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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20803
IXC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 74-2644120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5000 PLAZA ON THE LAKE, SUITE 200
AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (512) 328-1112
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the Company outstanding) was 31,542,891 on November 10,
1997.
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1997 and December
31, 1996............................................................ 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1997 and 1996................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996......................................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks.......... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 19
Item 2. Changes in Securities................................................ 19
Item 3. Defaults Upon Senior Securities...................................... 20
Item 4. Submission of Matters to a Vote of Security Holders.................. 20
Item 5. Other Information.................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................... 21
SIGNATURE.............................................................................. 25
2
3
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
1996
SEPTEMBER ------------------
30, (SEE NOTE 1)
1997
-----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 283,963 $ 61,340
Accounts receivable and other receivables, net of allowance
for doubtful accounts of $12,702 at September 30, 1997 and
$4,030 at December 31, 1996............................... 79,362 47,568
Other current assets......................................... 3,978 2,197
--------- --------
Total current assets................................. 367,303 111,105
Property and equipment......................................... 578,121 337,742
Less: accumulated depreciation................................. (101,429) (69,133)
--------- --------
476,692 268,609
Escrow under Senior Notes...................................... -- 51,412
Investment in unconsolidated subsidiary........................ 10,308 5,486
Deferred charges and other non-current assets.................. 35,570 22,539
--------- --------
Total assets......................................... $ 889,873 $459,151
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other current liabilities............... $ 132,378 $ 74,945
Accrued interest............................................. 17,907 8,906
Current portion of long-term debt and capital lease
obligations............................................... 7,760 6,750
--------- --------
Total current liabilities............................ 158,045 90,601
Long-term debt and capital lease obligations, less current
portion...................................................... 295,959 295,531
Long-term portion of unearned fiber usage revenue.............. 50,132 5,302
Other noncurrent liabilities................................... 10,916 4,238
7 1/4% Junior Convertible Preferred Stock; $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 1,036,574 shares issued and outstanding (aggregate
liquidation preference of $103,657, including dividends of
$3,657 at September 30, 1997)................................ 99,354 --
12 1/2% Junior Exchangeable Preferred Stock, $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 300,000 shares issued and outstanding (aggregate
liquidation preference of $304,167, including accrued
dividends of $4,167 at September 30, 1997)................... 292,576 --
Stockholders' equity (deficit):
10% Junior Series 3 Cumulative Preferred Stock, $.01 par
value; authorized -- 3,000,000 shares of all classes of
Preferred Stock; 12,550 shares issued and outstanding
(aggregate liquidation preference of $20,484 at September
30, 1997)................................................. 13 13
Common stock, $.01 par value; 100,000,000 shares authorized:
shares issued and outstanding -- 30,923,690 at September
30, 1997 and 30,795,014 at December 31, 1996.............. 309 308
Additional paid-in capital..................................... 118,321 123,434
Accumulated deficit............................................ (135,752) (60,276)
--------- --------
Total stockholders' equity (deficit)................. (17,109) 63,479
--------- --------
Total liabilities and stockholders' equity
(deficit).......................................... $ 889,873 $459,151
========= ========
See accompanying notes.
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net operating revenues:
Private line.................................. $ 41,948 $ 25,766 $111,311 $ 72,397
Switched long distance........................ 70,292 35,250 173,704 57,876
-------- ------- -------- --------
Net operating revenues................ 112,240 61,016 285,015 130,273
Operating expenses:
Cost of communication services................ 83,889 43,774 227,021 91,017
Operations and administration................. 22,240 12,083 57,471 33,286
Depreciation and amortization................. 17,666 7,280 41,031 19,934
-------- ------- -------- --------
Operating loss........................ (11,555) (2,121) (40,508) (13,964)
Interest income................................. 2,198 1,220 4,436 1,473
Interest income on escrow under Senior Notes.... -- 1,804 203 6,441
Interest expense................................ (7,960) (9,298) (23,720) (28,658)
Other, net...................................... (1,757) -- (1,757) --
Equity in net loss of unconsolidated
subsidiaries.................................. (7,317) (10) (13,668) (24)
-------- ------- -------- --------
Loss before benefit (provision) for income taxes
and minority interest......................... (26,391) (8,405) (75,014) (34,732)
Benefit (provision) for income taxes............ (211) 2,934 41 5,699
Minority interest............................... (186) (153) (503) (357)
-------- ------- -------- --------
Net loss........................................ (26,788) (5,624) (75,476) (29,390)
Dividends applicable to preferred stock......... (6,727) (437) (9,599) (1,302)
-------- ------- -------- --------
Net loss applicable to common and common
equivalent stockholders....................... $(33,515) $ (6,061) $(85,075) $(30,692)
-------- ------- -------- --------
Net loss per common and common equivalent
share......................................... $ (1.08) $ (0.19) $ (2.76) $ (1.13)
======== ======= ======== ========
Weighted average common and common equivalent
shares........................................ 30,897 31,311 30,832 27,126
======== ======= ======== ========
See accompanying notes.
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- --------
Net cash provided by operating activities......................... $ 17,494 $ 7,007
Investing activities
Release of funds from escrow under Senior Notes................. 69,564 70,125
Deposit into escrow under Senior Notes.......................... (18,152) --
Investments in unconsolidated subsidiary........................ (17,742) (1,988)
Purchase of property and equipment.............................. (202,477) (73,259)
--------- --------
Net cash used in investing activities............................. (168,807) (5,122)
Financing activities
Net proceeds from the sale of convertible preferred stock....... 95,696 --
Principal payments on long-term debt and capital lease
obligations.................................................. (10,139) (11,585)
Net proceeds from the sale of exchangeable preferred stock...... 288,287 --
Net proceeds from issuance of common stock -- initial public
offering..................................................... -- 81,515
Proceeds from issuance of common stock -- private placement..... -- 12,500
Other financing activities...................................... 92 (1,286)
--------- --------
Net cash provided by financing activities......................... 373,936 81,144
--------- --------
Net increase in cash and cash equivalents......................... 222,623 83,029
Cash and cash equivalents at beginning of period.................. 61,340 6,915
--------- --------
Cash and cash equivalents at end of period........................ $ 283,963 $ 89,944
========= ========
Supplemental disclosure of cash flow information:
Cash paid (received) for:
Interest..................................................... $ 19,467 $ 19,156
========= ========
Taxes........................................................ $ 120 $ (864)
========= ========
See accompanying notes.
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation for
the periods indicated have been included. Operating results for the three month
and nine month periods ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997. The
Balance Sheet at December 31, 1996 has been derived from the audited financial
statements at that date, but does not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements (including the notes thereto)
for the year ended December 31, 1996. Certain amounts shown in the 1996
financial statements have been reclassified to conform to the 1997 presentation.
2. LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Loss per common and common equivalent share is based on net loss less
preferred stock dividend requirements, divided by the weighted average common
and common equivalent shares outstanding during the period. Outstanding options
are included in the calculation to the extent they are dilutive. Loss per share
on a fully diluted basis is not presented as the fully diluted effect is either
antidilutive or not materially different from primary loss per common and common
equivalent share, as computed.
3. INCOME TAXES
The Company has determined that a valuation allowance should be applied
against a portion of the deferred tax assets related to the net operating loss
incurred in 1997 due to uncertainty regarding its realizability. The difference
between the tax benefit recorded for the nine months ended September 30, 1997
and the benefit calculated at the federal statutory rate is primarily due to the
valuation allowance applied against the deferred tax assets.
