4
respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
---------------------------------------------
(Name of Transferor)
by
------------------------------------------
Name:
Title:
Address:
<PAGE> 1
EXHIBIT 4.13
FIRST SUPPLEMENTAL INDENTURE
First Supplemental Indenture, dated as of October 23, 1997, by
and among IXC Communications, Inc., a Delaware corporation (the "Company"), each
of the Guarantors listed on the signature page hereto and IBJ Schroder Bank &
Trust Company, as trustee (the "Trustee"), under the Indenture dated as of
October 5, 1995, as amended by Amendment No. 1 to Indenture and Subsidiary
Guaranty dated as of June 4, 1996 among the Company, the Guarantors listed on
the signature pages thereto (the "Guarantors"), and the Trustee (as amended, the
"Indenture") pursuant to which the Company's 12 1/2% Senior Notes due 2005 (the
"Senior Notes") were issued. Capitalized terms used herein, but otherwise not
defined herein, shall have the meanings given to such terms in the Indenture.
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company to authorize and approve an
amendment to the Indenture, in accordance with subparagraph (d) of Section 9.01
of the Indenture, in order to add IXC International, Inc. ("IXC International"
or the "New Guarantor ") as a Guarantor pursuant to the requirements of the
Indenture; and
WHEREAS, Section 9.01 of the Indenture provides, among other
things, that the Company and the Trustee may amend or supplement the Indenture
as provided herein without the consent of any Holder to make any change that
would provide additional rights or benefits to the Holders of the Senior Notes
or that does not adversely affect the legal rights thereunder of any Holder of
the Senior Note; and
WHEREAS, all acts and proceedings required by law, the Indenture
and the charter documents of the Company necessary to constitute this First
Supplemental Indenture as a valid and binding agreement for the uses and
purposes herein set forth, in accordance with its terms, have been done and
taken; and the execution and delivery of this First Supplemental Indenture by
the Company and each of the Guarantors have been in all respects duly
authorized; and
WHEREAS, the Company has furnished the Trustee with (i) an
Officers' Certificate and an Opinion of Counsel stating that the conditions
precedent to the execution by the Trustee of this First Supplemental Indenture
have been satisfied, (ii) resolutions of the Company, each of the Guarantors and
IXC International, authorizing the execution of the First Supplemental
Indenture, and (iii) a request of the Company.
NOW, THEREFORE, each party hereto, for the equal and
proportionate benefit of the other parties hereto and the Holders, are executing
and delivering this First Supplemental Indenture.
<PAGE> 2
Section 1. Guarantee by IXC International.
For value received, IXC International agrees to become a party to
the Indenture as a Guarantor under and pursuant to the provisions of the
Indenture and hereby agrees to be bound by the terms and conditions set forth in
the New Subsidiary Guarantee set forth in Exhibit A attached hereto.
Section 2. Miscellaneous.
a. Effect of First Supplemental Indenture. Upon the execution
and delivery of this First Supplemental Indenture by the Company, the Guarantors
and the Trustee, the Indenture shall be supplemented in accordance herewith, and
this First Supplemental Indenture shall form a part of the Indenture for all
purposes, and every Holder of Senior Notes heretofore or hereafter authenticated
and delivered under the Indenture shall be bound hereby.
b. Indenture Remains in Full Force and Effect. Except as
supplemented hereby, all provisions in the Indenture shall remain in full force
and effect.
c. Ratification of Indenture. As amended by this First
Supplemental Indenture, the Indenture is in all respects ratified and confirmed
and, as so supplemented by this First Supplemental Indenture, shall be read,
taken and construed as one and the same instrument.
d. Confirmation and Preservation of Indenture. The Indenture as
supplemented by this First Supplemental Indenture is in all respects confirmed
and preserved.
e. Conflict with Trust Indenture Act. If any provision of this
First Supplemental Indenture limits, qualifies or conflicts with any provision
of the TIA that is required under the TIA to be part of and govern any provision
of this First Supplemental Indenture, the provision of the TIA shall control. If
any provision of this First Supplemental Indenture modifies or excludes any
provision of the TIA that may be so modified or excluded, the provision of the
TIA shall be deemed to apply to the Indenture as so modified or to be excluded
by this First Supplemental Indenture, as the case may be.
f. Severability. In case any provision in this First
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
g. Headings. The Section headings of this First Supplemental
Indenture have been inserted for convenience of reference only, are not to be
considered a part of this First Supplemental Indenture and shall in no way
modify or restrict any of the terms or provisions hereof.
h. Benefits of First Supplemental Indenture, etc. Nothing in
this First Supplemental Indenture or the Senior Notes, express or implied, shall
give to any Person, other than
- 2 -
<PAGE> 3
the parties hereto and thereto and their successors hereunder and thereunder and
the Holders of the Senior Notes, any benefit of any legal or equitable right,
remedy or claim under the Indenture, this First Supplemental Indenture or the
Senior Notes.
i. Successors. All agreements of the Company and in this First
Supplemental Indenture shall bind its successors. All agreements of the Trustee
in this First Supplemental Indenture shall bind its successors.
j. The Trustee. In entering into this First Supplemental
Indenture, the Trustee shall be entitled to the benefit of every provision of
the Indenture relating to the conduct or affecting the liability or affording
protection to the Trustee. The Trustee shall not be responsible in any manner
whatsoever for the recitals of fact herein, all of which are made by the Company
and the Guarantors.
k. Governing Law. The internal law of the State of New York
shall govern and be used to construe this First Supplemental Indenture without
regard to principals of conflict of laws thereof.
l. Events of Default. To the extent provisions of the Indenture
have been deleted by this First Supplemental Indenture, the Company is hereby
relieved of its obligations under such provisions and such provisions shall not
hereafter give rise to a Default or an Event of Default. To the extent
provisions of the Indenture have been amended by this First Supplemental
Indenture, a Default or an Event of Default may arise hereafter under such
provisions only as amended.
m. The Effective Date. This First Supplemental Indenture shall
become a legally effective and binding instrument upon the execution and
delivery hereof by all parties hereto.
n. Counterparts. This First Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which so executed shall be deemed to be an original, but
all of such counterparts shall together constitute but one and the same
agreement.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be executed by their respective officers, thereunto
duly authorized and attested, all as of the day and year first above written.
"Company"
Attest: IXC COMMUNICATIONS, INC.,
By: /s/ Jeffrey C. Smith By: /s/ James F. Guthrie
Name: Jeffrey C. Smith Name: James F. Guthrie
------------------------------- ------------------------------------
Title: Senior Vice President, Title: Executive Vice President and Chief
General Counsel and Secretary Financial Officer
"Guarantors"
ATLANTIC STATES MICROWAVE
TRANSMISSION COMPANY
CENTRAL STATES MICROWAVE
TRANSMISSION COMPANY
TELCOM ENGINEERING, INC.
TOWER COMMUNICATION SYSTEMS CORP.
WEST TEXAS MICROWAVE COMPANY
WESTERN STATES MICROWAVE
TRANSMISSION COMPANY
RIO GRANDE TRANSMISSION, INC.
IXC CARRIER, INC.
IXC LONG DISTANCE, INC.
LINK NET INTERNATIONAL, INC.
Attest: IXC INTERNATIONAL, INC.
By: /s/ Jeffrey C. Smith By: /s/ James F. Guthrie
------------------------------- ------------------------------------
Name: Jeffrey C. Smith Name: James F. Guthrie
Title: Senior Vice President, Title: Executive Vice President and Chief
General Counsel and Secretary Financial Officer
- 4 -
<PAGE> 5
"Trustee"
Attest: IBJ SCHRODER BANK & TRUST
COMPANY
By: /s/ Barbara McCluskey By: /s/ Terence Rawlins
------------------------------- ------------------------------------
Name: Barbara McCluskey Name: Terence Rawlins
Title: Assistant Secretary Title: Assistance Vice President
- 5 -
<PAGE> 6
EXHIBIT A
NEW SUBSIDIARY GUARANTEE
The New Guarantor (which term includes any successors or assigns
under the Indenture), agrees to irrevocably and unconditionally guaranteed on an
unsecured basis (i) the due and punctual payment of the principal of, and
premium and Liquidated Damages, if any, and interest on the Senior Notes,
whether at stated maturity, by acceleration or otherwise, the due and punctual
payment of interest on the overdue principal of, and premium if any, and (to the
extent permitted by law) interest, and Liquidated Damages on any interest, if
any, on the Senior Notes, and the due and punctual performance of all other
obligations of the Company, to the Holders or the Trustee all in accordance with
the terms set forth in the Indenture, (ii) in case of any extension of time of
payment or renewal of any Senior Notes or any such other obligations, that the
same will be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, whether at stated maturity, by acceleration
or otherwise, and (iii) the payment of any and all costs and expenses (including
reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing
any rights under this New Subsidiary Guarantee.
The obligations of the New Guarantor to the Holders and to the
Trustee pursuant to this New Subsidiary Guarantee and the Indenture are
expressly set forth in Article 11 of the Indenture and reference is hereby made
to such Indenture for the precise terms of this Guarantee.
No stockholder, officer, director, or incorporator, as such,
past, present or future of the New Guarantor shall have any liability under this
New Subsidiary Guarantee by reason of his or its status as such stockholder,
officer, director or incorporator.
