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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 2001
REGISTRATION NO. 333-67896
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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XO COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 54-1983517
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NUMBER)
</Table>
11111 SUNSET HILLS ROAD
RESTON, VIRGINIA 20190
(703) 547-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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GARY D. BEGEMAN, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
XO COMMUNICATIONS, INC.
11111 SUNSET HILLS DRIVE
RESTON, VIRGINIA 20190
(703) 547-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
BRUCE R. KRAUS, ESQ.
WILLKIE FARR & GALLAGHER
787 7TH AVENUE
NEW YORK, NY 10019
(212) 728-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the Shelf Registration Statement is expected to be made
pursuant to Rule 434, please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Subject to completion, dated August 29, 2001
PROSPECTUS
$517,500,000
XO COMMUNICATIONS, INC.
$517,500,000 5.75% Convertible Subordinated Notes Due 2009
20,259,319 shares of class A common stock issuable upon conversion of the
convertible notes
------------------------
This prospectus covers the sale by selling holders of:
- our 5.75% Convertible Subordinated Notes Due 2009; and
- our class A common stock into which the convertible notes are convertible.
The convertible notes registered by the registration statement of which this
prospectus is a part were issued and sold on January 12, 2001, in transactions
exempt from the registration requirements of the Securities Act, to Salomon
Smith Barney and Goldman, Sachs & Co., as the initial purchasers of the
convertible notes, and resold by the initial purchasers to qualified
institutional buyers (as defined in Rule 144A) in reliance on Rule 144A and
outside the United States in reliance on Regulation S. The convertible notes and
the class A common stock into which the convertible notes are convertible may be
offered and sold from time to time by the holders named in this prospectus. The
registration statement of which this prospectus is a part has been filed with
the Securities and Exchange Commission pursuant to a registration rights
agreement dated January 5, 2001, between us and the initial purchasers.
Interest on the convertible notes is payable on January 15 and July 15 of
each year, commencing on July 15, 2001. The convertible notes will mature on
January 15, 2009 unless previously repurchased or converted.
The convertible notes are convertible into shares of class A common stock at
any time prior to the close of business on the maturity date of the convertible
notes, unless previously repurchased, at a conversion rate of 39.1484 shares per
$1,000 principal amount of notes (subject to adjustment in certain events). This
conversion rate is equivalent to a conversion price of approximately $25.5438
per share.
On or after January 18, 2003, we may terminate the conversion rights of
holders of the convertible notes only if:
- for conversion terminations on or prior to January 18, 2004, the current
market price of our class A common stock equals or exceeds 150% of the
conversion price then in effect for at least 20 trading days in any 30-day
trading period, including the last day of the period; or
- for conversion terminations after January 18, 2004, the current market
price of our class A common stock equals or exceeds 135% of the conversion
price then in effect for at least 20 trading days in any 30-day trading
period, including the last day of the period.
If the conversion termination date occurs on or before January 18, 2004, we
will make a make-whole payment in cash with respect to the convertible notes
converted into class A common stock after the date of the press release
announcing the termination. The amount of the make-whole payment will be the
present value of all interest payments that thereafter would have been payable
on the convertible notes on each semi-annual interest payment date from the
conversion termination date through January 15, 2004. If the conversion
termination date occurs on or after January 19, 2004, we will not make any
make-whole payment.
The convertible notes are not redeemable by us prior to maturity. Upon a
change of control or, following the termination of our senior secured credit
facility or the waiver of certain of its restrictions, a termination of trading
of our class A common stock, each as described in this prospectus, holders of
the convertible notes will have the right to require us to repurchase the
convertible notes at a price equal to 100% of their principal amount plus
accrued and unpaid interest. In the event of a change of control, holders will
not have the right to require us to repurchase the convertible notes if:
- the market price of our class A common stock equals or exceeds 105% of the
conversion price; or
- 90% of the consideration in the change of control transaction consists of
shares of capital stock that are traded on a U.S. national securities
exchange or quoted on the Nasdaq National Market.
We will pay the repurchase price in cash or, at our option, in shares of our
class A common stock.
Our class A common stock is quoted on the Nasdaq National Market under the
symbol "XOXO." The closing sale price of our class A common stock on August 16,
2001 was $1.71 per share.
We have not applied for listing of the convertible notes on any securities
exchange or for quotation through any automated quotation system. The
convertible notes are eligible for trading in the Private Offerings, Resales and
Trading Through Automated Linkages ("PORTAL") Market of the NASDAQ Stock Market.
The convertible notes are unsecured general obligations of XO
Communications, Inc. and rank subordinate and junior in right of payment to all
of our existing and future senior indebtedness.
The selling holders may sell convertible notes or class A common stock at
any time at market prices or at privately negotiated prices. We may issue shares
under this prospectus in settlement of the repurchase price for the convertible
notes described under "Description of the Convertible Notes -- Repurchase of the
Convertible Notes Upon a Designated Event." Sales by the selling holders may be
made directly to purchasers or through underwriters, broker-dealers or agents,
who may receive compensation in the form of discounts, concessions or
commissions. The selling holders will be responsible for any commission or
discounts due to brokers or dealers. The amount of those commissions or
discounts cannot be known now because they will be negotiated at the time of the
sales. We will pay all other offering expenses. We will not receive any proceeds
from the sale of the convertible notes or shares of class A common stock by the
selling holders.
INVESTING IN THE CONVERTIBLE NOTES OR OUR CLASS A COMMON STOCK INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is [ ], 2001.
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TABLE OF CONTENTS
<Table>
Summary..................................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 14
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends................................................. 15
Use of Proceeds............................................. 15
Description of the Convertible Notes........................ 16
Certain United States Federal Income Tax Considerations..... 32
Description of Outstanding Capital Stock.................... 39
Description of Other Material Indebtedness.................. 47
Selling Holders............................................. 56
Plan of Distribution........................................ 58
Legal Matters............................................... 59
Experts..................................................... 59
Where You Can Find More Information......................... 60
Incorporation of Documents by Reference..................... 60
</Table>
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SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus and does not contain all the information you need to consider in
making your investment decision. You should read carefully this entire
prospectus.
XO COMMUNICATIONS, INC.
Since 1996, we have provided high-quality bundled local and long distance,
as well as dedicated telecommunications services to the rapidly growing business
market. We expanded our services through our acquisition of Concentric Network
Corporation on June 16, 2000 to offer a complete, single source of
communications services to our customers by combining our data and voice
services. The data services we offer include Internet access, virtual private
networks, high-capacity data network services including dedicated wavelength and
Ethernet services, and hosting services.
We believe that the increasing usage of both telephone service and new data
application and information services will continue to increase demand for
telecommunications capacity and for new communications services and
applications. To serve our customers' broad and expanding telecommunications
needs, we have assembled a collection of metropolitan, or metro, and inter-city
network assets in the United States that incorporate state-of-the-art fiber
optic cable and transmission equipment and fixed wireless spectrum and related
equipment, each of which is capable of carrying high volumes of data, voice,
video and Internet traffic.
We intend to integrate our network assets with advanced communications
technologies to enable us to provide a comprehensive array of communications
services entirely over our network, from point of initiation of the voice or
data transmission to the point of termination, which we refer to as end-to-end
service. To accomplish this, we are creating a North American fiber optic
network, which will consist of a series of rings of fiber optic cables that
encircle the central business districts of numerous metropolitan areas, which we
refer to as metro networks, that are connected by a network of fiber optic
cables, which we refer to as an inter-city network. Our combination of metro and
inter-city networks will enable us to provide high-speed, high-capacity
communications services between customers connected to our network and among
customers with multiple locations entirely over our network.
In April 2001, we announced that we had agreed to cancel our plans to
purchase European metro and inter-city fiber networks from Level 3
Communications. Under the agreement, the $128.0 million in payments that were
previously made to Level 3 for the European networks will be applied as a credit
to reduce the remaining amounts payable by us to Level 3 for our North American
inter-city fiber network agreement. As a result of these transactions, we are
suspending expansion of our European operations.
In connection with the restructuring of our arrangements with Level 3, we
announced that we would delay the "lighting" of our North American inter-city
network. In the meantime, we became a broadband transport customer of Level 3.
We agreed to initially lease approximately $30 million of wavelength on Level
3's inter-city network in North America in the future. In connection with this
lease, we will transfer to Level 3 approximately $60 million of inter-city
transmission equipment to be applied toward the purchase of wavelength capacity
from Level 3, none of which had been delivered as of June 30, 2001. We will
retain for future deployment the fibers and empty conduit that comprise our
North American inter-city network purchased from Level 3.
Since our inception, we have incurred substantial and increasing net losses
and negative cash flow from operations, and we expect these results to continue
over the next several years. We also have substantial existing debt and expect
to incur substantial additional obligations in the future as we continue to
implement our business plan.
Additional information about us, including our audited financial statements
and descriptions of our business, is contained in the documents incorporated by
reference in this prospectus.
