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This filing is made pursuant
to Rule 424(b)(3) under
the Securities Act of
1933 in connection with
Registration No. 333-52433
PROSPECTUS
[IXC LOGO] IXC COMMUNICATIONS, INC.
3,105,000 DEPOSITARY SHARES EACH REPRESENTING 1/20 OF A SHARE OF 6 3/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, 155,250 SHARES OF 6 3/4% CUMULATIVE
CONVERTIBLE PREFERRED STOCK, 2,634,377 SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF, OR PAYABLE AS DIVIDENDS ON, THE DEPOSITARY SHARES OR THE 6 3/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK AND 261,671 SHARES OF COMMON STOCK
------------------------
This Prospectus is being used in connection with the offering from time to
time by (a) certain holders (the "Convertible Preferred Selling Holders") of (i)
up to 3,105,000 depositary shares (the "Depositary Shares") each representing
1/20 of a share of the 6 3/4% Cumulative Convertible Preferred Stock, par value
$.01 per share ("1998 Convertible Preferred Stock"), liquidation preference
$1,000 per share (equivalent to $50 per Depositary Share) (the "Liquidation
Preference"), of IXC Communications, Inc. (the "Company"), (ii) up to 155,250
shares of the 1998 Convertible Preferred Stock and (iii) up to 2,634,377 shares
(the "Common Shares") of the Company's common stock, $.01 par value per share
(the "Common Stock") issuable upon conversion of, or payable as dividends on,
the 1998 Convertible Preferred Stock or the Depositary Shares and (b) the
holders (the "Acquisition Selling Stockholders" and together with the
Convertible Preferred Selling Holders, the "Selling Holders") of 261,671 shares
of Common Stock (the "Acquisition Common Shares"). The Depositary Shares, the
1998 Convertible Preferred Stock, the Common Shares and the Acquisition Common
Shares are collectively referred to as the "Securities."
Holders of the Depositary Shares are entitled to all proportional rights
and preferences of the 1998 Convertible Preferred Stock (including dividend,
voting, redemption and liquidation rights). Dividends on the 1998 Convertible
Preferred Stock accrue at a rate per annum equal to 6 3/4% of the Liquidation
Preference per share of 1998 Convertible Preferred Stock and are payable
quarterly, in arrears, on January 1, April 1, July 1 and October 1 of each year,
commencing on July 1, 1998. Dividends are payable in cash or under certain
circumstances, in shares of Common Stock.
The 1998 Convertible Preferred Stock is convertible at the option of the
holder thereof into shares of Common Stock at any time unless previously
redeemed or repurchased, at a rate of 0.6874 shares of Common Stock per
Depositary Share (13.748 shares of Common Stock per share of the 1998
Convertible Preferred Stock), subject to adjustment in certain events.
The shares of the 1998 Convertible Preferred Stock (and the corresponding
Depositary Shares) are redeemable at the option of the Company, after April 5,
2000, in whole or in part, at the redemption prices set forth herein, plus
accrued and unpaid dividends to the redemption date, subject to certain
conditions with respect to the closing price of the Common Stock, in the case of
redemptions prior to April 1, 2002.
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SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS
PRIOR TO PURCHASE.
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The Common Stock is quoted on the Nasdaq National Market (the "NNM") under
the symbol ("IIXC"). On June 23, 1998, the last reported sale price of the
Common Stock on the NNM, was $49 1/4 per share. The Depositary Shares are traded
in the Private Offerings, Resales and Trading Automated Linkages ("PORTAL"). On
June 23, 1998, the average of the bid and asked prices of the Depositary Shares
was $48 3/8. Shares of 1998 Convertible Preferred Stock and/or Depositary Shares
sold pursuant to this Prospectus will not be eligible for trading in the PORTAL
Market. The Company does not intend to list the Depositary Shares or the 1998
Convertible Preferred Stock on any securities exchange or to seek approval for
quotation of the 1998 Convertible Preferred Stock or the Depositary Shares
through any automated quotation system.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
June 23, 1998
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AVAILABLE INFORMATION
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 Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements, information
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at its
offices at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports, proxy statements,
information statements and other information concerning the Company are also
available for inspection at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006. In addition the Commission maintains an
Internet site at http://www.sec.gov that contains reports, proxy statements,
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (together with all exhibits, schedules, amendments, and supplements thereto,
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the Common Stock offered by this Prospectus.
This Prospectus, which forms a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement (certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission). For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract, agreement, or
other document are not necessarily complete, and, in each instance, reference is
made to the copy of the document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by reference to
such exhibit. The Registration Statement may be inspected and copied at the
public reference facilities at the Commission's offices at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional
Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York,
10048. Copies of all or any part thereof may be obtained from such office upon
payment of prescribed fees.
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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.
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 and filed with the Commission in May 15, 1998.
(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) Description of the Common Stock contained in the Registration
Statement on Form 8-A dated May 31, 1996 and filed with the Commission on June
3, 1996 as amended by Form 8-A/A dated June 26, 1996 as filed with the
Commission on June 26, 1996.
(19) 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.
(20) 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 superseded for purposes of this Prospectus to the
extent that a statement contained herein, modified 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.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
that have been incorporated by reference herein, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to: Investor Relations
Coordinator, IXC Communications, Inc., 1122 Capital of Texas Highway South,
Austin, Texas 78746, telephone number (512) 427-3731.
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RISK FACTORS
In addition to the other information contained in this Prospectus the
following factors should be considered carefully in evaluating an investment in
the Depositary Shares, the 1998 Convertible Preferred Stock or the Common Stock,
which involves a high degree of risk. 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,"
"believe," "seek" or "continue" or the negative thereof or other variations
thereon or comparable terminology, are forward-looking statements. The
discussions set forth below constitute cautionary statements identifying
important factors with respect to such forward-looking statements, including
risks and uncertainties, that could cause actual results to differ materially
from results referred to in the forward-looking statements. There can be no
assurance that the Company's expectations regarding any of these matters will be
fulfilled. As used herein, unless the context otherwise requires, the "Company"
refers to IXC Communication, Inc. and its subsidiaries, including predecessor
corporations. Certain terms used herein are defined in the Glossary at page A-1.
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 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 in 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, other 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 and the value of the Common Stock and its other
securities.
The Company's long distance switched services business will require cash to
meet operating expenses. In order to offer long distance switched services, the
Company installed switches, connected them to its Network and to the LECs (as
defined), acquired software and hired the personnel needed to establish a
national switched network. The Company's long distance switched services
business generated negative EBITDA for 1996 and 1997 and the Company believes it
may be negative during 1998, due to, among other things, access costs and uneven
traffic patterns creating high network overflow costs. Although the Company has
not yet achieved 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."
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The Company is required to make annual interest payments of $40.5 million
with respect to the $450.0 million principal amount of the Company's 9% Senior
Subordinated Notes Due 2008 (the "New Notes") issued in April 1998. The Company
will also be required to make interest payments and, beginning June 30, 1998,
principal payments in connection with borrowings under a secured equipment
financing facility of $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 Company's 12 1/2% Series B Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock") are
payable quarterly in cash (or, on or prior to March 31, 1999 and February 15,
2001 in additional shares of 1997 Convertible Preferred Stock and Exchangeable
Preferred Stock, respectively). Dividends on the 1998 Convertible Preferred
Stock are payable quarterly in 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 the 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 New Notes, the remaining $.8 million principal amount of the Company's
12 1/2% Senior Notes Due 2005 (the "Senior Notes") and other indebtedness, to
pay cash dividends on the 1998 Convertible Preferred Stock, the Exchangeable
Preferred Stock and the 1997 Convertible Preferred Stock and to access
additional sources of funding, any of which would have a material adverse effect
on the Company and the value of the Common Stock and its other securities. See
"-- 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, results of operations and financial condition.
In October 1997, the Company formed a joint venture with Telenor AS, the
Norwegian national telephone company, to provide telecommunication services to
carriers and resellers in nine European countries. The joint venture is owned 40
percent by the Company, 40 percent by Telenor Global Services AS ("Telenor"),
and 20 percent by Clarion Resources Communications Corporation, a U.S.-based
telecommunications company in which Telenor owns a controlling interest.
Although the Company cannot accurately predict the capital that will be required
to implement such joint venture (the "European Joint Venture"), the Company
estimates that its 1997 funding of approximately $5.8 million will be sufficient
for 1998. However, there can be no assurance that the European Joint Venture
will not require more capital from the Company during 1998 and thereafter.
In December 1997, the Company formed Unidial Communications Services, LLC,
a joint venture with Unidial Incorporated ("Unidial"). The joint venture is
building a direct sales force to market and sell Unidial's and the Company's
products over the Company's Network. The joint venture is owned 80 percent by
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."
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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 New
Notes and the purchase by the Company of $284.2 million (out of $285 million) of
its 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. In addition,
the Company may seek additional debt financings. If such additional debt
financings occur, they will substantially increase the Company's interest
expense. Furthermore, the Company will become more highly leveraged if it
exchanges the Exchangeable Preferred Stock for the Company's 12 1/2%
Subordinated Exchange Debentures Due 2009 pursuant to the terms of the
Certificate of Designation in connection with the Exchangeable Preferred Stock.
The Company's significant debt burden could have several important
consequences to the holders of the Common Stock, including, but not limited to:
(i) all or a significant portion of the Company's cash flow from operations must
be used to service its debt instead of being used in the Company's business (in
1997, the Company's EBITDA was $15.5 million, its cash flow from operations was
$14.3 million and interest expense was $31.3 million); (ii) the Company's
significant degree of leverage could increase its vulnerability to changes in
general economic conditions or increases in prevailing interest rates; (iii) the
Company's flexibility to obtain additional financing in the future, as needed to
continue the Network expansion or for any other reason, may be impaired by the
amount of debt outstanding and the restrictions imposed by the covenants
contained in the indenture for the New Notes (the "Indenture") and in agreements
relating to other indebtedness; and (iv) the Company may be more leveraged than
certain of its competitors, which may be a competitive disadvantage. There can
be no assurance that the Company's cash flow from operations will be sufficient
to meet its obligations under the New Notes, the Senior Notes or other
indebtedness or the 1998 Convertible Preferred Stock, the Exchangeable Preferred
Stock or the 1997 Convertible Preferred Stock as payments become due or that the
Company will be able to refinance the New 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 combined fixed charges and preferred stock
dividends were insufficient to cover its fixed charges by $12.3 million, $47.4
million, $121.2 million and $31.8 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 combined fixed charges
and cash dividends on preferred stock for the next several years. In order for
the Company to meet its debt and dividend service obligations, and its dividend
and redemption obligations with respect to its preferred stock, the Company will
need to substantially improve its operating results. There can be no assurance
that the Company's operating results will be sufficient to enable the Company to
meet its debt service obligations, and its dividend and redemption obligations
with respect to its preferred stock. In the absence of a substantial improvement
in operating results, the Company would face substantial liquidity problems and
would be required to raise additional financing through the issuance of debt or
equity securities; however, there can be no assurance that the Company would be
successful in raising such financing.
RECENT AND EXPECTED LOSSES
The Company reported a net loss of $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 New Notes or other
indebtedness; (ii) pay cash dividends on the 1998 Convertible Preferred Stock,
the Exchangeable Preferred Stock or the 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
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reasons. Such events could have a material adverse effect on the Company and the
value of the Common Stock and its other securities.
RISKS RELATING TO THE NETWORK EXPANSION; MAINTENANCE OF NETWORK, RIGHTS-OF-WAY
AND PERMITS
The continuing Network expansion is an essential element of the Company's
future success. The Company has, from time to time, experienced delays with
respect to the construction of certain portions of the Network expansion and may
experience similar delays in the future. These delays have postponed the
Company's ability to transfer long distance traffic from leased facilities to
owned facilities. 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, its financial results and the value of
the Common Stock and its other securities.
The expansion of the Company's Network and its construction or acquisition
of new networks will be dependent, among other things, on its ability to acquire
rights-of-way and required permits from railroads, utilities and governmental
authorities on satisfactory terms and conditions and on its ability to finance
such expansion, acquisition and construction. Once expansion of the Network is
completed and requisite rights and permits are obtained, there can be no
assurance that the Company will be able to maintain all of its existing rights
and permits. Loss of substantial rights and permits or the failure to enter into
and maintain required arrangements for the Company's Network could have a
material adverse effect on the Company's business, financial condition and
results of operations and on the value of the Common Stock and its other
securities.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
The Company's success in marketing its services to business and government
users requires that the Company provide superior reliability, capacity and
security via its Network. The Company's Network and networks upon which it
depends are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security (by computer virus, break-ins or
otherwise) and other disruptions which may cause interruptions in service or
reduced capacity for customers, which could have a material adverse effect on
the Company's business, financial condition and results of operations and on the
value of the Common Stock and its other securities.
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its services will continue to
decline over the next several years. The Company is aware that certain long
distance carriers (WorldCom, MCI, LCI, Qwest and others) are expanding their
capacity and believes that other long distance carriers, as well as potential
new entrants to the industry, are considering the construction of new fiber
optic and other long distance transmission networks. If the MCI/WorldCom merger
or the Qwest/LCI merger is approved, the result would be even larger, and
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
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building new transmission lines, companies building such lines are likely to
install fiber that provides substantially more transmission capacity than will
be needed over the short or medium term. Further, recent technological advances
have shown the potential to greatly expand the capacity of existing and new
fiber optic cable. Although such technological advances may enable the Company
to increase its capacity, an increase in the capacity of the Company's
competitors could adversely affect the Company's business. If industry capacity
expansion results in capacity that exceeds overall demand in general or along
any of the Company's routes, severe additional pricing pressure could develop.
As a result, certain industry observers have predicted that, within a few years,
there may be dramatic and substantial price reductions and that long distance
calls will not be materially more expensive than local calls. In addition,
several companies (including AT&T and ICG Communications, Inc.) have announced
plans to offer long distance voice telephony over the Internet, at substantially
reduced prices. Price reductions could have a material adverse effect on the
Company and the value of the Common Stock.
DEVELOPMENT RISKS AND DEPENDENCE ON LONG DISTANCE SWITCHED SERVICES BUSINESS
The success of the Company in the long distance switched services business
is dependent on the Company's ability to generate significant customer traffic,
to manage an efficient switched long distance network and related customer
service and the timely completion of the Network expansion. Prior to 1996 the
Company had not previously managed a switched long distance network and there
can be no assurance that its long distance switched services business can
generate positive EBITDA or net income. The failure of the Company to generate
increased customer traffic, to complete new routes in a timely manner, or to
effectively manage the switched network and related customer service or to
generate positive EBITDA or net income from the long distance switched services
business would have a material adverse effect on the Company. The Company's long
distance switched services business will require cash to meet its operating
expenses. The Company's long distance switched services business generated
negative EBITDA for each of the four quarters of 1996 and 1997 and the Company
believes it may be negative during 1998, due to access costs and uneven traffic
patterns creating high network overflow costs. Although the Company is
attempting to control such costs and improve EBITDA from long distance switched
services, there is no assurance it will be successful. The Company expects that
the Network expansion will result in an improvement in the gross margins and
EBITDA generated by its long distance switched services business. The Company
has experienced and expects to continue to experience difficulties in commencing
services for end users of carrier customers. Although the Company believes that
its performance with respect to these matters has met or exceeded industry
norms, such difficulties may adversely affect the Company's relationships with
its customers.