4. COMMITMENTS AND CONTINGENCIES
During 1997, the Company has made and will continue to make material
commitments related to the expansion of its fiber optic network.
During 1997, the Company has entered into several agreements with major
long distance carriers for the sale of dark fiber amounting to $243 million.
Although these agreements provide for certain penalties if the Company does not
complete construction of the defined routes within the time frame specified in
the agreements, management does not anticipate that the Company will incur any
material penalties under these provisions.
On April 4, 1997 Tel-Central Communications, Inc. ("Tel-Central") filed a
complaint against IXC Long Distance, Inc., one of the Company's subsidiaries, in
the United States District Court in the Western District of Missouri, after the
Company terminated service to Tel-Central for failure to pay for services. On
May 23, 1997, Tel-Central filed a voluntary Chapter 11 petition in bankruptcy.
The case was stayed as a result of the bankruptcy proceedings until August 1997,
when Tel-Central dismissed the action.
From time to time the Company is involved in various legal proceedings
arising in the ordinary course of business, some of which are covered by
insurance. In the opinion of the Company's management, none of the
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
claims relating to such proceedings will have a material effect on the financial
condition or results of operations of the Company.
5. STOCK OPTIONS
During the quarter ended September 30, 1997, the Company granted stock
options for an aggregate of 751,000 shares of common stock under the 1996 Stock
Plan and the 1997 Special Executive Stock Plan. At September 30, 1997 stock
options covering 2,751,046 shares of common stock were outstanding.
6. PROSPECTIVE ACCOUNTING CHANGES
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS
No. 128"), which simplifies the calculation of earnings per share. Under SFAS
No. 128, stock options and other equity instruments are excluded from the
calculation of "basic earnings per share", which will replace primary earnings
per share disclosures. SFAS No. 128 is effective for periods ending after
December 15, 1997. The Company believes that its future adoption of SFAS No. 128
will not have a significant impact on earnings per share disclosures for the
periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 131 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
7. PREFERRED STOCK
In April 1997, the Company issued $100 million of 7 1/4% Junior Convertible
Preferred Stock Due 2007 ("Convertible Preferred Stock"). The net proceeds of
approximately $95.7 million from the offering were used to fund capital
expenditures, investments in an unconsolidated subsidiary and general corporate
purposes. Resales of the Convertible Preferred Stock and the common stock
issuable upon conversion thereof were registered under the Securities Act of
1933, as amended (the "Securities Act") in August 1997 in compliance with the
registration rights agreement entered into by the Company with the initial
purchasers of the Convertible Preferred Stock. On March 31, 2007, the
Convertible Preferred Stock must be redeemed by the Company at a price equal to
the liquidation preference plus accrued and unpaid dividends; thus it is
"mandatorily redeemable" and is not reported in stockholders' equity. Dividends
payable prior to or on June 30, 1999 are, at the option of the Company, payable
in cash or through the issuance of additional shares of Convertible Preferred
Stock equal to the dividend amount divided by the liquidation preference of such
additional shares. After March 31, 1999, to the extent and for so long as the
Company is not permitted to pay cash dividends on the Convertible Preferred
Stock by the terms of any then outstanding indebtedness or any other agreement
or instrument to which the Company is subject, the Company will be required to
pay dividends, which shall accrue at the rate per annum of 8 3/4%, through the
issuance of additional shares of Convertible Preferred Stock. Payment of cash
dividends on the Convertible Preferred Stock is not currently permitted under
the indenture for the Company's 12 1/2% Senior Notes due 2005 until certain
financial conditions have been met. During September 1997, the Company issued
18,451 additional shares of Convertible Preferred Stock in satisfaction of its
September 1997 dividend requirements.
In August 1997, the Company issued $300 million of 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock"). The
net proceeds of approximately $288.3 million from the offering are being used to
fund capital expenditures, investments in the Company's unconsolidated
subsidiaries
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
and general corporate purposes. The Exchangeable Preferred Stock has not been
registered under the Securities Act and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements. On August 15, 2009, the Exchangeable Preferred Stock must be
redeemed by the Company at a price equal to the liquidation preference plus
accrued and unpaid dividends; thus it is "mandatorily redeemable" and is not
included in stockholders' equity. Dividends on the Exchangeable Preferred Stock
will accrue at a rate of 12 1/2% per annum of the liquidation preference thereof
and will be payable quarterly in arrears on February 15, May 15, August 15 and
November 15 of each year commencing November 15, 1997. Dividends payable prior
to or on August 15, 2000 are, at the option of the Company, payable in cash or
through issuance of additional shares of Exchangeable Preferred Stock equal to
the dividend amount divided by the liquidation preference of such additional
shares. The registration rights agreement entered into by the Company with the
initial purchasers of the Exchangeable Preferred Stock requires that the Company
file an exchange offer registration statement (the "Exchange Offer Registration
Statement") with respect to an offer (the "Registered Exchange Offer") to
exchange the Exchangeable Preferred Stock for a new series of Exchangeable
Preferred Stock registered under the Securities Act. In October 1997, the
Company filed the Exchange Offer Registration Statement with the Securities and
Exchange Commission. If, on or before January 19, 1998, the Registered Exchange
Offer has not been consummated, or a shelf registration statement has not been
declared effective with respect to the Exchangeable Preferred Stock, the
Exchangeable Preferred Stock dividend rate is subject to increase pursuant to
the terms of the registration rights agreement. After February 15, 2001,
interest on the Exchangeable Preferred Stock may be paid only in cash. Payment
of cash dividends on the Exchangeable Preferred Stock is not currently permitted
under the indenture for the Company's 12 1/2% Senior Notes due 2005 until
certain financial conditions have been met.
8. PSINET INC.
In July 1997 the Company announced agreements with PSINet Inc. ("PSINet").
Under the terms of the PSINet agreements, after consummation of the transaction,
the Company will provide PSINet with an indefeasible right to use 10,000 miles
of OC-48 transmission capacity on its Network over a 20-year period in exchange
for 20% (post-issuance) of PSINet common stock. In addition, if the value of the
PSINet common stock received by the Company is less than $240 million at the
earlier of one year after the final delivery of the transmission capacity
(scheduled for late-1999) or four years after closing, PSINet will pay the
Company cash or, at PSINet's option, deliver additional PSINet common stock to
bring the value of the Company's investment to $240 million. Upon delivery of
the transmission capacity to PSINet, the Company will also receive a maintenance
fee which, when all the capacity has been delivered, will be approximately $11.5
million per year. The Company expects to consummate the transactions
contemplated by the PSINet agreements upon the satisfaction of certain
conditions, including the approval of PSINet stockholders. There can be no
assurance that such conditions will be satisfied or that the PSINet transaction
will be consummated.
9. SUBSEQUENT EVENTS
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 will be
owned 40 percent by the Company, 40 percent by Telenor Global Services AS, and
20 percent by Clarion Resources Communications Corporation, a U.S.-based
telecommunications company in which Telenor owns a controlling interest. Under
the terms of the agreement, the Company will have two seats on the joint
venture's board.
In October 1997, the Company consummated its offer to exchange shares of
its Common Stock for the 12,550 outstanding shares of its 10% Junior Series 3
Cumulative Redeemable Preferred Stock (the "Series 3 Preferred Stock"). Each
holder that tendered shares of Series 3 Preferred Stock prior to the expiration
date of
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the tender offer (October 31, 1997) received approximately 49.85 shares of
Common Stock for each share of Series 3 Preferred Stock. The number of shares of
Common Stock issued for each share of Series 3 Preferred Stock was calculated by
dividing the aggregate per share liquidation preference, including accrued and
unpaid dividends, of one share of Series 3 Preferred Stock as of October 31,
1997 by $33.00, the last reported sale price of the Company's Common Stock on
the Nasdaq National Market at that date. The aggregate liquidation preference,
including accrued and unpaid dividends, of the Series 3 Preferred Stock at the
tender date was approximately $20.6 million ($1,645 per share for the 12,550
shares outstanding). Over 95% of the shares of Series 3 Preferred Stock were
tendered prior to the expiration of the exchange offer.
10. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. The Senior Notes are unconditionally guaranteed, jointly and
severally, by certain wholly owned direct and indirect subsidiaries (the
"Subsidiary Guarantors"). The obligations of each Subsidiary Guarantor are
limited to the minimum extent necessary to prevent the guarantee from violating
or becoming voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
Certain subsidiaries of the Company do not guarantee the Senior Notes (the
"Non-Guarantor Subsidiaries"). The claims of creditors of Non-Guarantor
Subsidiaries have priority over the rights of the Company to receive dividends
or distributions from such subsidiaries.
The equity method has been used by the Company with respect to investments
in subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented based on management's
determination that they do not provide additional information that is material
to investors. Presented below is condensed consolidating financial information
for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as
of and for the nine months ended September 30, 1997.
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1997
---------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Current assets:
Cash and cash equivalents... $295,479 $(21,708) $ 10,192 $ -- $283,963
Accounts receivable and
other receivables, net... 974 57,779 20,609 -- 79,362
Other current assets........ 1,643 2,299 36 -- 3,978
-------- -------- -------- ---------- --------
Total current
assets............ 298,096 38,370 30,837 -- 367,303
Property and equipment, net... 9,895 415,752 51,305 (260) 476,692
Escrow under Senior Notes..... -- -- -- -- --
Due from affiliates........... 448,905 -- 11,202 (460,107) --
Deferred charges and other
non-current assets.......... 10,859 9,679 32,170 (6,830) 45,878
-------- -------- -------- ---------- --------
Total assets........ $767,755 $463,801 $ 125,514 $ (467,197) $889,873
======== ======== ======== ========== ========
Current liabilities:
Accounts payable, accrued
interest and other
current liabilities...... $ 27,196 $ 75,082 $ 48,008 $ (1) $150,285
Current portion of long-term
debt and capital lease
obligations.............. 46 998 6,716 -- 7,760
-------- -------- -------- ---------- --------
Total current
liabilities....... 27,242 76,080 54,724 -- 158,045
Long-term debt and capital
lease obligations, less
current portion............. 278,189 2,850 14,920 -- 295,959
Due to affiliates............. -- 379,231 89,367 (468,598) --
Investments in and advances to
unconsolidated
subsidiaries................ 86,737 25,626 -- (112,363) --
Other noncurrent
liabilities................. -- 65,379 -- (4,331) 61,048
Convertible preferred stock... 99,354 -- -- -- 99,354
Exchangeable preferred
stock....................... 292,576 -- -- -- 292,576
Stockholders' equity
(deficit):
Preferred stock............. 13 -- 2,585 (2,585) 13
Common stock................ 309 3 -- (3) 309
Additional paid-in
capital.................. 118,321 30,054 36,347 (66,401) 118,321
Retained earnings
(accumulated deficit).... (134,986) (115,422) (72,429) 187,085 (135,752)
-------- -------- -------- ---------- --------
Total stockholders'
(deficit)......... (16,343) (85,365) (33,497) 118,096 (17,109)
-------- -------- -------- ---------- --------
Total liabilities
and stockholders'
(deficit)......... $767,755 $463,801 $ 125,514 $ (467,197) $889,873
======== ======== ======== ========== ========
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Net operating revenue:
Private line................ $ 43 124,690 10,553 (23,975) 111,311
Switched long distance...... -- 88,484 157,135 (71,915) 173,704
-------- -------- -------- -------- --------
Net operating
revenues.......... 43 213,174 167,688 (95,890) 285,015
Operating expenses:
Cost of communication
services................. 3 156,634 165,637 (95,253) 227,021
Operations and
administration........... (53) 40,406 17,823 (705) 57,471
Depreciation and
amortization............. 1,202 30,900 8,997 (68) 41,031
-------- -------- -------- -------- --------
Operating loss...... (1,109) (14,766) (24,769) 136 (40,508)
Interest income............... 32,951 510 307 (29,332) 4,436
Interest income on escrow
under Senior Notes.......... 203 -- -- 203
Interest expense.............. (27,073) (20,330) (5,648) 29,331 (23,720)
Other, net.................... -- (1,757) -- -- (1,757)
Equity in net loss of
unconsolidated
subsidiaries................ (80,002) (32,335) (12,231) 110,900 (13,668)
-------- -------- -------- -------- --------
Loss before benefit
(provision) for income taxes
and minority interest....... (75,030) (68,678) (42,341) 111,035 (75,014)
Benefit (provision) for
income taxes............. (446) (299) 786 41
Minority Interest............. -- -- -- (503) (503)
-------- -------- -------- -------- --------
Net loss...................... $(75,476) $(68,977) $ (41,555) $110,532 $(75,476)
======== ======== ======== ======== ========
See accompanying notes.
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IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
IXC GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Net cash provided by (used in)
operating activities......... $ 27,991 $ (13,659) $ 3,983 $ (821) $ 17,494
Investing activities:
Release of funds from escrow
under Senior Notes........ 69,564 -- -- -- 69,564
Deposits into escrow under
Senior Notes.............. (18,152) -- -- -- (18,152)
Investments in unconsolidated
subsidiary................ -- -- (17,742) -- (17,742)
Purchase of property and
equipment................. (9,533) (176,543) (16,401) (202,477)
-------- --------- -------- ------- ---------
Net cash provided by (used
in), investing
activities................ 41,879 (176,543) (34,143) -- (168,807)
Financing activities:
Net proceeds from convertible
preferred stock........... 95,696 -- -- -- 95,696
Net proceeds from
exchangeable preferred
stock..................... 288,287 -- -- -- 288,287
Payments from (advance to)
affiliates................ (223,951) 179,995 43,956 -- --
Principal payments on
long-term debt and capital
lease obligations......... 122 (2,046) (8,215) -- (10,139)
Other financing activities... 92 -- -- -- 92
-------- --------- -------- ------- ---------
Net cash provided by
financing activities...... 160,246 177,949 35,741 -- 373,936
Net increase (decrease) in
cash and cash
equivalents............... 230,116 (12,253) 5,581 (821) 222,623
Cash and cash equivalents at
beginning of period....... 65,363 (9,455) 4,611 821 61,340
-------- --------- -------- ------- ---------
Cash and cash equivalents at
end of period............. $295,479 $ (21,708) $ 10,192 $ -- $283,963
======== ========= ======== ======= =========
See accompanying notes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained below, the matters
discussed in this item are forward-looking statements that involve a number of
risks and uncertainties. The Company's actual liquidity needs, capital resources
and results may differ materially from the discussion set forth in the
forward-looking statements. For a discussion of important factors that may cause
the actual results, performance or achievements of the Company to be materially
different from those expressed or implied by the forward-looking statements, see
"Business -- Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. In light of such risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
item will in fact transpire.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996
Net operating revenue for the third quarter and year-to-date 1997 increased
by 84.0% and 118.8% over the comparable 1996 periods, due mainly to the
continuing implementation of the Company's switched services business. Revenue
for the switched services business increased 99.4% and 200.1% for the 1997 third
quarter and year-to-date over 1996. Billable minutes of use ("MOUs") increased
over 1996 by 120.1% to 825.3 million minutes for the quarter and 245.4% to 2.1
billion minutes year-to-date. Revenue for the Company's private line business
increased 62.8% for the quarter and 53.8% year-to-date over 1996 due to
increased demand for capacity and the availability of additional capacity
resulting from the Company's network expansion.