We are incorporated in the State of Delaware. Our executive offices are
located at 11111 Sunset Hills Road, Reston, Virginia 20190 and our telephone
number is (703) 547-2000.
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THE OFFERING
Securities Offered The resale by selling holders of $517,500,000
aggregate principal amount of 5.75% Convertible
Subordinated Notes and the 20,259,319 shares of
class A common stock into which they are
convertible.
Maturity January 15, 2009, unless earlier repurchased or
converted.
Interest Payment Dates January 15 and July 15 of each year, commencing on
July 15, 2001.
Optional Conversion by
Holders Holders may convert the convertible notes into
shares of class A common stock at any time prior to
or on January 15, 2009, unless previously
repurchased, at a conversion rate of 39.1484 shares
per $1,000 principal amount of notes (equal to a
conversion price of approximately $25.5438 per
share), subject to certain adjustments. See
"Description of the Convertible Notes -- Conversion
Rights".
Termination of Conversion
Rights On or after January 18, 2003, under the
circumstances described below, we may terminate the
conversion rights of holders. We may terminate the
conversion rights only if the current market price
of our class A common stock equals or exceeds 150%
(on or prior to January 18, 2004) or 135%
(thereafter) of the conversion price then in
effect, for at least 20 trading days in any 30-day
trading period, including the last day of the
period. If the conversion termination date occurs
on or before January 18, 2004, we will make a
make-whole payment in cash with respect to the
convertible notes converted into class A common
stock after the date of the press release
announcing the termination. The amount of the
make-whole payment will be the present value of all
interest payments that thereafter would have been
payable on the convertible notes on each
semi-annual interest payment date from and
including the conversion termination date through
January 15, 2004. If the conversion termination
date occurs on or after January 19, 2004, we will
not make any make-whole payment.
Optional Redemption by XO
Communications The convertible notes are not redeemable by us
prior to maturity.
Right of Holders to Require
Repurchase Upon a change in control or, following the
termination of the our senior secured credit
facility or the waiver of certain of its
restrictions, a termination of trading, each as
described in this prospectus, each holder of
convertible notes will have the right, to require
the Company to purchase the holder's convertible
notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest.
In the event of a change in control, holders will
not have the right to repurchase the convertible
notes if (a) the market price of our class A common
stock equals or exceeds 105% of the conversion
price or (b) 90% of the consideration if the change
of control transaction consists of shares of
capital stock that are traded on a U.S. national
securities exchange or quoted on the Nasdaq
National Market. We will pay the repurchase price
in cash, or, at our option, in shares of class A
common stock.
However, the subordination provisions of the
convertible notes and the provisions of our senior
debt would likely prevent us from repurchasing the
convertible notes before we have repaid our senior
notes and senior secured credit facility and other
senior debt in full. In addition, your right to
require us to purchase your convertible notes upon
a termination of trading will not be effective
until certain restrictions under our senior secured
credit facility have been waived or the
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indebtedness under that facility is repaid and the
facility is terminated. See "Description of the
Convertible Notes -- Repurchase at the Option of
Holders Upon a Change of Control."
Subordination The convertible notes are unsecured and
subordinated in right of payment to all of our
existing and future senior indebtedness (as
defined). The convertible notes are also
effectively subordinated in right of payment to all
existing and future indebtedness and other
liabilities (including trade payables and excluding
intercompany liabilities) of our subsidiaries. The
indenture does not restrict the incurrence of
senior debt or other indebtedness by us or any of
our subsidiaries. As of June 30, 2001, the
aggregate amount of outstanding consolidated senior
debt was approximately $4,698.6 million. See
"Description of the Convertible
Notes -- Subordination."
Form, Denomination and
Registration The convertible notes were issued in fully
registered for, in minimum denominations of $1,000.
The convertible notes are represented by a global
note deposited with the trustee as custodian for
the Depository Trust Company and registered in the
name of Cede & Co., DTC's nominee. Beneficial
interests in the global note are shown on, and any
transfers will be effected through, records
maintained by DTC and its participants. See
"Description of the Convertible Notes -- Form,
Denomination and Registration."
Use of Proceeds We will not receive any proceeds from the sale by
selling holders of the convertible notes and the
class A common stock into which the convertible
notes are convertible.
Trading The convertible notes are eligible for trading in
the Private Offerings, Resales and Trading through
the Automated Linkages market, known as PORTAL. The
convertible notes are not be listed on any
securities exchange or quoted on the Nasdaq
National Market. The initial purchasers have
advised us that they make a market in the
convertible notes. The initial purchasers are not
obligated, however, to make a market in the
convertible notes, and any market making may be
discontinued at any time at its sole discretion
without notice. See "Plan of Distribution."
Nasdaq Symbol for our Class
A Common Stock Our class A common stock is traded on the Nasdaq
National Market under the symbol "XOXO".
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RISK FACTORS
You should carefully consider the following risk factors and other
information included or incorporated by reference in this prospectus before
deciding to purchase the convertible notes. Any of these risks could materially
adversely affect our business, financial condition, results or operations and
prospects which could in turn materially adversely affect the price of the
convertible notes and the class A common stock issuable upon conversion.
RISKS RELATED TO LIQUIDITY AND FINANCIAL RESOURCES
WE HAVE A HISTORY OF INCREASING NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS AND WE MAY NEVER BE ABLE TO SATISFY OUR CASH NEEDS FROM OPERATIONS.
For each period since inception, we have incurred substantial and
increasing net losses and negative cash flow from operations. For 2000, we
posted a net loss attributable to common stockholders of approximately $1,247.7
million and showed negative cash flows from operations of approximately $559.4
million. For the quarter and six month period ended June 30, 2001, we posted a
net loss attributable to common stockholders of approximately $500.7 million and
$983.3 million, respectively, and showed negative cash flows from operations for
the six months ended June 30, 2001 of approximately $311.6 million. Our
accumulated deficit was approximately $2,465.2 million at December 31, 2000 and
approximately $3,448.4 million at June 30, 2001. We expect that losses and
negative cash flow from operations will continue over the next several years.
Our existing operations do not currently, and are not expected in the near
future to, generate cash flows from which we can make interest payments on our
outstanding notes, make dividend payments on our outstanding preferred stock or
fund continuing operations and planned capital expenditures. We cannot know
when, if ever, net cash generated by our internal business operations will
support our growth and continued operations. If we are unable to generate cash
flow in the future sufficient to cover our fixed charges and are unable to raise
sufficient funds from other sources, we may be required to:
- refinance all or a portion of our debt and redeemable preferred stock; or
- sell all or a portion of our assets.
WE HAVE SUBSTANTIAL EXISTING DEBT AND PREFERRED STOCK AND WE WILL INCUR
SUBSTANTIAL ADDITIONAL OBLIGATIONS THAT WILL INCREASE THE RISK OF A DEFAULT.
As of June 30, 2001, we had outstanding ten issues of senior notes and one
issue of convertible subordinated notes totaling $4,603.6 million in principal
amount and accreted value, approximately $63.4 million in miscellaneous debt
obligations of our subsidiaries, and eight series of redeemable preferred stock
with an aggregate liquidation preference of $2,147.7 million. In addition, we
have a $1,000.0 million senior secured credit facility, under which $612.5
million was drawn at June 30, 2001. In July 2001, we borrowed the remaining
availability of $387.5 million. Based on our capital structure at June 30, 2001
and the existing interest rates for obligations with variable interest rates,
and assuming payment of dividends in additional shares of preferred stock for
the three series of our preferred stock that permit this type of dividend
payment, we estimate that our cash commitments for interest expense and dividend
payments for the year ending December 31, 2001 will be approximately $430.0
million.
The indentures under which our notes have been issued, and our senior
secured credit facility, permit us to incur substantial additional debt. We
fully expect to borrow substantial funds in the next several years. This
additional indebtedness will further increase the risk of a default unless we
can establish an adequate revenue base and generate sufficient cash flow to
repay our indebtedness. We may never establish an adequate revenue base to
produce an operating profit or generate adequate positive cash flow to provide
future capital expenditures and repayment of debt.
WE DO NOT HAVE SUFFICIENT ADDITIONAL FINANCING COMMITMENTS TO MEET OUR LONG TERM
NEEDS AND, IF WE ARE NOT SUCCESSFUL IN RAISING ADDITIONAL CAPITAL, WE WILL NOT
BE ABLE TO BUILD AND MAINTAIN OUR BUSINESS, WHICH MAY ADVERSELY AFFECT OUR
ABILITY TO COMPETE.
Building our business will require substantial additional capital spending.
Our capital spending plans have increased substantially over time, as our
strategy has evolved and our planned networks have grown larger and more robust.
We will need to raise additional capital because our anticipated future capital
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requirements exceed the $1,369.0 million in cash and marketable securities we
had on hand as of June 30, 2001.
At different points in recent years, debt and equity financing for
technology companies in general, and competitive communications companies in
particular, have not been available on terms that we would consider acceptable.
