<PAGE> 1
PROSPECTUS
This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 333-56045
[IXC LOGO] IXC COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS 9% SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING 9% SENIOR SUBORDINATED NOTES DUE 2008
The Exchange Offer will expire at 5:00 p.m., New York City time, on July 30,
1998, unless extended.
------------------------
IXC Communications, Inc. ("IXC Communications" or the "Company") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal" which, together with this Prospectus, constitutes the "Exchange
Offer"), to exchange $1,000 principal amount of its 9% Senior Subordinated Notes
Due 2008 (the "New Notes") which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a registration statement
(the "Registration Statement") of which this Prospectus is a part, for each
$1,000 principal amount of its outstanding 9% Senior Subordinated Notes Due 2008
(the "Old Notes" and together with the New Notes, the "Notes"), of which $450
million aggregate principal amount is outstanding as of the date hereof. The New
Notes will be obligations of IXC Communications evidencing the same debt as the
Old Notes, and will be entitled to the benefits of the same Indenture (as
defined). See "Description of the Notes." The form and terms of the New Notes
are substantially identical in all material respects to the form and terms of
the Old Notes except that the New Notes have been registered under the
Securities Act and therefore will not be subject to certain transfer
restrictions applicable to the Old Notes. See "The Exchange Offer."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on July 30, 1998,
unless extended by the Company (such date and time, as it may be extended, the
"Expiration Date"). Old Notes may be tendered only in integral multiples of
$1,000. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions. The Company will not receive any proceeds from the Exchange Offer.
See "The Exchange Offer."
The Exchange Offer is being made to satisfy certain obligations of the
Company under the Registration Rights Agreement dated as of April 16, 1998 (the
"Registration Rights Agreement") among the Company and the purchasers named
therein (the "Initial Purchasers"). Following the completion of the Exchange
Offer, holders of Old Notes not tendered will not have any further registration
rights (except that the Company will be required to file a shelf registration
statement in certain limited instances) and the Old Notes will continue to be
subject to restrictions on transfer. Accordingly, the liquidity of the market
for a holder's Old Notes could be adversely affected if the holder does not
participate in the Exchange Offer. See "Risk Factors -- Consequences of Failure
to Exchange Old Notes."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of the New
Notes received in exchange for the Old Notes where such Old Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Notes. The Old Notes have traded on the Private Offerings, Resale and Trading
through Automated Linkages ("PORTAL") Market. If a market for the New Notes
should develop, the New Notes could trade at prices higher or lower than their
original offering price. The Company does not currently intend to list the New
Notes on any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active public
market for the New Notes will develop. See "Risk Factors -- Lack of Public
Market."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD NOTES ON JUNE 30, 1998.
SEE "RISK FACTORS" ON PAGE 7 FOR INFORMATION THAT SHOULD BE CONSIDERED
IN CONNECTION WITH THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 25, 1998.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K (File No. 0-20803) for its
fiscal year ended December 31, 1997 as filed with the Commission on March 16,
1998 (the "Form 10-K").
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 filed with the Commission on May 15, 1998 (the "Form 10-Q").
(3) The Company's Current Report on Form 8-K dated January 8, 1998 and
filed with the Commission on January 9, 1998.
(4) The Company's Current Report on Form 8-K dated January 30, 1998 and
filed with the Commission on February 2, 1998.
(5) The Company's Current Report on Form 8-K dated February 12, 1998 and
filed with the Commission on February 13, 1998.
(6) The Company's Current Report on Form 8-K dated March 2, 1998 and filed
with the Commission on March 4, 1998.
(7) The Company's Current Report on Form 8-K dated March 18, 1998 and filed
with the Commission on March 18, 1998.
(8) The Company's Current Report on Form 8-K dated March 30, 1998 and filed
with the Commission on April 7, 1998.
(9) The Company's Current Report on Form 8-K dated April 2, 1998 and filed
with the Commission on April 7, 1998.
(10) The Company's Current Report on Form 8-K dated April 15, 1998 and
filed with the Commission on April 24, 1998.
(11) The Company's Current Report on Form 8-K dated April 17, 1998 and
filed with the Commission on April 21, 1998.
(12) The Company's Current Report on Form 8-K dated April 21, 1998 and
filed with the Commission on April 22, 1998.
(13) The Company's Current Report on Form 8-K dated April 23, 1998 and
filed with the Commission on April 24, 1998.
(14) The Company's Current Report on Form 8-K dated April 29, 1998 and
filed with the Commission on April 30, 1998.
(15) The Company's Current Report on Form 8-K dated May 27, 1998 and filed
with the Commission on May 29, 1998.
(16) The Company's Current Report on Form 8-K dated June 3, 1998 and filed
with the Commission on June 4, 1998.
(17) The Company's Current Report on Form 8-K dated June 23, 1998 and filed
with the Commission on June 23, 1998.
(18) The Company's definitive Proxy Statement filed with the Commission on
April 9, 1998 for the 1998 Annual Meeting of Stockholders on April 30, 1998.
(19) All documents filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of this offering shall be deemed to
be incorporated by reference in this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or
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<PAGE> 3
superseded for purposes of this Prospectus to the extent that a statement
contained herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
KELLI MCGLYNN, INVESTOR RELATIONS COORDINATOR, IXC COMMUNICATIONS, INC., 1122
CAPITAL OF TEXAS HIGHWAY SOUTH, AUSTIN, TEXAS 78746 (TELEPHONE 512-328-1112). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
THE DATE WHICH IS FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the New Notes being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are necessarily summaries of those
documents, and, with respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each
statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Commission. Such
reports, proxy and other information can be inspected at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549. At the Commission's Regional offices at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World
Trade Center, 13th floor, New York, New York 10048. Copies of such material can
be obtained at prescribed rates upon request from the Public Reference Section
of the Commission at 450 Fifth Street, N.W. Washington D.C. 20549. The
Commission also maintains a site on the World Wide Web (http://www.sec.gov) that
contains reports, proxy information statements and other information regarding
registrants, like the Company, that file electronically with the Commission. The
Company's common stock is listed on the Nasdaq National Market under the symbol
"IIXC." Reports, proxy statements and other information concerning the Company
may be inspected and copied at the offices of The Nasdaq Stock Market at 1735 K
Street, N.W., Washington D.C. 20006.
ii
<PAGE> 4
PROSPECTUS SUMMARY
Certain of the information contained in this Prospectus, including
information regarding the Company's network expansion and long distance switched
services and related strategy and financing, are forward-looking statements. For
a discussion of important factors that could cause actual results to differ
materially from the matters described in the forward-looking statements and
other matters that should be carefully considered by prospective investors, see
"Risk Factors". Certain terms used herein are defined in the Glossary at page
A-1.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" appearing elsewhere in this Prospectus and
the information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's Consolidated Financial
Statements (including Notes thereto), appearing in the Form 10-K and the Form
10-Q which are incorporated by reference herein. As used herein, unless the
context otherwise requires, the term "Company" refers to IXC Communications,
Inc. ("IXC Communications") and its subsidiaries, including predecessor
corporations.
THE COMPANY
The Company is a leading provider of telecommunications transmission,
switched long distance and associated services to long distance and other
communications companies. The Company owns a digital telecommunications network
(the "Network") which includes over 11,500 digital route miles. Substantial
additions to the Network are currently under construction. Subject to the
availability of capital and the completion of cost-sharing arrangements
currently being negotiated, the Network is planned to include over 18,000
digital route miles by the end of 1998, and over 20,000 digital route miles by
the end of 1999. 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. The Company was incorporated in the State of Delaware on July 27,
1992. The Company's principal executive offices are located at 1122 Capital of
Texas Highway South, Austin, Texas 78746 and its telephone number is (512)
427-3700.
Since beginning the Network expansion and entering into the long distance
switched services business in late 1995, the Company's revenues have grown
rapidly. The Company generated revenues of $91.0 million in 1995, $203.8 million
in 1996 and $420.7 million in 1997. The Company's customers include AT&T, MCI,
Sprint, WorldCom, Cable & Wireless, Excel, Frontier, LCI and over 200 other long
distance companies, wireless companies, cable television providers, Internet
service provides and governmental agencies.
The growing demand for the Company's services and the nearly complete usage
of its then-existing Network capacity have required the Company to supplement
its Network with capacity leased from other carriers. As a result, in 1995 the
Company began expanding its Network to increase its geographic scope and
capacity and reduce its off-net lease expense. The Company is expanding its
network with modern, technologically advanced, non-zero dispersion shifted fiber
and OC-192 electronics (initially configured on certain routes at OC-48
capacity). The new fiber and electronics are less expensive to install and
operate and have greater capacity and technical capabilities than the fiber and
electronics of older networks. Upon completion of the routes currently being
constructed, engineered, or planned through 1998, over 11,000 route miles of the
18,000 digital route miles of the Network will consist of advanced fiber and
electronics. Through a combination of its owned and leased facilities, the
Company originates and terminates long distance traffic in all 50 U.S. states,
as well as terminates long distance traffic in over 200 foreign countries.
On March 30, 1998, the Company issued and sold $135.0 million of its 6 3/4%
Cumulative Convertible Preferred Stock (the "1998 Convertible Preferred Stock")
issued in the form of Depositary Shares (2,700,000 Depositary Shares at $50 per
share). On April 14, 1998, the Company issued and sold an additional $20.25
million of its 1998 Convertible Preferred Stock (405,000 Depositary Shares at
$50 per share) in connection with an overallotment option granted to the initial
purchasers of the 1998 Convertible Preferred Stock. On April 21, 1998, the
Company sold $450.0 million of the Old Notes bearing an interest rate of 9%.
1
<PAGE> 5
Concurrently with the sale of the Old Notes, the Company consummated its tender
offer for cash for all its 12 1/2% Senior Notes due 2005 (the "Senior Notes").
Pursuant to the terms of the tender offer, $284,185,000 (out of $285.0 million)
in aggregate principal amount of the Senior Notes were tendered and accepted for
payment by the Company. The Company used approximately $342.7 million of the
estimated $435.6 million net proceeds from the Old Notes to pay the tender offer
price for the Senior Notes.
TERMS OF THE EXCHANGE OFFER
The Exchange Offer............ The Company is offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of outstanding Old Notes. The
Old Notes were issued and sold on April 21,
1998 in a transaction exempt from registration
under the Securities Act (the "Senior
Subordinated Sale"). The form and terms of the
New Notes are substantially identical in all
material respects to the form and terms of the
Old Notes, except that the New Notes have been
registered under the Securities Act and
therefore will not be subject to certain
transfer restrictions applicable to the Old
Notes. See "The Exchange Offer" for a
description of the procedures for tendering Old
Notes. The Exchange Offer satisfies the
registration obligations of the Company under
the Registration Rights Agreement. Holders that
do not tender all of their Old Notes will no
longer have any registration rights under the
Registration Rights Agreement (except that the
Company will be required to file a shelf
registration statement in certain limited
instances). See "-- Exchange Offer Procedures."
Tenders; Expiration Date;
Withdrawal; Termination....... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on July 30, 1998, or such
later date and time, if any, as extended by the
Company, in its sole discretion. Tenders of Old
Notes pursuant to the Exchange Offer may be
withdrawn and re-tendered at any time prior to
the Expiration Date. Any Old Notes not accepted
for exchange for any reason will be returned
without expense to the tendering holder thereof
as promptly as practicable after the expiration
or termination of the Exchange Offer. The
Company may terminate the Exchange Offer if any
of the events set forth under "The Exchange
Offer -- Conditions to the Exchange Offer"
shall have occurred and shall not have been
waived by the Company.
Interest on the New Notes..... Interest on the New Notes will accrue from the
last Interest Payment Date (as defined) on the
Old Notes or if no interest has been paid on
the Old Notes, from the date of issuance of the
Old Notes (the "Issue Date").
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, certain of which may be
waived by the Company. It is not, however,
conditioned on any minimum principal amount of
Old Notes being tendered for exchange. See "The
Exchange Offer -- Conditions to Exchange
Offer."
Exchange Offer Procedures..... The Old Notes may be tendered by properly
completing and signing the Letter of
Transmittal and delivering the Letter of
Transmittal to the Exchange Agent (as defined)
at its address set forth in this Prospectus on
or prior to the Expiration Date, together
2
<PAGE> 6
with: (i) the certificate or certificates
representing the Old Notes being tendered and
any required signature guarantees; (ii) a
timely confirmation of a book-entry transfer of
the Old Notes, if such procedure is available,
into the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry
Transfer Facility" or "Depository") pursuant to
the procedure for book-entry transfer described
in this Prospectus; or (iii) the completion of
the procedures for guaranteed delivery set
forth in this Prospectus. See "The Exchange
Offer -- Exchange Offer Procedures." Pursuant
to the Registration Rights Agreement, the
Company is required to file a shelf
registration statement for a continuous
offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes if:
(i) because of any change in law or in
currently prevailing interpretations of the
staff of the Commission, the Company is not
permitted to effect the Exchange Offer; (ii)
the Exchange Offer is not consummated within
150 days after the Issue Date; (iii) any
Initial Purchaser so requests with respect to
the Old Notes not eligible to be exchanged for
New Notes in the Exchange Offer and held by it
following consummation of the Exchange Offer;
or (iv) any holder of Old Notes (other than a
broker-dealer electing to exchange Old Notes,
acquired for its own account as a result of
market-making activities or other trading
activities for New Notes (an "Exchanging
Dealer")) is not eligible to participate in the
Exchange Offer or, in the case of any holder of
Old Notes (other than an Exchanging Dealer)
that participates in the Exchange Offer, such
holder does not receive freely tradeable New
Notes on the date of the exchange. See "The
Exchange Offer -- Purpose of the Exchange
Offer."