Important factors that could cause the Company's long distance switched
services business to fail to generate positive EBITDA include changes in the
businesses of the Company's reseller customers, an inability to attract new
customers or to quickly transfer new customers to its Network without problems,
the loss of existing customers, problems in the operation of the switched
network, the Company's lack of experience with long distance switched services,
increases in operating expenses or other factors affecting the Company's revenue
or expenses, including delays in the construction of the Network expansion and
increased expenses related to access charges and network overflow, not all of
which can be controlled by the Company. If traffic does not increase and costs
are not adequately controlled there can be no assurance that the long distance
switched services business will ever generate positive EBITDA. In addition, to
the extent that LECs grant 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).
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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 and the value of the Common Stock and its other securities.
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company's long distance operation continues to expand, the need for
sophisticated billing and information systems will increase significantly. For
example, during the first half of 1997, the Company had negative gross margins
in its long distance switched services business, due in part to certain
customers which were using the Company's services for termination in LATAs where
the Company's prices were too low relative to access costs in such LATAs.
The Company's plans for the development and implementation of its billing
systems rely, for the most part, on the delivery of products and services by
third party vendors. Failure of these vendors to deliver proposed products and
services in a timely and effective manner and at acceptable costs, failure of
the Company to adequately identify all of its information and processing needs,
failure of the Company's related processing or information systems or the
failure of the Company to upgrade systems as necessary could have a material
adverse effect on the ability of the Company to reach its objectives, on its
financial condition and on its results of operations and on the value of the
Common Stock and its other securities.
YEAR 2000 RISKS
Certain of the Company's older computer programs identify years with two
digits instead of four. This is likely to cause problems because the programs
may recognize the year 2000 as the year 1900. These problems (the "Year 2000
Problems") could result in a system failure or miscalculations disrupting
operations, including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. The Company has
completed an assessment identifying which programs will have to be modified or
replaced in order to function properly with respect to dates in the year 2000
and thereafter. The Company believes that the cost of modifying those systems
that were not already scheduled for replacement for business reasons prior to
2000 is immaterial. Updating the current software to be Year 2000-compliant is
scheduled to be completed by mid-1999, prior to any anticipated impact on
operating systems. Although the Company does not expect Year 2000 Problems to
have a material adverse effect on its internal operations, it is possible that
Year 2000 Problems could have a material adverse effect on (i) the Company's
suppliers and their ability to service the Company, to accurately invoice for
services rendered and to accurately process payments received; and (ii) the
Company's customers and their ability to continue to utilize the Company's
services, to collect from their customers and to pay the Company for services
received. The cumulative effect of such problems, if they occur, could have a
material adverse effect on the Company and the value of the Common Stock and its
other securities.
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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
and the value of the Common Stock and its other securities.
RELIANCE ON MAJOR CUSTOMERS
The Company's ten largest customers in 1997 accounted for approximately 61%
of its revenues, with Excel, AT&T, WorldCom and Frontier, its four largest
customers, accounting for approximately 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 customers of their
own facilities, construction of additional facilities by competitors or further
consolidations in the telecommunications industry involving the Company's
customers would lead such customers to reduce or cease their use of the
Company's services which could have a material adverse effect on the Company and
the value of the Common Stock and its other securities.
The Company's strategy for establishing and growing its long distance
switched services business is based in large part on its relationship with
Excel. The failure by the Company to fulfill its obligations to provide a
reliable switched network for use by Excel or the failure by Excel: (i) to
fulfill its obligations to utilize the Company's switched long distance services
(even though such failure could give rise in certain circumstances 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
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various Internet and telecommunications standards, interoperate with products
and components from other vendors and fulfill their intended function as a part
of the network infrastructure. Any failure of the Company's suppliers to provide
such products could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The telecommunications industry is highly competitive. Many of the
Company's competitors and potential competitors have substantially greater
financial, personnel, technical, marketing and other resources than those of the
Company and a far more extensive transmission network than the Company. Such
competitors may build additional fiber capacity in the geographic areas to be
served by the Network or to be served by the Network expansion. Qwest is
building a new nationwide long distance fiber optic network and Frontier has
agreed to pay $500.0 million to obtain fibers in Qwest's network. If the
MCI/WorldCom merger or the Qwest/LCI merger is approved, the result would be
even larger, and potentially stronger, competitor (or competitors). In addition,
Level 3 has announced that it will spend approximately $3.0 billion to construct
a 20,000 mile fiber optic communications network entirely based on Internet
technology. The Williams Companies, a competitor of the Company, has also
announced that it is accelerating the expansion of its national fiber optic
network with a $2.7 billion investment to create a 32,000 mile system by the end
of 2001. Furthermore, many telecommunications companies are acquiring switches
and the Company's reseller customers will have an increasing number of
alternative providers of switched long distance services. The Company competes
primarily on the basis of pricing, availability, transmission quality, customer
service (including the capability of making rapid additions to add end users and
access to end-user traffic records) and variety of services. The ability of the
Company to compete effectively will depend on its ability to maintain
high-quality services at prices generally equal to or below those charged by its
competitors.
An alternative method of transmitting telecommunications traffic is through
satellite transmission. Satellite transmission is superior to fiber optic
transmission for distribution communications, for example, video broadcasting.
Although satellite transmission is not preferred to fiber optic transmission for
voice traffic in most parts of the United States because it exhibits a slight
(approximately one-quarter-second) time delay, such delay is not important for
many data-oriented uses. In the event the market for data transmission grows,
the Company will compete with satellite carriers in such market. Also, at least
one satellite company, Orion Network Systems, Inc., has announced its intention
to provide Internet access services to businesses through satellite technology.
The Company competes with large and small facilities-based interexchange
carriers as well as with other coast-to-coast and regional fiber optic network
providers. There are currently four principal facilities-based long distance
fiber optic networks (AT&T, MCI, Sprint and WorldCom) and Qwest is building
another. The Company anticipates that each of Qwest and Frontier will have a
fiber network similar in geographic scope and potential operating capability to
that of the Company. The Company also sells long distance switched services to
both facilities-based carriers and nonfacilities-based carriers (switchless
resellers), competing with 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
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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 will not realize a return on its investment in data switches and
other equipment and it will not benefit from the growth, if any, in demand for
these services. A failure to successfully compete in data transmission services
could have a material adverse effect on the Company and the value of the Common
Stock and its other securities.
RECENT LEGISLATION AND REGULATORY UNCERTAINTY
Certain of the Company's operations are subject to regulation by the FCC
under the Communications Act. In addition, certain of the Company's businesses
are subject to regulation by state public utility or public service commissions.
Changes in the regulation of, or the enactment or changes in interpretation of
legislation affecting, the Company's operations could have a material adverse
affect on the Company and the Common Stock and its other securities. In 1996 the
federal government enacted the Telecom Act, which, among other things, allows
the RBOCs and others to enter the long distance business. Entry of the RBOCs or
other entities such as electric utilities and cable television companies into
the long distance business may have a negative impact on the Company or its
customers. The Company anticipates that certain of such entrants will be strong
competitors because, among other reasons, they may enjoy one or more of the
following advantages: they may (i) be well capitalized; (ii) already have
substantial end-user customer bases; and/or (iii) enjoy cost advantages relating
to local loops and access charges. The introduction of additional strong
competitors into the switched long distance business would mean that the Company
and its customers would face substantially increased competition. This could
have a material adverse effect on the Company and the value of the Common Stock
and its other securities. 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
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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 interest in Marca-Tel,
therefore could be diluted or lost entirely, which could have a material adverse
effect on the Company and the value of the Common Stock and its other
securities.
POTENTIAL LIABILITY OF INTERNET ACCESS PROVIDERS
The 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.
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Sales to switched services resellers generate low margins for the Company. In
addition, these customers frequently choose to move their business based solely
on small price changes and generally are perceived in the telecommunications
industry as presenting a high risk of payment delinquency or non-payments. The
Company's provision for service credits and bad debt was $3.0 million or 1.5% of
total revenues in 1996 (when it had $104.0 million of long distance switched
services revenue) and $17.4 million or 4.1% of total revenues in 1997 (when it
had $258.3 million of long distance switched services revenue). The Company
expects service credit and bad debt expense to continue to increase, but seeks
to control it so that it will not increase as a percentage of revenues. The
Company is continuing to implement procedures to control its exposure to service
credit and bad debt expense. Any material increase in service credit and bad
debt expense as a percentage of revenues could have a material adverse effect on
the Company's results of operations and financial position and on the value of
the Common Stock and its other securities.
RISKS RELATED TO TECHNOLOGICAL CHANGE
The market for the Company's telecommunications services is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new product and service introductions. There can be no
assurance that the Company will successfully identify new service opportunities
and develop and bring new services to market. The Company is also at risk from
fundamental changes in the way telecommunications services are marketed and
delivered. The Company's data communications service strategy assumes that
technology such as Frame Relay and ATM protocols, utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocols and transport infrastructure for data communications services. Future
technological changes, including changes related to the emerging wireline and
wireless transmission and switching technologies, could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company's pursuit of necessary technological advances may require
substantial time and expense, and there can be no assurance that the Company
will succeed in adapting its telecommunications services business to alternate
access devices, conduits and protocols.
In addition, recent technological advances that show the potential to
greatly expand the capacity of existing and new fiber optic cable, which could
greatly increase supply, could have a material adverse effect on the Company.
CONCENTRATION OF STOCK OWNERSHIP
Assuming no conversion of the Convertible Preferred Stock or 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. 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 will
beneficially own 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. This concentration of stock ownership could have
the effect of delaying or preventing a change of control of the Company or the
removal of existing management and may discourage attempts to do so.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of Common Stock has fluctuated over a broad range since
the completion of the Company's initial public offering in July 1996. The
trading price of the Common Stock is subject to wide fluctuations in response to
numerous factors, including, but not limited to, quarterly variations in
operating results of the Company or any of its principal customers, competition,
announcements of technological innovations or new products or pricing by the
Company or its competitors, product enhancements by the Company or its
competitors, regulatory changes, any difference between actual results and
results expected by investors and analysts, changes in financial estimates by
securities analysts and other events or factors. In
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addition, the stock market has experienced volatility that has affected the
market prices of equity securities of many companies and that often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Depositary Shares and
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock could negatively impact the market price of
the Depositary Shares and the Common Stock. Shares of Common Stock that have not
been previously traded in the public market but may at some time be sold in the
private market include: (i) shares held by affiliates; (ii) shares issued or to
be issued in acquisitions; (iii) shares issuable upon conversion of the
Company's convertible preferred stock, including convertible preferred stock to
be issued in the future; and (iv) shares to be issued pursuant to stock options.
The aggregate number of such shares is much greater than the number of shares of
Common Stock which have previously traded on the public market.
ANTI-TAKEOVER PROVISIONS
The Restated Certificate permits the Board of Directors to establish the
rights, preferences, privileges and restrictions of, and to issue, additional
shares of preferred stock without any further vote or action by the Company's
common stockholders. Although the Company has no present plans to issue any
additional shares of preferred stock (other than the issuance of shares of
preferred stock as a dividend on the 1997 Convertible Preferred Stock and the
Exchangeable Preferred Stock), the issuance of additional preferred stock could
adversely affect the holders of Depositary Shares (or 1998 Convertible Preferred
Stock). See "Description of 1998 Convertible Preferred Stock". In addition,
under certain circumstances, the holders of the Senior Notes can require the
Company to repurchase the Senior Notes upon the occurrence of a change of
control. See "Description of Certain Indebtedness". The issuance of additional
preferred stock and/or the existence of such change of control provisions in the
Indenture or with respect to the Depositary Shares (or 1998 Convertible
Preferred Stock) could have the effect of delaying or preventing a change in
control of the Company and may discourage attempts to do so.
RANKING; ABILITY TO PAY CASH DIVIDENDS
The 1998 Convertible Preferred Stock will rank senior to the Common Stock
with respect to payment of dividends and amounts upon liquidation, dissolution
or winding up. The 1998 Convertible Preferred Stock will rank on parity with the
1997 Convertible Preferred Stock, the Exchangeable Preferred Stock and all other
Parity Stock with respect to the payment of dividends and amounts upon
liquidation, dissolution or winding up.
While any shares of 1998 Convertible Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of stock that ranks senior to the 1998 Convertible Preferred Stock
with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up without the consent of the holders of 66 2/3% of the
outstanding shares of 1998 Convertible Preferred Stock. However, the Company may
create additional classes of stock, increase the authorized number of shares of
preferred stock of issue series of preferred stock ranking on a parity with the
1998 Convertible Preferred Stock with respect, in each case, to the payment of
dividends and amounts upon liquidation, dissolution and winding up (a "Parity
Security") without the consent of any holder of 1998 Convertible Preferred
Stock. See "Description of 1998 Convertible Preferred Stock -- Voting Rights"
below.
The ability of the Company to pay any dividends is subject to applicable
provisions of state law and the ability to pay cash dividends on the 1998
Convertible Preferred Stock will be subject to the terms of the Indenture, and
any other indebtedness of the Company then outstanding. The ability of the
Company in the future to pay cash dividends will depend on its meeting certain
financial criteria, which in turn will require significant improvements in the
Company's EBITDA. There can be no assurance that the Company will be able to
meet such financial criteria in order to pay cash dividends. There can be no
assurance that the Company will have the financial resources available to it to
satisfy its cash dividend requirements on the 1998 Convertible Preferred Stock,
which will require the Company to substantially increase its cash flow from
historical levels or to raise additional equity capital.
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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.
16
<PAGE> 17
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 providers 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 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 million of its New Notes bearing
an interest rate of 9%. Concurrently with the sale of the New Notes, the Company
consummated its tender offer for cash for all its 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 New Notes to pay the tender offer price for
the Senior Notes.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities. The Securities are being sold by the Selling Holders. All of the
expenses incurred in connection with the registration of the Securities offered
hereby will be paid by the Company, except for selling commissions and
underwriting discounts.
17
<PAGE> 18
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for each of the periods indicated is as follows (where earnings
are inadequate to cover combined fixed charges and preferred stock dividend
requirements, the deficiency is shown in brackets):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS
----------------------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996 1997 1998+
-------- ---- -------- -------- --------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$(55,735) 1.4x $(12,348) $(47,355) $(121,242) $(31,755)
</TABLE>
- ---------------
+ As adjusted for the sale of $155.25 million of 1998 Convertible Preferred
Stock, the issuance of the New 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 combined fixed charges and preferred
stock dividends by $35,619 million for the three months ended March 31, 1998.
For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, 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 the leases. Preferred stock dividends
consist of dividends on the 1998 Convertible Preferred Stock, the 1997
Convertible Preferred Stock and the Company's 10% Junior Series 3 Cumulative
Redeemable Preferred Stock (the "Series 3 Preferred Stock") which was redeemed
in March 1998.