This is a continuing Guarantee and shall remain in full force and
effect and shall be binding upon the each New Guarantor and its successors and
assigns until full and final payment of all of the Company's obligations under
the Senior Notes and Indenture and shall inure to the benefit of the successors
and assigns of the Trustee and the Holders, and, in the event of any transfer or
assignment of rights by any Holder or the Trustee, the rights and privileges
herein conferred upon that party shall automatically extend to and be vested in
such transferee or assignee, all subject to the terms and conditions hereof.
This is a Guarantee of payment and not of collectibility.
Any term or provision of this Guarantee to the contrary
notwithstanding, the aggregate amount of the Obligations guaranteed hereunder
shall be reduced to the extent necessary to prevent this Guarantee from
violating or becoming voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
The Obligations of the New Guarantor under the New Subsidiary
Guarantee pursuant to Article 11 of the Indenture shall be senior to the
Indebtedness of the New Guarantor on the same basis as the Senior Notes are
senior to the Indebtedness of the Company. For purposes of the foregoing
sentence, (a) the New Guarantor may make, and the Trustee and the Holders of the
Notes have the right to receive and/or retain, payments by the New Guarantor
only at such times as they may receive and/or retain payments in respect of the
Senior Notes pursuant to the Indenture, including Article 11 thereof, and (b)
the rights and obligations of the relevant parties relative to the New
Subsidiary Guarantee and the New Guarantor's Indebtedness shall be the same as
their respective rights and obligations relative to the Senior Notes of the
Company pursuant to Article 11 of the Indenture.
- 6 -
<PAGE> 7
THE TERMS OF ARTICLE 11 OF THE INDENTURE ARE INCORPORATED
HEREIN BY REFERENCE.
Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.
- 7 -
<PAGE> 1
EXHIBIT 4.14
SECOND SUPPLEMENTAL INDENTURE
Second Supplemental Indenture, dated as of December 22, 1997, by
and among IXC Communications, Inc., a Delaware corporation (the "Company"), each
of the Guarantors listed on the signature page hereto and IBJ Schroder Bank &
Trust Company, as trustee (the "Trustee"), under the Indenture dated as of
October 5, 1995, as amended by Amendment No. 1 to Indenture and Subsidiary
Guaranty dated as of June 4, 1996 and supplemented by the First Supplemental
Indenture dated as of October 23, 1997 among the Company, the Guarantors listed
on the signature pages thereto (the "Guarantors"), and the Trustee (as amended
and supplemented, the "Indenture") pursuant to which the Company's 12 1/2%
Senior Notes due 2005 (the "Senior Notes") were issued. Capitalized terms used
herein, but otherwise not defined herein, shall have the meanings given to such
terms in the Indenture.
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company to authorize and approve an
amendment to the Indenture, in accordance with subparagraph (d) of Section 9.01
of the Indenture, in order to add IXC Internet Services, Inc. ("IXC Internet" or
the "New Guarantor ") as a Guarantor pursuant to the requirements of the
Indenture; and
WHEREAS, Section 9.01 of the Indenture provides, among other
things, that the Company and the Trustee may amend or supplement the Indenture
as provided herein without the consent of any Holder to make any change that
would provide additional rights or benefits to the Holders of the Senior Notes
or that does not adversely affect the legal rights thereunder of any Holder of
the Senior Note; and
WHEREAS, all acts and proceedings required by law, the Indenture
and the charter documents of the Company necessary to constitute this Second
Supplemental Indenture as a valid and binding agreement for the uses and
purposes herein set forth, in accordance with its terms, have been done and
taken; and the execution and delivery of this Second Supplemental Indenture by
the Company and each of the Guarantors have been in all respects duly
authorized; and
WHEREAS, the Company has furnished the Trustee with (i) an
Officers' Certificate and an Opinion of Counsel stating that the conditions
precedent to the execution by the Trustee of this Second Supplemental Indenture
have been satisfied, (ii) resolutions of the Company, each of the Guarantors and
IXC Internet, authorizing the execution of the Second Supplemental Indenture,
and (iii) a request of the Company.
NOW, THEREFORE, each party hereto, for the equal and
proportionate benefit of the other parties hereto and the Holders, are executing
and delivering this Second Supplemental Indenture.
<PAGE> 2
Section 1. Guarantee by IXC Internet.
For value received, IXC Internet agrees to become a party to the
Indenture as a Guarantor under and pursuant to the provisions of the Indenture
and hereby agrees to be bound by the terms and conditions set forth in the New
Subsidiary Guarantee set forth in Exhibit A attached hereto.
Section 2. Miscellaneous.
a. Effect of Second Supplemental Indenture. Upon the execution
and delivery of this Second Supplemental Indenture by the Company, the
Guarantors and the Trustee, the Indenture shall be supplemented in accordance
herewith, and this Second Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Senior Notes heretofore or
hereafter authenticated and delivered under the Indenture shall be bound hereby.
b. Indenture Remains in Full Force and Effect. Except as
supplemented hereby, all provisions in the Indenture shall remain in full force
and effect.
c. Ratification of Indenture. As amended by this Second
Supplemental Indenture, the Indenture is in all respects ratified and confirmed
and, as so supplemented by this Second Supplemental Indenture, shall be read,
taken and construed as one and the same instrument.
d. Confirmation and Preservation of Indenture. The Indenture as
supplemented by this Second Supplemental Indenture is in all respects confirmed
and preserved.
e. Conflict with Trust Indenture Act. If any provision of this
Second Supplemental Indenture limits, qualifies or conflicts with any provision
of the TIA that is required under the TIA to be part of and govern any provision
of this Second Supplemental Indenture, the provision of the TIA shall control.
If any provision of this Second Supplemental Indenture modifies or excludes any
provision of the TIA that may be so modified or excluded, the provision of the
TIA shall be deemed to apply to the Indenture as so modified or to be excluded
by this Second Supplemental Indenture, as the case may be.
f. Severability. In case any provision in this Second
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
g. Headings. The Section headings of this Second Supplemental
Indenture have been inserted for convenience of reference only, are not to be
considered a part of this Second Supplemental Indenture and shall in no way
modify or restrict any of the terms or provisions hereof.
h. Benefits of Second Supplemental Indenture, etc. Nothing in
this Second Supplemental Indenture or the Senior Notes, express or implied,
shall give to any Person, other than
- 2 -
<PAGE> 3
the parties hereto and thereto and their successors hereunder and thereunder and
the Holders of the Senior Notes, any benefit of any legal or equitable right,
remedy or claim under the Indenture, this Second Supplemental Indenture or the
Senior Notes.
i. Successors. All agreements of the Company and in this Second
Supplemental Indenture shall bind its successors. All agreements of the Trustee
in this Second Supplemental Indenture shall bind its successors.
j. The Trustee. In entering into this Second Supplemental
Indenture, the Trustee shall be entitled to the benefit of every provision of
the Indenture relating to the conduct or affecting the liability or affording
protection to the Trustee. The Trustee shall not be responsible in any manner
whatsoever for the recitals of fact herein, all of which are made by the Company
and the Guarantors.
k. Governing Law. The internal law of the State of New York
shall govern and be used to construe this Second Supplemental Indenture without
regard to principals of conflict of laws thereof.
l. Events of Default. To the extent provisions of the Indenture
have been deleted by this Second Supplemental Indenture, the Company is hereby
relieved of its obligations under such provisions and such provisions shall not
hereafter give rise to a Default or an Event of Default. To the extent
provisions of the Indenture have been amended by this Second Supplemental
Indenture, a Default or an Event of Default may arise hereafter under such
provisions only as amended.
m. The Effective Date. This Second Supplemental Indenture shall
become a legally effective and binding instrument upon the execution and
delivery hereof by all parties hereto.
n. Counterparts. This Second Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which so executed shall be deemed to be an original, but
all of such counterparts shall together constitute but one and the same
agreement.
- 3 -
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be executed by their respective officers, thereunto
duly authorized and attested, all as of the day and year first above written.
"Company"
Attest: IXC COMMUNICATIONS, INC.,
By: /s/ Jeffrey C. Smith By: /s/ James F. Guthrie
------------------------------- ------------------------------------
Name: Jeffrey C. Smith Name: James F. Guthrie
Title: Senior Vice President, Title: Executive Vice President and Chief
General Counsel and Secretary Financial Officer
"Guarantors"
ATLANTIC STATES MICROWAVE
TRANSMISSION COMPANY
CENTRAL STATES MICROWAVE
TRANSMISSION COMPANY
TELCOM ENGINEERING, INC.
TOWER COMMUNICATION SYSTEMS CORP.
WEST TEXAS MICROWAVE COMPANY
WESTERN STATES MICROWAVE
TRANSMISSION COMPANY
RIO GRANDE TRANSMISSION, INC.
IXC CARRIER, INC.
IXC LONG DISTANCE, INC.
LINK NET INTERNATIONAL, INC.
IXC INTERNATIONAL, INC.
Attest: IXC INTERNET SERVICES, INC.