Acceptance of Old Notes and
Delivery of New Notes......... The Company will accept for exchange any and
all Old Notes which are validly tendered (and
not withdrawn) in the Exchange Offer prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant
to the Exchange Offer will be delivered after
acceptance of the tendered Old Notes and
promptly following the Expiration Date. See
"The Exchange Offer -- Acceptance of Old Notes
for Exchange; Delivery of New Notes."
Exchange Agent................ IBJ Schroder Bank & Trust Company is serving as
Exchange Agent (the "Exchange Agent") in
connection with the Exchange Offer.
Federal Income Tax
Consequences.................. The Exchange Offer will not result in any
income, gain or loss to the holders of the
Notes or the Company for federal income tax
purposes. See "Certain U.S. Federal Income Tax
Consequences."
Use of Proceeds............... There will be no proceeds to the Company from
the exchange of the Old Notes for the New Notes
pursuant to the Exchange Offer.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE
OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in no-action letters issued to third parties
unrelated to the Company, the New Notes issued pursuant to the
3
<PAGE> 7
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof who are not "affiliates" of the
Company (within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act; provided that the New Notes are acquired in the ordinary course
of the holders' business, such holders have no arrangement or understanding with
any person to participate in any distribution (within the meaning of the
Securities Act) of the New Notes and neither the holders nor any other person is
engaging in or intends to engage in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of the New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the New Notes prior to offering or
selling such New Notes. The Company is required, under the Registration Rights
Agreement, to register the New Notes in any jurisdiction reasonably requested by
the holders, subject to certain limitations. Upon consummation of the Exchange
Offer, holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any registration
rights under the Registration Rights Agreement (except that the Company will be
required to file a shelf registration statement in certain limited instances)
covering such Old Notes not tendered and such Old Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "The Exchange Offer -- Consequences of
Failure to Exchange."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are substantially identical in
all material respects, except for certain transfer restrictions and registration
rights relating to the Old Notes.
Securities Offered............ $450,000,000 aggregate principal amount of 9%
Senior Subordinated Notes Due 2008 of the
Company.
Maturity Date................. April 15, 2008.
Interest Payment Dates........ April 15 and October 15 of each year,
commencing October 15, 1998.
Optional Redemption........... The New Notes will not be redeemable at the
option of the Company prior to April 15, 2003,
except that until April 15, 2001, the Company
may redeem, at its option, in the aggregate up
to 35% of the original principal amount of the
New Notes at the redemption price set forth
herein plus accrued interest, if any, to the
date of redemption, with the net proceeds of
one or more Equity Offerings, provided that at
least $200.0 million aggregate principal amount
of the Notes must remain outstanding and be
held, directly or indirectly, by Persons other
than the Company and its Affiliates after each
such redemption. On or after April 15, 2003,
the New Notes may be redeemed at the option of
the Company, in whole or in part, at the
redemption prices set forth herein. See
"Description of the Notes -- Optional
Redemption."
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<PAGE> 8
Change of Control............. Upon the occurrence of a Change of Control each
Holder will be entitled to require the Company
to repurchase all such Holder's Notes at 101%
of the principal amount thereof plus accrued
interest to the date of repurchase. The Change
of Control provisions of the Indenture may be
amended with the consent of the holders of a
majority in principal amount of the Notes then
outstanding. There can be no assurance that the
Company will be able to raise sufficient funds
to repurchase all the Notes in the event of a
Change of Control. See "Risk Factors -- Change
of Control," "Description of the
Notes -- Change of Control," "-- Certain
Covenants" and "-- Defaults."
Ranking....................... The New Notes will be general unsecured
obligations of the Company and will be
subordinate in right of payment to all existing
and future Senior Indebtedness of the Company
and will be effectively subordinated to all
indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries.
The New Notes will rank pari passu in right of
payment to all existing and future Senior
Subordinated Indebtedness of the Company. See
"Description of the Notes -- Ranking."
Restrictive Covenants......... The indenture under which the Notes will be
issued (the "Indenture") will contain certain
covenants that, among other things, will limit
(i) the incurrence of additional Indebtedness
by the Company and its Restricted Subsidiaries
(as defined), (ii) the payment of dividends and
other restricted payments by the Company and
its Restricted Subsidiaries, (iii) the creation
of restrictions on distributions from
Restricted Subsidiaries, (iv) asset sales, (v)
transactions with affiliates, (vi) sales or
issuances of Restricted Subsidiary capital
stock and (vii) mergers and consolidations. All
these limitations and prohibitions, however,
are subject to a number of important
qualifications and exceptions. See "Description
of the Notes -- Certain Covenants."
RISK FACTORS
In determining whether to exchange New Notes for Old Notes, the holders of
Old Notes should consider carefully the information set forth under the caption
"Risk Factors" and all other information contained in this Prospectus before
making any decision to acquire New Notes.
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<PAGE> 9
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data of the Company. The historical financial data has been derived from the
audited Consolidated Financial Statements of the Company as of and for the years
ended December 31, 1995, 1996 and 1997. The historical financial data for the
three months ended March 31, 1997 and 1998 has been derived from the unaudited
interim financial statements. The unaudited interim financial statements include
all adjustments, consisting of normal recurring accruals, which management
considers necessary for a fair presentation of the financial position and the
results of operations for these interim periods. The summary consolidated
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" and the Consolidated Financial Statements,
and other financial information included elsewhere in this Prospectus or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------ ----------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue.................... $ 91,001 $203,761 $420,710 $ 83,910 $129,184
Operating income (loss).................. 1,429 (14,016) (45,235) (11,641) (768)
Interest expense, net.................... 11,577 26,834 23,571 6,467 4,686
Loss before extraordinary item(1)........ (3,218) (37,448) (94,555) (19,878) (19,397)
OTHER FINANCIAL AND OPERATIONS DATA:
EBITDA(2)................................ $ 18,867 $ 13,225 $ 15,513 $ (1,639) $ 18,302
Capital expenditures..................... 23,670 136,391 314,327 68,743 64,383
Ratio of earnings to fixed charges
(deficiency)(3)....................... (10,631) (45,616) (99,606) (17,817) (20,019)
Minutes of use (in millions)............. 12.8 1,105.2 3,031.1 605.2 1,030.8
</TABLE>
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, 1998
------------------------------ -----------
1995 1996 1997 (UNAUDITED)
-------- -------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................ $ 6,915 $ 61,340 $152,720 $199,647
Gross property and equipment............. 151,828 337,742 724,588 781,450
Total assets............................. 336,475 459,151 917,095 1,113,095
Total debt and capital lease
obligations........................... 298,794 302,281 320,295 327,724
Redeemable preferred stock............... -- -- 403,368 415,419
Stockholders' equity (deficit)........... 6,858 63,479 (47,955) 51,470
</TABLE>
- ---------------
(1) The Company recognized an extraordinary loss of $1.7 million in 1995
relating to the early extinguishment of debt.
(2) 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, and 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.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before the provision (benefit) for income taxes, plus fixed
charges. Fixed charges consist of interest expense, amortization of
financing costs and the portion of rental expense on operating leases which
the Company estimates to be representative of the interest factor
attributable to rental expense. Where earnings were insufficient to cover
fixed charges, the dollar amount of the deficiency is shown. As adjusted for
the sale of $155.25 million of 1998 Convertible Preferred Stock, the
issuance of the Old Notes and the purchase of $284.2 million (out of $285.0
million) of Senior Notes which occurred in April 1998, as if they had
occurred on or before January 1, 1998, and assuming dividends are paid in
cash at 6 3/4% on the 1998 Convertible Preferred Stock, the Company's
earnings would have been insufficient to cover fixed charges by $(21,263)
for the three months ended March 31, 1998.
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RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Old Notes for New Notes offered hereby, holders of Old Notes
should consider the following factors carefully in evaluating the Company and
its business, which (other than "Consequences of Failure to Exchange Old Notes")
are generally applicable to the Old Notes as well as to the New Notes.
Statements contained in this Prospectus regarding the Company's expectations
with respect to its network expansion, related financings and fiber sale and
cost-saving agreements, future operations and other information, which can be
identified by the use of forward-looking terminology, such as "may," "will,"
"expect," "anticipate," "estimate," "seek" or "continue" or the negative thereof
or other variations thereon or comparable terminology, are forward-looking
statements. The discussions set forth below constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including risks and uncertainties, that could cause actual results to differ
materially from results referred to in the forward-looking statements. There can
be no assurance that the Company's expectations regarding any of these matters
will be fulfilled.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Upon consummation of the Exchange Offer, holders of Old Notes (other than
those that were prohibited from participating in the Exchange Offer) that did
not tender their Old Notes will not have any registration rights under the
Registration Rights Agreement covering such Old Notes not tendered and such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon (except that the Company will be required to file a shelf
registration statement in certain limited instances). See "The
Exchange -- Purpose of the Exchange Offer." In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
does not intend to register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission with respect to similar
transactions set forth in no-action letters issued to third parties unrelated to
the Company, the New Notes issued pursuant to the Exchange Offer in exchange for
the Old Notes may be offered for resale, resold and otherwise transferred by
holders thereof who are not "affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided that the New
Notes are acquired in the ordinary course of the holders' business, such holders
have no arrangement or understanding with any person to participate in any
distribution (within the meaning of the Securities Act) of the New Notes and
neither the holders nor any other person is engaging in or intends to engage in
a distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of the New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes was acquired by such broker-dealer as a result of market-making activities
or other trading activities. The Company has agreed that, for a period of 180
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." The New Notes may not be offered or sold unless it has been
registered or qualified for sale under applicable state securities laws or an
exemption from registration or qualification is available and is complied with.
The Registration Rights Agreement requires the Company to register or qualify
the New Notes for resale in any state (if required) as may be requested by their
holders, subject to certain limitations.
LACK OF PUBLIC MARKET
Prior to this Exchange Offer, although, the Old Notes have traded on the
Portal Market, there has been no public market for the Old Notes. The New Notes
will not be eligible to trade on the PORTAL Market. If a market for the New
Notes should develop, the New Notes could trade at prices higher or lower than
their initial offering price. The Company does not currently intend to list the
New Notes on any securities exchange
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or to seek approval for quotation through any automated quotation system. There
can be no assurance that an active public market for the New Notes will develop.
NEGATIVE CASH FLOW AND CAPITAL REQUIREMENTS
The Company's capital expenditures were $314.3 million and $64.4 million
and interest expense and capitalized interest were $38.6 million and $9.9
million for 1997 and for the three months ended March 31, 1998, respectively.
The Company's EBITDA was $15.5 million and $18.3 million, its cash flow provided
by operating activities was $14.3 million and used by operating activities was
$16.4 million and its net loss was $94.6 million and $19.4 million for 1997 and
for the three months ended March 31, 1998, respectively. The Company expects to
make substantial capital expenditures of over $525.0 million (subject to the
availability of capital) during 1998 (of which $64.4 million has been spent
through March 31, 1998) and substantial amounts thereafter. The Company
anticipates meeting the cash requirements relating to such capital expenditures
from cash on hand, cash flow from fiber sales and its operations, vendor
financing, if available, and additional equity and/or debt financings. The
Company intends to incur a substantial amount of additional indebtedness. The
amount of actual capital expenditures may vary materially as a result of cost-
saving arrangements, increases or decreases in the amount of traffic on the
Network, unexpected costs, delays or advances in the timing of certain capital
expenditures and other factors. 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 MCI so that it can
complete the sale to MCI of an indefeasible right to use ("IRU") fibers from New
York to Los Angeles (the "MCI Fiber Sale"), to enter into cost-saving
arrangements with carriers or other large users of fiber capacity, to otherwise
raise significant capital and/or to significantly increase its cash flow. The
failure of 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's business, financial condition and results of operations.
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 annual 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 "-- Development Risks and Dependence on Long Distance Switched
Services Business."
The Company will be required to make substantial annual interest payments
with respect to the Notes. The Company will also be required to make payments
relating to other debt it may incur, including interest payments and, beginning
June 30, 1998, principal payments in connection with borrowings under a secured
equipment financing facility of $28.0 million (all of which had been borrowed at
March 31, 1998) entered into with NTFC Capital Corporation and Export
Development Corporation, in July 1997 (the "NTFC Equipment Facility"). Dividends
on the Company's 7 1/4% Junior Convertible Preferred Stock Due 2007 (the "1997
Convertible Preferred Stock") and the 12 1/2% Junior Exchangeable Preferred
Stock Due 2009 (the "Exchangeable Preferred Stock") are payable quarterly in
cash (or, on or prior to March 31, 1999 and February 15, 2001, respectively, in
additional shares of 1997 Convertible Preferred Stock and Exchangeable Preferred
Stock, respectively). Dividends on the 1998 Convertible Preferred Stock are
payable quarterly in
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cash or, if the documents governing the Company's indebtedness as of the date of
issuance of the 1998 Convertible Preferred Stock prohibit such payment in cash,
in shares of Common Stock. Delays in the Network expansion, larger than
anticipated capital expenditures for the Network or continued negative cash flow
from the long distance switched services business could impair the ability of
the Company to meet its obligations under the Notes, the Senior Notes and other
indebtedness, or on the 1997 Convertible Preferred Stock, the Exchangeable
Preferred Stock and the 1998 Convertible Preferred Stock and to access
additional sources of funding, any of which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"-- Risks Relating to the Network Expansion; Maintenance of Network,
Rights-of-Way and Permits," and "-- 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, 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, financial condition and results of operations.