Cost of communication services consists primarily of access charges paid to
Local Exchange Carriers ("LECs") and transmission lease payments to, and
exchanges with, other carriers. These costs increased 91.6% for the quarter and
149.4% year-to-date over 1996 due to additional leases supporting the Company's
private line and switched services businesses, MOUs obtained from other carriers
and access charges paid to LECs in connection with the switched services
business. The Company has historically had a relatively low cost of
communication services as a percentage of revenues because substantially all its
revenues were derived from private line services, generally provided at a
relatively low cost over its own network. Expenses in the switched services
business are substantially greater than the private line business due to the
additional cost of LEC access charges, leases for long distance circuits and
MOUs obtained from other carriers. In July 1997 the Federal Communications
Commission ("FCC") mandated rate reductions for the connection charges paid by
long distance carriers to LEC's. The favorable impact of these rate reductions
during the third quarter are reflected in the financial statements. The Company
expects its cost of communication services as a percentage of revenue to
increase over historical results as the switched services revenue becomes a
larger share of the Company's business.
Operations and administration expenses for the quarter and year-to-date for
1997 have increased 84.1% and 72.7% over 1996 primarily as a result of costs
associated with the Company's switched network. Although the Company has been
successful in establishing its nationwide switched services business with
significant revenues, the Company's operating loss, plus depreciation and
amortization ("EBITDA") in the switched services business has been negative and
the Company believes it is likely to remain negative for the balance of the
year.
Depreciation and amortization for the quarter and year-to-date for 1997
increased 142.7% and 105.8% over the comparable 1996 periods due to the increase
in depreciable assets related to the Company's network expansion. Depreciation
and amortization will continue to increase in conjunction with spending on
capital assets to increase network capacity.
Interest income for the quarter and year-to-date for 1997 decreased over
1996 by $.8 million and $3.3 million as proceeds from the Company's 1996 and
1997 debt and equity placements were used to construct the Company's network and
operate its business. The Company's sale of $300 million of its 12 1/2% Junior
Exchangeable Preferred Stock Due 2009 (the "Exchangeable Preferred Stock") which
occurred in August 1997, did not have a significant impact on interest income
for the quarter.
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Interest expense for the quarter and year-to-date periods decreased over
1996 by $1.3 million and $4.9 million. Total interest expense expensed for the
year-to-date 1997 period were $23.7 million, compared to $28.7 million for the
comparable 1996 period. Capitalization of interest reduced interest expense by
$4.9 million year-to-date in 1997 compared to $1.4 million in 1996.
"Other, net" represents the net book value of a write-off of an operating
software module retired during 1997.
Equity in net loss of unconsolidated subsidiaries increased by $7.3 million
for the third quarter and $13.6 million for the year-to-date 1997 over 1996 due
to both the increased equity portion attributed to the Company and the increased
losses in the Mexican telecommunications investment described below. The losses
are expected to continue for this investment during the foreseeable future.
The income tax benefit for the quarter and year-to-date for 1997 decreased
by $3.1 million and $5.7 million over 1996. This decrease occurred because
although the tax benefit of the Company's losses are being fully reserved in
both 1997 and 1996, in 1996 the Company recognized tax benefits related to the
favorable resolution of federal income tax examinations.
The net loss applicable to common and common equivalent shareholders for
the quarter and nine months ended September 30, 1997 were larger than the
comparable 1996 periods due to the factors described above and the increase in
preferred stock dividends in 1997. The increase in preferred stock dividends of
$6.3 million for the quarter, and $8.3 million for the nine month period is the
result of issuing the Convertible Preferred Stock in April 1997 and the
Exchangeable Preferred Stock in August 1997.
LIQUIDITY AND CAPITAL RESOURCES
Actual Results
The Company's private line operations have historically provided positive
cash flow from operations, which has provided adequate liquidity to meet the
Company's operational needs. However, the Company's capital expenditures and,
since the issuance of the Company's 12 1/2% Senior Notes due 2005 (the "Senior
Notes") in the fourth quarter of 1995, its interest expense have been financed
with the proceeds of debt and equity securities.
Cash provided by operating activities was $17.5 million for the nine months
ended September 30, 1997 compared to $7.0 million in the comparable period of
1996. The improvement is due to the sale of fiber capacity partially offset by
decreased year-over-year operating results associated with the implementation of
the switched services business.
Cash used in investing activities for the nine months ended September 30,
1997 was $168.8 million compared to $5.1 million for the nine months ended
September 30, 1996. The increase was due in part to higher capital spending and
investment in the Marca-Tel joint venture. Capital spending, related to the
expansion of the Company's network capacity, increased $129.2 million to $202.5
million for the nine months ended September 30, 1997. Funding of the Company's
investment in the Marca-Tel joint venture was $17.7 million during the first
nine months of 1997, an increase of $15.7 million over the comparable 1996
period. Escrow funding activity from the Company's senior debt to support the
network expansion ended during the first nine months of 1997, with a
year-over-year reduction of $18.7 million.
Cash provided by financing activities increased to $373.9 million for the
first nine months of 1997 versus $81.1 million for the comparable period in
1996. Increased funding during 1997 was the result of issuing the Company's
7 1/4% Junior Convertible Preferred Stock due 2007 (the "Convertible Preferred
Stock") in April 1997 and issuing the Exchangeable Preferred Stock in August
1997. Net proceeds of $95.7 million were received for the Convertible Preferred
Stock while net proceeds of $288.3 million were received for the Exchangeable
Preferred Stock. During the comparable period in 1996, net proceeds of $94.0
million were received from issuance of common stock in connection with the
Company's initial public offering and concurrent private placement to General
Electric Pension Trust which occurred in July 1996.
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Sources of Cash
As of September 30, 1997, the Company had approximately $284.0 million in
cash. The Company expects that its primary sources of cash over the next twelve
months will be cash on hand, cash generated by operations, the proceeds if any,
from offerings of debt and/or equity securities, the Proposed Credit Facility
(as herein defined), the NTFC Equipment Facility (as herein defined), additional
vendor and working capital financing the Company may seek and the anticipated
proceeds of fiber sales.
The Company is engaged in discussions with potential lenders regarding a
revolving credit facility (the "Proposed Credit Facility") under which it seeks
to borrow up to a certain percentage of eligible accounts receivable. Although
the total availability under the Proposed Credit Facility would vary from time
to time according to the aggregate amount of eligible accounts receivable, the
Company anticipates that the lender would impose a limit on borrowings under the
facility. There can be no assurance that the Company will obtain such a
facility. In July 1997, the Company entered into a secured equipment financing
facility with NTFC Capital Corporation, an affiliate of Northern Telecom Inc.,
to provide up to $28 million in financing. Provided the Company meets certain
financial tests, the Company expects to borrow approximately $28 million under
this agreement in the fourth quarter in connection with the purchase of certain
equipment for use in its network.
In February 1997, the Company and a carrier entered into a contract ("IRU
Agreement") pursuant to which the carrier will purchase an indefeasible right to
use ("IRU") fibers from Chicago to Los Angeles (the "Chicago-Los Angeles Fiber
Sale") which, following performance by the Company of its obligations thereunder
to the satisfaction of such carrier, will result in proceeds to the Company of
approximately $97.9 million. The Company has already received $43.3 million from
this contact, with the balance expected to be paid in the first quarter of 1998.