By: /s/ Jeffrey C. Smith By: /s/ James F. Guthrie
------------------------------- ------------------------------------
Name: Jeffrey C. Smith Name: James F. Guthrie
Title: Senior Vice President, Title: Executive Vice President and Chief
General Counsel and Secretary Financial Officer
- 4 -
<PAGE> 5
"Trustee"
Attest: IBJ SCHRODER BANK & TRUST
COMPANY
By: /s/ Barbara McCluskey By: /s/ Terence Rawlins
------------------------------- ------------------------------------
Name: Barbara McCluskey Name: Terence Rawlins
Title: Assistant Secretary Title: Assistance Vice President
- 5 -
<PAGE> 6
EXHIBIT A
NEW SUBSIDIARY GUARANTEE
The New Guarantor (which term includes any successors or assigns
under the Indenture), agrees to irrevocably and unconditionally guaranteed on an
unsecured basis (i) the due and punctual payment of the principal of, and
premium and Liquidated Damages, if any, and interest on the Senior Notes,
whether at stated maturity, by acceleration or otherwise, the due and punctual
payment of interest on the overdue principal of, and premium if any, and (to the
extent permitted by law) interest, and Liquidated Damages on any interest, if
any, on the Senior Notes, and the due and punctual performance of all other
obligations of the Company, to the Holders or the Trustee all in accordance with
the terms set forth in the Indenture, (ii) in case of any extension of time of
payment or renewal of any Senior Notes or any such other obligations, that the
same will be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, whether at stated maturity, by acceleration
or otherwise, and (iii) the payment of any and all costs and expenses (including
reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing
any rights under this New Subsidiary Guarantee.
The obligations of the New Guarantor to the Holders and to the
Trustee pursuant to this New Subsidiary Guarantee and the Indenture are
expressly set forth in Article 11 of the Indenture and reference is hereby made
to such Indenture for the precise terms of this Guarantee.
No stockholder, officer, director, or incorporator, as such,
past, present or future of the New Guarantor shall have any liability under this
New Subsidiary Guarantee by reason of his or its status as such stockholder,
officer, director or incorporator.
This is a continuing Guarantee and shall remain in full force and
effect and shall be binding upon the each New Guarantor and its successors and
assigns until full and final payment of all of the Company's obligations under
the Senior Notes and Indenture and shall inure to the benefit of the successors
and assigns of the Trustee and the Holders, and, in the event of any transfer or
assignment of rights by any Holder or the Trustee, the rights and privileges
herein conferred upon that party shall automatically extend to and be vested in
such transferee or assignee, all subject to the terms and conditions hereof.
This is a Guarantee of payment and not of collectibility.
Any term or provision of this Guarantee to the contrary
notwithstanding, the aggregate amount of the Obligations guaranteed hereunder
shall be reduced to the extent necessary to prevent this Guarantee from
violating or becoming voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
The Obligations of the New Guarantor under the New Subsidiary
Guarantee pursuant to Article 11 of the Indenture shall be senior to the
Indebtedness of the New Guarantor on the same basis as the Senior Notes are
senior to the Indebtedness of the Company. For purposes of the foregoing
sentence, (a) the New Guarantor may make, and the Trustee and the Holders of the
Notes have the right to receive and/or retain, payments by the New Guarantor
only at such times as they may receive and/or retain payments in respect of the
Senior Notes pursuant to the Indenture, including Article 11 thereof, and (b)
the rights and obligations of the relevant parties relative to the New
Subsidiary Guarantee and the New Guarantor's Indebtedness shall be the same as
their respective rights and obligations relative to the Senior Notes of the
Company pursuant to Article 11 of the Indenture.
- 6 -
<PAGE> 7
THE TERMS OF ARTICLE 11 OF THE INDENTURE ARE INCORPORATED
HEREIN BY REFERENCE.
Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.
- 7 -
<PAGE> 1
EXHIBIT 4.15
THIRD SUPPLEMENTAL INDENTURE
Third Supplemental Indenture, dated as of January 6, 1998, by and
among IXC Communications, Inc., a Delaware corporation (the "Company"), each of
the Guarantors listed on the signature pages hereto (the "Guarantors") and IBJ
Schroder Bank & Trust Company, as trustee (the "Trustee"), under the Indenture
dated as of October 5, 1995, as amended by Amendment No. 1 to Indenture and
Subsidiary Guaranty dated as of June 4, 1996 and as supplemented by the First
Supplemental Indenture dated as of October 23, 1997 and the Second Supplemental
Indenture dated as of December 22, 1997 among the Company, the Guarantors, and
the Trustee (as amended and supplemented, the "Indenture") pursuant to which the
Company's 12 1/2% Senior Notes due 2005 (the "Senior Notes") were issued.
Capitalized terms used herein, but otherwise not defined herein, shall have the
meanings given to such terms in the Indenture.
WHEREAS, on August 2, 1996, the Company consummated its offer to
exchange (the "Exchange Offer") any and all of its outstanding Series A Senior
Notes for a like aggregate principal amount of Series B Senior Notes;
WHEREAS, certain affiliates and other holders of the Series A
Senior Notes (collectively the "Non-Exchanging Holders") were unable to or did
not participate in the Exchange Offer;
WHEREAS, at least one Non-Exchanging Holder has expressed a
desire to exchange its Series A Senior Notes for Series B Senior Notes in a
transaction outside of the Company's Exchange Offer;
WHEREAS, pursuant to Section 2.01 of the Indenture, the Series B
Senior Notes may be originally issued only in exchange for the Series A Senior
Notes pursuant to the Exchange Offer;
WHEREAS, the Boards of Directors of the Company and each of the
Guarantors have determined that it is in the best interest of the Company and
the Guarantors to authorize and approve an amendment to the Indenture in
accordance with subparagraph (d) of Section 901 of the Indenture in order to
allow the Company, upon request of a Holder of the Series A Senior Notes, to
exchange the Series A Senior Notes for a like principal amount of new securities
which are identical in all material respects to the Series B Senior Notes except
that such new securities will not be registered pursuant to an effective
registration statement under the Securities Act of 1933, as amended;
WHEREAS, Section 9.01 of the Indenture provides, among other
things, that the Company and the Trustee may amend or supplement the Indenture
as provided herein without the consent of any Holder to make any change that
does not adversely affect the legal rights thereunder of any Holder of the
Senior Notes;
<PAGE> 2
WHEREAS, all acts and proceedings required by law, the Indenture
and the charter documents of the Company necessary to constitute this Third
Supplemental Indenture as a valid and binding agreement for the uses and
purposes herein set forth, in accordance with its terms, have been done and
taken; and the execution and delivery of this Third Supplemental Indenture by
the Company and each of the Guarantors have been in all respects duly
authorized; and
WHEREAS, the Company has furnished the Trustee with (i) an
Officers' Certificate and an Opinion of Counsel stating that the conditions
precedent to the execution by the Trustee of this Third Supplemental Indenture
have been satisfied, (ii) resolutions of the Company and each of the Guarantors
authorizing the execution of the Third Supplemental Indenture, and (iii) a
request of the Company.
NOW, THEREFORE, each party hereto, for the equal and
proportionate benefit of the other parties hereto and the Holders, is executing
and delivering this Third Supplemental Indenture.
Section 1. Amendment of Section 2.01 of the Indenture. The third
paragraph of Section 2.01 of the Indenture is hereby amended to read in its
entirety as follows:
"All Senior Notes which shall be issued and authenticated on the
date of this Indenture shall be designated as the 12.50% Series A Senior
Notes due 2005 of the Company. The Series B Senior Notes shall be
designated as the 12.50% Senior Series B Notes due 2005 of the Company
and shall be identical in all material respects to the Series A Senior
Notes (except that the Series B Senior Notes will not contain the legend
set forth in Section 2.06(g)(i) manifesting the transfer restrictions).
The Series B Senior Notes shall be originally issued only in exchange
for the then outstanding Series A Senior Notes tendered at the option of
the Holders thereof pursuant to the Exchange Offer. Notwithstanding
anything in this Indenture to the contrary, upon request of a Holder of
Series A Senior Notes, the Company, in exchange for a like principal
amount of Series A Senior Notes, may issue new securities to such Holder
which are identical in all material respects to the Series B Senior
Notes except that such new securities will not be registered pursuant to
an effective registration statement under the Securities Act, and shall
contain the legend set forth in Section 2.06(g)(i) manifesting such
transfer restrictions."
Section 2. Amendment of Section 2.02 of the Indenture. Section 2.02 of
the Indenture is hereby amended to add a sixth paragraph to the end of Section
2.02 to read in its entirety as follows:
"Notwithstanding anything in this Indenture to the contrary, the
authority of the Trustee to authenticate Senior Notes includes the
authority
- 2 -
<PAGE> 3
to authenticate Series B Senior Notes to be issued in an exchange for a
like principal amount of Series A Senior Notes pursuant to the Exchange
Offer or otherwise in accordance with Section 2.01 hereof."
Section 3. Amendment of Section 4.09 of the Indenture. Paragraph (vii)
of the second sentence of Section 4.09 of the Indenture is hereby amended to
read in its entirety as follows:
"(vii) the issuance of the Series B Senior Notes in connection
with the Exchange Offer or otherwise in accordance with Section 2.01
hereof."
Section 4. Miscellaneous.
a. Effect of Third Supplemental Indenture. Upon the execution
and delivery of this Third Supplemental Indenture by the Company, the Guarantors
and the Trustee, the Indenture shall be supplemented in accordance herewith, and
this Third Supplemental Indenture shall form a part of the Indenture for all
purposes, and every Holder of Senior Notes heretofore or hereafter authenticated
and delivered under the Indenture shall be bound hereby.
b. Indenture Remains in Full Force and Effect. Except as
supplemented hereby, all provisions in the Indenture shall remain in full force
and effect.
c. Ratification of Indenture. As amended by this Third
Supplemental Indenture, the Indenture is in all respects ratified and confirmed
and, as so supplemented by this Third Supplemental Indenture, shall be read,
taken and construed as one and the same instrument.
d. Confirmation and Preservation of Indenture. The Indenture as
supplemented by this Third Supplemental Indenture is in all respects confirmed
and preserved.
e. Conflict with Trust Indenture Act. If any provision of this
Third Supplemental Indenture limits, qualifies or conflicts with any provision
of the TIA that is required under the TIA to be part of and govern any provision
of this Third Supplemental Indenture, the provision of the TIA shall control. If
any provision of this Third Supplemental Indenture modifies or excludes any
provision of the TIA that may be so modified or excluded, the provision of the
TIA shall be deemed to apply to the Indenture as so modified or to be excluded
by this Third Supplemental Indenture, as the case may be.
f. Severability. In case any provision in this Third
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
g. Headings. The Section headings of this Third Supplemental
Indenture have been inserted for convenience of reference only, are not to be
considered a part of this Third Supplemental Indenture and shall in no way
modify or restrict any of the terms or provisions hereof.