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. 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 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 "-- Integration of Acquired
Businesses; Business Combinations."
SUBSTANTIAL INDEBTEDNESS
The Company is highly leveraged. As of March 31, 1998, the Company had
outstanding approximately $327.7 million of long-term debt and capital lease
obligations (including the current portion thereof). The issuance of the Notes
and the purchase by the Company of the Senior Notes which occurred in April 1998
resulted in a ratio of debt and redeemable preferred stock to stockholders'
equity for the Company which is significantly higher than that which existed as
of March 31, 1998. Furthermore, the Company will become more highly leveraged if
it incurs additional debt or 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. In addition, the Indenture
does not treat the accretion of original issue discount as an Incurrence of
Indebtedness. The level of indebtedness would adversely impact the Company's
ability to make payments on, or to repurchase the Notes.
The Company's significant debt burden could have several important
consequences to the Holders of the Notes, including, but not limited to: (i) the
cash received from operations may be insufficient to meet
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principal, interest and other payments on the Notes in addition to paying other
indebtedness of the Company as it becomes due; (ii) 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 EBITDA
was $15.5 million, its cash flow provided by operating activities was $14.3
million and interest expense was $31.3 million); (iii) the Company's significant
degree of leverage could increase its vulnerability to changes in general
economic conditions or increases in prevailing interest rates; (iv) the
Company's flexibility to obtain additional financing in the future, as needed to
continue the Network expansion or for any other reason, may be impaired by the
amount of debt outstanding and the restrictions imposed by the covenants
contained in the Indenture and in agreements relating to other indebtedness, and
(v) the Company may be more leveraged than certain of its competitors, which may
be a competitive disadvantage. There can be no assurance that the Company's cash
flow from operations will be sufficient to meet its obligations under the Notes,
the Senior Notes or other indebtedness or the 1997 Convertible Preferred Stock,
the Exchangeable Preferred Stock or the 1998 Convertible Preferred Stock as
payments become due or that the Company will be able to refinance the Notes or
the Senior Notes or other indebtedness at maturity or the 1997 Convertible
Preferred Stock or the Exchangeable Preferred Stock upon mandatory redemption.
The Company's earnings before fixed charges were insufficient to cover its
fixed charges by $10.6 million, $45.6 million, $99.6 million and $20.0 million
for the years ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1998. 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.
RANKING OF NOTES AND SUBORDINATION
The indebtedness evidenced by the Notes will constitute general unsecured
obligations of the Company. The Company may not pay principal of, or premium or
interest on, the Notes, make any deposit pursuant to defeasance provisions or
repurchase, redeem or otherwise retire the Notes if any Senior Indebtedness is
not paid when due or any other default on Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, and until such default has been cured or waived or has
ceased to exist, any such acceleration has been rescinded or such Senior
Indebtedness has been discharged or paid in full. In addition, if a default
exists with respect to certain Senior Indebtedness and certain other conditions
are satisfied, the Company may not make any payments on the Notes for a
designated period of time. Upon any payment or distribution of assets of the
Company upon a total or partial liquidation, dissolution, reorganization or
similar proceeding, the holders of Senior Indebtedness will be entitled to
receive payment in full before the holders of the Notes are entitled to receive
any payment. See "Description of the Notes," "-- Substantial Indebtedness" and
"Description of Other Indebtedness".
The Company conducts a substantial portion of its operations through its
subsidiaries and depends, in part, on earnings and cash flows of, and dividends
from, such subsidiaries to pay its obligations, including payments of principal
and interest on its indebtedness. In addition, any right of the Company and its
creditors to participate in the assets of any of the Company's subsidiaries upon
any liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors (except
to the extent the Company may itself be a creditor of such subsidiary).
Accordingly, the Notes will be effectively subordinated to the outstanding
indebtedness and other liabilities, including trade payables, of the Company's
subsidiaries. See "-- Substantial Indebtedness" and "Description of Other
Indebtedness".
In the event of the bankruptcy, liquidation or reorganization of the
Company, the assets of the Company will be available to pay the Notes only after
all Senior Indebtedness has been paid in full. Sufficient funds may not exist to
pay amounts due on the Notes in such event. In addition, the subordination
provisions of the
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Indenture provide that no payment may be made with respect to the Notes during
the continuance of a payment default under any Senior Indebtedness. Furthermore,
if certain non-payment defaults exist with respect to Senior Indebtedness, the
holders of such Senior Indebtedness will be able to prevent payments on the
Notes for certain periods of time. See "Description of the Notes -- Ranking".
RECENT AND EXPECTED LOSSES
The Company reported a net loss of $94.6 million for the year ended
December 31, 1997 and a net loss of $19.4 million for the three months ended
March 31, 1998, primarily due to substantial depreciation related to capital
expenditures, interest expense associated with the Senior Notes and operational
expenses associated with the long distance switched services business, and such
net losses may continue. During 1998 and thereafter, the Company's ability to
generate operating income, EBITDA and net income will depend to a great extent
on demand for the private line circuits constructed in the Network expansion and
the success of the Company's switched long distance and data services. There can
be no assurance that the Company will return to profitability in the future.
Failure to generate operating income, EBITDA and net income will impair the
Company's ability to: (i) meet its obligations under the Notes or other
indebtedness; (ii) pay cash dividends on the 1997 Convertible Preferred Stock,
the Exchangeable Preferred Stock or the 1998 Convertible 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's business, financial condition and
results of operations.
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. 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. The
route from Washington to Houston via Atlanta is 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's business, financial condition and
results of operations.
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.
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.
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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
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 III has announced that it will spend
approximately $3.0 billion to construct a 20,000 mile fiber optic communications
network entirely based on Internet technology. The Williams Companies has also
announced that it is accelerating the expansion of its national fiber optic
network with a $2.7 billion investment to create a 32,000 mile system by the end
of 2001. Since the cost of the actual fiber is a relatively small portion of the
cost of building new transmission lines, companies building such lines are
likely to install fiber that provides substantially more transmission capacity
than will be needed over the short or medium term. Further, recent technological
advances have shown the potential to greatly expand the capacity of existing and
new fiber optic cable. Although such technological advances may enable 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's business, financial condition and results of operations.
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.
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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 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 and service disputes was $3.0
million in 1996 (when it had $104.0 million of long distance switched services
revenue), $17.4 million in 1997 (when it had $258.3 million of long distance
switched services revenue) and $6.4 million for the three months ended March 31,
1998 (when it had $85.4 million of long distance switched services revenue).
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 ETI and Telecom One, which it believes provide a strategic fit with its
business and Network. See "-- 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 "-- 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's business, financial condition and results of operations.
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
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material adverse effect on the ability of the Company to reach its objectives,
on its financial condition and on its results of operations.
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 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's business, financial condition and
results of operations.
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, it
has reviewed potential acquisition candidates and has held discussions with a
number of these candidates. The acquisition of 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 can cause service interruptions and integration problems. The risks
associated with acquisitions could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 29%, 6%, 4% and 4% 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
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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's business, financial condition and results of operations.
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 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 III has announced that it will spend approximately $3.0 billion to
construct a 20,000 mile fiber optic communications network entirely based on
Internet technology. The Williams Companies, a competitor 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
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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 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."
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.
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
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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's business, financial condition and
results of operations.
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's business, financial condition and results of operations.
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's business, financial
condition and results of operations. 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.
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. Legislation has recently been
introduced to amend the Telecom Act so as to facilitate RBOC re-entry. It is
possible that additional legislation will also be introduced, seeking to further
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
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interest in Marca-Tel, therefore could be diluted or lost entirely, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The Company provides services to on-line service providers and Internet
access providers and owns approximately 20% of the common stock of PSINet. The
law governing the liability of on-line services providers and Internet access
providers for participating in the hosting or transmission of objectionable
materials or information currently is unsettled. Under the terms of the Telecom
Act, 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
business, financial condition and results of operations.
RISKS RELATED TO TECHNOLOGICAL CHANGE
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as Frame Relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for data communications services. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies, could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company's pursuit of necessary technological advances may require
substantial time and expense, and there can be no assurance that the Company
will succeed in adapting its telecommunications services business to alternate
access devices, conduits and protocols.
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In addition, recent technological advances that show the potential to
greatly expand the capacity of existing and new fiber optic cable, which could
greatly increase supply, could have a material adverse effect on the Company's
business, financial condition and results of operations.
CONCENTRATION OF STOCK OWNERSHIP
Assuming no conversion of the 1998 Convertible Preferred Stock or the 1997
Convertible Preferred Stock into shares of Common Stock, Trustees of General
Electric Pension Trust ("GEPT") beneficially owned approximately 30.2% of the
outstanding Common Stock, Grumman Hill Investments, L.P. ("GHI") and Richard D.
Irwin together beneficially owned approximately 10.4% of the outstanding Common
Stock, and two of the members of senior management and their affiliates
beneficially owned approximately 12.8% of the outstanding Common Stock at March
1, 1998. GEPT also owned 30.0% of the 1997 Convertible Preferred Stock at March
1, 1998. As a result, certain of these stockholders, if they act together,
generally would be able to elect a majority of directors elected by the holders
of Common Stock and exercise control over the business, policies and affairs of
the Company, and would have the power to approve or disapprove most actions
requiring stockholder approval without the approval of minority stockholders.
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes," or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. The Company wishes to caution the reader that these
forward-looking statements, such as the Company's plans to expand its existing
networks or to build and acquire networks in new areas, and statements regarding
development of the Company's businesses, the estimate of market sizes and
addressable markets for the Company's services and products, the Company's
anticipated capital expenditures, regulatory reform and other statements
contained in this Prospectus regarding matters that are not historical facts,
are only estimates or predictions.
No assurance can be given that future results will be achieved; actual
events or results may differ materially as a result of risks facing the Company
or actual results differing from the assumptions underlying such statements.
Such risks and assumptions include, but are not limited to, the Company's
ability to successfully market its services to current and new customers,
generate customer demand for its services in the particular markets where it
plans to market services, access markets, identify, finance and complete
suitable acquisitions, design and construct fiber optic networks, install cable
and facilities, including switching electronics, and obtain rights-of-way,
building access rights and any required governmental authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as regulatory, legislative and judicial
developments that could cause actual results to vary materially from the future
results indicated, expressed or implied, in such forward-looking statements.
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THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Old Notes were originally issued and sold on April 21, 1998 in reliance
upon the exemptions from registration under Rule 144A, Regulation S and Section
4(2) of the Securities Act. Pursuant to the Registration Rights Agreement, the
Company agreed to register with the Commission new debt securities with
substantially identical terms as the Old Notes, to be offered in exchange for
the Old Notes. The purpose of the Exchange Offer is to satisfy the Company's
obligations under the Registration Rights Agreement. Holders that do not tender
all of their Old Notes will no longer have any registration rights under the
Registration Rights Agreement other than as set forth in the following
paragraph. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
Pursuant to the Registration Rights Agreement, the Company is required to
file a shelf registration statement for a continuous offering pursuant to Rule
415 under the Securities Act in respect of the Old Notes if: (i) because of any
change in law or in currently prevailing interpretations of the staff of the
Commission, the Company is not permitted to effect the Exchange Offer; (ii) the
Exchange Offer is not consummated within 150 days after the date of the
Registration Rights Agreement; (iii) any Initial Purchaser so requests with
respect to the Old Notes not eligible to be exchanged for New Notes in the
Exchange Offer and held by it following consummation of the Exchange Offer; or
(iv) any holder of Old Notes (other than an Exchanging Dealer) is not eligible
to participate in the Exchange Offer or, in the case of any holder of Old Notes
(other than an Exchanging Dealer) that participates in the Exchange Offer, such
holder does not receive freely tradeable New Notes on the date of the exchange.
The Company is required to use its best efforts to keep the shelf registration
statement continuously effective for a period of two years from the date of its
effectiveness or such shorter period that will terminate when all the Old Notes
covered by the shelf registration statement has been sold pursuant thereto or is
eligible for sale under Rule 144(k) under the Securities Act.
TERMS OF THE EXCHANGE OFFER
GENERAL
The Company offers to exchange, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the New Notes for each $1,000 principal amount of the Old Notes
tendered for exchange. Holders of Old Notes may tender some or all of their Old
Notes pursuant to the Exchange Offer, however, Old Notes may be tendered only in
integral multiples of $1,000. The terms of the New Notes are substantially
identical in all material respects to the terms of the Old Notes, except that
the New Notes have been registered under the Securities Act and therefore will
not be subject to certain transfer restrictions applicable to the Old Notes).
See "Description of the Notes." The New Notes, like the Old Notes, are governed
by the Indenture. See "Description of the Notes." The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange.
Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in no-action letters issued to third parties
unrelated to the Company, the New Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof who are not "affiliates" of the Company (within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act;
provided that the New Notes are acquired in the ordinary course of the holders'
business, such holders have no arrangement or understanding with any person to
participate in any distribution (within the meaning of the Securities Act) of
the New Notes and neither the holders nor any other person is engaging in or
intends to engage in a distribution of the New Notes. Any holder who tenders in
the Exchange Offer for the purpose of participating in a public distribution of
the New Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with the distribution.