In February 1997, the Company entered into a contract with another carrier
pursuant to which the carrier will purchase an indefeasible right to use fibers
from Los Angeles to New York (the "New York-Los Angeles Fiber Sale") which
entitles the Company to receive, following performance by the Company of its
Obligations thereunder to the satisfaction of such carrier, approximately $121.0
million. Assuming that the network expansion proceeds according to schedule,
this amount will be due in January 1998. In October 1997, the carrier elected an
option to pay this amount over a period of up to eighteen months. The Company
has continued to enter into IRU agreements with carriers for varying amounts
with substantially similar provisions as the two identified above. Entering into
these IRU agreements allows the Company to build its network at a reduced cost
per mile.
In July 1997, the Company announced agreements with PSINet Inc. ("PSINet").
Under the terms of the PSINet agreements, after consummation of the transaction,
the Company will provide PSINet with an indefeasible right to use 10,000 miles
of OC-48 transmission capacity on its Network over a 20-year period in exchange
for 20% (post-issuance) of PSINet common stock. In addition, if the value of the
PSINet common stock received by the Company is less than $240 million at the
earlier of one year after the final delivery of the transmission capacity
(scheduled for late-1999) or four years after closing, PSINet will pay the
Company cash or, at PSINet's option, deliver additional PSINet common stock to
bring the value of the Company's investment to $240 million. Upon delivery of
the transmission capacity to PSINet, the Company will also receive a maintenance
fee which, when all the capacity has been delivered, will be approximately $11.5
million per year. The Company expects to consummate the transactions
contemplated by the PSINet agreements upon the satisfaction of certain
conditions, including receipt of approval of PSINet stockholders. There can be
no assurance that such conditions will be satisfied or that the PSINet
transaction will be consummated.
The preceding forward-looking statements regarding the Company's sources of
cash are based on certain assumptions as to future events, many of which are not
within the Company's control. Important factors that could adversely affect the
Company's ability to generate cash as discussed above include: (i) delays or
cost overruns with respect to the network expansion; (ii) delays by the
Company's contractors and partners in cost-saving arrangements in fulfilling
their obligations; (iii) delays or higher-than-expected costs in obtaining
rights-of-way; (iv) delays in the completion of the routes of the network
expansion scheduled for completion in 1997; (v) an inability by the Company to
continue to increase traffic on its switched network, in particular, higher
margin traffic; (vi) an inability by the Company to successfully provide service
for its switched services
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business on a cost-effective basis (including the provision of billing
information in an accurate and timely manner) for volumes that it has not
previously handled, (vii) the loss of one or more large customers; (viii) an
inability to decrease expenses; (ix) decreases in the Company's rates caused by
competitive pressures, among other unknown factors; and (x) an inability to
successfully complete the Chicago-Los Angeles Fiber Sale or the New York-Los
Angeles Fiber Sale. The ability of the Company to supplement cash through
financing activities is subject to the ability of the Company to find willing
buyers of debt or equity instruments on terms acceptable to the Company, market
conditions generally, and, with respect to debt instruments, the Company's
ability to obtain any required consents from the Company's existing bondholders.
Uses of Cash
The Company anticipates the following uses for its available cash: (i) the
network fiber and optronic expansion and other capital expenditures (including
those related to the PSINet transaction); (ii) debt service; (iii) lease
payments; (iv) funding its joint venture in Mexico; and (v) working capital.
The Company anticipates 1997 capital expenditures will be approximately
$400 million, of which $202.5 million has been spent through September 30, 1997.
The 1997 projected spending level encompasses the addition of additional fiber
route miles, as well as network upgrades and capacity expansion of the existing
fiber route. The preceding forward-looking statement regarding capital
expenditures for 1997 are based on certain assumptions as to future events, many
of which are not under the Company's control. Important factors which could
increase or decrease the amount of the capital expenditures include construction
delays or construction cost overruns, delays or higher than expected costs in
obtaining rights-of-way, or changes in the scope of the network expansion and
increased demands for capacity by the Company's customers. The Company expects
to continue to make substantial capital expenditures during the remainder of
1997 and thereafter. The Company currently anticipates that 1998 capital
expenditures will be in the mid-$400 million range. The Company frequently
revises its estimates of capital expenditures because of the rapid growth of the
Company's business and because the large, on-going network expansion is subject
to changes in timing, design, route and capacity, and variances from expected
costs.
The Company is required to make interest payments in the amount of $35.6
million on the Senior Notes each year. The Company's EBITDA is currently
insufficient to cover these debt service requirements. At November 1, 1997, the
aggregate liquidation preference of the Company's 10% Junior Series 3 Cumulative
Redeemable Preferred Stock (the "Series 3 Preferred Stock") was approximately
$.7 million, including accrued and unpaid dividends, after giving effect to the
consummation of the Company's offer to exchange shares of its common stock for
all of its outstanding shares of Series 3 Preferred Stock. Such dividends accrue
at an annual rate of 10% (based on the liquidation preference) plus interest.
The Company is also required (except in certain limited circumstances) to pay
quarterly cash dividends on the Convertible Preferred Stock (at an annual rate
of 7 1/4%) beginning with the dividend payment required to be made on June 30,
1999 (prior to such time these dividends may at the Company's option be paid in
cash or additional shares of Convertible Preferred Stock). Payment of cash
dividends on the Series 3 Preferred Stock, the Convertible Preferred Stock and
the Exchangeable Preferred Stock is not currently permitted under the terms of
the indenture (the "Indenture") for the Senior Notes until certain financial
conditions have been met. Additionally, cash dividends cannot be paid on the
Convertible Preferred Stock until all current and accrued dividends have been
paid in cash on the Series 3 Preferred Stock. During September 1997, the Company
issued 18,451 additional shares of Convertible Preferred Stock in satisfaction
of its dividend requirements. During September 1997, the Company accrued $4.2
million of in-kind dividends relating to the Exchangeable Preferred Stock.
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 will be
owned 40 percent by the Company, 40 percent by Telenor Global Services AS, and
20 percent by Clarion Resources Communications Corporation, a U.S.-based
telecommunications company in which Telenor owns a controlling interest. Under
the terms of the agreement, the Company will have two seats on the joint
venture's board. Although the Company cannot accurately predict the capital that
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will be required to implement the Telenor joint venture, it estimates that the
funding of $6 million will be sufficient for the remainder of 1997 and 1998.
The Company is indirectly participating in the development of a long
distance network to engage in the telecommunications business in Mexico by
Marca-Tel S.A. de C.V. ("Marca-Tel"). The Company indirectly owns 24.5% of
Marca-Tel through its ownership of 50% of Progress International LLC ("Progress
International"), which owns 49% of Marca-Tel. The remaining 51% of Marca-Tel is
owned by a Mexican individual and Fomento Radio Beep, S.A. de C.V. The other 50%
of Progress International is owned by Westel International, Inc. ("Westel").
Progress International has provided all the capital required from Marca-Tel
shareholders in order to finance Marca-Tel. The Company and Westel have agreed
to jointly contribute funds to Progress International. From inception to
September 30, 1997, the Company has provided approximately $25.0 million of the
$36.8 million contributed or loaned to Progress International. Substantially all
of the funding of Progress International has been contributed to Marca-Tel. The
Company is recognizing its share of the Progress International losses in line
with its pro rata share of the contributions to Progress International.