Specifically, in recent months, conditions in the capital markets for such
companies have deteriorated. Consequently, the capital markets may be less
receptive to debt and equity offerings by such companies at this time. If, as a
result of these existing market conditions or other factors, we fail or are
unable to raise sufficient capital when needed, we may be required to further
delay or abandon some of our planned future expansion or expenditures, which
could have a material adverse effect on our growth and our ability to compete in
the telecommunications services industry and generate profits for stockholders,
and could even result in a payment default on our existing debt.
THE COVENANTS IN OUR INDENTURES AND SENIOR SECURED CREDIT FACILITY RESTRICT OUR
FINANCIAL AND OPERATIONAL FLEXIBILITY, WHICH COULD HAVE AN ADVERSE AFFECT ON OUR
RESULTS OF OPERATIONS AND ON THE VALUE OF YOUR INVESTMENT.
The indentures under which our senior notes have been issued and our senior
secured credit facility contain covenants that restrict, among other things, our
ability to borrow money, grant additional liens on our assets, make particular
types of investments or other restricted payments, sell assets or merge or
consolidate. Our senior secured credit facility also requires us to maintain
specified financial ratios. If we fail to comply with these covenants or meet
these financial ratios, the holders of our senior notes or the lenders under our
senior secured credit facility could declare a default and demand immediate
repayment. Unless we cure any such default, they could seek a judgment and
attempt to seize our assets to satisfy the debt to them. The security for our
senior secured credit facility consists of all of the assets purchased with the
proceeds thereof, the stock of certain of our direct subsidiaries, all of our
assets and, to the extent of $125.0 million of guaranteed debt, assets of our
subsidiaries. A default under any of these agreements could adversely affect our
rights under other commercial agreements.
In addition, we are required to use the net proceeds from the sale of
certain series of senior notes and senior discount notes, and a portion of the
proceeds drawn under our senior secured credit facility, to fund expenditures
for the construction, improvement and acquisition of new and existing networks
and other assets used in our business and direct and indirect investments in
certain joint ventures to fund similar expenditures. Prior to the application of
all such proceeds, we may invest them in marketable securities.
Our existing debt obligations and outstanding redeemable preferred stock
also could affect our financial and operational flexibility, as follows:
- they may impair our ability to obtain additional financing in the future;
- they will require that a substantial portion of our cash flow from
operations and financing activities be dedicated to the payment of
interest on debt and dividends on preferred stock, which will reduce the
funds available for other purposes;
- they may limit our flexibility in planning for or reacting to changes in
market conditions; and
- they may cause us to be more vulnerable in the event of a downturn in our
business.
RISKS RELATED TO NETWORK DEVELOPMENT
IF WE CANNOT QUICKLY AND EFFICIENTLY INSTALL OUR NETWORK HARDWARE, WE WILL BE
UNABLE TO GENERATE REVENUE, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Each of our networks consists of many different pieces of hardware,
including switches, routers, fiber optic cables, electronics and combination
radio transmitter/receivers, known as transceivers, and associated equipment,
which are difficult to install. If we cannot install this hardware quickly, the
time in which customers can be connected to our network and we can begin to
generate revenue from our network will be delayed. You should be aware that the
construction of our North American inter-city fiber optic network is not under
our control, but is under the control of Level 3 Communications. If Level 3
fails to complete its network on time or if it fails to perform as specified,
our strategy of linking our local networks to one another and creating an
end-to-end North American network will be delayed.
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THE FAILURE OF OUR OPERATIONS SUPPORT SYSTEMS TO PERFORM AS WE EXPECT COULD
IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS OR RESULT IN
INCREASED CAPITAL EXPENDITURES, WHICH WOULD ADVERSELY AFFECT OUR REVENUES.
Some of the operations support systems we employ are proprietary. In
addition, we are continuing to integrate the operations support systems
previously employed by Concentric Network Corporation, which we acquired in June
2000, into our operations support systems. Our operations support systems are
expected to be an important factor in our success. If any of these systems fail
or do not perform as expected, we could suffer customer dissatisfaction, loss of
business or the inability to add customers on a timely basis, any of which would
adversely affect our revenues. Furthermore, problems may arise with higher
processing volumes or with additional automation features, which could
potentially result in system breakdowns and delays and additional unanticipated
expense to remedy the defect or to replace the defective system with an
alternative system.
IF OUR SELECTION OF IP TECHNOLOGY IS INCORRECT, INEFFECTIVE OR UNACCEPTABLY
COSTLY, IMPLEMENTATION OF OUR BUSINESS STRATEGY COULD BE DELAYED, WHICH WOULD
ADVERSELY AFFECT OUR GROWTH AND OPERATING RESULTS.
We plan to rely on IP technology as the basis for our planned end-to-end
network. Although IP technology is used throughout the Internet, its extension
to support other telecommunications applications, such as voice and video, has
not yet been perfected, and IP technology currently has several deficiencies,
including poor reliability and quality. Integrating this technology into our
network may prove difficult and may be subject to delays. In addition,
improvements to the IP technology may not become available in a timely fashion
or at a reasonable cost, if at all. If the technology choices we make prove to
be incorrect, ineffective or unacceptably costly, our strategy of creating an
end-to-end North American network could be delayed, which would adversely affect
our growth and operating results.
WE MAY NOT BE ABLE TO CONTINUE TO CONNECT OUR NETWORK TO THE INCUMBENT CARRIER'S
NETWORK OR MAINTAIN INTERNET PEERING ARRANGEMENTS ON FAVORABLE TERMS, WHICH
WOULD IMPAIR OUR GROWTH AND PERFORMANCE.
We must be a party to interconnection agreements with the incumbent carrier
in order to connect our customers to the public telephone network. We may not be
able to renegotiate or maintain interconnection agreements in all of our markets
on favorable terms. If we are unable to renegotiate or maintain interconnection
agreements in all of our markets on favorable terms, it could adversely affect
our ability to provide services in the affected markets.
We require continued peering arrangements with other ISPs, particularly the
large, national ISPs, to implement our planned expansion of data services
including Internet access services. Peering arrangements are agreements among
Internet backbone providers to exchange data traffic. Depending on the relative
size of the carriers involved, these exchanges may be made without settlement
charge. We may not be able to renegotiate or maintain peering arrangements on
favorable terms, which would impair our growth and performance.
PHYSICAL SPACE LIMITATIONS IN OFFICE BUILDINGS AND LANDLORD DEMANDS FOR FEES OR
REVENUE SHARING COULD LIMIT OUR ABILITY TO CONNECT CUSTOMERS DIRECTLY TO OUR
NETWORKS AND INCREASE OUR COSTS, WHICH WOULD ADVERSELY IMPACT OUR RESULTS.
Connecting a customer who is a tenant in an office building directly to our
network requires installation of in-building cabling through the building's
risers from the customer's office to our fiber in the street or our antenna on
the roof. In some office buildings, particularly the premier buildings in the
largest markets, the risers are already close to their maximum physical capacity
due to the entry of other competitive carriers into the market. Moreover, the
owners of these buildings are increasingly requiring competitive
telecommunications service providers like us to pay fees or otherwise share
revenue as a condition of access. We have not been required to pay these fees in
the smaller markets we have served in the past, but have been and may continue
to be required to do so to penetrate larger markets, which reduces our operating
margins. In addition, some major office building owners have equity interests
in, or joint ventures with, companies offering broadband communications services
over fiber optic networks and may have an incentive to encourage their tenants
to choose those companies' services over ours or to grant those companies more
favorable terms for installation of in-building cabling.
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THE AVAILABILITY OF EQUIPMENT THAT TAKES ADVANTAGE OF THE MULTIPOINT
CHARACTERISTICS OF OUR BROADBAND WIRELESS SPECTRUM LICENSES HAS BEEN ONLY
RECENTLY DEVELOPED AND MAY CONTINUE TO CAUSE PERFORMANCE PROBLEMS OR DELAYS.
Our broadband fixed wireless licenses permit us to transmit from a fixed
point to multiple receivers, which may reduce our installation costs, as
compared with traditional point-to-point links. Since this is a newly-authorized
service, vendors are only beginning to offer multipoint equipment, and we
encountered performance problems with it in its initial deployment. These
performance problems may not be satisfactorily resolved, which could delay our
plans to extend our services to customers through wireless connections.
Fixed wireless direct connections require us to obtain access to rooftops
from building owners and to satisfy local construction and zoning rules for
antennas and transmitters. The need to obtain these authorizations could be an
additional source of cost and delay.
OUR INABILITY TO ACCURATELY PREDICT THE TOTAL COST OF OUR BROADBAND WIRELESS
FIRST MILE DEPLOYMENT COULD HAVE AN ADVERSE IMPACT ON OUR RESULTS.
Although we have selected vendors from which we may purchase broadband
wireless equipment, because our fixed wireless deployment strategy contemplates
utilizing a number of equipment vendors, we do not know precisely how much the
equipment we will need will cost. Installation costs are expected to vary
greatly, depending on the particular characteristics of the locations to be
served. After initial installation, we expect to incur additional costs to
reconfigure, redeploy and upgrade our wireless direct connections as
technologies improve.