EXPIRATION DATE; EXTENSIONS, TERMINATION; AMENDMENT
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on July 30, 1998 or such later date
and time, if any, as extended by the Company, in its
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sole discretion. The Company may extend the Exchange Offer at any time and from
time to time by giving oral or written notice to holders of the Old Notes and
unless otherwise required by applicable law or regulation, by press release or
other public announcement on or before the Expiration Date. During any extension
of the Exchange Offer, all Old Notes tendered for exchange will remain subject
to the Exchange Offer. In connection with the Exchange Offer, the Company will
comply with all applicable requirements of the federal securities laws,
including, but not limited to, Rule 14e-1 under the Exchange Act.
The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Notes if any of the events set forth
under "-- Conditions to the Exchange Offer" shall have occurred and shall not
have been waived by the Company and (ii) amend the terms of the Exchange Offer
in any manner which, in its good faith judgment, is advantageous to the holders
of the Old Notes, whether before or after any tender of the Old Notes. Unless
the Company terminates the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date, the Company will exchange the New Notes for the
Old Notes promptly after acceptance of the tendered Old Notes by the Company and
following the Expiration Date.
EXCHANGE OFFER PROCEDURES
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus and the Letter of Transmittal.
Old Notes may be tendered by properly completing and signing the Letter of
Transmittal and delivering the Letter of Transmittal to the Exchange Agent at
its address set forth in this Prospectus on or prior to the Expiration Date,
together with: (i) the certificate or certificates representing the Old Notes
being tendered and any required signature guarantees; (ii) a timely confirmation
of a book-entry transfer (a "Book-Entry Confirmation") of the Old Notes, if such
procedure is available, into the Exchange Agent's account at the Depository
pursuant to the procedure for book-entry transfer described below; or (iii) the
completion of the procedures for guaranteed delivery set forth below. See
"Guaranteed Delivery Procedures."
If the New Notes (and any untendered Old Notes) are to be issued in the
name of the registered holder and the registered holder has signed the Letter of
Transmittal the holder's signature need not be guaranteed. In any other case,
the tendered Old Notes must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Exchange Agent and duly executed by the
registered holder and the signature on the endorsement or instrument of transfer
must be guaranteed by a commercial bank or trust company located or having an
office or correspondent in the United States, or by a member firm of a national
securities exchange or of the National Association of Securities Dealers, Inc.
(an "Eligible Institution"). If the New Notes and/or Old Notes not exchanged are
to be delivered to an address other than that of the registered holder appearing
on the register for the Old Notes, the signature on the Letter of Transmittal
must be guaranteed by an Eligible Institution. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes, where such Old Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER
INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE, NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal, the
Old Notes or a Book-Entry Confirmation and all other required documents are
received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance for exchange and withdrawal of any tender of Old Notes will
be determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the right to reject any or all tenders
not in
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proper form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the right to waive any
of the conditions of the Exchange Offer or any defect, withdrawal, rejection of
tender or irregularity in the tender of any Old Notes. Neither the Company, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects, withdrawals, rejections or irregularities with respect to
tenders of Old Notes nor shall any of them incur any liability for failure to
give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange Agent
as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants to the
Company and the Exchange Agent that: (i) it has full power and authority to
tender, exchange, sell, assign and transfer the Old Notes and to acquire New
Notes in exchange for the Old Notes; (ii) when the Old Notes is accepted for
exchange, the Company will acquire good and unencumbered title to the Old Notes,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim; and (iii) it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes. All authority conferred by the holder will survive the death or
incapacity of the holder and every obligation of the holder shall be binding
upon the heirs, legal representatives, successors, assigns, executors and
administrators of the holder.
Each holder will also certify that the holder, among other things: (i) is
not an "affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act) or that, if it is an "affiliate," it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable; (ii) is acquiring the New Notes offered in the ordinary
course of its business; (iii) has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Securities
Act) of the New Notes; and (iv) is not engaged in and does not intend to engage
in the distribution of the New Notes if such holder is not a broker-dealer.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written notice of withdrawal must be timely received by
the Exchange Agent at its address set forth in this Prospectus by mail, courier,
telegraphic, telex or facsimile transmission. Any notice of withdrawal must
specify the person named in the Letter of Transmittal as having tendered Old
Notes to be withdrawn, the certificate numbers of Old Notes to be withdrawn, the
aggregate principal amount of Old Notes to be withdrawn, a statement that the
holder is withdrawing its election to tender the Old Notes for exchange, and the
name of the registered holder of the Old Notes, and must be signed by the holder
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Exchange Agent that the person withdrawing the tender has
succeeded to the beneficial ownership of the Old Notes being withdrawn. The
Exchange Agent will return the properly withdrawn Old Notes promptly following
receipt of notice of withdrawal. If Old Notes has been tendered pursuant to a
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the Book-Entry Transfer Facility to be credited with the
withdrawn Old Notes and otherwise comply with the procedures of the Book-Entry
Transfer Facility. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by the Company, and such
determination will be final and binding on all parties. Any Old Notes which have
been tendered for exchange but which are not exchanged will be returned to the
holder thereof without cost to the holder (or, in the case of Old Notes tendered
by book-entry transfer, by crediting an account maintained with the Book-Entry
Transfer Facility for the Old Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange
22
<PAGE> 26
Offer. Properly withdrawn Old Notes may be re-tendered at any time on or prior
to the Expiration Date. Any Old Notes so withdrawn and not re-tendered will not
be exchanged for New Notes under the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon terms and subject to the conditions of the Exchange Offer, the Company
will accept for exchange any and all Old Notes which are validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date.
For the purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Old Notes when, as and if the Company has
given oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old Notes
for the purpose of causing the Old Notes to be assigned, transferred and
exchanged for New Notes. Upon the terms and subject to the conditions of the
Exchange Offer, delivery of New Notes in exchange for Old Notes will be made by
the Exchange Agent after acceptance of the tendered Old Notes by the Company and
promptly following the Expiration Date. Any Old Notes not accepted for exchange
by the Company for any reason will be returned without expense to the tendering
holders (or, in the case of Old Notes tendered by book-entry transfer, by
crediting an account maintained with the Book-Entry Transfer Facility) as
promptly as practicable after the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is terminated. See "-- Conditions to the Exchange Offer."
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of this Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Notes by causing the Book-Entry Transfer Facility to transfer the Old Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with the Book-Entry Transfer Facility's procedure for transfer. The Letter of
Transmittal with any required signature guarantees and any other required
documents, must be received by the Exchange Agent on or prior to the Expiration
Date for any book-entry transfers.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date, must tender their Old
Notes and follow the guaranteed delivery procedures. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent must have received from
the Eligible Institution a properly completed and duly executed notice of
guaranteed delivery (a "Notice of Guaranteed Delivery") (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of the Old Notes, the certificate number or numbers of such Old Notes and
the aggregate principal amount of the Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Old Notes (or a confirmation
of electronic delivery or book-entry delivery into the Exchange Agent's account
at the Depository) and any of the required documents will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly completed
and executed Letter of Transmittal (or facsimile thereof), as well as all other
documents required by the Letter of Transmittal and the certificate(s)
representing all tendered Old Notes in proper form for transfer (or a
confirmation of electronic mail delivery or book-entry delivery into the
Exchange Agent's account at the Depository), must be received by the Exchange
Agent within five business days after the Expiration Date. Any holder of Old
Notes who wishes to tender its Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the
Expiration Date.
23
<PAGE> 27
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company will
not be required to issue New Notes in exchange for any properly tendered Old
Notes not previously accepted and may terminate the Exchange Offer (by oral or
written notice to the holders and by timely public announcement communicated,
unless otherwise required by applicable law or regulation, by making a press
release or other public announcement, or, at its option, modify or otherwise
amend the Exchange Offer, if any of the following events occur:
1. there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or madministrative agency or commission (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer, or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clause (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
2. any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company, taken as a whole, that, in the sole judgment of
the Company is or may be adverse to the Company, or the Company shall have
become aware of facts that, in the sole judgment of the Company have or may
have adverse significance with respect to the value of the Old Notes or the
New Notes; which, in the sole judgment of the Company in any case, and
regardless of the circumstances (including any action by the Company)
giving rise to any such condition, makes it unlawful to proceed with the
Exchange Offer and/or with such acceptance for exchange or with such
exchange.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
These conditions are for the sole benefit of the Company and may be waived
by the Company, in whole or in part, in its sole discretion. Any determination
made by the Company that any of these conditions has occurred will be final and
binding on all holders of Notes, absent manifest error. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part.
24
<PAGE> 28
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company, the Trustee for the Notes, has been
appointed as the Exchange Agent for the Exchange Offer. All executed Letters of
Transmittal, questions and requests for assistance and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent, addressed as follows:
IBJ SCHRODER BANK & TRUST COMPANY
<TABLE>
<S> <C>
By Hand/Overnight Courier By Mail:
IBJ Schroder Bank & Trust Company IBJ Schroder Bank & Trust Company
One State Street P.O. Box 84
New York, NY 10004 Bowling Green Station
Attention: Securities Processing Window New York, NY 10274-0084
Subcellar One (SC-1) Attention: Reorganization Operations
Department
</TABLE>
By facsimile: (212) 858-2611 Call (212) 858-2103 for confirmation
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus and the Letter of Transmittal. If given or made, such
information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the respective
dates as of which information is given herein. The Exchange Offer is not being
made to (nor will tenders be accepted from or on behalf of) holders of Old Notes
in any jurisdiction in which the making of the Exchange Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction. The
Company may, however, at the reasonable request of any holder, take such action
as it may deem necessary to make the Exchange Offer in any such jurisdiction and
extend the Exchange Offer to holders of Old Notes in such jurisdiction.
TRANSFER TAXES
Holders who tender their Old Notes in exchange for New Notes will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register New Notes in the name of, or request that
Old Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer taxes thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes (other than
those that were prohibited from participating in the Exchange Offer) that did
not tender their Old Notes will not have any registration rights under the
Registration Rights Agreement with respect to such non-tendered Old Notes and,
accordingly, such Old Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon (except that the Company will be
required to file a shelf registration statement in certain limited
25
<PAGE> 29
instances). In general, the Old Notes may not be offered or sold, unless
registered under the Securities Act and the applicable state securities laws,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not intend
to register the Old Notes under the Securities Act. Based on interpretations by
the staff of the Commission with respect to similar transactions set forth in
no-action letters issued to third parties unrelated to the Company, the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for resale, resold and otherwise transferred by holders thereof who are
not "affiliates" of the Company (within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the New Notes are acquired in
the ordinary course of the holders' business, such holders have no arrangement
or understanding with any person to participate in any distribution (within the
meaning of the Securities Act) of the New Notes and neither the holders nor any
other person is engaging in or intends to engage in a distribution of the New
Notes. If any holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer, the
holder (i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes must acknowledge that it will deliver a prospectus in connection with
any resale of the New Notes. See "Plan of Distribution." In addition, to comply
with the securities laws of certain jurisdictions, if applicable, the New Notes
may not be offered or sold unless it has been registered or qualified for sale
in such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company has agreed under the Registration
Rights Agreement to register or qualify the New Notes for resale in any
jurisdictions requested by any holder, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their Old
Notes will not have any registration rights under the Registration Rights
Agreement with respect to such non-tendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon (except that the Company will be required to file a shelf
registration statement in certain limited instances).
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and, as
of the Expiration Date, to the best of the Company's information and belief,
each person participating in the Exchange Offer will be acquiring the New Notes
in its ordinary course of business and will not have any arrangement or
understanding with any person to participate in the distribution of the New
Notes to be received in the Exchange Offer. In this regard, the Company will
make each person participating in the Exchange Offer aware (through this
Prospectus or otherwise) that if the Exchange Offer is being registered for the
purpose of secondary resale, any holder using the Exchange Offer to participate
in a distribution of New Notes to be acquired in the registered Exchange Offer
(i) may not rely on the staff position enunciated in K-III Communications
Corporation (available May 14, 1993), Morgan Stanley and Co. Inc. (available
June 5, 1991) and Exxon Capital Holding Corp. (available May 13, 1988) or
similar letters and (ii) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
26
<PAGE> 30
SELECTED HISTORICAL 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 as of and for
the periods ended December 31, 1993, 1994, 1995, 1996 and 1997. The historical
financial data for the Company for the three months ended March 31, 1997 and
1998 has been derived from unaudited interim financial statements. The unaudited
interim financial statements include all adjustments, consisting of normal
recurring accruals, which management considers necessary for a fair presentation
of the financial position and the results of operations for these interim
periods. 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 appearing in the Form 10-K and the Form
10-Q which are incorporated by reference herein and the other financial
information included elsewhere in the Prospectus or incorporated by reference
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenue........................... $ 71,123 $ 80,663 $ 91,001 $203,761 $420,710 $ 83,910 $129,184
Operating income (loss)......................... (10,596) 14,085 1,429 (14,016) (45,235) (11,641) (768)
Income (loss) before extraordinary item......... (31,812) 5,017 (3,218) (37,448) (94,555) (19,878) (19,397)
Extraordinary gain (loss)(1).................... 8,495 2,298 (1,747) -- -- -- --
Net income (loss)............................... $(23,317) $ 7,315 $ (4,965) $(37,448) $(94,555) (19,878) (19,397)
Basic and diluted income (loss) per share before
extraordinary gain (loss)(2).................. $ (1.43) $ .13 $ (.21) $ (1.42) $ (3.75) (0.66) (0.98)
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges
(deficiency)(3)............................... $(54,377) 1.66x $(10,631) $(45,616) $(99,606) $ (17,817) (20,019)
EBITDA(4)....................................... $ 10,465 $ 26,206 $ 18,867 $ 13,225 $ 15,513 (1,639) 18,302
Capital expenditures............................ 27,008 7,087 23,670 136,391 314,327 68,743 64,383
</TABLE>
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- 1998
1993 1994 1995 1996 1997 (UNAUDITED)
-------- -------- -------- -------- -------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents....................... $ 6,230 $ 6,048 $ 6,915 $ 61,340 $152,720 $ 199,647
Total assets.................................... 94,281 105,409 336,475 459,151 917,095 1,113,095
Total debt and capital lease obligations........ 59,954 69,124 298,794 302,281 320,295 327,724
Redeemable preferred stock...................... -- -- -- -- 403,368 415,419
Stockholders' equity (deficit).................. 6,871 14,189 6,858 63,479 (47,955) 51,470
</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 Company's consolidated financial statements.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income before the provision (benefit) for income taxes, plus fixed
charges. Fixed charges consist of interest expense, amortization of
financing costs and the portion of rental expense on operating leases which
the Company estimates to be representative of the interest factor
attributable to rental expense. Where earnings are insufficient to cover
fixed charges, the dollar amount of the deficiency is shown. As adjusted for
the sale of $155.25 million of 1998 Convertible Preferred Stock, the
issuance of the Old Notes and the purchase of $284.2 million (out of $285.0
million) of Senior Notes which occurred in April 1998, as if they had
occurred on or before January 1, 1998, and assuming dividends are paid in
cash at 6 3/4% on the 1998 Convertible Preferred Stock, the Company's
earnings would have been insufficient to cover fixed charges by $(21,263)
for the three months ended March 31, 1998.