- 3 -
<PAGE> 4
h. Benefits of Third Supplemental Indenture, etc. Nothing in
this Third Supplemental Indenture or the Senior Notes, express or implied, shall
give to any Person, other than the parties hereto and thereto and their
successors hereunder and thereunder and the Holders of the Senior Notes, any
benefit of any legal or equitable right, remedy or claim under the Indenture,
this Third Supplemental Indenture or the Senior Notes.
i. Successors. All agreements of the Company and in this Third
Supplemental Indenture shall bind its successors. All agreements of the Trustee
in this Third Supplemental Indenture shall bind its successors.
j. The Trustee. In entering into this Third Supplemental
Indenture, the Trustee shall be entitled to the benefit of every provision of
the Indenture relating to the conduct or affecting the liability or affording
protection to the Trustee. The Trustee shall not be responsible in any manner
whatsoever for the recitals of fact herein, all of which are made by the Company
and the Guarantors.
k. Governing Law. The internal law of the State of New York
shall govern and be used to construe this Third Supplemental Indenture without
regard to principals of conflict of laws thereof.
l. Events of Default. To the extent provisions of the Indenture
have been deleted by this Third Supplemental Indenture, the Company is hereby
relieved of its obligations under such provisions and such provisions shall not
hereafter give rise to a Default or an Event of Default. To the extent
provisions of the Indenture have been amended by this Third Supplemental
Indenture, a Default or an Event of Default may arise hereafter under such
provisions only as amended.
m. The Effective Date. This Third Supplemental Indenture shall
become a legally effective and binding instrument upon the execution and
delivery hereof by all parties hereto.
n. Counterparts. This Third Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which so executed shall be deemed to be an original, but
all of such counterparts shall together constitute but one and the same
agreement.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be executed by their respective officers, thereunto
duly authorized and attested, all as of the day and year first above written.
"Company"
Attest: IXC COMMUNICATIONS, INC.,
By: /s/ Jeffrey C. Smith By: /s/ James F. Guthrie
------------------------------- ------------------------------------
Name: Jeffrey C. Smith Name: James F. Guthrie
Title: Senior Vice President, Title: Executive Vice President and Chief
General Counsel and Secretary Financial Officer
"Guarantors"
ATLANTIC STATES MICROWAVE
TRANSMISSION COMPANY
CENTRAL STATES MICROWAVE
TRANSMISSION COMPANY
TELCOM ENGINEERING, INC.
TOWER COMMUNICATION SYSTEMS CORP.
WEST TEXAS MICROWAVE COMPANY
WESTERN STATES MICROWAVE
TRANSMISSION COMPANY
RIO GRANDE TRANSMISSION, INC.
IXC CARRIER, INC.
IXC LONG DISTANCE, INC.
LINK NET INTERNATIONAL, INC.
IXC INTERNATIONAL, INC.
Attest: IXC INTERNET SERVICES, INC.
By: /s/ Jeffrey C. Smith By: /s/ James F. Guthrie
------------------------------- ------------------------------------
Name: Jeffrey C. Smith Name: James F. Guthrie
Title: Senior Vice President, Title: Executive Vice President and Chief
General Counsel and Secretary Financial Officer
- 5 -
<PAGE> 6
"Trustee"
Attest: IBJ SCHRODER BANK & TRUST
COMPANY
By: /s/ Barbara McCluskey By: /s/ Terence Rawlins
------------------------------- ------------------------------------
Name: Barbara McCluskey Name: Terence Rawlins
Title: Assistant Secretary Title: Assistance Vice President
- 5 -
<PAGE> 1
EXHIBIT 10.21
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First Amendment"),
is dated as of December 23, 1997, by and between the following parties:
LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation
with offices at 220 Athens Way, Nashville,
Tennessee 37228 and its assigns ("NTFC")
LENDER/SECURED PARTY: EXPORT DEVELOPMENT CORPORATION, a corporation
established by an Act of Parliament of
Canada with its principal place of business
at 151 O'Connor, Ottawa, Canada K1A 1K3 ("EDC")
BORROWER/DEBTOR: IXC CARRIER, INC., a Nevada corporation with its
principal place of business at 1122 South
Capital of Texas Hwy., Austin, Texas 78746
("Borrower")
GUARANTOR: IXC COMMUNICATIONS, INC., a Delaware corporation
with its principal place of business at 1122
South Capital of Texas Hwy., Austin, Texas 78746
("Guarantor")
This First Amendment changes only the terms referenced herein of the Loan and
Security Agreement -between the parties thereto dated as of July 18, 1997 (the
"Agreement"), and except as expressly amended hereby, the Agreement, including
the exhibits and schedules attached thereto, and all other documents executed in
connection therewith, remain in full force and effect as executed. Any terms not
otherwise defined herein shall have the meanings given them in the Agreement.
IN WITNESS WHEREOF, the parties have executed this First Amendment to Loan and
Security Agreement by their duly authorized representatives:
LENDER: BORROWER:
- ------ --------
NTFC CAPITAL CORPORATION IXC CARRIER, INC.
By:/s/ L.W. Middleton By: /s/ James F. Guthrie
TITLE: Secretary TITLE: Executive Vice President and
Chief Financial Officer
DATE: 12/23/97 DATE: 12/23/97
LENDER: GUARANTOR:
- ------ ---------
EXPORT DEVELOPMENT CORPORATION IXC COMMUNICATIONS, INC.
By: /s/ Bruce Dunlop /s/ Stephen Davies By: /s/ James F. Guthrie
TITLE: Financial Services International Executive Vice President
Manager Contracts Specialist and Chief Financial Officer
DATE: 12/24/97 DATE: 12/23/97
<PAGE> 2
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("First Amendment")
is dated as of December 23, 1997 by and between IXC CARRIER, INC., a Nevada
corporation ("Borrower"), IXC COMMUNICATIONS, INC., a Delaware corporation
("Guarantor"), NTFC CAPITAL CORPORATION, a Delaware corporation ("NTFC"), and
EXPORT DEVELOPMENT CORPORATION, a Canadian crown corporation("EDC").
B A C K G R O U N D:
A. THE PARTIES HAVE ENTERED INTO A LOAN AND SECURITY AGREEMENT
("Agreement") dated as of July 18, 1997, providing for extensions of credit to
Borrower for the purposes stated therein.
B. A portion of the right, title and interest of NTFC in, under and to
the Agreement and attendant Loan Documents was assigned to EDC pursuant to the
Assignment and Acceptance Agreement and the Intercreditor Agreement between NTFC
and EDC.
C. NTFC and EDC remain willing to extend such credit to Borrower, and
Borrower remains willing to borrow funds thereunder, upon the terms and
conditions set forth in the Agreement as amended by this First Amendment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto agree as follows:
T E R M S:
The following provisions of the Agreement are hereby amended:
1. Section 1.01 is amended by substituting the following definitions for
those in the Agreement:
"Cash Flow": during any fiscal period of Guarantor, the sum of (i) net
income (or loss) (which may be a positive or negative number) for such period,
plus (ii) all non-cash items deducted in determining such net income (or loss),
plus (iii) any infusions of cash equity available to Guarantor for general
corporate purposes (including cash infusions for the Guarantor's Common Stock,
Convertible Preferred Stock, Exchangeable Preferred Stock, or other Preferred
Stock duly authorized and issued pursuant to the Guarantor's Certificate of
Incorporation and By-Laws) or advances of subordinated debt to the Guarantor,
minus (iv) all non-cash items added in determining net income (or loss) during
such period, less (v) any Equity Payments made pursuant to Section 8.04 hereof.
"Note" or "Notes": collectively, one or more promissory notes issued by
Borrower to Lender or Lender's assignee, and all extensions, renewals,
modifications, replacements, amendments, restatements and refinancings thereof.
2. Section 2.02 is amended by substituting the following new Section for
that in the Agreement:
2
<PAGE> 3
2.02. Notes and Payment Terms.
(a)
Promissory Notes. The Advances shall be evidenced by one or more Notes
substantially in the form of Exhibit A hereto, with appropriate
insertions. Each Note shall be executed by Borrower, payable to the
order of Lender or Lender's assignee, and shall evidence the obligation
of Borrower to repay all principal amounts advanced under or pursuant to
this Agreement, together with interest and all other amounts due
thereunder. Each Note shall be dated the Closing Date, have a stated
maturity that is the Maturity Date, and bear interest at the Interest
Rate from the First Borrowing Date until the Note or any amount
thereunder is paid in full (whether on the Maturity Date, by
acceleration or otherwise). All schedules attached to the Note shall be
deemed a part thereof. Any such schedule may be amended by Lender from
time to time to reflect changes in the amounts includable thereon, but
the failure to attach or amend any schedule shall not diminish the
obligation of Borrower to repay all amounts due hereunder or on any
Note.