18
<PAGE> 19
SELLING HOLDERS
CONVERTIBLE PREFERRED SELLING HOLDERS
The Company issued and sold 135,000 shares of 1998 Convertible Preferred
Stock (2,700,000 Depositary Shares) to Goldman, Sachs & Co., Credit Suisse First
Boston Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated (the "Initial Purchasers") on March 30, 1998
at a purchase price of $1,000 per share (or $50 per Depositary Share). On April
14, 1998, the Company issued and sold an additional 20,250 shares of 1998
Convertible Preferred Stock (405,000 Depositary Shares) to the Initial
Purchasers in connection with an overallotment option. The 1998 Convertible
Preferred Stock was sold by the Initial Purchasers in transactions exempt from
the registration requirements of the Securities Act, to persons reasonably
believed by such Initial Purchasers to be "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act).
The Registration Statement of which the Prospectus is a part has been filed
pursuant to Rule 415 under the Securities Act to afford the Convertible
Preferred Selling Holders the opportunity to sell their Securities in public
transactions rather than pursuant to an exemption from the registration and
prospectus delivery requirements of the Securities Act. In order to avail itself
of that opportunity, a Convertible Preferred Selling Holder must notify the
Company of its intention to sell Securities and provide such other information
concerning the Convertible Preferred Selling Holder and the Securities to be
sold as may then be required by the Securities Act and the rules and regulations
thereunder, as applicable. No offer or sale pursuant to this Prospectus may be
made by any Convertible Preferred Selling Holder until such a request has been
made and until any supplement for the Prospectus has been filed or an amendment
to the Registration Statement of which this Prospectus is a part has become
effective. Additional Convertible Preferred Selling Holders will be added to the
Prospectus upon such Convertible Preferred Selling Holder's request and
provision of the requested information to the Company. The Company will from
time to time supplement or amend the Prospectus to the Registration Statement,
as applicable, to add additional Convertible Preferred Selling Holders and to
reflect the required information concerning and Convertible Preferred Selling
Holders. The Convertible Preferred Selling Holders may from time to time offer
and sell pursuant to this Prospectus any or all of the Depositary Shares, the
1998 Convertible Preferred Stock and any Common Stock issued upon conversion of,
or as payment of dividends on, the Depositary Shares or the 1998 Convertible
Preferred Stock.
19
<PAGE> 20
The following table sets forth information with respect to certain
Convertible Preferred Selling Holders which have requested to be included in
this Prospectus as of the date of this Prospectus. The Convertible Preferred
Selling Holders may, from time to time, also receive shares of Common Stock in
the event payment of dividends on the Depositary Shares or the 1998 Convertible
Preferred Stock is made with shares of Common Stock which may also be offered
and sold pursuant to this Prospectus. Such information set forth in the
following table has been obtained from the respective Convertible Preferred
Selling Holders identified in such table and has not been independently verified
by the Company. Unless otherwise disclosed in the footnotes to the table, no
Convertible Preferred Selling Holder has held any position, office or had any
other material relationship with the Company, its predecessor or affiliates
during the past three years. All of the shares of 1998 Convertible Preferred
Stock are registered in the name of "Cede & Co." on the books of the transfer
agent for the 1998 Convertible Preferred Stock.
<TABLE>
<CAPTION>
DEPOSITARY SHARES 1998 CONVERTIBLE PREFERRED STOCK
------------------------------------------- ----------------------------------------
PERCENT PERCENT
OF OF
SHARES SHARES SHARES SHARES SHARES SHARES
OWNED OWNED OWNED OWNED SHARES OWNED OWNED
PRIOR TO SHARES AFTER AFTER PRIOR TO OFFERED AFTER AFTER
NAME OF CONVERTIBLE THIS OFFERED THIS THIS THIS FOR THIS THIS
PREFERRED SELLING HOLDER OFFERING FOR SALE OFFERING OFFERING OFFERING SALE OFFERING OFFERING
------------------------ --------- --------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hudson River Trust Growth
Investors....................... 23,600 23,600 0 * 0 0 0 0
Hudson River Trust Growth & Income
Account......................... 42,900 42,900 0 * 0 0 0 0
Equitable Life Assurance Separate
Account Convertibles............ 53,000 53,000 0 * 0 0 0 0
Memphis Light, Gas & Water
Retirement Fund................. 26,700 26,700 0 * 0 0 0 0
David Lipscomb University General
Endowment....................... 1,800 1,800 0 * 0 0 0 0
The Frist Foundation.............. 6,900 6,900 0 * 0 0 0 0
Equitable Life Assurance Separate
Account Balanced................ 2,900 2,900 0 * 0 0 0 0
Hudson River Trust Balanced
Account......................... 28,800 28,800 0 * 0 0 0 0
Shepherd Investments International
Ltd. ........................... 25,000 25,000 0 * 0 0 0 0
Stark International............... 25,000 25,000 0 * 0 0 0 0
Aim Balanced Fund................. 70,000 70,000 0 * 0 0 0 0
Paloma Securities L.L.C........... 15,000 15,000 0 * 0 0 0 0
Delaware State Employees'
Retirement Fund................. 50,100 50,100 0 * 0 0 0 0
Declaration of Trust for the
Defined Benefit Plans of ZENECA
Holdings Inc.................... 9,050 9,050 0 * 0 0 0 0
Thermo Electron Balanced
Investment Fund................. 15,100 15,100 0 * 0 0 0 0
Declaration of Trust for the
Defined Benefit Plans of ICI
American Holdings Inc........... 14,000 14,000 0 * 0 0 0 0
Hillside Capital Incorporated
Corporate Account............... 4,850 4,850 0 * 0 0 0 0
General Motors Employees Domestic
Group Trust..................... 181,750 181,750 0 * 0 0 0 0
The J.W. McConnell Family
Foundation...................... 7,150 7,150 0 * 0 0 0 0
Summer Hill Global Partners
L.P............................. 1,000 1,000 0 * 0 0 0 0
First Church of Christ, Scientist-
Endowment....................... 3,500 3,500 0 * 0 0 0 0
Christian Science Trustees for
Gifts and Endowments............ 3,500 3,500 0 * 0 0 0 0
Capitol American Life Insurance
Co. -- Convertible.............. 15,000 15,000 0 * 0 0 0 0
Great Travellers Life Insurance
Co. -- Convertible.............. 15,000 15,000 0 * 0 0 0 0
Great American Reserve Insurance
Co. -- Convertible.............. 4,600 4,600 0 * 0 0 0 0
Beneficial Standard Life Insurance
Co. -- Convertible.............. 5,800 5,800 0 * 0 0 0 0
Bankers Life & Casualty Insurance
Co. -- Convertible.............. 4,600 4,600 0 * 0 0 0 0
OCM Convertible Trust............. 96,200 96,200 0 * 0 0 0 0
State Employees' Retirement Fund
of the State of Delaware........ 24,600 26,400 0 * 0 0 0 0
State of Connecticut Combined
Investment Funds................ 82,100 82,100 0 * 0 0 0 0
Chrysler Corporation Master
Retirement Trust................ 70,300 70,300 0 * 0 0 0 0
Combined Insurance Company of
America......................... 10,000 10,000 0 * 0 0 0 0
Vanguard Convertible Securities
Fund, Inc. ..................... 63,800 63,800 0 * 0 0 0 0
--------- ---------
Totals.................... 1,003,600 1,003,600 0 * 0 0 0 0
========= =========
<CAPTION>
COMMON STOCK
----------------------------------------
PERCENT
OF
SHARES SHARES SHARES
OWNED SHARES OWNED OWNED
PRIOR TO OFFERED AFTER AFTER
NAME OF CONVERTIBLE THIS FOR THIS THIS
PREFERRED SELLING HOLDER OFFERING SALE OFFERING OFFERING
------------------------ -------- ------- -------- --------
<S> <C> <C> <C> <C>
Hudson River Trust Growth
Investors....................... 0 0 0 0
Hudson River Trust Growth & Income
Account......................... 0 0 0 0
Equitable Life Assurance Separate
Account Convertibles............ 0 0 0 0
Memphis Light, Gas & Water
Retirement Fund................. 0 0 0 0
David Lipscomb University General
Endowment....................... 0 0 0 0
The Frist Foundation.............. 0 0 0 0
Equitable Life Assurance Separate
Account Balanced................ 0 0 0 0
Hudson River Trust Balanced
Account......................... 0 0 0 0
Shepherd Investments International
Ltd. ........................... 0 0 0 0
Stark International............... 0 0 0 0
Aim Balanced Fund................. 0 0 0 0
Paloma Securities L.L.C........... 0 0 0 0
Delaware State Employees'
Retirement Fund................. 0 0 0 0
Declaration of Trust for the
Defined Benefit Plans of ZENECA
Holdings Inc.................... 0 0 0 0
Thermo Electron Balanced
Investment Fund................. 0 0 0 0
Declaration of Trust for the
Defined Benefit Plans of ICI
American Holdings Inc........... 0 0 0 0
Hillside Capital Incorporated
Corporate Account............... 0 0 0 0
General Motors Employees Domestic
Group Trust..................... 0 0 0 0
The J.W. McConnell Family
Foundation...................... 0 0 0 0
Summer Hill Global Partners
L.P............................. 0 0 0 0
First Church of Christ, Scientist-
Endowment....................... 0 0 0 0
Christian Science Trustees for
Gifts and Endowments............ 0 0 0 0
Capitol American Life Insurance
Co. -- Convertible.............. 0 0 0 0
Great Travellers Life Insurance
Co. -- Convertible.............. 0 0 0 0
Great American Reserve Insurance
Co. -- Convertible.............. 0 0 0 0
Beneficial Standard Life Insurance
Co. -- Convertible.............. 0 0 0 0
Bankers Life & Casualty Insurance
Co. -- Convertible.............. 0 0 0 0
OCM Convertible Trust............. 0 0 0 0
State Employees' Retirement Fund
of the State of Delaware........ 0 0 0 0
State of Connecticut Combined
Investment Funds................ 0 0 0 0
Chrysler Corporation Master
Retirement Trust................ 0 0 0 0
Combined Insurance Company of
America......................... 0 0 0 0
Vanguard Convertible Securities
Fund, Inc. ..................... 0 0 0 0
Totals.................... 0 0 0 0
</TABLE>
- ---------------
* Less than 1%.
20
<PAGE> 21
ACQUISITION SELLING HOLDERS
The Company issued and sold 42,056 shares of Common Stock to David Kim on
March 20, 1998 in connection with the acquisition (the "NEI Acquisition") of all
of the outstanding capital stock of Network Evolutions, Incorporated ("NEI").
Following the NEI Acquisition, NEI became a wholly owned indirect subsidiary of
the Company. Prior to the NEI acquisition, Mr. Kim had been the President, the
Treasurer and the sole director of NEI since August 1994. Concurrently with the
NEI Acquisition, Mr. Kim signed an employment agreement to serve as President of
NEI and Vice President, Internet Technologies of IXC Carrier, Inc. for a term of
three years. In June 1998, Mr. Kim transferred 13,000 shares of Common Stock to
his wife Susan Chinn. Prior to the NEI Acquisition, Ms. Chinn served as
Secretary and Office Manager of NEI from December 1994 through February 1998.
On April 17, 1998, the Company issued and sold to Gordon Hutchins, Jr. and
William F. Linsmeier an aggregate of 14,527 shares of Common Stock as the final
payment of Common Stock in connection with the acquisition (the "Telecom One
Acquisition") of Telecom One which occurred on July 10, 1997. Prior to the
Telecom One acquisition, Mr. Hutchins served as an officer and one of two
directors of Telecom One since 1993. Prior to the Telecom One acquisition, Mr.
Hutchins provided certain consulting services to the Company from time to time.
Concurrently with the Telecom One Acquisition, Mr. Hutchins signed a consulting
agreement with Telecom One for a term of three years. Prior to the Telecom One
acquisition, Mr. Linsmeier served as an employee of Telecom One. Concurrently
with the Telecom One Acquisition, Mr. Linsmeier signed an employment agreement
with Telecom One for a term of three years, under which he serves as its Vice
President of Sales and Marketing.
The Company issued and sold an aggregate of 205,088 shares of Common Stock
to James R. Stritzinger, Marilyn J. Stritzinger, William R. Stritzinger and John
S. Stritzinger on May 20, 1998 in connection with the acquisition (the "Data
Place Acquisition") of all of the outstanding capital stock of Data Place.
Following the Data Place Acquisition, Data Place became a wholly owned indirect
subsidiary of the Company. For over 15 years prior to the Data Place
Acquisition, James Stritzinger served as President and one of four directors of
Data Place. Concurrently with the Data Place Acquisition, James Stritzinger
signed an employment agreement to serve as Regional Vice President, Business
Operations of Data Place for a term of two years. For over ten years prior to
the Data Place Acquisition, William Stritzinger served as Vice president and one
of four directors of Data Place. Concurrently with the Data Place Acquisition,
William Stritzinger signed an employment agreement to serve as Regional Vice
President, Internet Services Development of Data Place for a term of two years.
For over ten years prior to the Data Place Acquisition, John Stritzinger served
as Vice President and one of four directors of Data Place. Concurrently with the
Data Place Acquisition, John Stritzinger signed an employment agreement to serve
as Director, Support Services of Data Place for a term of two years. For over 15
years prior to the Data Place Acquisition, Marilyn Stritzinger served as
Secretary and one of four directors of Data Place. All of the Acquisition Common
Shares offered hereby are offered by the Acquisition Selling Holders.
21
<PAGE> 22
The following table sets forth, with respect to the Acquisition Selling
Holders, the number of shares of Common Stock owned by the Acquisition Selling
Holders prior to this offering, the number of shares of Common Stock offered for
the Acquisition Selling Holders account and the number of shares of Common Stock
and percentage of Common Stock owned by the Acquisition Selling Holders after
the anticipated completion of this offering.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON SHARES OF COMMON PERCENT OF COMMON
NAME OF ACQUISITION STOCK OWNED PRIOR TO STOCK OFFERED IN STOCK OWNED AFTER STOCK OWNED AFTER
SELLING HOLDERS THIS OFFERING THIS OFFERING THIS OFFERING THIS OFFERING
------------------- -------------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
David Kim................... 29,056 29,056 0 *
Susan Chinn................. 13,000 13,000 0 *
Gordon Hutchins, Jr......... 11,886 11,886 0 *
William F. Linsmeier........ 2,641 2,641 0 *
William S. Stritzinger...... 64,090 64,090 0 *
John S. Stritzinger, III.... 38,454 38,454 0 *
Marilyn J. Stritzinger...... 64,090 64,090 0 *
James R. Stritzinger........ 38,454 38,454 0 *
------- -------
Totals............ 261,671 261,671 0 *
======= =======
</TABLE>
- ---------------
* Less than 1%.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the
Securities offered hereby. The Securities may be sold from time to time to
purchasers directly by the Selling Holders. Alternatively, the Selling Holders
may from time to time offer the Securities through brokers, dealers or agents
who may receive compensation in the form of discounts, concessions or
commissions from the Selling Holders and/or the purchasers of the Securities for
whom they may act as agent. The Selling Holders and any such brokers, dealers or
agents who participate in the distribution of the Securities may be deemed to be
"underwriters," and any profits on the sale of the Securities by them and any
discounts, commissions or concessions received by any such brokers, dealers or
agents might be deemed to be underwriting discounts and commissions under the
Securities Act. To the extent the Selling Holders may be deemed to be
underwriters, the Selling Holders may be subject to certain statutory
liabilities of the Securities Act, including, but not limited to, Sections 11,
12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act.