(4) 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.
27
<PAGE> 31
DESCRIPTION OF THE NOTES
The following is a summary of certain provisions of the Notes. The terms of
the New Notes are identical in all material respects to the terms of the Old
Notes, except for certain transfer restrictions and registration rights relating
to the Old Notes. The New Notes, like the Old Notes, are governed by the
Indenture dated as of April 21, 1998 (the "Indenture") between the Company and
IBJ Schroder Bank & Trust Company, as Trustee (the "Trustee"). The following is
a summary of certain provisions of the Indenture and the Notes. A copy of the
Indenture and the form of Notes are available upon request to the Company at the
address set forth under "Available Information". The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Indenture, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended.
GENERAL
The Old Notes are, and the New Notes, when issued, will be unsecured senior
subordinated obligations of the Company. The Notes are limited in aggregate
principal amount to $450.0 million. The Old Notes were issued and the New Notes
will be issued, only in fully registered form, without coupons, in denominations
of $1,000 and any integral multiple of $1,000. The Notes will be subordinated to
all existing and future senior debt of the Company. Principal of, premium, if
any, and interest on the Notes will be payable, and the Notes may be presented
for registration of transfer or exchange, at the office of the Paying Agent and
Registrar.
The Trustee is also the Paying Agent and Registrar. The Company may change
any Paying Agent and Registrar without prior notice to holders of the Notes.
Holders of the Notes must surrender Notes to the Paying Agent to collect
principal payments.
The Notes will mature on April 15, 2008. Each Note will bear interest at
the rate of 9% per annum from the most recent interest payment date to which
interest has been paid or provided for or, if no interest has been paid or
provided for, from the Issue Date. Interest will be payable semiannually in cash
in arrears on each April 15 and October 15, commencing October 15, 1998.
Interest on the Notes will be computed on the basis of a 360 day year comprised
of twelve 30 day months and the actual number of days elapsed.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to April 15, 2003. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12 month period commencing on
April 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003................................................. 104.500%
2004................................................. 103.000
2005................................................. 101.500
2006 and thereafter.................................. 100.000
</TABLE>
In addition, at any time and from time to time prior to April 15, 2001, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Equity Offerings, at a redemption
price (expressed as a percentage of principal amount) of 109% plus accrued
interest to the redemption date (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date); provided, however, that at least $200.0 million aggregate
principal amount of the Notes must remain outstanding and be held, directly or
indirectly, by Persons other than the Company and its Affiliates after each such
redemption.
28
<PAGE> 32
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will be senior subordinated,
unsecured obligations of the Company. The payment of the principal of, premium
(if any), interest and all other obligations on the Notes is subordinate in
right of payment, as set forth in the Indenture, to the prior payment in full in
cash or cash equivalents of all Senior Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter incurred. Although the Indenture
contains limitations on the amount of additional Indebtedness that the Company
may incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness. See
"-- Certain Covenants -- Limitation on Indebtedness".
A substantial portion of the operations of the Company is conducted through
its subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even if such obligations do not constitute
Senior Indebtedness. The Notes, therefore, will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders (if any) of
subsidiaries of the Company. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications. In addition,
the Indenture does not treat the accretion of original issue discount as an
Incurrence of Indebtedness. Moreover, the Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness or Preferred Stock under the Indenture. See "-- Certain
Covenants -- Limitation on Indebtedness".
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company.
The Company may not pay principal of, premium (if any), interest or other
obligations on, the Notes or make any deposit pursuant to the provisions
described under "-- Defeasance" below and may not repurchase, redeem or
otherwise retire any Notes (collectively, "pay the Notes") if (i) any Designated
Senior Indebtedness is not paid when due or (ii) any other default on Designated
Senior Indebtedness occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either case,
the default has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Indebtedness has been paid in full in cash
or cash equivalents. However, the Company may pay the Notes without regard to
the foregoing if the Company and the Trustee receive written notice approving
such payment from the Representative of the Designated Senior Indebtedness with
respect to which either of the events set forth in clause (i) or (ii) of the
immediately preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in clause (i) or (ii)
of the second preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative of
the holders of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter (or earlier if
such Payment Blockage Period is terminated (i) by written notice to the Trustee
and the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer continuing
or (iii) because such Designated Senior
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<PAGE> 33
Indebtedness has been repaid in full in cash or cash equivalents).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions described in the first sentence of this
paragraph), unless the holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of such Designated
Senior Indebtedness, the Company may resume payments on the Notes after the end
of such Payment Blockage Period. The Notes shall not be subject to more than one
Payment Blockage Period in any consecutive 360 day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full in cash or cash equivalents of such
Senior Indebtedness before the holders of Notes are entitled to receive any
payment, and until the Senior Indebtedness is paid in full, any payment or
distribution to which holders of Notes would be entitled but for the
subordination provisions of the Indenture will be made to holders of such Senior
Indebtedness as their interests may appear. If a distribution is made to holders
of Notes that, due to the subordination provisions, should not have been made to
them, such holders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness or the Representative of such holders of the acceleration. So long
as any Designated Senior Indebtedness is outstanding, any acceleration of the
Notes shall not be effective until the earlier to occur of (i) five Business
Days following delivery of a notice of such acceleration to the Representative
or the holders of such Designated Senior Indebtedness and (ii) the acceleration
of such Designated Senior Indebtedness. If any Designated Senior Indebtedness is
outstanding, the Company may not pay the Notes until five Business Days after
the Representatives of all the issues of Designated Senior Indebtedness receive
notice of such acceleration and, thereafter, may pay the Notes only if the
Indenture otherwise permits payment at that time.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the holders of
Notes, and creditors of the Company who are not holders of Senior Indebtedness
may recover less, ratably, than holders of Senior Indebtedness and may recover
more, ratably, than holders of Notes. The terms of the subordination provisions
described above will not apply to payments from money or the proceeds of U.S.
Government Obligations held in trust by the Trustee for the payment of principal
of and interest on the Notes pursuant to the provisions described under
"-- Defeasance".
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes were issued in the form of a Global Note. The Global Note was
deposited with, or on behalf of, the Depository and registered in the name of
the Depository or its nominee. The New Notes will also be issued in the form of
a Global Note. Except as set forth below, the Global Note may be transferred, in
whole and not in part, only to the Depository or another nominee of the
Depository. Investors may hold their beneficial interests in the Global Note
directly through the Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the Depository. Notes
that are issued as described below under "-- Certificated Notes" will be issued
in definitive form. Upon the transfer of a Note in definitive form, such Note
will, unless the Global Note has previously been exchanged for Notes in
definitive form, be exchanged for an interest in the Global Note representing
the principal amount of Notes being transferred.
The Depository has advised the Company as follows: the Depository is a
limited purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934 (the "Exchange Act"). The Depository was created to hold securities
of institutions that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities transactions among its
participants
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<PAGE> 34
in such securities through electronic book entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's book entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly. Upon the
issuance of the Global Note for the New Notes, the Depository will credit, on
its book entry registration and transfer system, the principal amount of the for
the New Notes represented by such Global Note to the accounts of participants.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer of
those ownership interests will be effected only through, records maintained by
the Depository (with respect to participants' interest) and such participants
(with respect to the owners of beneficial interests in the Global Note other
than participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Notes for all
purposes of such Notes and the Indenture. Except as set forth below, owners of
beneficial interests in the Global Note will not be entitled to have the Notes
represented by the Global Note registered in their names, will not receive or be
entitled to receive physical delivery of certificated Notes in definitive form
and will not be considered to be the owners or holders of any Notes under the
Global Note.
The Company understands that under existing industry practice, in the event
an owner of a beneficial interest in the Global Note desires to take any action
that the Depository, as the holder of the Global Note, is entitled to take, the
Depository would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them. Payment of principal of and interest on Notes
represented by the Global Note registered in the name of and held by the
Depository or its nominee will be made to the Depository or its nominee, as the
case may be, as the registered owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to the
irrespective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole by
the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
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CERTIFICATED NOTES
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of U.S.
$1,000 and integral multiples thereof if (i) the Depository notifies the Company
that it is unwilling or unable to continue as Depository for the Global Note or
if at any time the Depository ceases to be a clearing agency registered under
the Exchange Act, (ii) the Company in its discretion at any time determines not
to have all of the Notes represented by the Global Note or (iii) a default
entitling the holders of the Notes to accelerate the maturity thereof has
occurred and is continuing. Any Note that is exchangeable pursuant to the
preceding sentence is exchangeable for certificated Notes issuable in authorized
denominations and registered in such names as the Depository shall direct.
Subject to the foregoing, the Global Note is not exchangeable, except for a
Global Note of the same aggregate denomination to be registered in the name of
the Depository or its nominee. In addition, such certificates will bear the
legend referred to under "Transfer Restrictions" (unless the Company determines
otherwise in accordance with applicable law) subject, with respect to such
Notes, to the provisions of such legend.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control (as
defined below), each holder of Notes shall have the right to require that the
Company repurchase such holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Change of Control" means the occurrence of any of the following events
(each a "Change of Control"):
(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 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
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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 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 Notes 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 Notes 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 Notes are 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.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Company to purchase such Holder's Notes at a purchase
price in cash equal to 101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of purchase (subject to the right
of holders of record on the relevant record date to receive interest on the
relevant interest payment date);
(2) 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);
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with the
covenant described hereunder, that a Holder must follow in order to have
its Notes purchased.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the purchase of Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company and its Restricted Subsidiaries to incur additional
Indebtedness are contained in the covenants described under "-- Certain
Covenants -- Limitation on Indebtedness". Such restrictions can only be waived
with the consent of the holders of a majority in principal amount of the Notes
then outstanding. Except for the limitations contained in such covenants,
however, the Indenture will not contain any covenants or provisions that may
afford holders of the Notes protection in the event of a highly leveraged
transaction.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require the Company to repurchase
the Notes
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could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the holders of Notes following the
occurrence of a Change of Control may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. In the event a Change
of Control occurs at a time when the Company is prohibited from purchasing
Notes, the Company could seek the consent of its lenders to make such purchase,
or could attempt to refinance the borrowings that contain such prohibitions. If
the Company does not obtain such consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes.
The provisions under the Indenture relative to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
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 (x) to the Incurrence of such Indebtedness (including pro forma
application of the net proceeds therefrom), (y) 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 and (z) to the issuance or redemption of
any Capital Stock (other than Disqualified Stock) and any dividends of
distributions 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, (x)
if prior to April 1, 2000, 5.5 to 1.0, and (y) if thereafter, 5.0 to 1.0, or
(ii) the Debt to 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.
(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) $250.0 million 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 Notes and the Exchange Notes;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3) or (4) 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 the Indenture;
(7) Indebtedness Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration) to acquire or improve
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equipment, inventory or network assets (including real estate) (including
acquisitions by way of capital lease and acquisitions of the Capital Stock
of a Person that becomes a Restricted Subsidiary to the extent of the fair
market value of the equipment, inventory or network assets so acquired) by
the Company or a Restricted Subsidiary after the Issue Date for use in a
Related Business;
(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 Nonrecourse Debt;
(9) Strategic Subordinated Indebtedness; and
(10) 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)-(9) above and
paragraph (a)), does not exceed 5% of Consolidated Tangible Assets.
(c) Notwithstanding the foregoing, the Company shall not Incur (x) any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations or (y) any Secured Indebtedness that is not
Senior Indebtedness unless the Notes are secured equally and ratably with (or
prior to) such Secured Indebtedness by a Lien on the assets securing such
Secured Indebtedness for so long as such Secured Indebtedness is so secured.