Although the Company cannot accurately predict the capital that will be
required to implement the Marca-Tel business plan, it estimates that an
additional $50.0 million (and possibly significantly more) will be required by
Marca-Tel from its stockholders during the remainder of 1997 and 1998. The
Company and Westel have pursued and are continuing to pursue selling equity
interests in Progress International to one or more third parties who could
assist Progress International with the funding of Marca-Tel. However, there can
be no assurance that any such funding will be available on satisfactory terms or
at all. The Company is currently, and may remain, the primary source of funds
available to Progress International for investment in Marca-Tel. Since the
ownership interests of the Company and Westel in Progress International are to
be proportional to their respective capital contributions, the Company's
percentage ownership of Progress International, and therefore its indirect
ownership interest in Marca-Tel, could increase if it continues to make
additional capital contributions which are not matched by Westel. The Indenture
contains significant limitations on the amount the Company may invest in
Progress International and other non-majority owned entities. Marca-Tel has
deployed three switching centers and is constructing a fiber optic route linking
Mexico's three major cities (Mexico City, Monterrey and Guadalajara), with
interconnection to the Company's U.S. network at its border crossing at
Reynosa/McAllen. Marca-Tel has entered into a turn-key contract with a major
international supplier of telecommunications equipment for a portion of this
build that provides for interim vendor financing for the equipment and fiber
purchases as well as a portion of the construction work. The Company anticipates
that Marca-Tel may be able to obtain additional funding through some combination
of the following: (i) offerings of debt or equity securities; (ii) other
incurrences of debt; (iii) joint venture arrangements with third parties; and
(iv) additional vendor financing of equipment purchases. Initially, such sources
of capital likely will not be adequate to meet the needs of Marca-Tel, and the
Company anticipates that, until such sources are adequate to enable Marca-Tel to
continue to pursue its business plan, it may be necessary for Progress
International to fund the shortfall. The Company is not obligated to continue to
fund Progress International; however, if the Company does not fund Progress
International, or if Progress International does not fund Marca-Tel's needs, the
Company's interest in Progress International, and thus its indirect interest in
Marca-Tel, may be diluted or lost entirely. No assurance can be given that
adequate funding sources will be available from Progress International or from
third parties to implement Marca-Tel's business plan or, if implemented, that
such business plan will be successful.
The forward-looking statements set forth above with respect to the funding
of Marca-Tel and the successful completion and operation of Marca-Tel's fiber
optic system in Mexico are based on certain assumptions as to future events.
Important factors that could adversely affect Marca-Tel's ability to achieve the
results discussed above include that: (i) there will be no significant delays or
cost overruns with respect to the network expansion; (ii) the Company's
contractors and partners in cost-saving arrangements will perform their
obligations; (iii) rights-of-way can be obtained in a timely, cost-effective
basis; (iv) the routes of the network expansion are substantially completed on
schedule; (v) Marca-Tel can successfully operate its switched services business
on a cost effective basis (including the provision of billing information in an
accurate and timely manner) for volumes that it has not previously handled; and
(vi) Marca-Tel can
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obtain sufficient funds from the debt or equity offerings, joint venture
arrangements, accounts, additional vendor financing, or otherwise.
Year 2000 Compliance
The Company has reviewed its software for Year 2000 compliance. In
conjunction with that review, the Company has determined that its current
software is either Year 2000 compliant, or there are projects planned to either
upgrade or replace the existing software prior to 2000. The projected costs
associated with the Year 2000 compliance portion of such upgrades have not yet
been identified, because they are part of a general system upgrade. In
accordance with the Emerging Issues Task Force of the Financial Accounting
Standards Board, the costs associated with upgrading or revising the Company's
software to be Year 2000 compliant will be recorded as an expense of the period
rather than capitalized. The Company currently estimates that the costs
associated with such upgrade projects will not be material to its operating
results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 1997 Tel-Central Communications, Inc. ("Tel-Central") filed a
complaint against IXC Long Distance, Inc., one of the Company's subsidiaries, in
the United States District Court in the Western District of Missouri, after the
Company terminated service to Tel-Central for failure to pay for services. On
May 23, 1997, Tel-Central file a voluntary Chapter 11 petition in bankruptcy.
The Tel-Central action was stayed as a result of the Tel-Central's Chapter 11
bankruptcy proceeding until August 1997, when Tel-Central dismissed the action
against IXC Long Distance, Inc.
From time to time the Company is involved in various legal proceedings
arising in the ordinary course of business, some of which are covered by
insurance. In the opinion of the Company's management, none of the claims
relating to such proceedings will have a material effect on the financial
condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
On August 20, 1997, the Company issued and sold 300,000 shares of the
Exchangeable Preferred Stock in a private placement at a purchase price of
$1,000 per share to three initial purchasers who subsequently sold the shares to
"qualified institutional buyers" (as defined in the Securities Act of 1933, as
amended (the "Act"). Dividends on the Exchangeable Preferred Stock accrue from
the date of issuance and are payable quarterly in arrears on February 15, May
15, August 15 and November 15 of each year (each a "Dividend Payment Date"), at
a rate per annum of 12 1/2% of the liquidation preference of $1,000 per share.
Dividends payable on or prior to February 15, 2001 may be paid, at the Company's
option, in cash or 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. On any scheduled Dividend
Payment Date, the Company may, at its option, exchange all, but not less than
all, of the shares of Exchangeable Preferred Stock then outstanding for the
Company's 12 1/2% Subordinated Exchange Debentures Due 2009 (the "Exchange
Debentures"). The Exchange Debentures will bear interest at a rate of 12 1/2%
per annum, payable semiannually on February 15 and August 15 of each year.
The registration rights agreement entered into between the Company and the
initial purchasers of the Exchangeable Preferred Stock requires that the Company
file an exchange offer registration statement (the "Exchange Offer Registration
Statement") with the Securities and Exchange Commission (the "Commission") for
the benefit of the holders of the Exchangeable Preferred Stock, with respect to
a registered offer (the "Registered Exchange Offer") to exchange the
Exchangeable Preferred Stock, or if the Exchangeable Preferred Stock has been
exchanged for Exchange Debentures, the Exchange Debentures, for a new series of
Exchangeable Preferred Stock or new Exchange Debentures, as the case may be, of
the Company. Under certain conditions, the Company is required to file a shelf
registration statement covering resales of the Exchangeable Preferred Stock or
Exchange Debentures, as the case may be. The Company filed the Exchange Offer
Registration Statement with the Commission on October 3, 1997. If by January 19,
1998, the Registered Exchange Offer has not been consummated, and/or a shelf
registration statement has not been declared effective with respect to the
Exchangeable Preferred Stock, additional dividends or interest, as the case may
be, will accrue at the rate of 0.50% per annum pursuant to the terms of the
registration rights agreement. Payment of cash dividends on the Exchangeable
Preferred Stock is not currently permitted under the Company's 12 1/2% Senior
Notes due 2005 until certain financial conditions have been met. The
Exchangeable Preferred Stock ranks junior to the Series 3 Preferred Stock,
senior to the Common Stock and, subject to certain conditions, on a parity with
the Company's 7 1/4% Junior Convertible Preferred Stock Due 2007, with respect
to payment of dividends and rights upon liquidation, winding-up and dissolution.