(b)
Interest Payments. Interest shall accrue on the principal amount
outstanding on each Note for each separate Advance at the applicable
Interest Rate for each Advance and shall be payable, in arrears, on each
Interest Payment Date to the holder of the Note. Interest only shall be
payable during the Interest Only Period, and thereafter all accrued
interest shall be payable, in arrears, with the principal payments
described below.
(c)
Principal Payments. On the Conversion Date, each Note shall
automatically convert to a term certain of twenty (20) consecutive
quarters, and principal shall be paid in twenty (20) equal consecutive
quarterly installments, plus accrued interest to the holder of the Note,
commencing on June 30, 1998 and on each Payment Date thereafter until
the Maturity Date; provided, however, that the principal payment amounts
shall be recalculated by Lender if any Advances are made hereunder after
the Conversion Date, based on the aggregate amount of all Advances made
at any time. The amount of each quarterly payment shall be calculated,
at the outset, by amortizing the amount of all principal amounts
outstanding on the Conversion Date. It is intended that the above
amortization schedule will fully amortize the principal amounts advanced
under all of the Notes. The final payment on a Note shall be in an
amount equal to all outstanding principal, accrued and unpaid interest,
premiums, and apportioned expenses, fees, penalties and all other unpaid
charges due under that Note and this Agreement.
(d)
Late Payments and Default Rate. Notwithstanding the foregoing, if
Borrower shall fail to pay within ten (10) days after the due date any
principal amount or interest or other amount payable under this
Agreement or under any Note, Borrower shall pay to Lender and/or to the
holder of any Note not held by Lender, to defray the administrative
costs of handling such late payments, an amount equal to interest on the
amount unpaid, to the extent permitted under applicable law, at the
Default Rate (instead of the Interest Rate), from the due date until
such overdue principal amount, interest or other unpaid amount is paid
in full (both before and after judgment) whether or not any notice of
default in the payment thereof has been delivered under Section 9.01
hereof. In addition, but without duplication, upon the occurrence and
during the continuance of an Event of Default, all outstanding amounts
hereunder shall bear interest at the Default Rate (instead of the
Interest Rate) until such amounts are paid in full or such Event of
Default is waived in writing by Lender.
3
<PAGE> 4
(e)
Excess Interest. Notwithstanding any provision of any Note, this
Agreement or any other Loan Document to the contrary, it is the intent
of Lender and Borrower that Lender or any holder of any Note shall never
be entitled to receive, collect, reserve or apply, as interest, any
amount in excess of the maximum rate of interest permitted to be charged
by applicable Law, as amended or enacted from time to time. In the event
Lender, or any holder of any Note, ever receives, collects, reserves or
applies, as interest, any such excess, such amount which would be
excessive interest shall be deemed a partial prepayment of principal and
treated as such, or, if the principal indebtedness and all other amounts
due are paid in full, any remaining excess funds shall immediately be
applied to any other outstanding indebtedness of Borrower due to Lender,
and if none is outstanding, shall be paid to Borrower. In determining
whether or not the interest paid or payable, under any specific
contingency, exceeds the highest lawful rate, Borrower and Lender shall,
to the maximum extent permitted under applicable law, (a) exclude
voluntary prepayments and the effects thereof as it may relate to any
fees charged by Lender, and (b) amortize, prorate, allocate, and spread,
in equal parts, the total amount of interest throughout the entire term
of the indebtedness; provided that if the indebtedness is paid and
performed in full prior to the end of the full contemplated term hereof,
and if the interest received for the actual period of existence hereof
exceeds the maximum lawful rate, Lender or any holder of any Note shall
refund to Borrower the amount of such excess or credit the amount of
such excess against the principal portion of the indebtedness, as of the
date it was received, and, in such event, Lender shall not be subject to
any penalties provided by any laws for contracting for, charging,
reserving or receiving interest in excess of the maximum lawful rate.
4. Schedule 2.02 attached hereto shall be attached to the Agreement in
replacement of the Schedule 2.02 attached to the Agreement at the Closing.
5. Schedule 4.26 attached hereto shall be attached to the Agreement in
replacement of the Schedule 4.26 attached to the Agreement at the Closing.
6. Schedule 6.02 attached hereto shall be attached to the Agreement in
replacement of the Schedule 6.02 attached to the Agreement at the Closing.
7. The First Amendment to the Disclosure Schedule attached hereto shall
be attached to the Agreement as an amendment to the Disclosure Schedule attached
to the Agreement at the Closing.
END OF FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------------
4
<PAGE> 1
EXHIBIT 10.22
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Second
Amendment"), is dated as of January 21, 1998, by and between the following
parties:
LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation
with offices at 220 Athens Way, Nashville,
Tennessee 37228 and its assigns ("NTFC")
LENDER/SECURED PARTY: EXPORT DEVELOPMENT CORPORATION, a corporation
established by an Act of Parliament of
Canada with its principal place of business
at 151 O'Connor, Ottawa, Canada K1A 1K3 ("EDC")
BORROWER/DEBTOR: IXC CARRIER, INC., a Nevada corporation with its
principal place of business at 1122 South
Capital of Texas Hwy., Austin, Texas 78746
("Borrower")
GUARANTOR: IXC COMMUNICATIONS, INC., a Delaware corporation
with its principal place of business at 1122
South Capital of Texas Hwy., Austin, Texas 78746
("Guarantor")
This Second Amendment changes only the terms referenced herein of the Loan and
Security Agreement -between the parties thereto dated as of July 18, 1997, as
amended by the First Amendment to Loan and Security Agreement dated as of
December 23, 1997 ("First Amendment") (collectively, the "Agreement"), and
except as expressly amended hereby, the Agreement, including the exhibits and
schedules attached thereto, and all other documents executed in connection
therewith, remain in full force and effect as executed. Any terms not otherwise
defined herein shall have the meanings given them in the Agreement.
R E C I T A L S:
A. The parties have entered into the Agreement, providing for extensions
of credit to Borrower for the purposes stated therein.
B. A portion of the Advances permitted under the Agreement have been
funded, but a portion remain unfunded because certain Landlord Consents have not
yet been obtained by Borrower. Therefore, the Financing Termination Date under
the Agreement must be extended.
C. NTFC and EDC remain willing to make Advances to Borrower upon the
receipt of additional Landlord Consents and upon the other terms and conditions
set forth in the Agreement as amended by this Second Amendment, and Borrower
desires to continue to borrow funds under the Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto agree as follows:
T E R M S:
The following provisions of the Agreement are hereby amended:
1. Exhibit A-1 and Exhibit A-2 attached hereto shall be attached to the
Agreement in replacement of Exhibit A originally attached to the Agreement, and
new Notes shall be executed in replacement of the outstanding Notes.
<PAGE> 2
2. Schedule 2.02 attached hereto shall be attached to the Agreement in
replacement of the Schedule 2.02 attached to the Agreement with the First
Amendment.
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Loan and Security Agreement by their duly authorized representatives:
LENDER: BORROWER:
NTFC CAPITAL CORPORATION IXC CARRIER, INC.
By: /s/ L.W. Middleton By: /s/ Stuart K. Coppens
TITLE: Secretary TITLE: Vice President Finance/CAO
DATE: 1/26/98 DATE: 1/21/98
LENDER: GUARANTOR:
EXPORT DEVELOPMENT CORPORATION IXC COMMUNICATIONS, INC.
By: /s/ Bruce Dunlop By: /s/ Stuart K. Coppens
TITLE: Financial Services Manager TITLE: Vice President Finance/CAO
DATE: 2/4/98 DATE: 1/21/98
By: /s/ Stephen Davies
TITLE: International Contracts Specialist
DATE: 2/4/98
2
<PAGE> 3
SCHEDULE 2.02 TO
LOAN AND SECURITY AGREEMENT
PAYMENT TERMS AND GOVERNING LAW
"Conversion Date": the Financing Termination Date.
"Financing Termination Date": March 31, 1998.
"Initial Payment Date": June 30, 1998.
"Interest Only Period": the period beginning on the First Borrowing Date
and continuing through March 31, 1998.
"Interest Payment Date": the last Business Day of each Calendar Quarter.
"Interest Rate": a fixed interest rate equal to the lesser of (i) the
five (5) year constant maturity Treasury Bill rate as quoted in the Federal
Reserve Statistical Release H.15 report on the last business day of the week
ending two weeks prior to the week of the Borrowing Date plus 320 basis points
("Interest Rate") expressed as an annual rate of interest, compounded monthly,
and calculated on the basis of a 360- day year, or (ii) the maximum permissible
rate under applicable law in effect at any time.
So long as no event of default has occurred and is continuing, the
Interest Rate applying to each Advance shall be reduced (on a one-time basis) by
75 basis points when the Guarantor's public debt rating as of any Payment Date
equals or exceeds Standard and Poor's BBB- rating.
So long as no event of default has occurred and is continuing, the
Interest Rate applying to each Advance shall be reduced (on a one-time basis) by
an additional 25 basis points when the Guarantor's public debt rating as of any
Payment Date equals or exceeds Standard and Poor's BBB rating.
If, after the Guarantor attains a BBB rating, the Guarantor's debt
rating is subsequently downgraded from BBB (but not less than BBB-) as of any
Payment Date, then the Interest Rate applying to each Advance will be increased
by 25 basis points. If the Guarantor's debt rating is further downgraded as of
any Payment Date below BBB-, then the Interest Rate applying to each Advance
will be increased by an additional 75 basis points.