(d) For purposes of determining compliance with the foregoing covenant,(i)
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 (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted 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 Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "--
Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of: (A) an
amount equal to the Cumulative Operating Cash Flow for the period (taken as
one accounting period) from April 1, 1998 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; (B) the
aggregate Net Cash Proceeds received by the Company from the issuance or
sale of its Capital Stock (other than Disqualified Stock) subsequent to
August 20, 1997 (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); (C) 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 August 20, 1997 of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified
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 (D) an amount equal to the sum of (i) 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 from
Unrestricted Subsidiaries), and (ii) 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
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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 the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made out of the substantially concurrent
sale of (or within 30 days after the sale of, as long as such Restricted
Payment was authorized by the Board of Directors as the intended use of
proceeds of such sale at the time of such sale), or any acquisition of any
Capital Stock of the Company or any Subordinated Obligation made by
exchange for, Capital Stock of the Company (other than Disqualified Stock
and other than Capital 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 (A) such Restricted Payment shall be excluded in
the calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale shall be excluded from the calculation of amounts
under clause (3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be Incurred pursuant
to the covenant described under "-- Limitation on Indebtedness"; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of
the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that at the time of payment of such
dividend, no other Default 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;
(iv) 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 $1.0 million 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;
(v) dividends paid on the Company's 1997 Convertible Preferred Stock
and its 1998 Convertible Preferred Stock outstanding on the Issue Date (and
on any shares of either class issued in payment of dividends thereon),
pursuant to their terms as in effect on the Issue Date; provided, however,
that at the time of any such payment no Default shall have occurred and be
continuing (or result therefrom); provided further, however, that such
dividends shall be included in the calculation of the amount of Restricted
Payments;
(vi) cash payments made in lieu of the issuance of fractional shares
of Capital Stock in connection with any exchange, redemption, dividend,
consolidation or conversion of shares of Capital Stock of the Company or
any acquisition of a Person or assets; provided, however, that the
aggregate amount of such payments shall not exceed $1.0 million; provided
further, however, that such payments shall be excluded in the calculation
of the amount of Restricted Payments; or
(vii) Restricted Payments to the extent attributable to dividends or
distributions received from Unrestricted Subsidiaries; provided, however,
that such dividends or distributions are neither treated as a reduction of
the Investment in such Unrestricted Subsidiary pursuant to paragraph
(a)(3)(D) of this covenant (or as a reduction of any Permitted Investment
in such Unrestricted Subsidiary) nor included
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in the calculation of Consolidated Net Income; provided further, however,
that such Restricted Payments shall be excluded from the calculation of the
amount of Restricted Payments.
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 Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date;
(ii) 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;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii); 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 Notes than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in such predecessor
agreements;
(iv) any such encumbrance or restriction consisting of customary
non-assignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the property
leased thereunder;
(v) 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;
(vi) 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;
(vii) any such encumbrance or restriction contained in the PSINet
Agreement; and
(viii) any encumbrance or restriction with respect to a Restricted
Subsidiary contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was Incurred if the Board of Directors
determines in good faith that any such encumbrance or restriction will not
materially affect the Company's ability to pay principal or interest on the
Notes when due and such encumbrance or restriction by its terms expressly
permits such Restricted Subsidiary (A) in the absence of a payment default
in respect of such Indebtedness or other agreement, to make cash payments
to the Company (in any form) sufficient to pay when due all amounts of
principal and interest on the Notes and (B) following the occurrence and
during the continuance of a payment default in respect of such Indebtedness
or other agreement, to resume making cash payments to the Company (in any
form) sufficient to pay when due all amounts of principal and interest on
the Notes no later than the earlier of the cure of such payment default and
the lapse of 179 consecutive days following the date when such encumbrance
or restriction became operative to prohibit or limit such Restricted
Subsidiary from making such payments to the Company; provided, however,
that no Restricted Subsidiary shall be affected by the operation of any
such encumbrances or restrictions following the occurrence of a payment
default on more than one occasion in any consecutive 360-day period.
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Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company (or such Restricted
Subsidiary, as the case may be) receives consideration at the time of such Asset
Disposition at least equal to the fair market value (evidenced by resolution of
the Board of Directors as set forth in an Officers' Certificate delivered to the
Trustee), (ii) after giving effect to such Asset Disposition, the non-cash
consideration received in connection with all Asset Dispositions for the period
beginning on the Issue Date through and including the date of such proposed
Asset Disposition, less cash received in connection with the sale, disposition,
transfer or other conversion of non-cash consideration received in connection
with Asset Dispositions during such period, does not exceed 5% of the Company's
Consolidated Tangible Assets after giving effect to such Asset Disposition and
(iii) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as the
case may be):
(A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness or Indebtedness (other than any Disqualified Stock) of a
Restricted Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company, unless permitted pursuant to the
last sentence of paragraph (b) of the covenant described under
"-- Limitation on Affiliate Transactions") within one year from the later
of the date of such Asset Disposition or the receipt of such Net Available
Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the Company
elects, to acquire Additional Assets within one year from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash;
and
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make an offer
to the holders of the Notes (and to holders of other Senior Subordinated
Indebtedness designated by the Company) to purchase Notes (and such other
Senior Subordinated Indebtedness) pursuant to and subject to the conditions
contained in the Indenture;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) or (C) above, the Company or such
Restricted Subsidiary shall permanently retire such Indebtedness and shall cause
the related loan commitment (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased. Notwithstanding
the foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
paragraph exceeds $10.0 million. Pending application of Net Available Cash
pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition (which assumption shall also constitute a repayment of Indebtedness
pursuant to the preceding paragraph) and (y) securities received by the Company
or any Restricted Subsidiary from the transferee that are promptly converted by
the Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that results in the purchase of
the Notes (and other Senior Subordinated Indebtedness) pursuant to clause
(a)(ii)(C) above, the Company will be required to purchase Notes tendered
pursuant to an offer by the Company for the Notes (and other Senior Subordinated
Indebtedness) at a purchase price of 100% of their principal amount (without
premium) plus accrued but unpaid interest (or, in respect of such other Senior
Subordinated Indebtedness, such lesser price, if any, as may be provided for by
the terms of, or agreed to by the holders of, such Senior Subordinated
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in the Indenture. The Company shall not be
required to make such an offer to purchase Notes (and other Senior Subordinated
Indebtedness) pursuant to this covenant if the Net Available Cash available
therefor is less than $10.0 million (which lesser amount shall be carried
forward for purposes of determining whether such an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
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(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this covenant by virtue thereof.
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 (i) 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 (ii) the Company delivers to the Trustee (x) with respect
to any Affiliate Transaction involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (y) with respect to any
Affiliate Transaction involving aggregate consideration in excess of $10.0
million, 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.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Permitted Investment or any Restricted Payment permitted to be
paid pursuant to the covenant described under "-- Limitation on Restricted
Payments";
(ii) 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;
(iii) the grant of stock options or similar rights to employees and
directors of the Company pursuant to plans approved by the Board of
Directors;
(iv) 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;
(v) 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;
(vi) 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;
(vii) any Affiliate Transaction between the Company and a Restricted
Subsidiary or between restricted Subsidiaries;
(viii) transactions in connection with Permitted Businesses between
the Company and GE Capital Communications;
(ix) transactions between the Company or any Restricted Subsidiary
specifically contemplated by the PSINet Agreement;
(x) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company; and
(xi) transactions between the Company or any Restricted Subsidiary and
any Person that is controlled (as defined in the definition of "Affiliate")
by the Company; provided, however, that Affiliates of the Company (other
than a Restricted Subsidiary) do not in the aggregate hold Investments in
such Person having a fair market value in excess of $1.0 million.
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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, Notes, Exchange
Debentures (if issued), or 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, Exchange Debentures (if issued), Notes or
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, Notes, Exchange Debentures (if issued) or Preferred Stock, as the
case may be, on the same terms and conditions; 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, Notes, Exchange Debentures (if issued) or 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.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock (other than Qualified Preferred Stock) of a Restricted Subsidiary, and
shall not permit any Restricted Subsidiary, directly or indirectly, to issue or
sell or otherwise dispose of any of its Capital Stock (other than Qualified
Preferred Stock) except (i) to the Company or a Wholly Owned Subsidiary, (ii)
if, immediately after giving effect to such issuance, sale or other disposition,
neither the Company nor any of its Subsidiaries own any Capital Stock of such
Restricted Subsidiary or (iii) if, immediately after giving effect to such
issuance, sale or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such Person remaining
after giving effect thereto would have been permitted to be made under the
covenant described under "-- Limitation on Restricted Payments" if made on the
date of such issuance, sale or other disposition.
Merger and Consolidation. 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:
(i) 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, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the Notes and the Indenture;
(ii) 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,
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;"
(iv) 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
(v) the Company shall have delivered to the Trustee an Officers'
Certificate, stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes except in the case of a sale,
assignment, transfer, lease, conveyance or
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other disposition of all the Company's assets that meets the requirements
described in the preceding paragraph.
SEC Reports. 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 file with the SEC and provide the Trustee and, upon
request, holders of the Notes 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.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due and continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, (iii) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure by
the Company to comply for 30 days after notice with any of its obligations in
the covenants described above under "-- Change of Control" (other than a failure
to purchase Notes) or under "-- Certain Covenants" under "-- Limitation on
Indebtedness", "-- Limitation on Restricted Payments", "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "-- Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"-- Limitation on Affiliate Transactions", "-- Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries" or "-- SEC Reports", (v)
the failure by the Company to comply for 60 days after notice with its other
agreements contained in the Indenture, (vi) Indebtedness of the Company or any
Significant Subsidiary (other than any Permitted PSINet Non-Recourse Debt) is
not paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total amount of
such Indebtedness unpaid or accelerated exceeds $5.0 million (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions") or (viii) any judgment or decree for the payment of money in excess
of $5.0 million is entered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is not
discharged, waived or stayed within 10 days after notice (the "judgment default
provision"). However, a default under clauses (iv), (v) and (viii) will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify the Company of the default and
the Company does not cure such default within the time specified after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable; provided, however, that so long as any Credit Agreement shall be in
force and effect, if an Event of Default shall have occurred and be continuing
(other than an Event of Default under clause (vii)), any such acceleration shall
not be effective until the earlier to occur of (i) five Business Days following
delivery of a notice of such acceleration to the Representative under such
Credit Agreement and (ii) the acceleration of any Indebtedness under such Credit
Agreement. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences. Subject to the provisions of the Indenture relating to the duties
of the Trustee, in case an Event of Default occurs and is continuing, the
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of the
Notes unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense.
Except to enforce the right to receive payment of principal, premium (if
any) or interest when due, no holder of an Note may pursue any remedy with
respect to the Indenture or the Notes unless (i) such holder
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has previously given the Trustee notice that an Event of Default is continuing,
(ii) holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the holders of a
majority in principal amount of the outstanding Notes have not given the Trustee
a direction inconsistent with such request within such 60 day period. Subject to
certain restrictions, the holders of a majority in principal amount of the
outstanding Notes are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of an Note or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the holders of the Notes.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the holders of Notes.
Without the consent of any holder of the Notes, the Company and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the holders of the
Notes or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any holder of the Notes or
to comply with any requirement of the SEC in connection with the qualification
of the Indenture under the Trust Indenture Act. However, no amendment may be
made to the subordination provisions of the Indenture that adversely affects the
rights of any holder of Senior Indebtedness then outstanding unless the holders
of such Senior Indebtedness (or their Representative) consent to such change.
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The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "Change of
Control" and under the covenants described under "-- Certain Covenants" (other
than the covenant described under "-- Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"-- Defaults" above and the limitations contained in clauses (iii) and (iv)
under "-- Certain Covenants -- Merger and Consolidation" above ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "-- Certain
Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is the Trustee under the Indenture and
has been appointed by the Company as Registrar and Paying Agent with regard to
the Notes. The Holders of a majority in principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any holder of
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
"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 correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" 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 Disposition" means (i) the sale, lease, conveyance or other
disposition of any assets (including by way of a sale and leaseback) other than
in the ordinary course of business consistent with past practices (provided that
the sale, lease, conveyance or other disposition of all or substantially all the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
deemed not to constitute an Asset Disposition but will be governed by the
covenant described under "-- Certain Covenants -- Merger and Consolidation", and
not by the covenant described under "-- Certain Covenants -- Limitation on Sales
of Assets and Subsidiary Stock") and (ii) the issue or sale by the Company or
any of its Restricted Subsidiaries of Capital Stock of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to its Wholly Owned Subsidiaries or by its Restricted Subsidiaries to the
Company or to another of the Company's Wholly Owned Subsidiaries, (ii) an
issuance of Capital Stock by a Wholly Owned Subsidiary of the Company to the
Company or to another of the Company's Wholly Owned Subsidiaries, (iii) a
Permitted Investment or a Restricted Payment that is not prohibited by the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments", (iv) an issuance or sale of Capital Stock of an Unrestricted
Subsidiary, (v) an Asset Swap, (vi) the issuance of Capital Stock of the Company
and (vii) the sale of any IRU pursuant to IRU Agreements in respect of the
network of the Company and its Restricted Subsidiaries (including sales of IRUs
specifically provided for in the PSINet Agreement), will be deemed not to
constitute Asset Dispositions.
"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 or
interest rate borne by the Notes, 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 determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
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<PAGE> 48
redemption or similar payment with respect to such Preferred Stock multiplied 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.
"Capital Lease Obligation" 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"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
attributable to leases constituting part of a Sale/ Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) non-cash 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 Subsidiaries; 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;
(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);
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(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 accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" 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 such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of: (i) the consolidated 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
maybe 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.
"Credit Agreements" means one or more debt facilities or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit 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 and all promissory
notes, guarantees, letters of credit, security agreements, pledge agreements,
mortgages, deeds of trust and other instruments, documents or agreements
executed pursuant thereto, 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 April 1, 1998 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 April 1, 1998 to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
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"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.