The Securities offered hereby may be sold by the Selling Holders from time
to time in one or more transactions at fixed prices, at prevailing market prices
at the time of sale, at varying prices determined at the time of sale or at
negotiated prices. The Securities may be sold in different ways, including,
without limitation, by one or more of the following methods: (a) a block trade
in which the broker or dealer so engaged will attempt to sell the Securities as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus; (c)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; (d) an exchange distribution in accordance with the rules of such
exchange; (e) face-to-face transactions between sellers and purchasers without a
broker-dealer; and (f) through the writing of options. At any time a particular
offer of the Securities is made, a revised Prospectus or Prospectus Supplement,
if required, will be distributed which will set forth the aggregate amount and
type of Securities being offered and the terms of the offering, including the
name or names of any underwriters, dealers or agents, any discounts, commissions
and other items constituting compensation from the Selling Holders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
Such Prospectus Supplement and, if necessary, a post-effective amendment to the
Registration Statement of which this Prospectus is a part, will be filed with
the Commission to reflect the disclosure of additional information with respect
to the distribution of the Securities. In addition, the Securities covered by
this Prospectus may be sold in private transactions or under Rule 144 rather
than pursuant to this Prospectus.
To the best knowledge of the Company, there are currently no plans,
arrangements or understandings between any Selling Holders and any broker,
dealer, agent or underwriter regarding the sale of the Securities
22
<PAGE> 23
by the Selling Holders. There is no assurance that any Selling Securityholder
will sell any or all of the Securities offered by it hereunder or that any such
Selling Securityholder will not transfer, devise or gift such Securities by
other means not described herein.
The Selling Holders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which may
limit the timing of purchases and sales of any of the Securities by the Selling
Holders and any other such person. Furthermore, under Regulation M under the
Exchange Act, any person engaged in the distribution of the Securities may not
simultaneously engage in market-making activities with respect to the particular
Securities being distributed for certain periods prior to the commencement of or
during such distribution. All of the foregoing may affect the marketability of
the Securities and the ability of any person or entity to engage in
market-making activities with respect to the Securities.
Pursuant to certain registration rights agreements entered into in
connection with the offer and sale of the Depositary Shares and the Common Stock
by the Company, each of the Company and the applicable Selling Holders will be
indemnified by the other against certain liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection therewith.
The Company has agreed to pay substantially all of the expenses incidental
to the registration, offering and sale of the Securities to the public other
than commissions, fees and discounts of underwriters, brokers, dealers and
agents.
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.
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 or 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
23
<PAGE> 24
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 whole 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 1997 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 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). See "Description of 1998
Convertible Preferred Stock."
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,
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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, 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 and 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 home 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 July 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 July 1997. This
Registration Statement of which this Prospectus is a part satisfies the
Company's obligations to register the shares of Common Stock issued as final
payment to the Telecom One Holders in April 1998 and issued to the former
stockholders of NEI and Data Place.
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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 New Notes will have the
right to require the Company to purchase their New 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. 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 DEPOSITARY SHARES
Each Depositary Share represents 1/20 of a share of 1998 Convertible
Preferred Stock deposited under the Deposit Agreement dated as of March 30, 1998
(the "Deposit Agreement"), among the Company, BankBoston, N.A. as Depositary
(the "Depositary"), and all holders from time to time of depositary receipts
issued thereunder (the "Depositary Receipts"). Subject to the terms of the
Deposit Agreement, each owner of a Depositary Share is entitled,
proportionately, to all the rights, preferences and privileges of the shares of
1998 Convertible Preferred Stock represented thereby (including dividend,
conversion, voting, and liquidation rights), and is subject to all of the
limitations of the fractional shares of 1998 Convertible Preferred Stock
represented thereby, which are summarized above under "Description of 1998
Convertible Preferred Stock" or "Description of Capital Stock." The Depositary
Shares are evidenced by Depositary Receipts.
The following summary of the terms and provisions of the Deposit Agreement,
Depositary Shares and Depositary Receipts does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Deposit Agreement (which contains the form of the Depositary Receipts),
copies of the form of which may be obtained from the Company or the Depositary
at the principal office of the Depositary at which at any particular time its
depositary business shall be administered upon request.
ISSUANCE OF DEPOSITARY RECEIPTS AND WITHDRAWAL OF 1998 CONVERTIBLE PREFERRED
STOCK
Immediately following the issuance of the 1998 Convertible Preferred Stock
by the Company, the Company deposited the 1998 Convertible Preferred Stock with
the Depositary and the Depositary issued and delivered the Depositary Receipts
to the Company. The Company delivered the Depositary Receipts to the
Underwriters. Depositary Receipts are issued evidencing only whole Depositary
Shares.
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Upon surrender of Depositary Receipts at the Corporate Office (as defined
in the Deposit Agreement) of the Depositary (or such other office as the
Depositary may designate), the owner of the Depositary Shares evidenced thereby
is entitled to delivery at such Corporate Office of certificates evidencing the
number of shares of 1998 Convertible Preferred Stock (but only in whole shares)
and any money and other property represented by such Depositary Receipts. If the
Depositary Receipts delivered by the holder evidence a number of Depositary
Shares in excess of the number of whole shares of 1998 Convertible Preferred
Stock to be withdrawn, the Depositary will deliver to such holder at the same
time a new Depositary Receipt evidencing such excess number of Depositary
Shares. The Company does not expect that there will be any public trading market
for the 1998 Convertible Preferred Stock except as represented by the Depositary
Shares.
CONVERSION PROVISIONS
As described under "Description of 1998 Convertible Preferred Stock --
Conversion Rights," the 1998 Convertible Preferred Stock may be converted, in
whole or in part, into shares of Common Stock at the option of the holders of
the 1998 Convertible Preferred Stock. The Depositary Shares may, at the option
of holders thereof, be converted into shares of Common Stock upon the same terms
and conditions as the 1998 Convertible Preferred Stock, except that the number
of shares of Common Stock received upon conversion of each Depositary Share will
be equal to the number of shares of Common Stock received upon conversion of
each share of 1998 Convertible Preferred Stock divided by 20. To effect such an
optional conversion, a holder of Depositary Shares must deliver Depositary
Receipts evidencing the Depositary Shares to be converted, together with a
written notice of conversion and a proper assignment of the Depositary Receipts
to the Company, to any transfer agent for the Depositary Shares, or in blank
(and, if applicable, payment of an amount equal to the dividend payable on such
Depositary Shares), to the Depositary or its agent. Each optional conversion of
Depositary Shares shall be deemed to have been effected immediately prior to the
close of business on the date on which the foregoing requirements shall have
been satisfied. The conversion shall be at the Conversion Rate (as defined) in
effect at such time and on such date, adjusted to reflect the fact that 20
Depositary Shares are the equivalent of one share of 1998 Convertible Preferred
Stock.
To the extent that Depositary Shares are converted into shares of Common
Stock and all of such shares of Common Stock cannot be distributed to the record
holders of Depositary Receipts without creating fractional interests in such
shares, the Depositary may, with the consent of the Company, sell such shares of
Common Stock, and the net proceeds of any such sale shall be distributed or made
available for distribution to such record holders that would otherwise have
received fractional interest in such shares of Common Stock.
PAYMENT AND CONVERSION
All amounts payable in cash with respect to the Depositary Shares will be
payable in United States dollars at the office or agency of the Company
maintained for such purpose within the City of New York or, at the option of the
Company, payment of dividends and Liquidated Damages (if any) may be made by
check mailed to the Holders of the Depositary Shares at their respective
addresses set forth in the register of Holders of the Depositary Shares
maintained by the Transfer Agent, provided that all cash payments with respect
to Depositary Shares the Holders of which have given wire transfer instructions
to the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof.
Any payment on the Depositary Shares due on any day that is not a Business
Day need not be made on such day, but may be made on the succeeding Business Day
with the same force and effect as if made on such due date.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions, and shares of Common Stock distributed as dividends, received in
respect of the 1998 Convertible Preferred Stock to the record holders of
Depositary Shares in proportion, insofar as possible, to the number of
Depositary Shares owned by such
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holders, subject to obligations of holders to file proofs, certificates and
other information and to pay certain charges and expenses to the Depositary.
In the event of a distribution other than cash in respect of the 1998
Convertible Preferred Stock, the Depositary will distribute property received by
it to the record holders of Depositary Shares in proportion, insofar as
possible, to the number of Depositary Shares owned by such holder, subject to
obligations of holders to file proofs, certificates and other information and to
pay certain charges and expenses to the Depositary, unless the Depositary
determines that it is not feasible to make such distribution, in which case the
Depositary may, with the approval of the Company, sell such property and
distribute the net proceeds from such sale to such holders.
RECORD DATE
Whenever (i) any cash dividend or other cash distribution shall become
payable or any Common Stock distributed in lieu thereof, any other distribution
shall be made, or any rights, preferences, or privileges shall be offered with
respect to the 1998 Convertible Preferred Stock, or (ii) the Depositary shall
receive notice of any meeting at which holders of 1998 Convertible Preferred
Stock are entitled to vote or of which holders of 1998 Convertible Preferred
Stock are entitled to notice, the Depositary shall in each such instance fix a
record date (which shall be the same date as the record date for the 1998
Convertible Preferred Stock) for the determination of the holders of Depositary
Receipts (x) who shall be entitled to receive such dividend, distribution,
rights, preferences, or privileges, or the net proceeds of the sale thereof or
(y) who shall be entitled to give instructions for the exercise of voting rights
at any such meeting or to receive notice of such meeting.
VOTING OF 1998 CONVERTIBLE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of 1998
Convertible Preferred Stock are entitled to vote, the Depositary will mail the
information contained in such notice of meeting to the record holders of
Depositary Shares. Each record holder of Depositary Shares on the record date
(which will be the same date as the record date for the 1998 Convertible
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of voting rights pertaining to the number of shares of 1998 Convertible
Preferred Stock (or fraction thereof) represented by such holder's Depositary
Shares. The Depositary will endeavor, insofar as practicable, to vote the number
of shares of 1998 Convertible Preferred Stock (or fractions thereof) represented
by such Depositary Shares in accordance with such instructions, and the Company
has agreed to take all action which may be deemed necessary by the Depositary in
order to enable the Depositary to do so. The Depositary will abstain from voting
the 1998 Convertible Preferred Stock to the extent it does not receive specific
written instructions from the holders of Depositary Shares representing such
1998 Convertible Preferred Stock.
Each Depositary Share shall entitle the holder to instruct the Depositary
to cast 1/20th of the vote of a share of 1998 Convertible Preferred Stock on
each matter submitted to a vote of the stockholders of the Company.
AMENDMENT OF DEPOSIT AGREEMENT
The form of Depositary Receipts and any provision of the Deposit Agreement
may at any time be amended by agreement between the Company and the Depositary.
However, any amendment that materially and adversely alters the rights of the
holders of Depositary Shares will not be effective unless such amendment has
been approved by the holders of at least 66 2/3% of the Depositary Shares then
outstanding. Every holder of Depositary Receipts at the time any such amendment
becomes effective shall be deemed to consent and agree to such amendment and to
be bound by the Deposit Agreement.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
that arise solely from the existence of the depositary arrangements and the
initial deposit of the 1998 Convertible Preferred Stock.
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Holders of Depositary Shares will pay all other transfer and other taxes and
governmental charges, and, in addition, such other charges as are expressly
provided in the Deposit Agreement to be for their accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY; TERMINATION OF THE DEPOSIT AGREEMENT
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary will be appointed by the Company within 45 days after delivery of the
notice of resignation or removal. The Deposit Agreement may be terminated by the
Company or by the Depositary if (i) there has been a final distribution in
respect of the 1998 Convertible Preferred Stock in connection with any
liquidation, dissolution or winding up of the Company and such distribution has
been distributed to the holders of Depositary Receipts, or (ii) each share of
1998 Convertible Preferred Stock shall have been converted into shares of Common
Stock.
BOOK-ENTRY-ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
DTC will act as securities depository for the Depositary Shares. The
information in this section concerning DTC and DTC's book-entry system is based
upon information obtained from DTC. The Depositary Shares will be issued only as
fully-registered Depositary Receipts registered in the name of Cede & Co. (as
nominee for DTC). One or more fully-registered global Depositary Receipts will
be issued, evidencing in the aggregate the total number of Depositary Shares,
and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, 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 Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). Access to
the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants").
Purchases of Depositary Shares within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Depositary
Shares on DTC's records. The ownership interest of each actual purchaser of a
Depositary Share ("Beneficial Owner") is in turn to be recorded on the Direct or
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased Depositary Shares. Transfers of
ownership interests in Depositary Shares are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the Depositary
Shares; DTC's records reflect only the identity of the Direct Participants to
whose accounts such Depositary Shares are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
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Dividend payments on the Depositary Shares will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participant and not of DTC or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
dividends to DTC is the responsibility of the Company, disbursement of such
payments to Direct Participants is the responsibility of DTC, and disbursement
of such payments to the Beneficial Owners is the responsibility of Direct and
Indirect Participants.
No Depositary Shares evidenced by global Depositary Receipts may be
exchanged in whole or in part for Depositary Receipts registered, and no
transfer of global Depositary Receipts in whole or in part may be registered, in
the name of any person other than DTC or any nominee of DTC unless DTC has
notified the Company that it is unwilling or unable to continue as depositary
for such global Depositary Receipts. All Depositary Shares evidenced by one or
more global Depositary Receipts or any portion thereof will be registered in
such names as DTC may direct.
The laws of some jurisdictions require that certain potential purchasers of
Depositary Shares take physical delivery of such Depositary Shares in definitive
form. Such laws may impair the ability to transfer beneficial interests in
Depositary Shares so long as such Depositary Shares are evidenced by global
Depositary Receipts.
As long as DTC, or its nominee, is the registered owner of the global
Depositary Receipts, DTC or such nominee, as the case may be, will be considered
the sole owner and holder of the global Depositary Receipts and all Depositary
Shares evidenced thereby for all purposes under the Depositary Shares. Except in
the limited circumstances referred to above, owners of beneficial interests in
global Depositary Shares will not be entitled to have the global Depositary
Receipts evidencing such Shares or such Depositary Shares registered in their
names, will not receive or be entitled to receive physical delivery of
Depositary Shares in exchange therefor and will not be considered to be owners
or holders of such global Depositary Receipts or any Depositary Shares evidenced
thereby for any purpose under the Depositary Shares.