IT IS EXPENSIVE AND DIFFICULT TO SWITCH NEW CUSTOMERS TO OUR NETWORK, AND LACK
OF COOPERATION OF THE INCUMBENT CARRIER CAN SLOW THE NEW CUSTOMER CONNECTION
PROCESS, WHICH COULD IMPACT OUR ABILITY TO COMPETE.
It is expensive and difficult for us to switch a new customer to our
network because:
- a potential customer faces switching costs if it decides to become our
customer, and
- we require cooperation from the incumbent carrier in instances where
there is no direct connection between the customer and our network.
Our principal competitors, the incumbent carriers, are already established
providers of local telephone services to all or virtually all telephone
subscribers within their respective service areas. Their physical connections
from their premises to those of their customers are expensive and difficult to
duplicate. To complete the new customer provisioning process, we rely on the
incumbent carrier to process certain information. The incumbent carriers have a
financial interest in retaining their customers, which could reduce their
willingness to cooperate with our new customer provisioning requests.
WE DEPEND ON OUR KEY PERSONNEL AND QUALIFIED TECHNICAL STAFF AND, IF WE LOSE
THEIR SERVICES, OUR ABILITY TO MANAGE THE DAY-TO-DAY ASPECTS OF OUR COMPLEX
NETWORK WILL BE WEAKENED. WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED
PERSONNEL, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We are highly dependent on the services of our management and other key
personnel. The loss of the services of our senior executive management team or
other key personnel could cause us to make less successful strategic decisions,
which could hinder the introduction of new services or the entry into new
markets. We could also be less prepared for technological or marketing problems,
which could reduce our ability to serve our customers and lower the quality of
our services.
We believe that a critical component for our success will be the attraction
and retention of qualified professional and technical personnel. In addition, we
must also develop and retain a large and sophisticated sales force, particularly
in connection with our plan to target larger national customers. We have
experienced intense competition for qualified personnel in our business with the
technical and other skill sets that we seek. We may not be able to attract,
develop, motivate and retain experienced and innovative personnel. If we fail to
do so, there will be an adverse effect on our ability to generate revenue and,
consequently, our operating cash flow.
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RISKS RELATED TO COMPETITION AND OUR INDUSTRY
WE FACE COMPETITION IN LOCAL MARKETS FROM OTHER CARRIERS, PUTTING DOWNWARD
PRESSURE ON PRICES, WHICH COULD IMPAIR OUR RESULTS.
We face competition in each of our markets principally from the incumbent
carrier in that market, but also from recent and potential market entrants,
including long distance carriers seeking to enter, reenter or expand entry into
the local exchange marketplace. This competition places downward pressure on
prices for local telephone service and data services, which can adversely affect
our operating results. In addition, we expect competition from other companies,
such as cable television companies, electric utilities, microwave carriers,
wireless telephone system operators and private networks built by large end-
users. If we are not able to compete effectively with these industry
participants, our operating results could be adversely affected.
WE FACE COMPETITION IN LONG DISTANCE MARKETS, PUTTING DOWNWARD PRESSURE ON
PRICES, WHICH COULD IMPAIR OUR RESULTS.
We also face intense competition from long distance carriers in the
provision of long distance services. This competition has substantially reduced
prices for long distance services in recent years. Although the long distance
market is dominated by three major competitors, AT&T, WorldCom and Sprint,
hundreds of other companies, such as Qwest, also compete in the long distance
marketplace. The incumbent carriers also are beginning to compete in the long
distance market. If we are not able to effectively compete with these industry
participants, our operating results could be adversely affected.
WE FACE COMPETITION IN CREATING A NATIONAL BROADBAND NETWORK, PUTTING DOWNWARD
PRESSURE ON PRICES, WHICH COULD IMPAIR OUR RESULTS.
Several of our competitors, such as AT&T, WorldCom, Qwest, Level 3, and
Williams, are creating broadband networks that would compete directly with the
network we are building. In addition, other competitors have the ability to do
so as well. If we are not able to successfully compete with these service
providers, our operating results could be adversely affected.
WE FACE COMPETITION FOR DATA SERVICES, PUTTING DOWNWARD PRESSURE ON PRICES,
WHICH COULD ADVERSELY AFFECT OUR RESULTS.
Competitors for data services consist of online service providers, Internet
service providers and web hosting providers. New competitors continue to enter
this market and include large computer hardware, software, media and other
technology and telecommunications companies, including the incumbent carriers.
Many communications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. This competition puts downward pressure on
prices. If we are unable to successfully compete with these data service
providers, our operating results could be adversely affected.
TECHNOLOGICAL ADVANCES AND REGULATORY CHANGES ARE ERODING TRADITIONAL BARRIERS
BETWEEN FORMERLY DISTINCT TELECOMMUNICATIONS MARKETS, WHICH COULD INCREASE THE
COMPETITION WE FACE AND IMPAIR OUR GROWTH.
New technologies, such as voice-over-IP, and regulatory
changes -- particularly those permitting incumbent local telephone companies to
provide long distance services -- are blurring the distinctions between
traditional and emerging telecommunications markets. In addition, the increasing
importance of data services has focused the attention of most telecommunications
companies on this growing sector. As a result, a competitor in any of our
business areas is potentially a competitor in our other business areas, which
could impair our prospects and growth.
MANY OF OUR COMPETITORS HAVE SUPERIOR RESOURCES, WHICH COULD PLACE US AT A COST
AND PRICE DISADVANTAGE.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. As a result, some of our
competitors can raise capital at a lower cost than we can, and they may be able
to develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than we can. Also, our competitors' greater brand name
recognition may require us to price
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our services at lower levels in order to win business. Finally, our competitors'
cost advantages give them the ability to reduce their prices for an extended
period of time if they so choose.
THE TECHNOLOGIES WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR ABILITY TO
COMPETE EFFECTIVELY AND ADVERSELY IMPACT OUR RESULTS.
The telecommunications industry is subject to rapid and significant changes
in technology. Most technologies and equipment that we use or will use,
including wireline and wireless transmission technologies, circuit and packet
switching technologies, multiplexing technologies, data transmission
technologies, including the DSL, ATM and IP technologies, and server and storage
technologies may become obsolete. If we do not replace or upgrade technology and
equipment that becomes obsolete, we will be unable to compete effectively
because we will not be able to meet the expectations of our customers, which
could cause our results to suffer.
The introduction of new technologies may reduce the cost of services
similar to those that we plan to provide. As a result, our most significant
competitors in the future may be new entrants to the telecommunications
industry. These new entrants may not be burdened by an installed base of
outdated equipment, and therefore may be able to more quickly respond to
customer demands.
Additionally, the markets for data and Internet-related services are
characterized by rapidly changing technology, evolving industry standards,
changes in customer needs, emerging competition and frequent new product and
service introductions. The future success of our data services business will
depend, in part, on our ability to accomplish the following in a timely and
cost-effective manner:
- effectively use leading technologies;
- continue to develop technical expertise;
- develop new services that meet changing customer needs; and
- influence and respond to emerging industry standards and other
technological changes.
Our pursuit of necessary technological advances may require substantial
time and expense.
WE MAY BE REQUIRED TO PAY PATENT LICENSING FEES, WHICH WILL DIVERT FUNDS THAT
COULD BE USED FOR OTHER PURPOSES AND COULD ADVERSELY IMPACT OUR RESULTS.
From time to time, we receive claims by third parties to the effect that
technology or processes used by us in our business are covered by those third
parties' alleged patent rights and related requests to consider licensing
certain patents held by those third parties. Should we be required to pay
license fees in the future, such payments, if substantial, could have a material
adverse effect on our results of operations.
OUR COMPANY AND INDUSTRY ARE HIGHLY REGULATED, WHICH RESTRICTS OUR ABILITY TO
COMPETE IN OUR TARGET MARKETS AND IMPOSES SUBSTANTIAL COMPLIANCE COSTS ON US
THAT ADVERSELY IMPACT OUR RESULTS.
We are subject to varying degrees of regulation from federal, state and
local authorities, as well as from various national and local agencies in Europe
and Canada. This regulation imposes substantial compliance costs on us. It also
restricts our ability to compete. For example, in each state in which we desire
to offer our services, we are required to obtain authorization from the
appropriate state commission. If we do not receive authorization for markets or
services to be launched in the future, our ability to offer services in our
target markets could be adversely affected.
THE REQUIREMENT THAT WE OBTAIN PERMITS AND RIGHTS-OF-WAY TO DEVELOP OUR NETWORK
INCREASES OUR COST OF DOING BUSINESS AND COULD ADVERSELY AFFECT OUR PERFORMANCE
AND RESULTS.
In order for us to acquire and develop our fiber networks, we must obtain
local franchises and other permits, as well as rights-of-way and fiber capacity
from entities such as incumbent carriers and other utilities, railroads, long
distance companies, state highway authorities, local governments and transit
authorities. The process of obtaining these permits and rights-of-way is
time-consuming and burdensome and increases our cost of doing business.