In October 1997, the Company consummated its offer to exchange shares of
its Common Stock for the 12,550 the outstanding shares of its Series 3 Preferred
Stock. Each holder that tendered shares of Series 3 Preferred Stock prior to the
expiration date of the tender offer (October 31, 1997) received approximately
49.85 shares of Common Stock for each share of Series 3 Preferred Stock. The
number of shares of Common
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Stock issued for each share of Series 3 Preferred Stock was calculated by
dividing the aggregate per share liquidation preference, including accrued and
unpaid dividends, of one share of Series 3 Preferred Stock as of October 31,
1997 by $33.00, the last reported sale price of the Company's Common Stock on
the Nasdaq National Market at that date. The aggregate liquidation preference,
including accrued and unpaid dividends, of the Series 3 Preferred Stock at the
tender date was approximately $20.6 million ($1,645 per share for the 12,550
shares outstanding). Over 95% of the shares of Series 3 Preferred Stock were
tendered prior to the expiration of the exchange offer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company furnished an Information Statement (the "EPS Information
Statement") to stockholders of the Company pursuant to Rule 14c-2 under the
Securities Exchange Act of 1934 (the "Exchange Act"), in connection with an
amendment (the "Amendment") to the Restated Certificate of Incorporation, as
amended (the "Certificate of Incorporation") of the Company to permit payment of
dividends on the Exchangeable Preferred Stock with additional shares of
Exchangeable Preferred Stock. The Amendment was approved by the Board. As
required by the Delaware General Corporation Law (the "DGCL") and the
Certificate of Incorporation, the Amendment was approved by the holders of a
majority of the outstanding shares of Common Stock and Series 3 Preferred Stock,
voting as a class, and three-quarters (3/4ths) of the outstanding shares of
Series 3 Preferred Stock, voting as a class, by written consent in lieu of a
meeting pursuant to Section 228(a) of the DGCL. The Amendment became effective
upon the filing of a Certificate of Amendment of the Certificate of
Incorporation with the Secretary of State of Delaware which, pursuant to Rule
14c-2 under the Exchange Act, did not take place until a date at least 20 days
following the date on which the EPS Information Statement was mailed to the
stockholders of the Company. The EPS Information Statement also served as notice
to stockholders of an action taken by less than unanimous written consent as
required by Section 228(d) of the DGCL. The EPS Information Statement was mailed
on or about October 1, 1997 to persons who were stockholders of record on
September 19, 1997.
The Company also furnished an Information Statement (the "1997 Plan
Information Statement") to stockholders of the Company pursuant to Rule 14c-2
under the Exchange Act in connection with the adoption and approval of the
Company's 1997 Special Executive Stock Plan (the "1997 Plan"). The 1997 Plan was
approved by the Board and was approved by the holders of a majority of the
outstanding shares of Common Stock and Series 3 Preferred Stock, voting as a
class, by written consent in lieu of a meeting pursuant to Section 228(a) of the
DGCL. The adoption and approval by the stockholders will become effective
November 17, 1997, which, pursuant to Rule 14c-2 under the Exchange Act, cannot
take place until a date at least 20 days following the date on which the 1997
Plan Information Statement was mailed to the Stockholders of the Company. The
1997 Plan Information Statement also served as notice to stockholders of an
action taken by less than unanimous written consent as required by Section
228(d) of the DGCL. The 1997 Plan Information Statement was mailed on or about
October 24, 1997 to persons who were stockholders of record on September 19,
1997.
ITEM 5. OTHER INFORMATION
In September 1997, the Company entered into an agreement with LCI
International, Inc. to sell dark fiber installed on the Company's 729-mile route
from Cleveland to New York for approximately $20 million.
In July 1997, the Company consummated its acquisition of Telecom One, Inc.,
a switchless reseller serving commercial and residential customers in 32 states.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------
3.1* Restated Certificate of Incorporation of IXC Communications, Inc., as amended.
3.2* Bylaws of IXC Communications, Inc., as amended.
4.1 Specimen certificate representing shares of Common Stock of IXC Communications,
Inc. (incorporated by reference to Exhibit 4.1 of IXC Communications, Inc.
Registration Statement on Form S-1 filed with the Commission on May 20, 1996, as
amended (File No. 333-4061) (the "S-1")).
4.2 Indenture dated as of October 5, 1995 by and among IXC Communications, Inc., on its
behalf and as successor-in-interest to I-Link Holdings, Inc. and IXC Carrier Group,
Inc., each of IXC Carrier, Inc., on its behalf and as successor-in-interest to
I-Link, Inc., CTI Investments, Inc., Texas Microwave, Inc. and WTM Microwave, Inc.,
Atlantic States Microwave Transmission Company, Central States Microwave
Transmission Company, Telcom Engineering, Inc., on its behalf and as
successor-in-interest to SWTT Company and Microwave Network, Inc., Tower
Communication Systems Corp., West Texas Microwave Company, Western States Microwave
Transmission Company, Rio Grande Transmission, Inc., IXC Long Distance, Inc., Link
Net International, Inc. (collectively, the "Guarantors") and IBJ Schroder Bank &
Trust Company, as Trustee, with respect to the 12 1/2% Series A and Series B Senior
Notes due 2005 (incorporated by reference to Exhibit 4.1 of IXC Communications,
Inc.'s and each of the Guarantor's Registration Statement on Form S-4 filed with
the Commission on April 1, 1996, as amended (File No. 333-2936) (the "S-4")).
4.3 Purchase Agreement dated October 5, 1995 by and among IXC Communications, Inc., and
the Purchasers named therein (incorporated by reference to Exhibit 4.2 of the S-4).
4.4 A/B Exchange Registration Rights Agreement dated as of October 5, 1995 by and among
IXC Communications, Inc., the Guarantors and the Purchasers named therein
(incorporated by reference to Exhibit 4.3 of the S-4).
4.5 Escrow Account and Disbursement Agreement dated as of October 5, 1995 by and among
IXC Communications, Inc., IBJ Schroder Bank & Trust Company, as Escrow Holder, and
IBJ Schroder Bank & Trust Company, as Collateral Agent (incorporated by reference
to Exhibit 4.4 of the S-4).
4.6 Escrow Account Security Agreement dated as of October 5, 1995 by and between IXC
Communications, Inc. and IBJ Schroder Bank & Trust Company (incorporated by
reference to Exhibit 4.5 of the S-4).
4.7 Form of 12 1/2% Series A Senior Notes due 2005 (incorporated by reference to
Exhibit 4.6 of the S-4).
4.8 Form of 12 1/2% Series B Senior Notes due 2005 and Subsidiary Guarantee
(incorporated by reference to Exhibit 4.8 of the S-1).
4.9 Amendment No. 1 to Indenture and Subsidiary Guarantee dated as of June 4, 1996 by
and among IXC Communications, Inc., the Guarantors and the Trustee (incorporated by
reference to Exhibit 4.11 of the S-1).
4.10 Stock Exchange Agreement dated as of June 10, 1996 by and between IXC
Communications, Inc., and Trustees of General Electric Pension Trust ("GEPT")
(incorporated by reference to Exhibit 4.12 of the S-1).
4.11 Registration Rights Agreement dated as of June 10, 1996 by and among IXC
Communications, Inc., GEPT and certain stockholders of IXC Communications, Inc.
(incorporated by reference to Exhibit 4.13 of the S-1).
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------
4.12 Purchase Agreement dated as of March 25, 1997 by and among IXC Communications,
Inc., Credit Suisse First Boston Corporation ("CS First Boston") and Dillon Read &
Co. Inc. ("Dillon Read") (incorporated by reference to Exhibit 4.12 of IXC
Communications, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (the "March 31, 1997 10-Q")).
4.13 Registration Rights Agreement dated as of March 25, 1997 by and among IXC
Communications, Inc., CS First Boston and Dillon Read (incorporated by reference to
Exhibit 4.13 of the March 31, 1997 10-Q).