MISCELLANEOUS
The Depositary will, with the approval of the Company, appoint a Registrar
for registration of the Depositary Receipts or Depositary Shares in accordance
with any requirements of any applicable stock exchange on which the Depositary
Receipts or the Depositary Shares are listed. The Registrar will maintain books
at the Corporate Office for the registration and registration of transfer of
Depositary Receipts or at such other place as is approved by the Company and of
which the holders of Depositary Receipts are given reasonable notice.
The Company will deliver to the Depositary and the Depositary will forward
to holders of Depositary Shares all notices and reports required by law, the
rules of any national securities exchange upon which the 1998 Convertible
Preferred Stock, the Depositary Shares or the Depositary Receipts are listed or
by the Company's Restated Certificate or Bylaws to be furnished by the Company
to holders of the 1998 Convertible Preferred Stock.
Neither the Depositary nor the Company will be liable if either is by law
or certain other circumstances beyond its control prevented from or delayed in
performing its obligations under the Deposit Agreement. Neither the Depositary
nor the Company assumes any obligation or will be subject to any liability under
the Deposit Agreement to holders of Depositary Receipts other than to use its
best judgment and good faith in the performance of such duties as are
specifically set forth in the Deposit Agreement. The Depositary will not be
obligated to appear in, prosecute or defend any legal proceeding in respect of
any Depositary Shares or any shares of 1998 Convertible Preferred Stock unless
satisfactory indemnity is furnished. The Company and the Depositary may rely on
advice of counsel or accountants, or information provided by persons presenting
shares of 1998 Convertible Preferred Stock for deposit, holders of Depositary
Shares or other persons believed to be authorized or competent and on documents
believed to be genuine.
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The Depositary will act as transfer agent and registrar for, and paying
agent for the payment of dividends with respect to, the Depositary Shares.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The owners of the Depositary Shares will be treated for federal income tax
purposes as if they were the owners of the shares of 1998 Convertible Preferred
Stock represented thereby. Accordingly, the tax treatment for the owners of the
Depositary Shares will be the same as the tax treatment for the owners of shares
of 1998 Convertible Preferred Stock described below. In addition, no gain or
loss will be recognized upon the withdrawal of shares of 1998 Convertible
Preferred Stock in exchange for Depositary Shares pursuant to the Deposit
Agreement, an owner's tax basis in the withdrawn shares of 1998 Convertible
Preferred Stock will be the same as the tax basis in the Depositary Shares
surrendered therefor, and such owner's holding period of the withdrawn
Securities will include the period during which the owner held the surrendered
Depositary Shares.
DESCRIPTION OF 1998 CONVERTIBLE PREFERRED STOCK
GENERAL
The following is a summary of certain terms of the 1998 Convertible
Preferred Stock offered hereby. The terms of the 1998 Convertible Preferred
Stock are set forth in the Certificate of Designation of the Powers, Preferences
and Relative, Participating, Optional and Other Special Rights of 6 3/4%
Cumulative Convertible Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "1998 Certificate of Designation"). This summary is
not intended to be complete and is subject to, and qualified in its entirety by
reference to, the Company's Restated Certificate of Incorporation, as amended
(the "Restated Certificate") which includes the 1998 Certificate of Designation,
including the definitions therein of certain terms used below. Copies of the
Restated Certificate and the 1998 Certificate of Designation will be made
available as set forth under "Available Information".
Pursuant to the 1998 Certificate of Designation, 155,250 shares of 1998
Convertible Preferred Stock with a liquidation preference of $1,000 per share
(the "Liquidation Preference") were authorized for issuance. The 1998
Convertible Preferred Stock is fully paid and nonassessable, and Holders thereof
have no preemptive rights in connection therewith. Each Depositary Share
represents 1/20 of a share of 1998 Convertible Preferred Stock. The Company does
not expect that there will be any trading market for the 1998 Convertible
Preferred Stock except as represented by the Depositary Shares.
There can be no assurance that any trading market for the Depositary Shares
will develop. If any such market does develop, the Liquidation Preference of the
1998 Convertible Preferred Stock per Depositary Share is not necessarily
indicative of the price at which Depositary Shares will actually trade, and the
Depositary Shares may trade at prices below such Liquidation Preference. The
market price of the Depositary Shares can be expected to fluctuate with changes
in the financial markets and economic conditions, the market price of the Common
Stock, the financial condition and prospects of the Company and other factors
that generally influence the market prices of securities.
The transfer agent for the 1998 Convertible Preferred Stock will be
BankBoston, N.A. unless and until a successor is selected by the Company (the
"Transfer Agent"). The offices of the Transfer Agent are located in New York
City at 1 Exchange Plaza, 55 Broadway, 3rd Floor, New York, New York.
RANKING
The 1998 Convertible Preferred Stock ranks (A) pari passu in right of
payment with the 1997 Convertible Preferred Stock, the Exchangeable Preferred
Stock and each other class of capital stock or series of preferred stock,
established hereafter by the Company's Board of Directors, the terms of which
expressly provide that such class or series ranks on a parity with the 1998
Convertible Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution (collectively referred to as "Parity Securities")
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(B) junior in right of payment to any Senior Securities (as defined) as to
dividends and upon liquidation, dissolution or winding up of the Company and (C)
senior, with respect to such matters, to the Common Stock and any capital stock
of the Company that expressly provides that it will rank junior to the 1998
Convertible Preferred Stock ("Junior Securities"). The 1998 Certificate of
Designation provides that the Company may not, without the affirmative vote or
consent of the Holders of at least 66 2/3% of the outstanding shares of 1998
Convertible Preferred Stock, authorize, create (by way of reclassification or
otherwise) or issue any class or series of capital stock of the Company ranking
senior to the 1998 Convertible Preferred Stock ("Senior Securities") or any
obligation or security convertible or exchangeable into or evidencing a right to
purchase, shares of any class or series of Senior Securities.
DIVIDENDS
The Holders of shares of the 1998 Convertible Preferred Stock will be
entitled to receive, when, as and if dividends are declared by the Board of
Directors out of funds of the Company legally available therefor, cumulative
preferential dividends from the issue date of the 1998 Convertible Preferred
Stock accruing at the rate of $3.375 per Depositary Share ($67.50 per share of
1998 Convertible Preferred Stock) per annum, or $0.8438 per Depositary Share
($16.875 per share of 1998 Convertible Preferred Stock) per quarter, payable
quarterly in arrears on January 1, April 1, July 1, and October 1 of each year
or, if any such date is not a Business Day, on the next succeeding business day
(each, a "Dividend Payment Date"), to the Holders of record as of the next
preceding December 15, March 15, June 15, and September 15 (each, a "Record
Date"). Accrued but unpaid dividends, if any, may be paid on such dates as
determined by the Board of Directors. Dividends will be payable in cash except
as set forth below. The first dividend payment of $0.8531 per Depositary Share
will be payable on July 1, 1998. Dividends payable on the 1998 Convertible
Preferred Stock (and the corresponding Depositary Shares) will be computed on
the basis of a 360-day year of twelve 30-day months and will be deemed to accrue
on a daily basis. Dividends may, at the option of the Company, be paid in Common
Stock if, and only if, the documents governing the Company's indebtedness that
exists on the issue date of the 1998 Convertible Preferred Stock then prohibit
the payment of such dividends in cash. If the Company elects to pay dividends in
shares of Common Stock, the number of shares of Common Stock to be distributed
will be calculated by dividing the amount of such dividend otherwise payable in
cash by 95% of the arithmetic average of the Closing Price (as defined) for the
five Trading Days (as defined) preceding the Dividend Payment Date. If the
Company elects to pay any dividend in Common Stock, it will give the Depository
5 Business Days notice prior to the related Dividend Payment Date and the
Depository will forward such notice to Holders. The 1998 Convertible Preferred
Stock (and the corresponding Depositary Shares) will not be redeemable unless
all dividends accrued through such redemption date shall have been paid in full.
Notwithstanding anything to the contrary herein contained, the Company shall not
be required to declare or pay a dividend if another person (including, without
limitation, any of its subsidiaries) pays an amount to the Holders equal to the
amount of such dividend on behalf of the Company and, in such event, the
dividend will be deemed paid for all purposes. For a discussion of certain
federal income tax considerations relevant to the payment of dividends on the
1998 Convertible Preferred Stock, see "Certain U.S. Federal Income Tax
Consequences of the 1998 Convertible Preferred Stock -- Dividends to Corporate
Shareholders".
The term "Closing Price" means on any day the reported last bid price on
such day or in case no sale takes place on such day, the average of the reported
closing bid and asked prices on the principal national securities exchange on
which such stock is listed or admitted to trading or, if not listed or admitted
to trading on any national securities exchange, the average of the closing bid
and asked prices as furnished by any independent registered broker-dealer firm,
selected by the Company for that purpose, in each case adjusted for any stock
split during the relevant period.
Dividends on the 1998 Convertible Preferred Stock (and the corresponding
Depositary Shares) will accrue whether or not the Company has earnings or
profits, whether or not there are funds legally available for the payment of
such dividends and whether or not dividends are declared. Dividends will
accumulate to the extent they are not paid on the Dividend Payment Date for the
quarter to which they relate. Accumulated unpaid dividends will accrue and
cumulate at a rate of 6 3/4% per annum. The 1998 Certificate of Designation
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<PAGE> 33
provides that the Company will take all reasonable actions required or permitted
under Delaware law to permit the payment of dividends on the 1998 Convertible
Preferred Stock.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the 1998 Convertible
Preferred Stock (and the corresponding Depositary Shares) with respect to any
dividend period unless all dividends for all preceding dividend periods have
been declared and paid upon, or declared and a sufficient sum set apart for the
payment of such dividend upon, all outstanding shares of 1998 Convertible
Preferred Stock. Unless full cumulative dividends on all outstanding shares of
1998 Convertible Preferred Stock due for all past dividend periods shall have
been declared and paid, or declared and a sufficient sum for the payment thereof
set apart, then: (i) no dividend (other than a dividend payable solely in shares
of Junior Securities or options, warrants or rights to purchase Junior
Securities) shall be declared or paid upon, or any sum set apart for the payment
of dividends upon, any shares of Junior Securities; (ii) no other distribution
shall be declared or made upon, or any sum set apart for the payment of any
distribution upon, any shares of Junior Securities; (iii) no shares of Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities or a
purchase, redemption or other acquisition from the proceeds of a substantially
concurrent sale of Junior Securities) by the Company or any of its subsidiaries;
and (iv) no monies shall be paid into or set apart or made available for a
sinking or other like fund for the purchase, redemption or other acquisition or
retirement for value of any shares of Junior Securities by the Company or any of
its subsidiaries. Holders of the 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
as herein described.
VOTING RIGHTS
Holders of record of shares of the 1998 Convertible Preferred Stock (and
the corresponding Depositary Shares) will have no voting rights, except as
required by law and as provided in the 1998 Certificate of Designation. The 1998
Certificate of Designation provides that upon the accumulation of accrued and
unpaid dividends on the outstanding 1998 Convertible Preferred Stock in an
amount equal to six full quarterly dividends (whether or not consecutive)
(together with any event with a similar effect pursuant to the terms of any
other series of preferred stock upon which like rights have been conferred a
"Voting Rights Triggering Event"), the number of members of the Company's Board
of Directors will be immediately and automatically increased by two (unless
previously increased pursuant to the terms of any other series of preferred
stock upon which like rights have been conferred), and the Holders of a majority
of the outstanding shares of 1998 Convertible Preferred Stock, voting together
as a class (pro rata, based on liquidation preference) with the holders of any
other series of preferred stock upon which like rights have been conferred and
are exercisable, will be entitled to elect two members to the Board of Directors
of the Company. Voting rights arising as a result of a Voting Rights Triggering
Event will continue until such time as all dividends in arrears on the 1998
Convertible Preferred Stock are paid in full. Notwithstanding the foregoing,
however, this right to elect directors will expire when the number of shares of
1998 Convertible Preferred Stock outstanding is reduced to 13,500 or less.
In addition, as provided above under "-- Ranking" the Company may not
authorize, create (by way of reclassification or otherwise) or issue any Senior
Securities, or any obligation or security convertible into or evidencing the
right to purchase any Senior Securities, without the affirmative vote or consent
of the Holders of 66 2/3% of the then outstanding shares of the 1998 Convertible
Preferred Stock.
The owners of Depositary Shares will be entitled to direct the voting of
the shares of 1998 Convertible Preferred Stock represented thereby.
CONVERSION RIGHTS
The 1998 Convertible Preferred Stock will be convertible at the option of
the Holder, into shares of Common Stock at any time, unless previously redeemed
or repurchased, at a conversion rate of 0.6874 shares of Common Stock per
Depositary Share (13.748 shares of Common Stock per share of the 1998
Convertible
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<PAGE> 34
Preferred Stock) (as adjusted pursuant to the provisions hereof, the "Conversion
Rate") (subject to the adjustments described below). The right to convert a
share of the 1998 Convertible Preferred Stock called for redemption or delivered
for repurchase will terminate at the close of business on the Redemption Date
(as defined below) for such 1998 Convertible Preferred Stock or at the time of
repurchase, as the case may be.
The right of conversion attaching to any Depositary Share may be exercised
by the Holder thereof by delivering the Depositary Share to be converted to the
office of the Transfer Agent, accompanied by a duly signed and completed notice
of conversion in form reasonably satisfactory to the Transfer Agent. The
conversion date will be the date on which the Depositary Share and the duly
signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, the Company will issue and deliver
to the Transfer Agent a certificate or certificates for the number of full
shares of Common Stock issuable upon conversion, with any fractional shares
rounded up to full shares or, at the Company's option, payment in cash in lieu
of any fraction of a share, based on the Closing Price of the Common Stock on
the Trading Day preceding the conversion date. Notwithstanding the foregoing, if
a number of Depositary Shares that is not divisible by 20 (without remainder) is
submitted for conversion, any fractional share otherwise issuable upon such
conversion will be rounded down. Such certificate or certificates will be
delivered by the Transfer Agent to the appropriate Holder on a book-entry basis
or by mailing certificates evidencing the additional shares to the Holders at
their respective addresses set forth in the register of Holders maintained by
the Transfer Agent. All shares of Common Stock issuable upon conversion of the
Depositary Shares will be fully paid and nonassessable and will rank pari passu
with the other shares of Common Stock outstanding from time to time. Any
Depositary Shares surrendered for conversion during the period from the close of
business on any Record Date to the opening of business on the next succeeding
Dividend Payment Date must be accompanied by payment of an amount equal to the
dividends payable on such Dividend Payment Date on the Depositary Shares being
surrendered for conversion. In the case of any Depositary Shares that have been
converted after any Record Date but before the next Dividend Payment Date,
dividends that are payable on such Dividend Payment Date will be payable on such
Dividend Payment Date notwithstanding such conversion, and such dividends will
be paid to the Holder of such Depositary Shares on such Record Date. No other
payment or adjustment for dividends, or for any dividends in respect of shares
of Common Stock, will be made upon conversion. Holders of Common Stock issued
upon conversion will not be entitled to receive any dividends payable to holders
of Common Stock as of any record time before the close of business on the
conversion date.