We may not be able to maintain our existing franchises, permits and
rights-of-way that we need to implement our business. We may also be unable to
obtain and maintain the other franchises, permits and rights that we require. A
sustained and material failure to obtain or maintain these rights could
materially adversely affect our performance and operating results in the
affected metropolitan area.
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CREDIT RISKS ASSOCIATED WITH OUR INTERNET-RELATED CUSTOMERS AND SERVICE
PROVIDERS MAY ADVERSELY AFFECT US.
Many of our customers are in various internet-related businesses, including
ISPs, some of which have been adversely affected by recent business trends in
that sector. To the extent the credit quality of these customers deteriorates or
these customers seek bankruptcy protection, our ability to collect our
receivables, and ultimately our operating results, may be adversely affected.
We provide a significant portion of our DSL service through wholesale
arrangements with other DSL service providers, many of which have been adversely
affected by recent trends in that sector. One such provider, Northpoint
Communications Group, Inc., has sold its assets in connection with its
bankruptcy proceedings, and is no longer able to provide wholesale DSL service
to us and other service providers. To the extent that other DSL service
providers are unable to provide wholesale DSL service to us, we in turn may be
unable to provide that service to our customers if we cannot provide service on
our own DSL equipment or obtain wholesale service from another DSL service
provider. In addition, the transition of our DSL customers' services to another
source of DSL service may cause potential disruptions for the affected DSL
customers' services. If we are unable to serve these customers, we will lose the
related revenues.
RISKS RELATED TO GROWTH AND DEVELOPMENT OF DATA SERVICES
IF WE ARE UNABLE TO MANAGE OUR GROWTH, THE CONTINUED RAPID GROWTH OF OUR
NETWORK, SERVICES AND SUBSCRIBERS COULD BE SLOWED, WHICH WOULD ADVERSELY IMPACT
OUR RESULTS.
We have rapidly expanded and developed our network and service offerings
and increased the number of our subscribers, and expect to continue to do so.
This has placed and will continue to place significant demands on our
management, technical staff, operational and financial systems and procedures
and controls. We may not be able to manage our anticipated growth effectively,
which would harm our business, results of operations and financial condition.
Further expansion and development of our network, service offerings and
subscriber base will depend on a number of factors, including:
- technological developments, including improvements in IP technology;
- our ability to hire, train and retain qualified personnel in a
competitive labor market;
- availability of rights-of-way, building access and antenna sites;
- development of customer billing, order processing and network management
systems that are capable of serving our growing customer base; and
- cooperation of the incumbent local telephone companies.
IF WE ARE NOT ABLE TO SUCCEED IN THE DATA SERVICES MARKET, THE VALUE OF YOUR
INVESTMENT COULD BE ADVERSELY IMPACTED.
Our ability to succeed in the data services market depends to a large
extent on our ability to build a tailored, value-added network services
business. Our ability to do so is subject to the following risks:
- the data services markets are relatively new, and current and future
competitors are likely to introduce competing services or products, which
may result in market saturation;
- critical issues concerning commercial use of tailored, value-added
services and Internet services, including security, reliability, ease and
cost of access, and quality of service, remain unresolved and may impact
the growth of such services;
- the market for data services may fail to grow or grow more slowly than
anticipated;
- our inability to obtain sufficient quantities of sole- or limited-source
components required to provide data services or to develop alternative
sources, if required, could result in delays and increased costs in
expanding, and overburdening of, our network infrastructure;
- suppliers may not provide us with products or components that comply with
Internet standards or that properly inter-operate with other products or
components used in our network infrastructure;
- the failure of any link in the delivery chain, including the networks
with which we may establish public or private peering arrangements or
private transit could impact our ability to serve customers;
- the market for tailored value-added network services is extremely
competitive, and we expect that competition will intensify in the future;
- we could experience interruptions in service due to interruption in
electricity and other utility services, a natural disaster, such as an
earthquake, or other unanticipated problems; and
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- we could have liability for information disseminated through our network.
WE FACE RISKS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR INTERNATIONAL
OPERATIONS.
Through the Concentric acquisition, we have acquired entities operating in
the United Kingdom and The Netherlands. We also have an interest in a joint
venture located in Canada. We may in the future expand into other international
markets, either through acquisition of businesses or assets, organic
development, or a combination thereof. The following risks are inherent in doing
business on an international level:
- unexpected changes in regulatory requirements or tax consequences;
- export restrictions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
One or more of these factors could have a material adverse effect on our
future international operations.
RISKS RELATED TO THE CONVERTIBLE NOTES
THE CONVERTIBLE NOTES ARE SUBORDINATED TO OUR EXISTING AND FUTURE SENIOR DEBT,
AND WE MAY BE UNABLE TO REPAY OUR OBLIGATIONS UNDER THE CONVERTIBLE NOTES.
The convertible notes are unsecured and subordinated in right of payment to
all of our existing and future senior debt. In addition, holders of our
preferred stock have and will have claims relating to our assets that are senior
to the class A common stock. As of June 30, 2001 we had approximately $4,698.6
million of indebtedness and other obligations ranking senior to the convertible
notes, and shares of outstanding preferred stock with an aggregate liquidation
preference of approximately $2,147.7 million ranking senior to the class A
common stock. The indenture governing the convertible notes does not restrict
the incurrence of senior indebtedness or other debt or the issuance of senior
preferred stock by us or our subsidiaries. Because the convertible notes are
subordinated to our senior debt, in the event of:
- our bankruptcy, liquidation or reorganization;
- the acceleration of the convertible notes due to an event of default
under the indenture; and
- certain other events,
we will make payments on the convertible notes only after we have satisfied all
of our senior debt obligations. Therefore, we may not have sufficient assets
remaining to repay the convertible notes in whole or in part.
In addition, all payments on the convertible notes may be prohibited in the
event of a payment default on senior debt obligations and may be prohibited in
the event of non-payment defaults for 179 days or more.
BECAUSE THE CONVERTIBLE NOTES ARE STRUCTURALLY SUBORDINATED TO THE OBLIGATIONS
OF OUR SUBSIDIARIES, YOU MAY NOT BE FULLY REPAID IF WE BECOME INSOLVENT.
Creditors of any of our subsidiaries, including the lenders under our
senior secured credit facility and trade creditors, have and will have claims
relating to the assets of that subsidiary that are senior to the convertible
notes. As a result, the convertible notes are structurally subordinated to the
debt and other obligations of our subsidiaries. Holders of the convertible notes
have no claim to the assets of any of our subsidiaries.
BECAUSE THE CONVERTIBLE NOTES THAT YOU HOLD ARE UNSECURED, YOU MAY NOT BE FULLY
REPAID IF WE BECOME INSOLVENT.
The convertible notes will not be secured by any of our assets or our
subsidiaries' assets. The indentures relating to the convertible notes and our
outstanding senior notes permit us to incur secured debt. If we became insolvent
the holders of any secured debt would receive payments from the assets used
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as security before you receive payments. As of June 30, 2001, we had drawn
$612.5 million of our outstanding secured debt under our $1 billion senior
secured credit facility. In July 2001, we borrowed the remaining availability of
$387.5 million.
IF WE EXPERIENCE A DESIGNATED EVENT, WE MAY BE UNABLE TO PURCHASE THE
CONVERTIBLE NOTES YOU HOLD AS REQUIRED UNDER THE INDENTURE.
Upon the occurrence of designated events, including changes of control and
a termination of trading, we must make an offer to purchase all outstanding
convertible notes at a purchase price equal to 100% of the principal amount of
the convertible notes, plus accrued interest. We may not have sufficient funds
to pay the purchase price for all convertible notes tendered by holders seeking
to accept the offer to purchase. In addition, the indentures relating to the
convertible notes and each issue of our outstanding and proposed notes, the
senior secured credit facility and our other debt agreements may require us to
repurchase the other debt upon the occurrence of one or more designated events
or may prohibit us from purchasing any convertible notes before their stated
maturity, including upon a designated event. Moreover, your right to require us
to purchase your convertible notes upon a termination of trading will not be
effective until certain restrictions contained in our senior secured credit
facility have been waived or the indebtedness under that facility is repaid and
that facility is terminated. In any event, our ability to make such a payment
upon a designated event is subject to restrictions contained in, and payments
due under, our existing indentures and senior secured credit facility, and to
the subordination provisions of the convertible notes. Our failure to purchase
all validly tendered notes would result in an event of default under the
indenture. See "Description of the Convertible Notes -- Repurchase at Option of
Holders Upon a Designated Event."
THERE MAY BE A LIMITED MARKET FOR THE CONVERTIBLE NOTES, SO YOU MAY BE UNABLE TO
SELL THE CONVERTIBLE NOTES.