"Debt to 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 consolidated capital of such Person as of such date. For
purposes of this definition, "capital" means the sum of (x) the greater of (I)
stockholder's equity (deficit) and (II) paid-in capital, plus, without
duplication, (y) redeemable stock (other than Disqualified Stock), each as
determined in accordance with GAAP.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness Incurred
pursuant to clause (1) of paragraph (b) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (ii) any other Senior
Indebtedness of the Company which, at the date of determination, has an
aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to, at least $25.0
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"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 anniversary of the Stated Maturity of the
Notes; 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 Notes 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 provisions described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "-- Certain
Covenants -- Change of Control"; provided further, however, that the Company's
1997 Convertible Preferred Stock outstanding on the Issue Date shall be deemed
not to constitute Disqualified Stock.
"Equity Offering" means either (x) an underwritten primary public offering
of common stock of the Company pursuant to an effective registration statement
under the Securities Act or (y) an issuance and sale of common stock of the
Company to one or more persons that are primarily engaged, directly or
indirectly, in a Related Business.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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.
"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
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<PAGE> 51
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.
"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 Note is registered on the
Registrar's books.
"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 not 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 notes, 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);
(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
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<PAGE> 52
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 Subsidiary of such Person), plus the aggregate liquidation reference or
redemption amount of all Disqualified Stock of such Person (excluding any
Disqualified Stock held by such Person or a Wholly Owned 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.
"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 instruments issued
by such Person. For purposes of the definition of "Unrestricted Subsidiary", the
definition of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments", (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 any designation 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 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 Capital Stock (other than
Disqualified Stock) of the Company.
"IRU" means an indefeasible right to use fiber or telecommunications
capacity.
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"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 Notes are 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 $10.0 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 presence, in each case as
contemplated in connection with the transactions contemplated by the PSI Net
Agreement.
"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 Available Cash" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset
Disposition (including any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Disposition), net of the direct
costs relating to such Asset Disposition (including legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness Incurred pursuant to clause (1) of paragraph (b) of the
covenant described under "-- Certain Covenants -- Limitation on Indebtedness")
secured by a Lien on the asset or assets that were the subject of such Asset
Disposition and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP; provided, however, that Net
Available Cash shall not include that portion of Net Available Cash from an
Asset Disposition by a Restricted Subsidiary of the Company that are paid as a
pro rata dividend or distributed with respect to Capital Stock of such
Restricted Subsidiary, or used to purchase, redeem or otherwise retire for value
Capital Stock of such Restricted Subsidiary, held by a Person other than the
Company or any of its Affiliates.
"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.
"1997 Convertible Preferred Stock" means the Company's 7 1/4% Junior
Convertible Preferred Stock Due 2007.
"1998 Convertible Preferred Stock" means the Company's 6 3/4% Cumulative
Convertible Preferred Stock.
"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 non-cash 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 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 non-cash
charges (excluding any such non-cash 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 non-cash charges were deducted in computing such
Consolidated Net Income and (B) less all non-cash income for such period
(excluding any such non-cash income to the extent it represents
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<PAGE> 54
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
non-cash 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.
"Permitted Business" means (i) any communications business and (ii) any
business reasonably related or ancillary thereto.
"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) any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock";
(ix) the IXC Internet Capital Contribution;
(x) 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 $240.0 million value
protection right provided for by the PSINet Agreement;
(xi) any Person primarily engaged in a Related Business to the extent
the Investment represents a minority equity interest in such Person which
is received as the consideration for the disposition by the Company or its
Restricted Subsidiaries of a fiber IRU (which does not require significant
additional capital expenditures for optronics or electronic equipment)
which the Board of Directors has determined in good faith is excess to the
reasonable requirements of the Company;
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(xii) any Person to the extent such Investment is dividended or
otherwise distributed to the Company or a Restricted Subsidiary by an
Unrestricted Subsidiary; and
(xiii) other Investments in any Person that in the aggregate do not
exceed $50.0 million (without regard to increases and decreases in the
value of the Investments).
"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 a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"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.
"Qualified Preferred Stock" of a Restricted Subsidiary means a series of
Preferred Stock of such Restricted Subsidiary which (i) has a fixed liquidation
preference that is no greater in the aggregate than the sum of (x) the fair
market value (as determined in good faith by the Board of Directors at the time
of the issuance of such series of Preferred Stock) of the gross consideration
received by such Restricted Subsidiary for the issuance of such series of
Preferred Stock (without reduction for underwriting by similar offers and any
transaction expenses) and (y) accrued and unpaid dividends to the date of
liquidation, (ii) has a fixed annual dividend and has no right to share in any
dividend or other distributions based on the financial or other similar
performance of such Restricted Subsidiary and (iii) does not entitle the holders
thereof to vote in the election of directors, managers or trustees of such
Restricted Subsidiary unless such Restricted Subsidiary has failed to pay
dividends on such series of Preferred Stock for a period of at least 12
consecutive calendar months.
"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 the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing
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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 expenses, including any premium (whether or not provided for in the
instrument governing the Indebtedness to be Refinanced) 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.
"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).
"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 its 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 its Capital
Stock (other than dividends or distributions payable solely in its Capital
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 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 Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than the Company or a Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into
Capital Stock of the Company that is not Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition) or
(iv) the making of any Investment (other than a Permitted Investment)
in any Person.
"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.
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"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" of the Company means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not allowed as a claim in such proceeding) and (iii) fees, expenses and
indemnities in respect of (A) indebtedness of the Company for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds, letters of credit or
other similar instruments for the payment of which such Person is responsible or
liable unless, in the case of (i) and (ii), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate or pari passu in right of payment to the
Notes; provided, however, that Senior Indebtedness shall not include (1) any
obligation of such Person to any Subsidiary of such Person, (2) any liability
for Federal, state, local or other taxes owed or owing by such Person, (3) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including guarantees thereof or instruments evidencing such
liabilities) or (4) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness that ranks pari passu with the Notes.
"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).
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a majority of the voting power of the
Voting Stock of a Person engaged in a Related Business that by its terms, or by
the terms of any agreement or instrument pursuant to which such Indebtedness is
outstanding, (i) is expressly made subordinate in right of payment to the Notes
on terms prescribed by the Indenture and (ii) provides that no payment of
principal, premium or interest on, or any other payment with respect to, such
Indebtedness may be made prior to the first anniversary following the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of the
sale of Capital Stock (other than Disqualified Stock) of the Company after the
Incurrence of such Indebtedness.
"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 Notes pursuant to a written agreement to that
effect (including, if issued, the Exchange Debentures as set forth in the
Company's Certificate of Designation relating to the Exchangeable Preferred
Stock).
"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 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
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by the United States, 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 &
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 & Poor's Ratings Group or "A" by Moody's Investors Service, Inc.
"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 Preferred Stock or Indebtedness of, 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 the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments". Notwithstanding the foregoing,
IXC Internet Services, Inc., IXC Leasing LLC, IXC International, Inc., Progress
International LLC and, upon acquisition by the Company, Network Long Distance,
Inc. shall be deemed to be Unrestricted Subsidiaries for purposes of the
Indenture. 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 (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" 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.
"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 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.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, and 3,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). The following summary
of certain provisions of the Common Stock and the Preferred Stock of the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Restated Certificate, the Certificate of Designations and Bylaws of the
Company, as amended, and the provisions of applicable law.
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COMMON STOCK
As of May 1, 1998, there were 31,793,006 outstanding shares of Common Stock
held by 143 holders of record. Each holder of Common Stock is entitled to one
vote per share on all matters to be voted on by the stockholders. Subject to the
rights of the holders of the Preferred Stock, each holder of Common Stock is
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available therefor. In the event
of the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets, if any, remaining,
after payment of liabilities, subject to the prior liquidation rights of holders
of the Preferred Stock described below. The shares of Common Stock have no
preemptive or other similar rights, and there are no redemption or sinking fund
provisions applicable to Common Stock.
PREFERRED STOCK
There are three million shares of the Preferred Stock authorized. The
Company has designated 155,250 shares of Preferred Stock as 1998 Convertible
Preferred Stock, 1,400,000 shares of Preferred Stock as 1997 Convertible
Preferred Stock and 450,000 shares of Preferred Stock as Exchangeable Preferred
Stock. As of May 1, 1998, there were 1,074,496 shares of the 1997 Convertible
Preferred Stock issued and outstanding, 318,616 shares of Exchangeable Preferred
Stock issued and outstanding, 155,250 shares of 1998 Convertible Preferred Stock
were issued and outstanding and no other shares of Preferred Stock were
outstanding. As of May 1, 1998, the 1997 Convertible Preferred Stock, the 1998
Convertible Preferred Stock and the Exchangeable Preferred Stock were held by
20, one and three holders of record respectively.
The 1997 Convertible Preferred Stock is convertible at the option of the
holders, unless previously redeemed, at any time into shares of Common Stock at
a rate (subject to adjustment in certain events) of 4.263 shares of Common Stock
for each share of 1997 Convertible Preferred Stock, equivalent to a Conversion
Rate of $23.46 for each share of Common Stock. Dividends on the 1997 Convertible
Preferred Stock accrue at a rate per annum of 7 1/4% per share on the
liquidation preference thereof of $100 per share ($7.25 per annum per share).
Dividends payable prior to or on June 30, 1999, are, at the option of the
Company, payable (i) in cash or (ii) through the issuance of additional shares
of the 1997 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 1997 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 1997
Convertible Preferred Stock. The Company is required to redeem all the remaining
shares of the 1997 Convertible Preferred Stock on March 31, 2007.
The 1997 Convertible Preferred Stock is not redeemable prior to April 3,
2000. On or after such date, the 1997 Convertible Preferred Stock will be
redeemable at the option of the Company, in while or in part, at the redemption
prices set forth in the Certificate of Designation in connection with the 1997
Convertible Preferred Stock plus accrued and unpaid dividends through the
redemption date, provided that prior to April 1, 2002, the 1007 Convertible
Preferred Stock will not be subject to redemption unless for any 20 trading days
within the period of 30 consecutive trading days ending on the trading day
immediately prior to the notice of redemption, the closing bid price for the
Common Stock on the NNM equals or exceeds 150% of the then effective conversion
price.
The 1998 Convertible Preferred Stock is convertible at the option of the
holders, unless previously redeemed or repurchased, at any time into shares of
Common Stock at a rate (subject to adjustment in certain events) of 13.748
shares of Common Stock for each share of 1998 Convertible Preferred Stock.
Dividends on the 1998 Convertible Preferred Stock are payable quarterly and
accrue at a rate per annum of 6 3/4% per share on the liquidation preference
thereof of $1,000 per share ($67.50 per annum per share). Dividends may, at the
option of the Company, be paid in Common Stock if, and only if, the documents
governing the Company's indebtedness that exists as of March 30, 1998 then
prohibit the payment of such dividends in cash. The 1998 Convertible Preferred
Stock is redeemable after April 5, 2000 subject to certain conditions with
respect to the
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closing price of the Common Stock in the case of redemptions prior to April 1,
2002. The 1998 Convertible Preferred Stock was issued in the form of 3,105,000
depositary shares (at $50 per share).
The Exchangeable Preferred Stock will be, under certain terms and
conditions, exchangeable into the Company's Exchange Debentures as set forth in
the Company's Certificate of Designation relating to the Exchangeable Preferred
Stock. The Exchange Debentures, if issued, will rank junior to the Notes.
Dividends on the Exchangeable Preferred Stock accrue at a rate per annum of
12 1/2% of the liquidation preference thereof of $1,000 per share. Dividends are
payable quarterly in cash, except that on or prior to February 15, 2001,
dividends may be paid, at the Company's option, by the issuance of additional
shares of Exchangeable Preferred Stock (including fractional shares) having an
aggregate liquidation preference equal to the amount of such dividends. The
Exchangeable Preferred Stock is not redeemable prior to August 15, 2002, except
that, on or prior to August 15, 2000, the Company may redeem, at its option, up
to 35% of the outstanding Exchangeable Preferred Stock with the net proceeds of
one or more public equity offerings if at least $195 million aggregate
liquidation preference of the Exchangeable Preferred Stock remains outstanding
after each such redemption. On or after August 15, 2002, the Exchange Preferred
Stock is redeemable at the option of the Company. The Company is required to
redeem the Exchangeable Preferred Stock on August 15, 2009.
Except for certain amendments to the Restated Certificate and as required
by law, the holders of the 1997 Convertible Preferred Stock and the 1998
Convertible Preferred Stock are not entitled to any voting rights unless
payments of dividends on the 1997 Convertible Preferred Stock or the 1998
Convertible Preferred Stock, respectively, are in arrears for an aggregate of
six quarterly dividend payments. In such event, the holders of a majority of the
outstanding shares of the 1997 Convertible Preferred Stock or the 1998
Convertible Preferred Stock, as applicable (together with holders of other
series of the preferred stock having similar rights, including the Exchangeable
Preferred Stock) will be entitled to elect two directors to the Board of
Directors until such time as all dividend arrearages have been paid. The
Exchangeable Preferred Stock is nonvoting except (i) as otherwise required by
law and (ii) that holders of the Exchangeable Preferred Stock, voting together
as a class with the holders of any other series of preferred stock with similar
exercisable voting rights (including the 1997 Convertible Preferred Stock and
the 1998 Convertible Preferred Stock), (a) upon the failure of the Company (1)
to pay dividends for six or more dividend periods, (2) to satisfy any mandatory
redemption obligation with respect to the Exchangeable Preferred Stock, (3) to
comply with the covenants set forth in the Certificate of Designation with
respect to the Exchangeable Preferred Stock or (4) to comply with certain
covenants or make certain payments on certain indebtedness, will be entitled to
elect two members to the Board of Directors of the Company; and (b) have the
right, subject to certain exceptions, to approve each issuance by the Company of
preferred stock that ranks senior to the Exchangeable Preferred Stock with such
approval requiring consent of holders of two-thirds of the shares of
Exchangeable Preferred Stock. The Exchangeable Preferred Stock ranks on a parity
with the 1997 Convertible Preferred Stock and the 1998 Convertible Preferred
Stock with respect to payment of dividends and amounts upon liquidation,
dissolution and winding up. On any scheduled dividend payment date, the Company
may, at its option, exchange all but not less than all of the shares of the
Exchangeable Preferred Stock then outstanding for the Exchange Debentures.