"Maturity Date": March 31, 2003, on which date all outstanding
principal, accrued and unpaid interest, premiums, expenses, fees, penalties and
all other unpaid charges due under the Note and this Agreement shall be finally
due and payable.
"Payment Date": the Initial Payment Date and the last Business Day of
each Calendar Quarter thereafter.
"Second Amendment to Disclosure Schedule": the Second Amendment Dated as
of January 22, 1998 to IXC Communications, Inc. Disclosure Schedule, attached
hereto and hereby made a part of the Agreement.
3
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES
INCORPORATION UNDER WHICH
OR SUBSIDIARY
NAME OF SUBSIDIARY ORGANIZATION DOES BUSINESS TYPE OF ENTITY
------------------ ------------ ------------- --------------
<S> <C> <C> <C>
Atlantic States Microwave Transmission Company Nevada None Corporation
Central States Microwave Transmission Company Ohio None Corporation
Infotel Europe N/A European Joint Venture
IXC Broadband Services, Inc. Delaware None Corporation
IXC Business Services, LLC Delaware None Limited Liability Company
IXC Carrier, Inc. Nevada None Corporation
IXC International, Inc. Delaware None Corporation
IXC Internet Services, Inc. Delaware None Corporation
IXC Leasing, LLC Delaware None Limited Liability Company
IXC Long Distance, Inc. Delaware None Corporation
IXC-One Acquisition Corp. California None Corporation
Link Net International, Inc. Delaware None Corporation
Marca-Tel S.A. de C.V. Mexico None Corporation
MSM Associates, Limited Partnership Delaware None Limited Partnership
Mutual Signal Corp. New York None Corporation
Mutual Signal Corporation of Michigan New York None Corporation
Mutual Signal Holding Corporation Delaware None Corporation
Pisces Acquisition Corp. Delaware Corporation
Progress International, L.L.C. Texas None Limited Liability Company
Rio Grande Transmission, Inc. Delaware None Corporation
Switched Services Communications, L.L.C. Texas None Limited Liability Company
Telcom Engineering, Inc. Texas None Corporation
Telecom One, Inc. Delaware None Corporation
Tower Communication Systems Corp. Ohio None Corporation
UniDial Communications Services, LLC Kentucky None Limited Liability Company
U.S. Advantage Long Distance, Inc. Texas None Corporation
West Texas Microwave Company Texas None Corporation
Western States Microwave Transmission Company Nevada None Corporation
European Joint Venture England N/A Joint Venture
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 pertaining to the IXC Communications, Inc. 1996 Stock Plan and the
IXC Communications, Inc. Amended and Restated 1994 Stock Plan and to the
incorporation by reference in the Registration Statement on Form S-8 pertaining
to the IXC Communications, Inc. Special Stock Plan and to the incorporation by
reference in the Amendment No. 1 to the Registration Statement on Form S-3 of
IXC Communications, Inc. for the registration of 97,481 shares of common stock
and 1,400,000 shares of 7 1/4% Junior Convertible Preferred Stock (including any
common stock issuable upon conversion thereof) of our report dated February 28,
1998, with respect to the consolidated financial statements of IXC
Communications, Inc. included in the Annual Report on Form 10-K for the year
ended December 31, 1997.
Ernst & Young LLP
Austin, Texas
March 16, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the use of our report dated
January 30, 1998, with respect to the Combined Financial Statements of Marca Tel
for the years ended December 31, 1997 and December 31, 1996 in the Form 10-K of
IXC Communications, Inc.
ARTHUR ANDERSEN
/s/ FELIPE ROJAS PEREZ
- ---------------------------------------------------------
Felipe Rojas Perez
Monterrey, N.L.
March 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 152,720,000
<SECURITIES> 0
<RECEIVABLES> 107,689,000
<ALLOWANCES> 14,403,000
<INVENTORY> 0
<CURRENT-ASSETS> 249,506,000
<PP&E> 724,588,000
<DEPRECIATION> 115,651,000
<TOTAL-ASSETS> 917,095,000
<CURRENT-LIABILITIES> 181,677,000
<BONDS> 285,000,000
403,368,000
414
<COMMON> 316,000
<OTHER-SE> (47,955,000)
<TOTAL-LIABILITY-AND-EQUITY> 917,095,000
<SALES> 0
<TOTAL-REVENUES> 420,710,000
<CGS> 0
<TOTAL-COSTS> 325,127,000
<OTHER-EXPENSES> 140,818,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,076,000
<INCOME-PRETAX> (93,166,000)
<INCOME-TAX> (1,389,000)
<INCOME-CONTINUING> (94,555,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94,555,000)
<EPS-PRIMARY> (3.75)
<EPS-DILUTED> (3.75)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MARCA TEL
COMBINING FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
1
<PAGE> 2
MARCA TEL
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-36
Combining Balance Sheets as of December 31, 1997 and 1996... F-37
Combining Statements of Income (Loss) for the Years Ended
December 31, 1997 and 1996................................ F-39
Combined Statements of Shareholders' Equity for the Years
Ended December 31, 1997 and 1996.......................... F-40
Combined Statements of Cash Flow for the Years Ended
December 31, 1997 and 1996................................ F-41
Notes to the Combining Financial Statements for the Year
Ended December 31, 1997 and 1996.......................... F-42
</TABLE>
2
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
Marca Tel:
We have audited the accompanying combined balance sheets of Marca Tel, S.A.
de C.V., Marca Tel International, S.A. de C.V. and Grupo Marca Tel, S.A. de C.V.
(collectively referred to as "the Company"), stated in U.S. dollars, as of
December 31, 1997 and 1996, and the related combining statements of income,
changes in shareholders' equity and cash flows for the years then ended. These
combining 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 the auditing standards generally
accepted in the United States. 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 combined financial position of the Company as of
December 31, 1997 and 1996, and the results of their operations, their changes
in shareholders' equity and their cash flows for the years then ended, in
accordance with the accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN
Monterrey, N.L.
January 30, 1998
3
<PAGE> 4
MARCA TEL
COMBINING BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
MARCA TEL GRUPO
MARCA TEL, INTERNATIONAL, MARCA TEL, COMBINED COMBINED
S.A. DE C.V. S.A. DE C.V. S.A. DE C.V. ELIMINATIONS 1997 1996
------------ -------------- ------------ --------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.... $ 100,378 $ 295,414 $ 8,363 $ -- $ -- $ 404,155 $ 199,495
Accounts receivable.......... 3,683,059 -- -- -- -- 3,683,059 --
Value added taxes............ 5,714,074 650,768 2,209 -- 1,104,737 5,262,314 3,466,561
Affiliated companies......... 635,248 3,055,740 186,811 -- 3,877,799 -- --
Miscellaneous creditors...... 784,844 36,413 52,261 -- -- 873,518 722,490
----------- ---------- ---------- -------- ---------- ----------- -----------
Total current
assets.............. 10,917,603 4,038,335 249,644 -- 4,982,536 10,223,046 4,388,546
----------- ---------- ---------- -------- ---------- ----------- -----------
INVESTMENT IN SHARES........... -- -- 4,250,000 -- -- 4,250,000 4,250,000
PROPERTY AND EQUIPMENT, net.... 68,560,939 1,119,947 559,408 -- -- 70,240,294 26,593,833
OTHER ASSETS................... 5,357,832 1,391 264,359 170,015 1,742,876 4,050,721 2,149,960
DEFERRED CHARGES............... 1,709,948 -- -- -- -- 1,709,948 1,731,814
----------- ---------- ---------- -------- ---------- ----------- -----------
Total assets.......... $86,546,322 $5,159,673 $5,323,411 $170,015 $6,725,412 $90,474,009 $39,114,153
=========== ========== ========== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this combined statement.
4
<PAGE> 5
MARCA TEL
COMBINING BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(U.S. DOLLARS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCA TEL GRUPO
MARCA TEL, INTERNATIONAL, MARCA TEL, COMBINED COMBINED
S.A. DE C.V. S.A. DE C.V. S.A. DE C.V. ELIMINATIONS 1997 1996
------------ -------------- ------------ --------------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term
debt...................... $ -- $ -- $ 325,000 $ -- $ -- $ 325,000 $ 325,000
Suppliers (Siemens)......... 16,349,155 -- -- -- -- 16,349,155 25,286,778
Accounts payable............ 71,456 643,485 13,495 -- -- 728,436 --
Affiliated companies........ 3,055,741 186,811 635,248 3,877,800 -- -- --
Taxes payable............... 607,312 1,425,308 17,943 1,056,978 -- 993,585 102,748
Other accrued liabilities... 34,895 -- -- -- -- 34,895 950,697
------------ ---------- ---------- ---------- -------- ------------ -----------
Total current
liabilities........ 20,118,559 2,255,604 991,686 4,934,778 -- 18,431,071 26,665,223
------------ ---------- ---------- ---------- -------- ------------ -----------
LONG TERM DEBT:
Banco Santander Mexicano,
S.A....................... -- -- 2,744,096 -- -- 2,744,096 2,870,833
Suppliers (Siemens)......... 49,086,608 -- -- -- -- 49,086,608 --
------------ ---------- ---------- ---------- -------- ------------ -----------
Total long term
debt............... 49,086,608 -- 2,744,096 -- -- 51,830,704 2,870,833
------------ ---------- ---------- ---------- -------- ------------ -----------
Total liabilities.... 69,205,167 2,255,604 3,735,782 4,934,778 -- 70,261,775 29,536,056
SHAREHOLDERS' EQUITY:
Capital stock............... 29,496 6,567 6,634 -- -- 42,697 42,697
Advances for future capital
increases................. 44,276,015 2,760,304 1,647,720 -- -- 48,684,039 12,655,099
Accumulated earnings
(losses).................. (26,964,356) 137,198 (66,725) 1,790,634 170,015 (28,514,502) (3,119,699)
------------ ---------- ---------- ---------- -------- ------------ -----------
Total shareholders'
equity............. 17,341,155 2,904,069 1,587,629 1,790,634 170,015 20,212,234 9,578,097
------------ ---------- ---------- ---------- -------- ------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $ 86,546,322 $5,159,673 $5,323,411 $6,725,412 $170,015 $ 90,474,009 $39,114,153
============ ========== ========== ========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these combining statements.