We do not intend to apply for listing of the convertible notes on any
securities exchange or for the inclusion of the convertible notes in any
automated quotation system. In addition, any market making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act. As a
result, a market for the convertible notes may not develop or, if it does, may
not be maintained. Consequently, the convertible notes are and may continue to
be relatively illiquid, and you may be unable to sell your convertible notes.
Various factors could have a materially adverse effect on the trading price
of the convertible notes, including the failure of an active market to develop
and fluctuations in the prevailing interest rates. In addition, our operating
results and prospects could from time to time be below the expectations of
public market analysts and investors, which could adversely affect public
perception of our creditworthiness and, therefore, the trading price of the
convertible notes. The trading price of the convertible notes could also be
significantly affected by the market price of our class A common stock, which
has fluctuated significantly since it has been publicly traded and may continue
to do so in the future.
WE DO NOT PLAN TO PAY ANY DIVIDENDS ON OUR COMMON STOCK.
We do not anticipate paying any dividends on, or repurchase shares of, our
class A common stock for the foreseeable future. Our senior secured credit
facility and the indentures governing our senior notes restrict our ability to
pay cash dividends.
WE HAVE A SUBSTANTIAL NUMBER OF SHARES OF CLASS A COMMON STOCK THAT MAY BE SOLD,
WHICH COULD AFFECT THE TRADING PRICES OF OUR CLASS A COMMON STOCK AND THE
CONVERTIBLE NOTES.
We have a substantial number of shares of class A common stock subject to
stock options and warrants and the convertible notes may be converted into
shares of class A common stock. We cannot predict the effect, if any, that
future sales of shares of class A common stock or the convertible notes, or the
availability of shares of class A common stock or the convertible notes for
future sale, will have on the market price of our class A common stock or the
convertible notes. Sales of substantial amounts of class
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A common stock (including shares issued upon the exercise of stock options or
warrants or the conversion of notes), or the perception that such sales could
occur, may adversely affect prevailing market prices for our class A common
stock and the convertible notes.
OTHER RISKS
CRAIG O. MCCAW, WHO CONTROLS XO, MAY HAVE INTERESTS WHICH ARE ADVERSE TO YOUR
INTERESTS AND HE MAY ACT IN A MANNER THAT ADVERSELY IMPACTS THE VALUE OF YOUR
INVESTMENT.
Craig O. McCaw, primarily through his majority ownership and control of
Eagle River Investments, L.L.C., currently controls more than 50% of our total
voting power, and holds proxies that are likely to continue to assure that Mr.
McCaw will hold a majority of that voting power. Because Mr. McCaw has the
ability to control our direction and future operations and has interests in
other companies that may compete with us, he may make decisions which are
adverse to your interests and the interests of our other security holders.
Mr. McCaw effectively controls a decision whether a change of control of XO
will occur. Moreover, Delaware corporate law could make it more difficult for a
third party to acquire control of us, even if a change of control could be
beneficial to you.
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FORWARD-LOOKING STATEMENTS
Our forward-looking statements are subject to a variety of factors that
could cause actual results to differ significantly from current beliefs.
Some statements and information contained in this prospectus and in the
documents incorporated by reference into this prospectus are not historical
facts, but are "forward-looking statements," as such term is defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "plans," "may," "will," "would," "could," "should," or
"anticipates" or the negative of these words or other variations of these words
or other comparable words, or by discussions of strategy that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding:
- product and service development, including the development and deployment
of data products and services based on IP, Ethernet and other
technologies and strategies to expand our targeted customer base and
broaden our sales channels;
- market development, including the number and location of markets we
expect to serve;
- network development, including those with respect to IP network and
facilities development and deployment, switches using next generation
switching technology, broadband fixed wireless technology, testing and
installation, high speed technologies such as DSL, and matters relevant
to our metro and inter-city networks; and
- liquidity and financial resources, including anticipated capital
expenditures, funding of capital expenditures and anticipated levels of
indebtedness.
All such forward-looking statements are qualified by the inherent risks and
uncertainties surrounding expectations generally, and also may materially differ
from our actual experience involving any one or more of these matters and
subject areas. The operation and results of our business also may be subject to
the effect of other risks and uncertainties in addition to the relevant
qualifying factors identified in the above "Risk Factors" section and elsewhere
in this prospectus and in the documents incorporated by reference in this
prospectus, including, but not limited to:
- general economic conditions in the geographic areas that we are targeting
for communications services;
- the ability to achieve and maintain market penetration and average per
customer revenue levels sufficient to provide financial viability to our
business;
- access to sufficient debt or equity capital to meet our operating and
financing needs;
- the quality and price of similar or comparable communications services
offered or to be offered by our current or future competitors;
- future telecommunications-related legislation or regulatory actions; and
- various other events, conditions and circumstances, many of which are
beyond our control.
Many factors mentioned in our discussion in this prospectus will be
important in determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any additional disclosures we make in our
Forms 10-K, 10-Q and 8-K reports to the SEC. Also note that we provide a
cautionary discussion of risks and uncertainties under "Risk Factors" on page 4
of this prospectus. These are factors that we think could cause our actual
results to differ materially from expected results. Other factors besides those
listed here could also adversely affect us.
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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table shows our consolidated ratio of earnings to fixed
charges and our consolidated ratio of earnings to fixed charges and preferred
dividends:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------------- ENDED
1996 1997 1998 1999 2000 JUNE 30, 2001
---- ---- ---- ---- ---- --------------
Ratio of earnings to fixed charges................ NA NA NA NA NA NA
Ratio of earnings to fixed charges and
preferred dividends............................. NA NA NA NA NA NA
</Table>
For the years ended December 31, 1996, 1997, 1998, 1999 and 2000, and the
six months ended June 30, 2001, fixed charges were in excess of earnings during
the periods presented by a deficiency in the amount of $70.0 million, $127.9
million, $279.0 million, $564.2 million, $1,125.9 million and $932.4 million,
respectively.
For the years ended December 31, 1996, 1997, 1998, 1999 and 2000, and the
six months ended June 30, 2001, fixed charges and preferred dividends were in
excess of earnings during the periods presented by a deficiency in the amount of
$70.0 million, $167.2 million, $337.7 million, $633.4 million, $1,272.3 million
and $1,011.1 million, respectively.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the convertible
notes or the class A common stock into which the convertible notes are
convertible.
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DESCRIPTION OF THE CONVERTIBLE NOTES
We issued the convertible notes under an indenture, dated as of January 12,
2001, between us and U.S. Trust Company, National Association, as trustee. The
terms of the convertible notes include those provided in the indenture and those
provided in the registration rights agreement that we executed in connection
with the issuance of the convertible notes. The following description is only a
summary of the material provisions of the convertible notes, the indenture and
the registration rights agreement. We urge you to read these documents in their
entirety because they, and not this description, define your rights as holders
of these notes. Copies of these documents have been filed with the Securities
and Exchange Commission. See "Where You Can Find Additional Information." When
we refer to XO in this section, we refer only to XO Communications, Inc., a
Delaware corporation, and not its current or future subsidiaries. Certain
capitalized terms used in this section are defined at the end of this section
under "-- Certain Definitions."
BRIEF DESCRIPTION OF THE CONVERTIBLE NOTES
The convertible notes are:
- limited to $517,500,000 aggregate principal amount and issued in
denominations of $1,000 and integral multiples of $1,000 in fully
registered form;
- general unsecured obligations of XO; subordinate in right of payment to
all of our existing and future Senior Debt;
- convertible into class A common stock at a conversion rate of 39.1484
shares per $1,000 principal amount of notes (equal to a conversion price
of approximately $25.5438 per share), subject to certain adjustments
thereof;
- subject to repurchase by us at your option if a Designated Event occurs;
and
- due on January 15, 2009, unless earlier converted or repurchased by us at
your option.
The indenture does not contain any financial covenants and does not
restrict us from paying dividends, incurring Senior Debt or any other
indebtedness or issuing or repurchasing our other securities. The indenture also
does not protect you in the event of a highly leveraged transaction or a change
of control of XO except to the extent described under "-- Repurchase at the
Option of Holders Upon a Designated Event" below.
You may present definitive convertible notes for conversion, registration
of transfer and exchange, without service charge, at our office or agency in New
York City, which shall initially be the office or agency of the trustee in New
York City. For information regarding conversion, registration of transfer and
exchange of global notes, see --"Form, Denomination and Registration; Trustee"
below.
INTEREST
The convertible notes bear interest at a rate of 5.75% per year from
January 12, 2001 or from the most recent payment date to which interest has been
paid or duly provided for. We will pay interest semiannually in arrears on
January 15 and July 15 of each year. Interest will be paid to the person in
whose name a convertible note is registered at the close of business on the
January 1 or July 1, as the case may be, immediately preceding the relevant
interest payment date, except that when we repurchase convertible notes tendered
in connection with a Designated Event, we will pay the interest accrued through
the date of repurchase to the tendering holder rather than to the holder of
record. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Principal and interest will be payable at our office or agency maintained
for such purpose or, at our option, payment of interest may be made by check
mailed to the holders of the convertible notes at their respective addresses set
forth in the register of holders of convertible notes. Until otherwise
designated by us, the office or agency maintained for such purpose will be the
principal corporate trust office of the trustee.