4.14 Amendment to Registration Rights Agreement dated as of March 25, 1995 between IXC
Communications, Inc. and GEPT (incorporated by reference to Exhibit 4.14 of the
March 31, 1997 10-Q).
4.15 Registration Rights Agreement dated as of July 8, 1997 among IXC Communications,
Inc. and each of William G. Rodi, Gordon Hutchins, Jr. and William F. Linsmeier
(incorporated by reference to exhibit 4.15 of IXC Communications, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, as amended (the "June 30,
1997 10-Q")).
4.16 Registration Rights Agreement dated as of July 8, 1997 among IXC Communications,
Inc. and each of William G. Rodi, Gordon Hutchins, Jr. and William F. Linsmeier
(incorporated by reference to Exhibit 4.16 of the June 30, 1997 10-Q).
4.17 Purchase Agreement dated as of August 14, 1997 by and among IXC Communications,
Inc. and the initial purchasers named in Schedule A thereto (incorporated by
reference to Exhibit 4.1 of IXC Communications, Inc. Current Report on Form 8-K
dated August 20, 1997 and filed with the Commission on August 28, 1997 (the
"8-K")).
4.18 Indenture dated as of August 15, 1997 between IXC Communications, Inc. and The Bank
of New York (incorporated by reference to Exhibit 4.2 of the 8-K).
4.19 Registration Rights Agreement dated as of August 14, 1997 by and among IXC
Communications, Inc. and the purchasers named therein (incorporated by reference to
Exhibit 4.3 of the 8-K).
10.1 Office Lease dated June 21, 1989 with USAA Real Estate Company, as amended
(incorporated by reference to Exhibit 10.1 of the S-4).
10.2 Equipment Lease dated as of December 1, 1994 by and between DSC Finance Corporation
and Switched Services Communications, L.L.C.; Assignment Agreement dated as of
December 1, 1994 by and between Switched Services Communications, L.L.C. and DSC
Finance Corporation; and Guaranty dated December 1, 1994 made in favor of DSC
Finance Corporation by IXC Communications, Inc. (incorporated by reference to
Exhibit 10.2 of the S-4).
10.3 Amended and Restated 1994 Stock Plan of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 10.3 of the June 30, 1997 10-Q).
10.4 Form of Non-Qualified Stock Option Agreement under the 1994 Stock Plan of IXC
Communications, Inc. (incorporated by reference to Exhibit 10.4 of the S-4).
10.5 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated by
reference to Exhibit 10.5 of the S-4).
10.6 Form of IXC Communications, Inc. Restricted Stock Agreement (incorporated by
reference to Exhibit 10.6 of the S-4).
10.7 Amended and Restated Development Agreement by and between Intertech Management
Group, Inc. and IXC Long Distance, Inc. (incorporated by reference to Exhibit 10.7
of the S-4).
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------
10.8 Second Amended and Restated Service Agreement dated as of January 1, 1996 by and
between Switched Services Communications, L.L.C. and Excel Telecommunications, Inc.
(incorporated by reference to Exhibit 10.8 of the S-4).
10.9 Equipment Purchase Agreement dated as of January 16, 1996 by and between Siecor
Corporation and IXC Carrier, Inc. (incorporated by reference to Exhibit 10.9 of the
S-4).
10.10 1996 Stock Plan of IXC Communications, Inc., as amended (incorporated by reference
to Exhibit 10.10 of IXC Communications, Inc. Annual Report on Form 10-K for the
year ended December 31, 1996 (the "10-K")).
10.11 IRU Agreement dated as of November 1995 between WorldCom, Inc. and IXC Carrier,
Inc. (incorporated by reference to Exhibit 10.11 of the S-4).
10.12 Outside Directors' Phantom Stock Plan of IXC Communications, Inc., as amended
(incorporated by reference to Exhibit 10.12 of the 10-K).
10.13 Business Consultant and Management Agreement dated as of March 1, 1997 by and
between IXC Communications, Inc. and Culp Communications Associates (incorporated
by reference to Exhibit 10.13 of IXC Communications, Inc. Registration Statement on
Form S-4 filed with the Commission on October 3, 1997 (File No. 333-37157) (the
"EPS S-4").
10.14 Employment Agreement dated December 28, 1995 by and between IXC Communications,
Inc. and James F. Guthrie (incorporated by reference to Exhibit 10.14 of the S-1).
10.15 Employment Agreement dated August 28, 1995, by and between IXC Communications, Inc.
and David J. Thomas (incorporated by reference to Exhibit 10.15 of the S-1).
10.16 Special Stock Plan of IXC Communications, Inc. (incorporated by reference to
Exhibit 10.16 of the 10-K).
10.17 Lease dated as of June 4, 1997 between IXC Communications, Inc. and Carramerica
Realty, L.P. (incorporated by reference to Exhibit 10.17 of the June 30, 1997
10-Q).
10.18 Loan and Security Agreement dated as of July 18, 1997 among IXC Communications,
Inc., IXC Carrier, Inc. and NTFC Capital Corporation (incorporated by reference to
Exhibit 10.18 of the June 30, 1997 10-Q).
10.19 IRU and Stock Purchase Agreement dated as of July 22, 1997 between IXC Internet
Services, Inc. and PSINet Inc. (incorporated by reference to Exhibit 10.19 of the
June 30, 1997 10-Q).
10.20 Joint Marketing and Services Agreement dated on July 22, 1997 between IXC Internet
Services, Inc. and PSINet Inc. (incorporated by reference to Exhibit 10.20 of the
June 30, 1997 10-Q).
10.21 Employment Agreement dated as of September 9, 1997 between Benjamin L. Scott and
IXC Communications, Inc. (incorporated by reference to Exhibit 10.21 of the EPS
S-4).
10.22 IXC Communication, Inc. 1997 Special Executive Stock Plan (incorporated by
reference to Exhibit 10.22 of the EPS S-4).
11.1* Statement of Computation of Earnings per Share.
27.1* Financial Data Schedule.
* Filed herewith.
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(b) Reports on Form 8-K.
1. Form 8-K dated July 3, 1997 and filed with the Commission on July 22,
1997 with respect to a press release reporting on the status of the Company's
private line business and its switched service business.
2. Form 8-K dated July 23, 1997 and filed with the Commission on July 29,
1997 with respect to a press release announcing agreements between the Company
and PSINet.
3. Form 8-K dated August 5, 1997 and filed with the Commission on August 6,
1997 pursuant to Rule 135(c)d of the Act with respect to the Company's notice of
offering of unregistered securities.
4. Form 8-K dated August 18, 1997 and filed with the Commission on August
18, 1997 pursuant to Rule 135c(d) of the Act with respect to the Company's
notice of pricing of its offering of unregistered securities.
5. Form 8-K dated August 20, 1997 and filed with the Commission on August
21, 1997 pursuant to Rule 135c(d) of the Act with respect to the Company's
notice of offering of unregistered securities with respect to the sale of the
Exchangeable Preferred Stock, which occurred on August 20, 1997.
6. Form 8-K dated August 20, 1997 and filed with the Commission on August
28, 1997 describing the terms and conditions of the Company's Exchangeable
Preferred Stock sold in a private placement on August 20, 1997.
7. Form 8-K dated September 17, 1997 and filed with the Commission on
September 19, 1997 with respect to a press release announcing an agreement with
LCI International, Inc. ("LCI") pursuant to which the Company will sell dark
fiber to LCI.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IXC Communications, Inc.,
a Delaware corporation
November 13, 1997 By: /s/ JAMES F. GUTHRIE
------------------------------------
James F. Guthrie
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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