5
<PAGE> 6
MARCA TEL
COMBINING STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCA TEL, GRUPO
MARCA TEL, INTERNATIONAL, MARCA TEL, COMBINED COMBINED
S.A. DE C.V. S.A. DE C.V. S.A. DE C.V. ELIMINATIONS 1997 1996
------------ -------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Net sales........... $ 5,915,946 $ -- $ -- $ (130,084) $ 5,785,862 $ --
Income from
administrative
services.......... -- 9,446,500 -- (9,446,500) -- --
Other income........ -- 118,020 (118,020) -- -- --
------------ ---------- --------- ----------- ------------- -----------
Total
revenues..... 5,915,946 9,446,500 118,020 (9,694,604) 5,785,862 --
Cost of sales
excluding
depreciation and
amortization...... 10,341,476 -- -- -- 10,341,476 --
------------ ---------- --------- ----------- ------------- -----------
Gross profit
(loss)....... (4,425,530) 9,446,500 118,020 (9,694,604) (4,555,614) (3,110,000)
OPERATING EXPENSES:
Administrative
expenses.......... 18,061,631 8,780,129 14,697 (9,694,604) 17,161,853 --
Depreciation and
amortization...... 2,573,366 98,507 40,084 (170,015) 2,541,942 --
------------ ---------- --------- ----------- ------------- -----------
Operating
income
(loss)....... (25,060,527) 567,864 63,239 170,015 (24,259,409) (3,110,000)
OTHER INCOME (EXPENSE):
Interest expense.... (229,020) -- (296,398) -- (525,418) (12,571)
Interest income..... -- 10,114 -- -- 10,114 2,872
Other losses........ (2,102,380) (154,035) (137,507) -- (2,393,922) --
Translation gain
(loss)............ 1,725,599 (1,705) 303,942 -- 2,027,836 --
------------ ---------- --------- ----------- ------------- -----------
(605,801) (145,626) (129,963) -- (881,390) (9,699)
------------ ---------- --------- ----------- ------------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES.................. (25,666,328) 422,238 (66,724) 170,015 (25,140,799) --
PROVISION FOR INCOME
TAXES.................. -- 254,004 -- -- 254,004 --
------------ ---------- --------- ----------- ------------- -----------
Net income
(loss)....... $(25,666,328) $ 168,234 $ (66,724) $ 170,015 $ (25,394,803) $(3,119,699)
============ ========== ========= =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
6
<PAGE> 7
MARCA TEL
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(U.S. DOLLARS)
<TABLE>
<CAPTION>
ADVANCES FOR TOTAL
CAPITAL FUTURE CAPITAL CUMULATIVE SHAREHOLDERS'
STOCK INCREASES LOSSES EQUITY
------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.............. $12,922 $ -- $ -- $ 12,922
Capital increase...................... 29,775 -- -- 29,775
Net loss for the year................. -- -- (3,119,699) (3,119,699)
Advances for future capital
increases.......................... -- 12,655,099 -- 12,655,099
------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996.............. 42,697 12,655,099 (3,119,699) 9,578,097
Net loss for the year................. -- -- (25,394,803) (25,394,803)
Advances for future capital
increases.......................... -- 36,028,940 -- 36,028,940
------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997.............. $42,697 $48,684,039 $(28,514,502) $ 20,212,234
======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
7
<PAGE> 8
MARCA TEL
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(U.S. DOLLARS)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the year..................................... $(25,394,803) $ (3,199,699)
Adjustments to reconcile net loss to cash provided by
operating activities --
Depreciation and amortization.......................... 2,541,942 --
------------ ------------
(22,852,861) (3,199,699)
RESOURCES GENERATED BY OPERATIONS:
(Increase) decrease in assets --
Accounts receivable.................................... (3,730,873) --
Value-added taxes...................................... (1,905,290) (3,575,132)
Miscellaneous creditors................................ (170,958) (745,118)
------------ ------------
(5,807,121) (4,320,250)
Increase (decrease) in liabilities --
Current portion of long-term debt...................... 8,084 335,179
Suppliers (Siemens).................................... (8,424,715) 26,078,750
Accounts payable....................................... 737,893 --
Taxes payable.......................................... 904,958 105,966
Other accrued liabilities.............................. (904,043) 980,472
------------ ------------
(7,677,823) 27,500,367
------------ ------------
Net cash (used in) provided by operating
activities..................................... (36,337,805) 19,980,418
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shares...................................... -- (4,250,000)
Property and equipment.................................... (45,870,208) (26,593,833)
Deferred charges and other assets......................... (2,197,090) (3,855,403)
------------ ------------
Net cash used in investing activities............. $(48,067,298) $(34,699,236)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loans................................................ $ (126,737) $ 3,195,833
Suppliers................................................. 49,086,608 29,775
Advances for future capital increase...................... 36,028,940 12,655,099
------------ ------------
Net cash provided by financing activities......... 84,988,811 15,880,707
Effects of exchange rate changes on cash.................. (379,048) (962,394)
------------ ------------
Net increase in cash and cash equivalents......... 204,660 199,495
Cash and cash equivalents at beginning of year............ 199,495 --
------------ ------------
Cash and cash equivalents at end of year.................. $ 404,155 $ 199,495
============ ============
Supplemental cash flow disclosures:
Cash paid during the period for --
Interest............................................... $ 3,189,485 $ 76,156
============ ============
Income taxes........................................... $ 186,921 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
8
<PAGE> 9
MARCA TEL
NOTES TO THE COMBINING FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
(STATED IN U.S. DOLLARS)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of operations
The principal activity of this group is to provide basic public telephone
services of long distance calls through a concession valid for 30 years, granted
in October 1995 by the Ministry of Communications and Transportation. Until
December 1996, the Company was in its development stage period. In January 1997,
the Company began the sale of services, primarily national and international
long-distance calls.
Basis of Combination
The accompanying combined financial statements include the financial
statements of Marca Tel, S.A. de C.V., Marca Tel International, S.A. de C.V. and
Grupo Marcatel, S.A. de C.V. All material intercompany balances and transactions
have been eliminated in combination.
Basis for Translation
The accounts of the companies are maintained in Mexican pesos.
The combined balance sheet was remeasured into U.S. dollars in accordance
with Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation" (SFAS-52). In this regard Mexico has been considered to be a highly
inflationary economy, and accordingly, the functional currency of the Mexican
operations is the U.S. dollar. The method of translating the Mexican combined
financial statements was as follows:
a. Quoted year-end exchange rates are used to remeasure monetary
assets and liabilities.
b. All other assets and shareholders' equity accounts are remeasured
at the exchange rates in effect at the time the items were originally
recorded.
c. Revenues and expenses are remeasured at the average rates of
exchange in effect during the year, except for depreciation and
amortization, which are translated at the exchange rates in effect when the
respective assets were acquired.
d. Translation gains and losses arising from the remeasurement are
included in the determination of net income in the period such gains and
losses arise and have been distributed to the related income statement
accounts.
Use of estimates
The accounting policies followed by the companies require management to
make certain estimates and use certain assumptions to determine the valuation of
some of the balances included in the financial statements and to make
disclosures required to be included therein. Although the actual results may
differ from those estimates, management believes that the estimates and
assumptions used were appropriate in the circumstances.
Adjustments to conform with accounting principles generally accepted in the
United States
Certain accounting practices applied by the companies that conform with the
accounting principles generally accepted in Mexico do not conform with the
generally accepted accounting principles in the United States. The accompanying
financial statements have been prepared for use primarily in the United States
and
9
<PAGE> 10
MARCA TEL
NOTES TO THE COMBINING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
(STATED IN U.S. DOLLARS)
reflect certain adjustments required to conform with the accounting principles
generally accepted in that country.
Cash and cash equivalents
Cash and cash equivalents are primarily represented by short-term bank
deposits, valued at market price (cost plus accrued interest).
Investment in shares
This investment is valued at cost, which approximates market or net
realizable value (see Note 3).
Property and equipment
Property and equipment includes the costs of buildings and equipment.
Additions, improvements and expenditures for repairs and maintenance that
significantly add to the productive capacity or extend the life of an asset are
capitalized; other expenditures for repairs and maintenance are charged to
income.
Depreciation is calculated under the straight-line method over the
estimated remaining useful lives of the assets, which begin depreciating when
the asset is completed or placed in service, whichever comes first.
Pensions and other employee benefits
The companies are liable for severance payments to employees terminating
under certain conditions. The charge occurs in the period in which the payments
are made and the companies are also liable for the payment of vested seniority
premiums to employees with 15 or more years of service. At December 31, 1997 the
companies had not recorded a liability for this concept primarily because they
were in their first year of operation.