Under Federal law in effect as of the date of this Prospectus, a Holder
delivering Depositary Shares for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty that may be payable in
respect of any transfer involved in the issue or delivery of the shares of
Common Stock in a name other than that of the Holder of the Depositary Shares.
Certificates representing shares of Common Stock will not be issued or delivered
unless all taxes and duties, if any, payable by the Holder have been paid.
The Conversion Rate is subject to adjustment in certain events, including,
without duplication; (a) dividends (and other distributions) paid in shares of
Common Stock, (b) subdivisions and combinations of any shares of Common Stock,
(c) the issuance to all holders of Common Stock of rights, options or warrants
entitling them to subscribe for or purchase any shares of Common Stock of the
Company (collectively, "Rights") at less than the then current market price of
Common Stock (determined as of the record date for stockholders entitled to
receive such Rights), (d) distributions to all holders of Common Stock of
evidences of indebtedness of the Company, shares of capital stock, cash or
assets (including securities, but excluding those dividends and Rights referred
to above, (e) distributions consisting exclusively of cash (excluding any cash
portion of distributions referred to in (d) above) to all holders of Common
Stock in an aggregate amount that, combined together with (i) other such
all-cash distributions made within the preceding 12 months in respect of which
no adjustment has been made and (ii) any cash and the fair market value of other
consideration payable in respect of any tender offer by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the then current market price of the
Common Stock and the number of shares of Common Stock then outstanding at the
date of such
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<PAGE> 35
distribution) on the record date for such distribution and (f) the successful
completion of a tender offer by the Company or any of its subsidiaries for
Common Stock that involves an aggregate consideration that, together with (i)
any cash and other consideration payable in any other tender offers by the
Company or any of its subsidiaries for Common Stock expiring within 12 months
preceding the expiration of such tender offer in respect of which no adjustment
has been made and (ii) the aggregate number of any such all-cash distributions
referred to in (e) above to all holders of Common Stock within the 12 months
preceding the expiration of such tender offer in respect of which no adjustments
have been made, exceeds 10% of the Company's market capitalization on the
expiration of such tender offer. The 1998 Certificate of Designation provides
that the Company may make voluntary increases in the Conversion Rate in addition
to those required in the foregoing provisions, provided that each such increase
is in effect for at least 20 calendar days. No adjustment of the Conversion Rate
will be required unless such adjustment would require an increase or decrease of
at least 1.0% or more of the Conversion Rate.
In addition, the 1998 Certificate of Designation provides that in the event
that any other transaction or event occurs as to which the foregoing Conversion
Rate adjustment provisions are not strictly applicable but the failure to make
any adjustment would adversely affect the conversion rights represented by the
1998 Convertible Preferred Stock in accordance with the essential intent and
principles of such provisions, then, in each such case, either (i) the Company
will appoint an investment banking firm of recognized national standing, or any
other financial expert that does not (or whose directors, officers, employees,
affiliates or stockholders do not) have a direct or material indirect financial
interest in the Company or any of its subsidiaries, who has not been, and, at
the time it is called upon to give independent financial advice to the Company,
is not (and none of its directors, officers, employees, affiliates or
stockholders are) a promoter, director or officer of the Company or any of its
subsidiaries, which will give their opinion upon or (ii) the Board of Directors
shall, in its sole discretion, determine consistent with the Board of Directors'
fiduciary duties to the holders of the Company's Common Stock, the adjustment,
if any, on a basis consistent with the essential intent and principles
established in the foregoing Conversion Rate adjustment provisions, necessary to
preserve, without dilution, the conversion rights represented by the 1998
Convertible Preferred Stock. Upon receipt of such opinion or determination, the
Company will promptly mail a copy thereof to the Holders of the 1998 Convertible
Preferred Stock and the Depositary Shares and will, subject to the fiduciary
duties of the Company's Board of Directors, make the adjustments described
therein.
The Company will provide to Holders of the Depositary Shares reasonable
notice of any event that would result in an adjustment to the Conversion Rate
pursuant to the foregoing paragraph so as to permit the Holders to effect a
conversion of Depositary Shares into shares of Common Stock prior to the
occurrence of such event.
If at any time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for United
States federal income tax purposes (e.g., distributions of evidences of
indebtedness or assets of the Company, but generally not stock dividends on
common stock or rights to subscribe for common stock) and, pursuant to the anti-
dilution provisions of the 1998 Certificate of Designation, the number of shares
into which the 1998 Convertible Preferred Stock is convertible is increased,
such increase may be deemed for United States federal income tax purposes to be
the payment of a taxable dividend to Holders of the Depositary Shares. See
"Certain U.S. Federal Income Tax Considerations of the 1998 Convertible
Preferred Stock -- Adjustment of Conversion Price".
REDEMPTION
Optional Redemption
The 1998 Convertible Preferred Stock (and corresponding Depositary Shares)
may not be redeemed at the option of the Company on or prior to April 5, 2000.
After April 5, 2000 the Company may redeem the 1998 Convertible Preferred Stock
(and corresponding Depositary Shares). Notwithstanding the foregoing, prior to
April 1, 2002, the Company shall only have the option to redeem shares of the
1998 Convertible Preferred Stock (and corresponding Depositary Shares) if,
during the period of 30 consecutive Trading Days (as defined below) ending on
the Trading Day immediately preceding the date that the notice of redemption is
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<PAGE> 36
mailed to Holders, the Closing Price for the Common Stock exceeded $75 divided
by the Conversion Rate effective on the date of such notice for at least 20 of
such Trading Days. Subject to the immediately preceding sentence, the 1998
Convertible Preferred Stock (and corresponding Depositary Shares) may be
redeemed, in whole or in part, at the option of the Company after April 5, 2000,
at the redemption prices specified below (expressed as percentages of the
Liquidation Preference thereof), in each case, together with accrued and unpaid
dividends and liquidated damages (if any), to the date of redemption, upon not
less than 15 nor more than 60 days' prior written notice, if redeemed during the
period commencing on April 5, 2000 to March 31, 2001 at 105.40%, and thereafter
during the 12-month period commencing on April 1 of each of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR RATE
---- ----------
<S> <C>
2001.............................................. 104.73%
2002.............................................. 104.05%
2003.............................................. 103.38%
2004.............................................. 102.70%
2005.............................................. 102.03%
2006.............................................. 101.35%
2007.............................................. 100.68%
2008 and thereafter............................... 100.00%
</TABLE>
Except as provided in the preceding sentence, no payment or allowance will
be made for accrued dividends on any shares of 1998 Convertible Preferred Stock
(and corresponding Depositary Shares) called for redemption.
"Trading Day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day
on which securities are not traded on the applicable securities exchange or in
the applicable securities market.
On and after any date fixed for redemption (the "Redemption Date"),
provided that the Company has made available at the office of the Transfer Agent
a sufficient amount of cash to effect the redemption, dividends will cease to
accrue on the 1998 Convertible Preferred Stock (and corresponding Depositary
Shares) called for redemption (except that, in the case of a Redemption Date
after a dividend payment record date and prior to the related dividend payment
date, holders of 1998 Convertible Preferred Stock (and corresponding Depositary
Shares) on the dividend payment record date will be entitled on such dividend
payment date to receive the dividend payable on such shares), such shares shall
no longer be deemed to be outstanding and all rights of the holders of such
shares as holders of 1998 Convertible Preferred Stock (and corresponding
Depositary Shares) shall cease except the right to receive the cash deliverable
upon such redemption, without interest from the Redemption Date.
TRANSFER AGENT, PAYING AGENT, CONVERSION AGENT
The Company has initially appointed the Transfer Agent to act as the Paying
Agent and Conversion Agent. The Company may at any time terminate the
appointment of any Paying Agent or Conversion Agent and appoint additional or
other Paying Agents and Conversion Agents, provided that until the 1998
Convertible Preferred Stock (and the corresponding Depositary Shares) has been
delivered to the Company for cancellation, or moneys sufficient to pay the
Liquidation Preference and accrued dividends and Liquidated Damages (if any) on
the 1998 Convertible Preferred Stock (and the corresponding Depositary Shares)
have been made available for payment and either paid or returned to the Company
as provided in the 1998 Certificate of Designation, it will maintain an office
or agency in the Borough of Manhattan in The City of New York for surrender of
1998 Convertible Preferred Stock (and the corresponding Depositary Shares) for
conversion.
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<PAGE> 37
Dividends payable on the 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) on any redemption date or repurchase date that
is a Dividend Payment Date will be paid to the Holders of record as of the
immediately preceding Record Date.
All moneys deposited with any Paying Agent or then held by the Company in
trust for the payment of the Liquidation Preference and dividends or Liquidated
Damages (if any) on any shares of the 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) which remain unclaimed at the end of two years
after such payment has become due and payable will be repaid to the Company, and
the Holder of such shares of the 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) will thereafter be entitled to look only to the
Company for payment thereof.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company after payment in full of the liquidation preference
(and any accrued and unpaid dividends) on any Senior Securities each Holder of
shares of the 1998 Convertible Preferred Stock (and the corresponding Depositary
Shares) will be entitled, on an equal basis with the holders of the 1997
Convertible Preferred Stock, the Exchangeable Preferred Stock and any other
outstanding Parity Securities, to payment out of the assets of the Company
available for distribution of an amount equal to the Liquidation Preference per
share of the 1998 Convertible Preferred Stock (or per Depositary Share) held by
such Holder, plus accrued and unpaid dividends and liquidated damages (if any)
to the date fixed for liquidation, dissolution, or winding up before any
distribution is made on any Junior Securities, including, without limitation,
Common Stock of the Company. After payment in full of the Liquidation Preference
and an amount equal to the accrued and unpaid dividends and liquidated damages
(if any), to which Holders of 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) are entitled, such Holders will not be entitled
to any further participation in any distribution of assets of the Company.
However, neither the voluntary sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with or into one or more corporations will be deemed to be a voluntary
or involuntary liquidation, dissolution or winding up of the Company, unless
such sale, conveyance, exchange, transfer, consolidation or merger shall be in
connection with a liquidation, dissolution or winding up of the affairs of the
Company or reduction or decrease in capital stock.
The 1998 Certificate of Designation does not contain any provision
requiring funds to be set aside to protect the Liquidation Preference of the
1998 Convertible Preferred Stock, although such Liquidation Preference is
substantially in excess of the par value of the shares of the 1998 Convertible
Preferred Stock.
CERTAIN COVENANTS
Transactions with Affiliates
The 1998 Certificate of Designation provides that the Company will not, and
will not permit any of its subsidiaries to, without the affirmative vote or
consent of the holders of a majority of the outstanding shares of 1998
Convertible Preferred Stock, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant subsidiary than those that would have been obtained in a comparable
transaction by the Company or such subsidiary with an unrelated Person and (ii)
the Company files in its minute books with respect to any Affiliate Transaction
or series of related Affiliate Transaction involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the members of the Board of Directors that are disinterested as to
such Affiliate Transaction.
As used herein, "Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For
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<PAGE> 38
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
voting securities of a Person shall be deemed to be control.
The provisions of the foregoing paragraph shall not prohibit (i) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (ii) the
grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iii) any
employment or consulting arrangement or agreement entered into by the Company or
any of its subsidiaries in the ordinary course of business and consistent with
the past practice of the Company or such subsidiary, (iv) the payment of
reasonable fees to directors of the Company and its subsidiaries who are not
employees of the Company or its subsidiaries, (v) any Affiliate Transaction
between the Company and a subsidiary thereof or between such subsidiaries (for
purposes of this paragraph, "subsidiary" includes any entity deemed to be an
Affiliate because the Company or any of its subsidiaries own securities in such
entity or controls such entity), or (vi) transactions between the Company or any
subsidiary thereof specifically contemplated by the PSINet Agreement dated as of
July 22, 1997 between a subsidiary of the Company and PSINet, as amended as of
the date hereof.
Payments for Consent
The 1998 Certificate of Designation provides that neither the Company nor
any of its subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of dividend or other distribution, fee or
otherwise, to any Holder of shares of the 1998 Convertible Preferred Stock (and
the corresponding Depository Shares) for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the 1998 Certificate of
Designation or the 1998 Convertible Preferred Stock unless such consideration is
offered to be paid and is paid to all Holders of the 1998 Convertible Preferred
Stock that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
Reports
The 1998 Certificate of Designation provides that, whether or not required
by the rules and regulations of the Commission, so long as any shares of the
1998 Convertible Preferred Stock are outstanding, the Company will furnish to
the Holders of the 1998 Convertible Preferred Stock (and the corresponding
Depositary Shares) (i) all quarterly and annual financial information that would
be required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all information that would be
required to be contained in a current report on Form 8-K if the Company were
required to file such reports. In the event the Company has filed any such
report with the Commission, it will not be obligated to separately finish the
report to any Holder unless and until such Holder requests a copy of the report.
In addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
MERGER, CONSOLIDATION OR SALE OF ASSETS OF THE COMPANY
In the event that the Company is party to any Fundamental Change or
transaction (including, without limitation, a merger other than a merger that
does not result in a reclassification, conversion, exchange or cancellation of
Common Stock), consolidation, sale of all or substantially all of the assets of
the Company, recapitalization or reclassification of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of a subdivision or combination of Common Stock)
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<PAGE> 39
or any compulsory share exchange (each of the foregoing, including any
Fundamental Change, being referred to as a "Transaction"), the Company will be
obligated, subject to applicable provisions of state law and the restrictions of
the Indenture, either to offer (a "Repurchase Offer") to purchase all of the
shares of 1998 Convertible Preferred Stock (and the corresponding Depositary
Shares) on the date (the "Repurchase Date") that is 75 days after the date the
Company gives notice of the Transaction, at a price (the "Repurchase Price")
equal to $50 per Depositary Share ($1,000.00 per share of 1998 Convertible
Preferred Stock), together with accrued and unpaid dividends through the
Repurchase Date or to adjust the Conversion Rate as described below. If a
Repurchase Offer is made, the Company shall deposit, on or prior to the
Repurchase Date, with a paying agent an amount of money sufficient to pay the
aggregate Repurchase Price of the 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) which is to be paid on the Repurchase Date.
On or before the 15th day after the Company knows or reasonably should know
that a Transaction has occurred, the Company will be required to mail to all
Holders of record of the Depositary Shares a notice of the occurrence of such
Transaction and whether or not the documents governing the Company's
indebtedness permit at such time a Repurchase Offer, and, as applicable, either
the new Conversion Rate (as adjusted at the option of the Company) or the date
by which the Repurchase Offer must be accepted, the Repurchase Price for the
1998 Convertible Preferred Stock (and the corresponding Depositary Shares) and
the procedures which the holder must follow to accept the Repurchase Offer. To
accept the Repurchase Offer, the Holder of a Depositary Share will be required
to deliver, on or before the 10th day prior to the Repurchase Date, written
notice to the Company (or an agent designated by the Company for such purpose)
of the holder's acceptance, together with the certificates evidencing the
Depositary Share with respect to which the offer is being accepted, duly
endorsed for transfer.