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CONVERSION RIGHTS
GENERALLY
You may convert any outstanding convertible notes (or any portion thereof
that is an integral multiple of $1,000) into our class A common stock, initially
at a conversion rate of 39.1484 shares of our class A common stock per $1,000
principal amount of convertible notes (equivalent to a conversion price of
approximately $25.5438 per share of class A common stock). The conversion rate
is subject to adjustment as described below. Except as described below, no
adjustment will be made on conversion of any convertible notes for interest
accrued thereon or for dividends on any class A common stock issued.
If convertible notes are converted after a record date for the payment of
interest and prior to the next succeeding interest payment date, the convertible
notes being converted must be accompanied by funds equal to the interest payable
on the succeeding interest payment date on the principal amount so converted. We
will not issue fractional shares of class A common stock upon conversion of
convertible notes and, in lieu thereof, will pay a cash adjustment based upon
the closing sale price of the class A common stock on the last trading day prior
to the date of conversion or, at our election, round the fraction up to the
nearest whole share. In the event you exercise your right to require us to
repurchase convertible notes upon a Designated Event, your conversion rights
will terminate on the close of business on the Designated Event offer
termination date unless we default in the payment due upon repurchase or you
elect to withdraw the submission of election to repurchase. See "Repurchase at
Option of Holders Upon a Designated Event."
EXERCISE OF CONVERSION RIGHTS
You may exercise conversion rights at any time prior to the close of
business on the last trading day prior to the maturity date of the convertible
notes by delivering the convertible note at the specified office of a conversion
agent, accompanied by a duly signed and completed notice of conversion, together
with any funds that may be required as described in the preceding paragraph. A
notice of conversion can be obtained from the trustee. Beneficial owners of
interests in a global note may exercise their right of conversion by delivering
to The Depository Trust Company the appropriate instruction form for conversion
pursuant to DTC's conversion program. The conversion date will be the date on
which the convertible note, the duly signed and completed notice of conversion,
and any funds that may be required as described in the preceding paragraph are
so delivered. If you deliver a convertible note held in your name for
conversion, you will not be required to pay any taxes or duties payable in
respect of the issue or delivery of class A common stock on conversion, but you
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 class A common stock in a name
other than yours. Certificates representing shares of class A common stock will
not be issued or delivered unless all taxes and duties, if any, payable by the
holder of the convertible notes being converted have been paid.
ADJUSTMENT OF THE CONVERSION PRICE GENERALLY
The conversion price is subject to adjustment in certain events discussed
below. No adjustment in the conversion price will be required unless the
adjustment would require a change of at least 1% of the conversion price then in
effect. Any adjustment that does not require a change of at least 1% of the
conversion price then in effect but would otherwise be required to be made will
be carried forward and taken into account in any subsequent adjustment. Except
as stated below, the conversion price will not be adjusted for the issuance of
class A common stock or any securities convertible into or exchangeable for
class A common stock or carrying the right to purchase any of the foregoing.
The events which may trigger an adjustment of the conversion price are:
(i) the issuance of common stock as a dividend or distribution on common
stock;
(ii) certain subdivisions and combinations of our common stock;
(iii) the issuance to all or substantially all holders of common stock of
certain rights or warrants to purchase common stock at a price per
share less than the Current Market Price;
(iv) the payment of dividends or other distribution to all holders of
common stock of shares of our capital stock (other than common stock)
or evidences of our indebtedness or assets (including
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securities, but excluding those rights, warrants, dividends and
distributions referred to above or paid exclusively in cash);
(v) the payment of dividends or other distributions consisting exclusively
of cash (excluding any cash portion of distributions referred to in
clause (iv)) to all holders of common stock to the extent such
distributions, combined together with (A) all such all-cash
distributions made within the preceding 12 months in respect of which
no adjustment has been made plus (B) any cash and the fair market
value of other consideration payable in respect of any tender offers
by us or any of our Subsidiaries for common stock concluded within the
preceding 12 months in respect of which no adjustment has been made,
exceeds 10% of our market capitalization (being the product of the
then current market price of the class A common stock times the number
of shares of common stock then outstanding) on the record date for
such distribution and
(vi) the purchase of common stock pursuant to a tender offer made by us or
any of our Subsidiaries to the extent that the aggregate
consideration, together with (X) any cash and the fair market value
of any other consideration payable in any other tender offer expiring
within 12 months preceding such tender offer in respect of which no
Conversion Price adjustment has previously been made plus (Y) the
aggregate amount of any such all-cash distributions referred to in
clause (v) 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 our market capitalization
on the expiration of such tender offer.
The conversion price may also be adjusted upon certain "changes of control"
and in other circumstances discussed below.
Adjustment of the Conversion Price Upon a Change of Control
In addition to the conversion price adjustment events discussed above, the
conversion price is subject to adjustment upon the occurrence of a Change of
Control in which:
- our stockholders receive consideration per share of class A common stock
that is greater than the conversion price, without giving effect to the
adjustment described below, at the effective time of the Change of
Control; and
- and (ii) at least 10% of the total consideration paid to our stockholders
consists of cash, cash equivalents, securities or other assets (other
than publicly traded securities), which we refer to as "non-public
consideration."
If the conversion price is adjusted as a result of a Change of Control,
upon conversion of convertible notes after the Change of Control, in addition to
the class A common stock or other securities deliverable upon the conversion of
the convertible notes as described in paragraphs (i) through (vi) above, the
holder of the convertible notes will receive a number of publicly traded
securities of the acquiror in the Change of Control transaction determined
through the following calculation:
PV cashflows X (non-public consideration/total consideration)
-------------------------------------------------------------
Acquiror stock price
<Table>
Where PV = the present value of the aggregate interest payments that
cashflows would have been payable on the convertible notes from the
date of conversion through January 15, 2004, calculated
using a discount rate equal to 3.25% plus the yield to
maturity of U.S. Treasury securities having a maturity
closest to, but not later than, January 15, 2004
Total = the total value of the consideration payable to our
consideration stockholders at the effective time of the Change of Control,
with the value of any assets or securities other than cash
or a publicly traded security being determined in good faith
by our board of directors based upon an opinion as to that
value obtained from an accounting, appraisal or investment
banking firm of international standing
Acquiror stock = the price per security of the acquiror's publicly traded
price securities delivered in connection with the Change of
Control transaction at the effective time of the Change of
Control;
</Table>
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provided, however, that if the consideration received by our stockholders in
respect of the Change of Control consists of at least 75% non-public
consideration or if the acquiror's common stock is not publicly traded, then
upon conversion of convertible notes after the Change of Control, in lieu of
issuing additional securities of the acquiror, as set forth above, the holder
will be entitled to receive upon conversion an additional amount in cash
calculated as follows:
PV cashflows X (non-public consideration/total consideration)
In the case of:
- any reclassification or change of the class A common stock; or
- a consolidation, merger or combination involving us or a sale or
conveyance to another corporation of our property and assets as an
entirety or substantially as an entirety, in each case as a result of
which holders of class A common stock shall be entitled to receive stock,
other securities, other property or assets (including cash) with respect
to or in exchange for such class A common stock,
the holders of the convertible notes then outstanding will be entitled
thereafter to convert the convertible notes into the kind and amount of shares
of stock, other securities or other property or assets, which they would have
owned or been entitled to receive the such reclassification, change,
consolidation, merger, combination, sale or conveyance had the convertible notes
been converted into class A common stock immediately prior to the
reclassification, change, consolidation, merger, combination, sale or conveyance
(assuming, in a case in which our shareholders may exercise rights of election,
that a holder of notes would not have exercised any rights of election as to the
stock, other securities or other property or assets receivable in connection
therewith and received per share the kind and amount received per share by a
plurality of non-electing shares). Some of the foregoing events would also
constitute or result in a Designated Event requiring us to offer to repurchase
the convertible notes. See "Repurchase at Option of Holders Upon a Designated
Event."
OTHER ADJUSTMENTS TO THE CONVERSION PRICE
We may from time to time, to the extent permitted by law, reduce the
effective conversion price of the convertible notes by any amount for any period
of at least 20 days, in which case we will give at least 15 days' notice of such
decrease, if the board of directors has made a determination that such decrease
would be in our best interests, which determination will be conclusive. We may
also, at our option, make such reductions in the conversion price, in addition
to those set forth above, as the board of directors deems advisable to avoid or
diminish any income tax to holders of class A common stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for income tax purposes. See "Certain United States Federal
Income Tax Considerations." No reduction of the conversion price by the board of
directors shall be taken into account for purposes of determining:
- whether the Current Market Price of the class A common stock exceeds the
conversion price by 105% in connection with an event which otherwise
would be a Change of Control; or
- whether the Current Market Price exceeds the triggering levels in
connection with the termination of conversion rights provisions. See
"-- Optional Termination of Conversion Rights by XO."