Under the Mexican Labor Law, the companies are liable for separating
payments to employees terminating under certain circumstances. The companies
accrue for such costs when known.
The companies have no other post-retirement or post-employment benefits
which would require adjustment under Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions"
or Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Post-employment Benefits".
Capitalized interest
Interest incurred with respect to long-term capital projects is capitalized
and reflected as a reduction to interest expense. Such amount was $4,109,837 in
1997.
Income taxes
Deferred income taxes are calculated using the liability method for
temporary differences between assets and liabilities for financial and tax
reporting purposes.
Financial instruments
The companies have considered the disclosure provisions of Statement of
Financial Accounting Standards No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk, and Financial Instruments
with Concentration of Credit Risk", as well as the provisions of Statement of
10
<PAGE> 11
MARCA TEL
NOTES TO THE COMBINING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
(STATED IN U.S. DOLLARS)
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments". The companies do not have any financial instruments,
which would call for any additional disclosures under Statements 105 and 107.
Furthermore, the fair value of the companies' financial instruments generally
approximate the amounts at which they are carried on the balance sheet.
Deferred charges
This mainly corresponds to expenses incurred for improvements and
remodeling of leased facilities in Monterrey and Guadalajara. These deferred
charges are subject to amortization over 10 years.
Other assets
This corresponds to a fund (escrow account) created to finance part of the
investments in assets that Siemens Aktiengesellschaft will perform by creating a
contract to provide the telecommunications networks, including the systems
equipment, fiber optics, labor structure, etc.
2. PROPERTY AND EQUIPMENT:
At December 31, the property and equipment consists of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land................................................ $ 361,092 $ 313,990
Building............................................ 1,692,286 216,545
Furniture and fixtures.............................. 592,302 88,551
Transportation equipment............................ 46,933 32,997
Communication equipment............................. 32,525 690,348
Net construction, installation and equipment........ 69,663,621 19,693,460
Advance to suppliers................................ -- 5,557,942
----------- -----------
Total fixed assets........................ 72,388,759 26,593,833
Accumulated depreciation.................. (2,145,466) --
----------- -----------
$70,240,293 $26,593,833
=========== ===========
</TABLE>
The fixed assets of the companies are given as collateral to Siemens,
derived from the obligation that exists with its supplier as mentioned in Note
9.
3. INVESTMENT IN SHARES:
Grupo Marca Tel, S.A. de C.V. has an investment in shares corresponding to
the purchase of shares of Inmobiliaria Mexicana del Noreste, S.A. de C.V., by
means of a contract dated September 26, 1996, in which the Company acquires
99.99% of the shares issued and outstanding of the Company and .01% corresponds
to Marca Tel International, S.A. de C.V. These shares were acquired with
contract that provides for the shares to be held as collateral by the seller
until the purchase price of such shares is to be paid in 60 monthly installments
through September 2001 (see Note 4).
11
<PAGE> 12
MARCA TEL
NOTES TO THE COMBINING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
(STATED IN U.S. DOLLARS)
4. LONG-TERM DEBT:
<TABLE>
<S> <C>
Maturity:
1998 (current portion)................................. $ 325,000
==========
1999................................................... 325,000
2000................................................... 325,000
2001................................................... 2,094,096
----------
$2,744,096
==========
</TABLE>
The loan corresponds to Banco Santander Mexicano, S.A. and is payable in 60
monthly payments of $27,083, at an annual interest rate of LIBOR + 4 points with
a final payment of US$1,570,830 due on September 26, 2001.
The loan is guaranteed with the shares of Inmobiliaria Mexicana del
Noreste, S.A. de C.V.
5. TAX ENVIRONMENT:
Income and asset tax regulations
The companies are subject to income taxes. Income taxes are computed taking
into consideration the taxable and deductible effects of inflation, such as
depreciation calculated on restated values and the deduction of purchases in
place of cost of sales, which permit the deduction of current cost, and taxable
income is increased or reduced by the effects of inflation on certain monetary
assets and liabilities through the inflationary component. The income tax rate
in effect is 34% over taxable income.
Since 1996 was the start-up period of the companies, they will not be
subject to asset tax until 2000.
At December 31, 1997 the companies had available tax loss carryforwards
totaling $23,645,893 expiring in 2006 and 2007, which will be indexed through
the date used. Since there is no assurance that sufficient taxable income will
be generated in the future to utilize these tax loss carryforwards, no related
deferred tax benefits have been recorded.
The provisions for income taxes have been determined on the basis of the
taxable income of each individual company.
Mexican law requires the payment to employees of 10% of the Company's
taxable income, excluding certain adjustments for inflation. These amounts are
treated as compensation expense and are reflected in the appropriate income
statement captions in the accompanying financial statements. The employee profit
sharing expense in 1997 in Marcatel International, amounted $57,678.
6. SHAREHOLDERS' EQUITY:
At December 31, 1997, the combined capital stock consists of 2,000 ordinary
nominative shares, completely subscribed and paid, with a par value of 100
Mexican pesos each which corresponds to the fixed portion of the capital stock.
The variable portion is unlimited.
In accordance with the companies' bylaws, shares are divided into two
series, classified as series "A" and "B". "Series A" represents the minimum
fixed capital in a proportion of 51% of the total capital stock and can only be
owned by Mexican individuals or entities and "Series B" represents the remaining
variable capital of free subscription.
In an Extraordinary General Shareholders' Meeting held on January 12, 1996
and protocolized on January 10, 1997, an increase in the capital stock of Marca
Tel, S.A. de C.V. was approved with the issuance
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MARCA TEL
NOTES TO THE COMBINING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
(STATED IN U.S. DOLLARS)
of 15,300 series "A-1" shares and 14,700 series "B-1" shares amounting to
$5,000,000 (five million of Mexican Pesos). These shares remain deposited in the
treasury of the Company for its subsequent subscription and payment. No increase
in capital stock has been made as of the date of the issuance of these financial
statements.
During 1996 and 1997, the shareholders made advances for future capital
increases.
7. COMMITMENTS AND GUARANTEES:
At December 31, 1997, Marca Tel, S.A. de C.V. had the following commitments
and guarantees:
(a) Long-term contract with its principal supplier (Siemens) to carry
out a turnkey project in order to establish a telecommunications system in
Mexico. This supplier is in charge of installing and supplying the
equipment and the information system to perform communication activities
for external users. The commercial contract with Siemens amounts to
$74,539,537, of which $49,086,608 has been spent, as of December 31, 1997
and is shown in the balance sheet in accounts payable to suppliers. The
dollar denominated liability with Siemens bears interest at an annual rate
of 11%, which is recorded under other accounts payable. As of the date of
operation and of the license granted by the Ministry of Communications and
Transportation, fixed assets and accounts receivable from customers have
been pledged as collateral.
(b) A collateral agreement was executed on December 20, 1996, whereby
the shareholders of Progress International, L.L.C. and Formento Radio Beep,
S.A. de C.V. and Mr. Gustavo Mario de la Garza Ortega pledged the 1,000
shares of the capital stock of the association they own to Siemens
Aktiengesellschaft and Siemens, S.A. de C.V.
An agreement was executed on February 28, 1997 among the above mentioned
shareholders and Siemens Aktiengesellschaft and Siemens, S.A. de C.V., whereby
it was decided to terminate the collateral agreement dated December 20, 1996,
given an irrevocable administration and collateral trust was established on that
same date among the shareholders of Progress International, L.L.C. and Fomento
Radio Beep, S.A. de C.V. and Mr. Gustavo Mario de la Garza Ortega, acting as
trustees in second lien; Bancomer, S.A., Institucion de Banca Multiple and Grupo
Financiero Bancomer, Trust Division, acting as trustors and Siemens
Aktiengesellschaft and Siemens Credit Corporation, acting as trustees in first
lien, whereby the trust held the 1,000 shares of the capital stock of the
association owned by the shareholders.
8. CONTINGENCIES:
In June 1997, through the Federal Telecommunications Commission (COFETEL),
the Ministry of Communications and Transportation issued an administrative
resolution establishing costs of interconnection projects relative to signaling,
pre-subscription and numbering that must be recovered by Telefonos de Mexico,
S.A. de C.V. and Telefonos del Noroeste, S.A. de C.V. in operating their local
services.
According to the official resolution, each company participating in the
long-distance telephone service in Mexico must pay the aforementioned companies
an amount to be determined by an expert hired by COFETEL. Such payment will be
based on various variables such as: recorded cross minutes, market share, total
ratio of ports owned by the company to the overall amount of ports existing in
Mexico. As of December 31, 1997, the companies' relative contingent liability
amounted to US$37,157,883 which must be paid to Telefonos de Mexico and
Telefonos del Noroeste over a seven-year period, starting on January 1, 1998.
Since some telephone companies have expressed dissatisfaction with the
COFETEL resolution, and to this date payments have not been made, although the
related liabilities have been recorded.
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MARCA TEL
NOTES TO THE COMBINING FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
(STATED IN U.S. DOLLARS)
9. SITUATION OF DISSOLUTION:
At December 31, 1997, Marcatel, S.A. de C.V. and Grupo Marcatel, S.A. de
C.V. had accumulated losses exceeding two-thirds of their capital stock, which
places them in a situation of technical bankruptcy. In order for any related
action to be taken, a dissolution order must be approved by the shareholders or
requested by an interested third party through a judicial order.
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