In the event the Company does not make a Repurchase Offer with respect to a
Transaction and such Transaction results in shares of Common Stock being
converted into the right to receive, or being exchanged for, (i) in the case of
any Transaction other than a Transaction involving a Common Stock Fundamental
Change (as defined below) (and subject to funds being legally available for such
purpose under applicable law at the time of such conversion), securities, cash
or other property, each share of the 1998 Convertible Preferred Stock (and the
corresponding Depositary Shares) shall thereafter be convertible into the kind
and, in the case of a Transaction which does not involve a Fundamental Change
(as defined below), amount of securities, cash and other property receivable
upon the consummation of such Transaction by a holder of that number of shares
of Common Stock into which a share of the 1998 Convertible Preferred Stock (and
the corresponding Depositary Shares) was convertible immediately prior to such
Transaction, or (ii) in the case of a Transaction involving a Common Stock
Fundamental Change, common stock, each share of the 1998 Convertible Preferred
Stock (and the corresponding Depositary Shares) shall thereafter be convertible
(in the manner described therein) into common stock of the kind received by
holders of Common Stock (but in each case after giving effect to any adjustment
discussed below relating to a Fundamental Change if such Transaction constitutes
a Fundamental Change), other than as required by Delaware law.
If any Fundamental Change occurs, then the Conversion Rate in effect will
be adjusted immediately after such Fundamental Change as described below. In
addition, in the event of a Common Stock Fundamental Change, each share of 1998
Convertible Preferred Stock (and the corresponding Depositary Shares) shall be
convertible solely into common stock of the kind received by holders of Common
Stock as a result of such Common Stock Fundamental Change.
The Conversion Rate in the case of any Transaction involving a Fundamental
Change will be adjusted immediately after such Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change (as defined below),
the Conversion Rate will thereupon become the higher of (A) the Conversion
Rate in effect immediately prior to such Non-Stock Fundamental Change, but
after giving effect to any other prior adjustments effected pursuant to the
provision of "-- Conversion Rate", and (B) a fraction, the numerator of
which is (x) the redemption rate for one share of the 1998 Convertible
Preferred Stock if the redemption date were the date of such Non-Stock
Fundamental Change (or, for the period commencing on the first date of
original issuance of the
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1998 Convertible Preferred Stock and through April 1, 1999, and the
twelve-month period commencing April 1, 1999, the product of 106.75% and
106.075%, respectively), multiplied by $1000 plus (y) any then-accrued and
unpaid dividends on one share of the 1998 Convertible Preferred Stock, and
the denominator of which is the greater of the Applicable Price or the then
applicable Reference Market Price; and
(ii) in the case of a Common Stock Fundamental Change, the Conversion
Rate in effect immediately prior to such Common Stock Fundamental Change,
but after giving effect to any other prior adjustments effected pursuant to
the provision of "-- Conversion Rate", will thereupon be adjusted by
multiplying such Conversion Rate by a fraction of which the denominator
will be the Purchaser Stock Price (as defined below) and the numerator will
be the Applicable Price; provided, however, that in the event of a Common
Stock Fundamental Change in which (A) 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
successor, acquirer, or other third party (and cash, if any, is paid only
with respect to any fractional interests in such common stock resulting
from such Common Stock Fundamental Change) and (B) all Common Stock will
have been exchanged for, converted into, or acquired for common stock (and
cash with respect to fractional interests) of the successor, acquirer, or
other third party, the Conversion Rate in effect immediately prior to such
Common Stock Fundamental Change will thereupon be adjusted by multiplying
such Conversion Rate by the number of shares of common stock of the
successor, acquirer, or other third party received by a holder of one share
of Common Stock as a result of such Common Stock Fundamental Change.
The foregoing Conversion Rate adjustments are designed, in certain
circumstances, to increase the Conversion Rate that would be applicable in
"Fundamental Change" Transactions where all or substantially all Common Stock is
converted into securities, cash or property and not more than 50% of the value
received by the holders of Common Stock consists of stock listed or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on the NNM (a Non-Stock Fundamental Change, as defined below). Such
increase would result in an increase in the amount of the securities, cash, or
property into which each share of the 1998 Convertible Preferred Stock (or the
corresponding Depositary Shares) is convertible over that which would have been
obtained in the absence of such Conversion Rate adjustments.
In a Non-Stock Fundamental Change Transaction where the initial value
received per share of Common Stock (measured as described in the definition of
Applicable Price) is lower than both $1,000 divided by the Conversion Rate in
effect prior to any adjustment described above and the Reference Market Price,
the Conversion Rate will be adjusted as described above but calculated as though
such initial value had been the Reference Market Price.
In a Fundamental Change Transaction where all or substantially all Common
Stock is converted into securities, cash, or property and more than 50% of the
value received by the holders of Common Stock consists of listed or NNM traded
common stock (a Common Stock Fundamental Change, as defined below), the
foregoing adjustments are designed to provide in effect that (a) where Common
Stock is converted partly into such Common Stock and partly into other
securities, cash, or property, each share of the 1998 Convertible Preferred
Stock (or the corresponding Depositary Shares) will be convertible solely into a
number of shares of such Common Stock determined so that the initial value of
such shares (measured as described in the definition of "Purchaser Stock Price"
below) equals the value of the shares of Common Stock into which such share of
the 1998 Convertible Preferred Stock (or the corresponding Depositary Shares)
was convertible immediately before the Transaction (measured as aforesaid) and
(b) where Common Stock is converted solely into such common stock, each share of
the 1998 Convertible Preferred Stock (or the corresponding Depositary Shares)
will be convertible into the same number of shares of such common stock
receivable by a holder of the number of shares of Common Stock into which such
share of the 1998 Convertible Preferred Stock (or the corresponding Depositary
Shares) was convertible immediately before such Transaction.
The term "Applicable Price" means (i) in the case of a Non-Stock
Fundamental Change in which the holders of Common Stock receive only cash, the
amount of cash received by the holder of one share of Common Stock and (ii) in
the event of any other Non-Stock Fundamental Change or any Common Stock
Fundamental Change, the average of the Closing Price (as defined below) for
Common Stock during the ten
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Trading Days prior to the record date for the determination of the holders of
Common Stock entitled to receive such securities, cash, or other property in
connection with such Non-Stock Fundamental Change or Common Stock Fundamental
Change or, if there is no such record date, the date upon which the holders of
Common Stock shall have the right to receive such securities, cash, or other
property (such record date or distribution date being hereinafter referred to as
the "Entitlement Date") in each case as adjusted in good faith by the Company to
appropriately reflect any of the events referred to above.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that for each of the ten consecutive Trading Days
prior to the Entitlement Date has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on the Nasdaq National Market; provided, however, that a Fundamental
Change shall not be a Common Stock Fundamental Change unless either (i) the
Company continues to exist after the occurrence of such Fundamental Change and
the outstanding 1998 Convertible Preferred Stock continues to exist as
outstanding 1998 Convertible Preferred Stock or (ii) not later than the
occurrence of such Fundamental Change, the outstanding 1998 Convertible
Preferred Stock is converted into or exchanged for shares of convertible
preferred stock of an entity succeeding to the business of the Company or a
subsidiary thereof, which convertible preferred stock has powers, preferences,
and relative, participating, optional, or other rights and qualifications,
limitations, and restrictions, substantially similar to those of the 1998
Convertible Preferred Stock.
The term "Fundamental Change" means the occurrence of any Transaction or
event in connection with a plan pursuant to which all or substantially all
Common Stock shall be exchanged for, converted into, acquired for, or constitute
solely the right to receive securities, cash, or other property (whether by
means of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization, or otherwise), provided, that,
in the case of a plan involving more than one such Transaction or event, for
purposes of adjustment of the Conversion Rate, such Fundamental Change shall be
deemed to have occurred when substantially all Common Stock shall be exchanged
for, converted into, or acquired for or constitute solely the right to receive
securities, cash, or other property, but the adjustment shall be based upon the
consideration that a holder of Common Stock received in such Transaction or
event as a result of which more than 50% of Common Stock shall have been
exchanged for, converted into, or acquired for or constitute solely the right to
receive securities, cash, or other property. The term "Non-Stock Fundamental
Change" means any Fundamental Change other than a Common Stock Fundamental
Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in such Common Stock Fundamental Change for the ten consecutive Trading
Days prior to and including the Entitlement Date, as adjusted in good faith by
the Company to appropriately reflect any of the events referred to above.
The term "Reference Market Price" shall initially mean $38.79 (which is an
amount equal to 66 2/3% of the reported last sales price for Common Stock on the
NNM on March 25, 1998) and in the event of any adjustment of the Conversion Rate
other than as a result of a Non-Stock Fundamental Change, the Reference Market
Price shall also be adjusted so that the ratio of the Reference Market Price to
the Conversion Rate after giving effect to any such adjustment shall always be
the same as the ratio of the initial Reference Market Price to the initial
Conversion Rate.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company may amend the 1998 Certificate of Designation with the consent
of the Depositary, who will consent upon receipt of the affirmative vote or
consent of the holders of a majority of the 1998 Convertible Preferred Stock
then outstanding, (including votes or consents obtained in connection with a
tender offer or exchange offer for the 1998 Convertible Preferred Stock or the
corresponding Depositary Shares) and, except as otherwise provided by applicable
law, any past default or failure to comply with any provision of the 1998
Certificate of Designation may also be waived with the consent of such holders.
Notwithstanding the foregoing, however, without the consent of each Holder
affected, an amendment or waiver may not (with
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respect to any shares of the 1998 Convertible Preferred Stock held by a
non-consenting Holder): (i) alter the voting rights with respect to the 1998
Convertible Preferred Stock or reduce the number of shares of the 1998
Convertible Preferred Stock whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the Liquidation Preference of any share of the
1998 Convertible Preferred Stock or adversely alter the provisions with respect
to the redemption of the 1998 Convertible Preferred Stock, (iii) reduce the rate
of or change the time for payment of dividends on any share of the 1998
Convertible Preferred Stock, (iv) waive a default in the payment of dividends or
Liquidated Damages (if any) on the Convertible Preferred Stock, (v) make any
share of the 1998 Convertible Preferred Stock payable in money other than United
States dollars, (vi) make any change in the provisions of the 1998 Certificate
of Designation relating to waivers of the rights of Holders of the 1998
Convertible Preferred Stock to receive the Liquidation Preference, dividends or
Liquidated Damages (if any) on the 1998 Convertible Preferred Stock, or (vii)
make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of the
1998 Convertible Preferred Stock, the Company may (to the extent permitted by
Delaware law) amend or supplement the 1998 Certificate of Designation to cure
any ambiguity, defect or inconsistency, to provide for uncertificated shares of
the 1998 Convertible Preferred Stock in addition to or in place of certificated
shares of the 1998 Convertible Preferred Stock or to make any change that would
provide any additional rights or benefits to the Holders of the 1998 Convertible
Preferred Stock or to make any change that the Board of Directors determines, in
good faith, is not materially adverse to Holders of the 1998 Convertible
Preferred Stock.
REISSUANCE
Shares of the 1998 Convertible Preferred Stock redeemed for or converted
into Common Stock or otherwise acquired by the Company will assume the status of
authorized but unissued shares of preferred stock undesignated as to series and
may be redesignated and reissued as part of any series of preferred stock, but
not as the 1998 Convertible Preferred Stock.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
OF THE 1998 CONVERTIBLE PREFERRED STOCK
The following discussion of certain of the Federal income tax consequences
to U.S. Holders (as defined below) of the purchase, ownership, and disposition
of the 1998 Convertible Preferred Stock and any Common Stock received as
dividends thereon or upon the exchange or conversion thereof. This discussion
summary is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the final, temporary and proposed Treasury Regulations
promulgated thereunder, and administrative pronouncements and rulings and
judicial decisions now in effect, all of which are subject to change (possibly
with retroactive effect) or different interpretations. This summary does not
purport to deal with all aspects of Federal income taxation that may be relevant
to an investor's decision to purchase shares of the 1998 Convertible Preferred
Stock, nor any tax consequences arising under the laws of any state, locality or
foreign jurisdiction. This summary is not intended to be applicable to all
categories of investors, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, persons other than U.S. Holders, persons
that hold the 1998 Convertible Preferred Stock or Common Stock as part of a
straddle or conversion transaction, or holders subject to the alternative
minimum tax, which may be subject to special rules. In addition, this discussion
is limited to persons who hold the 1998 Convertible Preferred Stock or Common
Stock as "capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the Code. ALL PROSPECTIVE PURCHASERS OF THE 1998
CONVERTIBLE PREFERRED STOCK ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS
REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP, AND DISPOSITION OF THE 1998 CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK RECEIVED AS DIVIDENDS THEREON OR UPON THE EXCHANGE OR CONVERSION
THEREOF.
As used herein, a "U.S. Holder" of a Security means an individual that is a
citizen or resident of the United States (including certain former citizens and
former long-term residents), a corporation, partnership or other entity created
or organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, or a trust if (i) a U.S. court
is able to exercise primary supervision over the administration of the trust and
(ii) one or more U.S. persons have the authority to control all substantial
decisions of the trust. A "Foreign Holder" is any beneficial owner of a Security
other than a U.S. Holder.
CONSEQUENCES TO U.S. HOLDERS
Distributions
The amount of any distribution with respect to the 1998 Convertible
Preferred Stock will be equal to the amount of cash or the fair market value of
the shares of Common Stock distributed. A share of Common Stock distributed by
the Company will be equal to the fair market value of Common Stock on the date
of distribution. A stockholder's holding period for such shares of Common Stock
will commence on the day following the date of distribution and will not include
such stockholder's holding period for the shares of the 1998 Convertible
Preferred Stock with respect to which the shares of Common Stock were
distributed. The amount of any distribution with respect to the 1998 Convertible
Preferred Stock, whether paid in cash or in shares of Common Stock, and the
amount of any distribution with respect to Common Stock will be treated as a
dividend, taxable as ordinary income to the recipient thereof, to the extent of
the Company's current or accumulated earnings and profits as determined under
Federal income tax principles. To the extent that the amount of such
distribution exceeds the current and accumulated earnings and profits of the
Company, the excess will be applied against and will reduce the holder's tax
basis in the 1998 Convertible Preferred Stock or Common Stock, as the case may
be. Any amount by which such distribution exceeds the amount treated as a
dividend and the amount applied against basis will be treated as capital gain.
Dividends to Corporate Shareholders
In general, a distribution that is treated as a dividend for Federal income
tax purposes and that is made to a corporate shareholder with respect to the
1998 Convertible Preferred Stock or Common Stock will qualify
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for the 70% dividends-received deduction under Section 243 of the Code. U.S.
Holders should note, however, that there can be no assurance that distributions
with respect to the 1998 Convertible Preferred Stock or Common Stock will not
exceed the amount of current or accumulated earnings and profits of the Company
in the future. Accordingly, there can be no assurance that the
dividends-received deduction will apply to distributions on the 1998 Convertible
Preferred Stock or Common Stock.