The Board of Directors of the Company has the authority to issue the
preferred stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences, voting rights and the number of shares consisting of any series or
the designation of such series without further vote or action by the
stockholders. The issuance of the preferred stock (or the ability of the Board
of Directors to issue the preferred stock) may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other rights
of the holders of Common Stock. The issuance of preferred stock with voting or
conversion rights may adversely affect the voting power of the holders of Common
Stock.
REGISTRATION RIGHTS
In June 1996, the Company granted certain registration rights to GEPT,
Grumman Hill Investments, L.P., and Richard D. Irwin, Ralph J. Swett, John J.
Willingham, Carl W. McKinzie and Phillip L. Williams,
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in consideration of the sale of Common Stock to GEPT and the lock-up
arrangements each of the parties entered into in connection with the Company's
initial public offering of its Common Stock which occurred in July 1996. Such
registration rights cover all the shares of Common Stock held by such persons or
their transferees which demand registration rights became exercisable on May 15,
1997. Subject to certain exceptions, whenever the Company registers any of its
Common Stock under the Securities Act during the period the agreement is
effective, whether or not for sale for its own account, the holders of such
registration rights are entitled to written notice of the registration and are
entitled to include (at the Company's expense) such Common Stock in such
registration. GEPT also has the right, subject to certain limitations, to
require the Company to use its best efforts to file registration statements
under the Securities Act covering Common Stock held by GEPT. All fees, costs and
expenses of such registrations (other than underwriting discounts and
commissions) will be borne by the Company.
The former shareholders of Telecom One and their transferees and assignees
(the "Telecom One Holders") were also granted registration rights with respect
to the shares of Common Stock issued by the Company for such acquisition which
occurred in June, 1997. In connection with the sale of the 1997 Convertible
Preferred Stock, the Company entered into a registration rights agreement with
the initial purchasers of the 1997 Convertible Preferred Stock, which required
the Company, at its cost, to file a shelf registration statement for the benefit
of the holders of the 1997 Convertible Preferred Stock with respect to the 1997
Convertible Preferred Stock and any shares of Common Stock issuable upon
conversion thereof. On August 28, 1997, the Commission declared effective a
shelf registration statement filed by the Company pursuant to its obligations
with respect to the holders of the 1997 Convertible Preferred Stock and with
respect to the initial payment to the Telecom One Holders. In addition, the
Telecom One Holders have been granted registration rights with respect to an
aggregate of 26,413 shares of Common Stock issued as final payment by the
Company for such acquisition and the former stockholders of certain subsidiaries
of the Company have been granted registration rights with respect to
approximately 250,000 shares of Common Stock issued in connection with such
acquisitions.
In connection with the sale of the 1998 Convertible Preferred Stock, the
Company entered into a registration rights agreement with the initial purchasers
of the 1998 Convertible Preferred Stock, which required the Company, at its
cost, to file a shelf registration statement for the benefit of the holders of
the 1998 Convertible Preferred Stock with respect to the 1998 Convertible
Preferred Stock (including the corresponding Depositary Shares) and the shares
of Common Stock issuable upon conversion thereof and as dividends thereon.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
INDENTURE
The Bylaws of the Company provide that stockholders may call a special
meeting of stockholders only upon a request of stockholders owning at least 50%
of IXC Communications' outstanding capital stock entitled to vote. In addition,
in the event of a change in control (i) holders of the Notes will have the right
to require the Company to purchase their Notes, in whole or in part, at a price
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase, and (ii) subject to applicable
provisions of state law and the restrictions of the Indenture, the Company will
be obligated to repurchase all or any part of the outstanding 1997 Convertible
Preferred Stock or to adjust its conversion rate and to offer to repurchase the
Exchangeable Preferred Stock. A change of control could also require the Company
to adjust the conversion rate of the 1998 Convertible Preferred Stock in favor
of the holders thereof. These provisions, as well as the authorized and unissued
preferred stock described above, could discourage potential acquisition
proposals and could delay or prevent a change in control or management of the
Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the DGCL, which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in certain
"business combinations" with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless the transaction is approved in a prescribed manner. The business
combinations to which Section 203 applies include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholders.
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In general, Section 203 defines an "interested stockholder" as a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the outstanding voting stock of the corporation.
LISTING
The Common Stock is listed on the NNM under the symbol "IIXC".
DESCRIPTION OF CERTAIN INDEBTEDNESS
On October 5, 1995, the Company issued and sold its Senior Notes in the
aggregate principal amount of $285.0 million to a group of institutional and
accredited investors. In connection with the purchase of approximately $284.2
million of the Senior Notes in April 1998 by the Company, substantially all of
the covenants in connection with the Senior Notes were eliminated.
In July 1997, the Company entered into the NTFC Equipment Facility pursuant
to which the Company has borrowed $28.0 million (the maximum amount thereunder)
in connection with the purchase of certain equipment for use in its Network. The
Company is required to make interest payments, and beginning June 30, 1998,
principal payments over a five year period in quarterly installments under the
NTFC Equipment Facility. The obligations under the NTFC Equipment Facility are
secured by the equipment purchased hereunder.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. Federal income tax
considerations relevant to the exchange of Old Notes for New Notes and does not
purport to be a complete analysis of all potential tax consequences of such
exchange, or all the potential tax effects thereof. Further, the discussion
below is not binding on the Internal Revenue Service (the "IRS") or the courts.
The Company has not sought, and will not seek, any rulings from the IRS with
respect to the positions discussed herein and there can be no assurance that the
IRS will not take a different position concerning the tax consequences of the
exchange of the Old Notes for the New Notes, or that any such position would not
be sustained.
This summary is based upon current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), regulations of the Treasury Department,
administrative rulings and pronouncements of the IRS and judicial decisions
currently in effect, all of which are subject to change, possibly with
retroactive effect. The discussion does not deal with all aspects of U.S.
Federal income taxation that may be relevant to particular investors in light of
their personal investment circumstances (for example, to persons holding the
Notes as part of a conversion transaction or as part of a hedge or hedging
transaction, or as a position in a straddle for tax purposes), nor does it
discuss U.S. Federal income tax considerations applicable to certain types of
investors subject to special treatment under the U.S. Federal income tax laws
(for example, insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, taxpayers subject to the alternative minimum tax
or non-U.S. holders). In addition, the discussion does not consider the effect
of any foreign, state, local, gift, estate or other tax laws that may be
applicable to a particular investor.
The exchange of Old Notes for New Notes will not constitute a recognition
event for federal income tax purposes. Consequently, no gain or loss will be
recognized by a holder on the exchange. Immediately after the exchange, a
holder's adjusted tax basis in the New Notes will be the same as the holder's
adjusted basis in the Old Notes immediately before the exchange. A holder will
be considered to have held the New Notes from the time the holder originally
acquired the Old Notes. Interest on the New Notes will accrue from the last
Interest Payment Date on which interest was paid on the Old Notes, or if no
interest has been paid, from the Issue Date. No additional interest will be paid
on the Old Notes tendered and accepted for exchange.
EACH POTENTIAL INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE
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NOTES INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX
LAWS.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission with respect to
similar transactions set forth in no-action letters issued to third parties
unrelated to the Company, the New Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof who are not "affiliates" of the Company (within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act;
provided that the New Notes are acquired in the ordinary course of the holders'
business, such holders have no arrangement or understanding with any person to
participate in any distribution (within the meaning of the Securities Act) of
the New Notes and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes was acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that was received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by, acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incidental to the Exchange Offer (including the reasonable fees and
disbursements of one counsel for the holders of the Notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the Notes (including certain broker-dealers) against certain
liabilities, including certain liabilities under the Securities Act.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company as set forth in "The Exchange Offer -- Terms and Conditions of the
Letter of Transmittal." The Company has not entered into any arrangement or
understanding with any person to distribute the New Notes to be received in the
Exchange Offer and, as of the Expiration Date, to the best of the Company's
information and belief, each person participating in the Exchange Offer will be
acquiring the New Notes in its ordinary course of business and will not have any
arrangement or understanding with any person to participate in the distribution
of the New Notes to be received in the Exchange Offer.
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LEGAL MATTERS
The validity of the New Notes will be passed upon for IXC Communications by
Riordan & McKinzie, Los Angeles, California. Carl W. McKinzie, a director and
stockholder of IXC Communications, is a stockholder of Riordan & McKinzie.
Certain attorneys of Riordan & McKinzie beneficially own capital stock of IXC
Communications.
EXPERTS
The consolidated financial statements of IXC Communications, Inc. at
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, appearing in the Annual Report (Form 10-K) of IXC
Communications, Inc., have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
by reference herein which, as to the year 1997, are based in part on the report
of other independent auditors. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of ETI incorporated by reference, in
this Registration Statement of which this Prospectus is a part, to the extent
and for the periods indicated in their reports, have been audited by Arthur
Andersen LLP, independent public accountants. In those reports, that firm states
that with respect to certain acquired entities its opinion is based on the
reports of other independent public accountants, namely Deloitte & Touche LLP,
Mayer Hoffman McCann L.C., and Yount, Hyde & Barbour, P.C. The financial
statements referred to above have been included herein in reliance upon the
authority of those firms as experts in accounting and auditing in giving said
reports.
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GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
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.
Carriers -- Companies that provide telecommunications transmission
services.
Digital -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies (both
fiber and microwave) employ a sequence of these pulses to represent information
as opposed to the continuously variable analog signal. The precise digital
numbers minimize distortion (such as graininess or snow in the case of video
transmission, or static or other background distortion in the case of audio
transmission). Both the Company's microwave and fiber optic facilities transmit
digital information.
EBITDA -- Operating income (loss) plus depreciation and amortization.
EBITDA is not a measurement determined in accordance with GAAP, should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP and is not necessarily comparable with similarly titled
measures for other companies.
ETI -- Eclipse Telecommunications, Inc., formerly known as Network Long
Distance, Inc.
Excel -- EXCEL Communications, Inc.
Facilities-based carrier -- Carriers who own transmission facilities.
FCC -- Federal Communications Commission.
Frame Relay -- A high-speed, data-packet switching service used to transmit
data between computers. Frame Relay supports data units of variable lengths at
access speeds ranging from 56 kilobits per second to 1.5 megabits per second.
This service is well-suited for connecting local area networks, but is not
appropriate for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern fiber
optic networks.
Frontier -- Frontier Corporation.
GAAP -- Generally Accepted Accounting Principles.
Interexchange Carrier -- A company providing inter-LATA or long distance
services between LATAs on an intrastate or interstate basis.
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.
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.
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Local loop -- A circuit within a LATA.
MCI -- MCI Communications Corporation.
MOUs -- Minutes of use of long distance service.
OC-3, OC-12, OC-48 and OC-192 -- Standard telecommunications industry
measurements for optical transmission capacity distinguishable by bit rate
transmitted per second and the number of voice or data transmissions that can be
simultaneously transmitted through fiber optic cable. An OC-3 is generally
equivalent to three DS-3s and has a bit rate of 155.52 megabits per second and
can transmit 2,016 simultaneous voice or data transmissions. An OC-12 has a bit
rate of 622.08 megabits per second and can transmit 8,064 simultaneous voice or
data transmissions. An OC-48 has a bit rate of 2,488.32 megabits per second and
can transmit 32,256 simultaneous voice or data transmissions. An OC-192 has a
bit rate of 9,953.28 megabits per second and can transmit 129,024 simultaneous
voice or data transmissions.
Qwest -- Qwest Communications Corporation.
RBOCs (regional Bell operating companies) -- The seven local telephone
companies (formerly part of AT&T) established by court decree in 1982.
Route miles -- The measure of the length of a transmission path in miles.
Sprint -- Sprint Corp.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Telecom One -- Telecom One, Inc.
The Williams Companies -- The Williams Companies, Inc.
WorldCom -- WorldCom, Inc.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION WHERE, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Documents Incorporated by Reference... i
Available Information................. ii
Prospectus Summary.................... 1
Risk Factors.......................... 7
The Exchange Offer.................... 20
Use of Proceeds....................... 26
Selected Historical Financial Data.... 27
Description of the Notes.............. 28
Description of Capital Stock.......... 55
Description of Certain Indebtedness... 59
Certain U.S. Federal Income Tax
Consequences........................ 59
Plan of Distribution.................. 60
Legal Matters......................... 61
Experts............................... 61
Glossary.............................. A-1
</TABLE>
<TABLE>
<S> <C>
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</TABLE>
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$450,000,000
LOGO
IXC COMMUNICATIONS, INC.
9% SENIOR SUBORDINATED NOTES
DUE 2008
--------------------
PROSPECTUS
--------------------
JUNE 25, 1998
======================================================