In addition, there are many exceptions and restrictions relating to the
availability of such dividends-received deduction such as restrictions relating
to (i) the holding period of stock the dividends on which are sought to be
deducted, (ii) debt-financed portfolio stock, (iii) dividends treated as
"extraordinary dividends" for purposes of Section 1059 of the Code, and (iv)
taxpayers that pay alternative minimum tax. Corporate shareholders should
consult their own tax advisors regarding the extent, if any, to which such
exceptions and restrictions (as amended by the Taxpayer Relief Act of 1997) may
apply to their particular factual situation.
Sale, Exchange or Redemption
Upon a sale, exchange or other disposition (other than a conversion or
exchange of the 1998 Convertible Preferred Stock for Common Stock) of the 1998
Convertible Preferred Stock or Common Stock, a U.S. Holder will generally
recognize capital gain or loss equal to the difference between the amount of
cash and the fair market value of property received by the holder in such sale,
exchange or other disposition and such U.S. Holder's adjusted tax basis in such
shares. Such gain or loss will be long-term gain or loss if the U.S. Holder's
holding period for the 1998 Convertible Preferred Stock or Common Stock is more
than 12 months. In the case of certain noncorporate taxpayers, including
individuals, long-term capital gains with respect to property held for more than
18 months are taxed at a maximum 20% Federal tax rate, and long-term capital
gains with respect to property held more than 12 months but no more than 18
months are taxed at a maximum 28% Federal tax rate.
Any gain or loss recognized by a holder upon redemption of the Preferred
Stock will be treated as gain or loss from the sale or exchange of the 1998
Convertible Preferred Stock, if, taking into account stock that is actually or
constructively owned as determined under Section 318 of the Code, (i) such
holder's interest in the 1998 Convertible Preferred Stock and Common Stock is
completely terminated as a result of the redemption, (ii) such holder's
percentage ownership in the Company's voting stock immediately after the
redemption is less than 80% of such percentage ownership immediately before such
redemption, or (iii) the redemption is "not essentially equivalent to a
dividend" (within the meaning of Section 302 of the Code).
If a redemption of the 1998 Convertible Preferred Stock or Common Stock is
treated as a distribution that is taxable as a dividend, the U.S. Holder will be
taxed on the payment received in the same manner as described above under
"-- Distributions," and the holder's adjusted tax basis in the redeemed shares
of the 1998 Convertible Preferred Stock or Common Stock will be transferred to
any remaining shares held by such holder in the Company. If the U.S. Holder does
not retain any stock ownership in the Company following the redemption, then
such holder may lose such basis completely.
Conversion or Exchange of the 1998 Convertible Preferred Stock
A U.S. Holder of the 1998 Convertible Preferred Stock will generally not
recognize gain or loss by reason of receiving Common Stock in exchange for the
1998 Convertible Preferred Stock upon the conversion or exchange of the
Preferred Stock, except that gain or loss will be recognized with respect to any
cash received in lieu of fractional shares and the fair market value of any
shares of Common Stock attributable to dividend arrearages will be treated as a
constructive distribution as described above under "-- Distributions". The
adjusted tax basis of Common Stock (including fractional share interests) so
acquired will be equal to the tax basis of the shares of the 1998 Convertible
Preferred Stock exchanged therefor and the holding period of Common Stock
received upon conversion will include the holding period of the shares of the
1998 Convertible Preferred Stock exchanged. The tax basis of any Common Stock
treated as a constructive distribution taxable as a dividend will be equal to
its fair market value on the date of the exchange.
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Adjustment of Conversion Price
If at any time the Company makes a distribution of property to holders of
Common Stock that would be taxable to such stockholders as a dividend for
Federal income tax purposes and, in accordance with the antidilution provisions,
the Conversion Price of the 1998 Convertible Preferred Stock is decreased, the
amount of such decrease may be deemed to be the payment of a taxable dividend to
holders of the 1998 Convertible Preferred Stock. For example, a decrease in the
Conversion Price in the event of distributions of indebtedness or assets of the
Company will generally result in deemed dividend treatment to holders of the
1998 Convertible Preferred Stock, but generally, a decrease in the event of
stock dividends or the distribution of rights to subscribe for Common Stock will
not.
Backup Withholding
Under the backup withholding provisions of the Code and applicable Treasury
Regulations, a U.S. Holder of the 1998 Convertible Preferred Stock or Common
Stock may be subject to backup withholding at the rate of 31% with respect to
dividends paid on, or the proceeds of a sale, exchange or redemption of, the
1998 Convertible Preferred Stock or Common Stock unless such holder (a) is a
corporation or comes within certain other exempt categories and when required
demonstrates this fact or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. The
amount of any backup withholding from a payment to a U.S. Holder will be allowed
as a credit against the holder's Federal income tax liability and may entitle
such holder to a refund, provided that the required information is furnished to
the Internal Revenue Service.
Consequences to Foreign Holders
Dividends. Dividends on the 1998 Convertible Preferred Stock (including
construction distributions of Common Stock resulting from an adjustment and
dividends in the form of additional shares of Common Stock) or on Common Stock
issuable upon conversion of the 1998 Convertible Preferred Stock paid to a
Foreign Holder that are not effectively connected with a trade or business
carried on by such Foreign Holder in the United States are generally subject to
a 30% United States withholding tax. Such U.S. withholding tax will apply to
amounts distributed to a Foreign Holder without regard to whether such amounts
are less than, equal to, or in excess of, current and accumulated earnings and
profits of the Company. However, to the extent that an amount distributed to a
Foreign Holder exceeds the current and accumulated earnings and profits of the
Company, such holder may obtain a refund of excess amounts withheld by filing an
appropriate claim therefor with the IRS. The rate of withholding may be reduced
to the extent provided by a tax treaty to which the United States is a party if
the recipient of the dividends is entitled to the benefits of the treaty.
Foreign Holders seeking a reduction in the rate of withholding under an income
tax treaty may be required, and Foreign Holders seeking an exemption for
dividends effectively connected with a trade or business carried on by such
Foreign Holder in the United States (as described in the next paragraph) will be
required, to comply with certain certification and other requirements. A Foreign
Holder that is eligible for a reduced rate of United States withholding tax
pursuant to a tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
Under current United States Treasury Regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and, under the current interpretation of such
regulations, for purposes of determining the applicability of an income tax
treaty rate.
Recently published final Treasury Regulations (the "1997 Withholding
Regulations"), generally effective for payments after December 31, 1999, provide
certain presumptions which differ from the presumption described above. Under
the 1997 Withholding Regulations, a Foreign Holder of the 1998 Convertible
Preferred Stock or Common Stock that wishes to claim the benefit of a treaty
rate is required to satisfy applicable certification requirements. In addition,
the 1997 Withholding Regulations provide that dividend payments are generally
subject to information reporting and backup withholding unless applicable
certification
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requirements are satisfied. The 1997 Withholding Regulations also require, in
the case of dividends with respect to the 1998 Convertible Preferred Stock or
Common Stock held by a foreign partnership, that (x) the certification
requirements described above be provided by the partners rather than by the
foreign partnership and (y) the partnership provide certain information, which
in certain circumstances may include a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
If the dividends on the 1998 Convertible Preferred Stock or Common Stock
issuable upon conversion of the 1998 Convertible Preferred Stock are effectively
connected with a trade or business carried on in the United States by a Foreign
Holder, or alternatively, if a tax treaty applies, attributable to a United
States permanent establishment maintained by the Foreign Holder, such dividends
will be subject to tax at the rates and in the manner applicable to U.S.
Holders. Effectively connected dividends or dividends attributable to a United
States permanent establishment, as the case may be, received by a corporate
Foreign Holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. Foreign Holders seeking a
reduction pursuant to any income tax treaty must comply with certain
certification and other requirements.
Gain on Disposition of the 1998 Convertible Preferred Stock or Common
Stock. Subject to the discussion below under "Certain Federal Income Tax
Consequences -- Consequences to Foreign to Holders -- Backup Withholding",
Foreign Holders generally will not be subject to U.S. Federal income tax in
respect of gain recognized on a disposition (including a redemption that is not
treated as a dividend) of the 1998 Convertible Preferred Stock or Common Stock
issuable upon conversion of the 1998 Convertible Preferred Stock unless (a) the
gain is effectively connected with a trade or business conducted by the Foreign
Holder within the United States or, alternatively, if a tax treaty applies,
attributable to a United States permanent establishment maintained by the
Foreign Holder (in which cases such gain will be subject to tax at the rates and
in the manner applicable to U.S. persons and, if the holder is a foreign
corporation, the branch profits tax described above may also apply), (b) in the
case of an individual Foreign Holder, such holder is present in the United
States for at least 183 days in the taxable year of the disposition and either
the income from the disposition is attributable to an office or other fixed
place of business maintained by the holder in the United States or the holder
has a "tax home" in the United States, (c) the Foreign Holder is subject to tax
pursuant to the provisions of United States Federal income tax laws applicable
to certain United States expatriates, or (d) the Company is a "United States
real property holding corporation" for the U.S. Federal income tax purposes. The
Company does not believe that it has been, currently is, or will be, a United
States real property holding corporation.
Federal Estate Tax. The 1998 Convertible Preferred Stock or Common Stock
issuable upon conversion of the 1998 Convertible Preferred Stock owned or
treated as being owned by an individual who is not a citizen or resident (as
defined for U.S. Federal estate tax purposes) of the United States at the time
of death will be includible in such individual's gross estate for U.S. Federal
estate tax purposes unless an applicable estate tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Company must report annually to the IRS and to each Foreign Holder the
amount of dividends paid to, and the tax withheld with respect to, each Foreign
Holder. These reporting requirements apply regardless of whether withholding tax
was reduced or eliminated by an applicable tax treaty. Copies of this
information also may be made available under the provisions of a specific tax
treaty or agreement with the tax authorities in the country in which the Foreign
Holder resides or is established.
United States backup withholding (which generally is imposed at the rate of
31% on certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) generally will not
apply to dividends paid on the 1998 Convertible Preferred Stock or Common Stock
before January 1, 2000 that are either (i) subject to withholding at the 30%
rate (or at a reduced rate under an applicable treaty) or (ii) paid to an
address outside of the United States. Dividends paid after December 31, 1999
generally will be subject to backup withholding at a 31% rate unless the Foreign
Holder provides a valid Form W-8 or is a corporation or other exempt recipient
that meets certain requirements.
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The payment of proceeds from the disposition of the 1998 Convertible
Preferred Stock or Common Stock to or through a United States office of a broker
generally will be subject to information reporting and backup withholding unless
either (i) the Foreign Holder is a corporation or other exempt recipient meeting
certain requirements or (ii) the Foreign Holder provides a valid Form W-8. The
payment of proceeds from the disposition of the 1998 Convertible Preferred Stock
or Common Stock to or through a non-U.S. office of a non-U.S. broker generally
will not be subject to backup withholding and information reporting. However,
for payments of proceeds before January 1, 2000, in the case of proceeds from
the disposition of the 1998 Convertible Preferred Stock or Common Stock effected
at a foreign office of a broker that is: (i) a United States person; (ii) a
"controlled foreign corporation" for United States Federal income tax purposes;
or (iii) a foreign person 50% or more of whose gross income from certain periods
is effectively connected with a United States trade or business, (a) backup
withholding will not apply unless such broker has actual knowledge that the
owner is not a Foreign Holder, and (b) information reporting will apply unless
the broker has documentary evidence in its files that the owner is a Foreign
Holder (and the broker has no actual knowledge to the contrary). After December
31, 1999, a broader class of foreign brokers having certain connections with the
United States will be subject to the same backup withholding and information
reporting as discussed in the preceding sentence.
Payment made through a foreign intermediary satisfying certain requirements
will not be subject to either backup withholding or information reporting.
Prospective investors should consult with their own tax advisers regarding these
rules, and in particular with respect to whether the use of a particular broker
would subject the investor to potential information reporting and backup
withholding.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Foreign
Holder's United States Federal income tax liability, if any, provided that the
required information is timely furnished to the IRS.
CONSEQUENCES TO THE COMPANY
Limitation on Use of Net Operating Losses
Under Section 382 of the Code, if the percentage of stock (by value) of a
corporation (the "Loss Corporation") that is owned by one or more "five-percent
shareholders" has increased by more than 50 percentage points over the lowest
percentage of stock owned by the same shareholders during a three-year testing
period (an "Ownership Change"), the use of pre-Ownership Change net operating
losses of the Loss Corporation following such Ownership Change will be limited
based on the value of the Loss Corporation on the date the Ownership Change
occurs (a "Section 382 Limitation"). As of the end of its most recent taxable
year, the Company had net operating losses that were subject to Section 382
Limitations. Although the Company believes that the issuance of the 1998
Convertible Preferred Stock should not result in an Ownership Change, future
equity issuances or transactions among shareholders may trigger an Ownership
Change. If such an Ownership Change occurs, the Company's use of its net
operating losses will be subject to a Section 382 Limitation based on the value
of the Company on the date of such an Ownership Change.
In light of the current Section 382 Limitations, and other current
limitations on the use of its net operating losses, the Company has reflected
these net operating losses on its financial statements as a deferred tax asset,
but has taken a full valuation allowance against (and thereby fully eliminated)
the deferred tax asset under generally accepted accounting principles.
47
<PAGE> 48
LEGAL MATTERS
The validity of the Common Stock is passed upon for the Company by Riordan
& McKinzie, Costa Mesa, California. Carl W. McKinzie, a director and stockholder
of the Company, is a stockholder of Riordan & McKinzie. The Company has granted
an option covering shares of Common Stock to another stockholder of Riordan &
McKinzie. Also, certain attorneys of Riordan & McKinzie beneficially own
additional shares of the Company.
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 and 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.
48
<PAGE> 49
GLOSSARY
Access charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
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.
Data Place -- The Data Place, Inc.
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.
A-1
<PAGE> 50
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.
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.
A-2
<PAGE> 51
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND THEREIN, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER, DEALER OR AGENT.
NEITHER THIS PROSPECTUS NOR ANY PROSPECTUS SUPPLEMENT SHALL CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE HEREIN OR IN ANY PROSPECTUS SUPPLEMENT IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR OF SUCH PROSPECTUS
SUPPLEMENT.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Documents Incorporated by Reference... 3
Risk Factors.......................... 4
The Company........................... 17
Use of Proceeds....................... 17
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 18
Selling Holders....................... 19
Plan of Distribution.................. 22
Description of Capital Stock.......... 23
Description of Depositary Shares...... 26
Description of 1998 Convertible
Preferred Stock..................... 31
Certain U.S. Federal Income Tax
Consequences of the 1998 Convertible
Preferred Stock..................... 43
Legal Matters......................... 48
Experts............................... 48
Glossary.............................. A-1
</TABLE>
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[IXC LOGO]
IXC COMMUNICATIONS, INC.
3,105,000 DEPOSITARY SHARES EACH REPRESENTING 1/20 OF A SHARE OF 6 3/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, 155,250 SHARES OF 6 3/4% CUMULATIVE
CONVERTIBLE PREFERRED STOCK, 2,634,377 SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF, OR PAYABLE AS DIVIDENDS ON, THE DEPOSITARY SHARES OR THE 6 3/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK AND 261,671 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
JUNE 23, 1998
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