TAX CONSEQUENCES OF ADJUSTMENTS TO THE CONVERSION PRICE
In the event of a taxable distribution to holders of class A common stock
(or other transaction) that results in any adjustment of the conversion price,
the holders of convertible notes may, in certain circumstances, be deemed to
have received a distribution subject to United States income tax as a dividend;
in certain other circumstances, the absence of such an adjustment may result in
a taxable dividend to the holders of class A common stock. See "Certain United
States Federal Income Tax Considerations."
OPTIONAL TERMINATION OF CONVERSION RIGHTS BY XO
On or after January 18, 2003, we may, at our option, terminate the
conversion rights of holders of convertible notes if the Current Market Price of
class A common stock exceeds:
- for conversion terminations on or prior to January 18, 2004, 150% of the
prevailing conversion price then in effect for at least 20 trading days
in any consecutive 30-day trading period, including the last trading day
of such period; or
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- for conversion terminations after January 18, 2004, 135% of the
prevailing conversion price then in effect for at least 20 trading days
in any consecutive 30-day trading period, including the last trading day
of such period.
If the conversion termination date occurs on or before January 18, 2004, we
will make an additional cash make-whole payment with respect to the convertible
notes converted into class A common stock after the date of the press release
announcing the conversion termination. The make-whole payment will be equal to
the present value of the aggregate value of the interest payments that would
have been payable on the convertible notes on each semi-annual interest payment
date from the conversion termination date through January 15, 2004. The present
value will be calculated using the bond equivalent yield on U.S. Treasury notes
or bills having a term nearest in length to that of the additional period as of
the day immediately preceding the conversion expiration date.
We will issue a press release for publication on the Dow Jones News Service
(or a comparable news service) announcing any termination of conversion rights
prior to the opening of business on the second trading day after the end of the
applicable 20 trading day measurement period referred to above. The conversion
termination date will in no event be prior to January 18, 2003 and we will not
be entitled to terminate conversion rights unless the Current Market Price of
the class A common stock exceeds the thresholds discussed above for the 20
trading day measurement period. Conversion rights will terminate at the close of
business on the conversion termination date, which will be a date we select not
less than 30 nor more than 60 days after the date of the press release. The
press release will announce the conversion termination date and provide the
current conversion price of the convertible notes and the Current Market Price
of the class A common stock, in each case as of the close of business on the
last day of the 20 trading day measurement period. We will also issue a notice
containing the same information by first class mail to the holders of the
convertible notes not more than four business days after we issue the press
release.
REDEMPTION
The convertible notes are not redeemable prior to maturity.
SUBORDINATION
The payment of principal and interest on the convertible notes will be
subordinated in right of payment, as set forth in the indenture, to the prior
payment in full in cash or other payment satisfactory to the holders of Senior
Debt, whether outstanding on the date of the indenture or incurred after that
date. Upon any distribution to our creditors in our liquidation or dissolution
or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to us or our property, an assignment for the benefit of
creditors or any marshaling of our assets and liabilities, the holders of Senior
Debt will be entitled to receive payment in full in cash or other payment
satisfactory to the holders of Senior Debt of all obligations in respect of
Senior Debt before the holders of convertible notes will be entitled to receive
any payment with respect to the convertible notes.
In the event of any acceleration of the convertible notes because of an
event of default, the holders of any Senior Debt then outstanding will be
entitled to payment in full in cash or other payment satisfactory to the holders
of such Senior Debt of all obligations in respect of such Senior Debt before the
holders of the convertible notes are entitled to receive any payment or
distribution in respect thereof. If payment of the convertible notes is
accelerated because of an event of default, we or the trustee will promptly
notify the holders of Senior Debt or the trustee(s) for the Senior Debt of the
acceleration.
We also may not make any payment upon or in respect of the convertible
notes if:
- a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of Senior Debt occurs and is
continuing beyond any applicable period of grace; or
- a default, other than a payment default, occurs and is continuing with
respect to any Designated Senior Debt that permits holders of the
Designated Senior Debt as to which the default relates to accelerate its
maturity, and the trustee receives a payment blockage notice with respect
to the default from us, the holder of the Designated Senior Debt, or any
other person permitted to give a payment blockage notice under the
indenture.
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If we stop making payments on the convertible notes as a result of a
payment default of our Senior Debt or our receipt of a payment blockage notice,
we will resume making payment on the convertible notes:
- in the case of a payment default, upon the date on which the payment
default is cured or waived or ceases to exist; and
- in case of a payment blockage notice, upon the earlier of the date on
which the default referred to in the payment blockage notice is cured or
waived or ceases to exist or 179 days after the date on which the
applicable payment blockage notice is received if the maturity of the
Senior Debt has not been accelerated. No new period of payment blockage
may be commenced unless and until 365 days have elapsed since the
effectiveness of the immediately prior payment blockage notice. No
nonpayment default that existed or was continuing on the date of delivery
of any payment blockage notice to the trustee shall be, or be made, the
basis for a subsequent payment blockage notice.
We currently have no Designated Senior Debt outstanding but have the right
to so designate debt incurred in the future or currently outstanding.
By reason of the subordination provisions described in this section, in the
event of our liquidation or insolvency, holders of Senior Debt may receive more,
ratably, and holders of the convertible notes may receive less, ratably, than
the our other creditors. Such subordination will not prevent the occurrences of
any event of default under the indenture.
The convertible notes are obligations exclusively of XO. However, because
our operations are primarily conducted through Subsidiaries, the cash flow and
our consequent ability to service our debt, including the convertible notes, are
primarily dependent upon the earnings of our Subsidiaries and the distribution
of those earnings to, or upon loans or other payments of funds by those
Subsidiaries to, us. The payment of dividends and the making of loans and
advances to us by our Subsidiaries may be subject to statutory or contractual
restrictions, are dependent upon the earnings of those Subsidiaries and are
subject to various business considerations.
Any right we have to receive assets of any of our Subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
convertible notes to participate in those assets) will be structurally
subordinated to the claims of that Subsidiary's creditors (including the lenders
under our Senior Secured Credit and Guaranty Agreement, dated as of February 3,
2000 and trade creditors), except to the extent that we are ourselves recognized
as a creditor of the Subsidiary, in which case our claims of would still be
subordinate to any security interests in the assets of the Subsidiary and any
indebtedness of such Subsidiary senior to that held by us.
As of June 30, 2001, we had approximately $4,698.6 million of outstanding
indebtedness that would have constituted Senior Debt, and the indebtedness and
other liabilities of our subsidiaries (excluding intercompany liabilities and
obligations of a type not required to be reflected on the balance sheet of such
subsidiary in accordance with GAAP) that would structurally have been senior to
the convertible notes were approximately $63.4 million. The indenture does not
limit the amount of additional indebtedness, including Senior Debt, that we can
create, incur, assume or guarantee, nor does the indenture limit the amount of
indebtedness and other liabilities that any Subsidiary can create, incur, assume
or guarantee.
In the event that, notwithstanding the foregoing, the trustee or any holder
of convertible notes receives any payment or distribution of our assets of any
kind in contravention of any of the terms of the indenture, whether in cash,
property or securities, including, without limitation by way of set-off or
otherwise, in respect of the convertible notes before all Senior Debt is paid in
full in cash or other payment satisfactory to the holders of Senior Debt, then
such payment or distribution will be held by the recipient in trust for the
benefit of holders of Senior Debt, and will be immediately paid over or
delivered to the holders of Senior Debt or their representative or
representatives to the extent necessary to make payment in full in cash or other
payment satisfactory to such holders of all Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution, or provision therefor,
to or for the holders of Senior Debt.
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REPURCHASE AT OPTION OF HOLDERS UPON A DESIGNATED EVENT
Each holder of convertible notes will have the right to require us to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
the holder's notes at an offer price in cash equal to 100% of the aggregate
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase upon the occurrence of either of the following Designated Events:
- a Change of Control; or
- a Termination of Trading, provided that our credit agreement has
terminated or the lenders under our credit agreement have waived certain
restrictions with respect to the incurrence of indebtedness under Section
6.1 thereof.
Within 30 days following the applicable Designated Event, we will mail a
notice to each holder describing the transaction or transactions that constitute
the Designated Event and offering to repurchase notes pursuant to the procedures
required by the indenture and described in the notice, which date will be no
earlier than 30 days and no later than 60 days from the date the notice is
mailed. We will have the option to pay the repurchase price either solely in
cash or, subject to certain conditions specified in the indenture, solely in
shares of our class A common stock valued at 95% of the average closing sale
price of our class A common stock for the five trading days before and including
the third trading day before the repurchase date.
If the Designated Event in question is a Change of Control, holders of
notes will not have the right to require us to repurchase their notes if either:
- the daily market price per share of our class A common stock for any five
trading days within the period of 10 consecutive trading days ending
immediately after the later of the Change of Control or the public
announcement thereof or the period of 10 consecutive trading days ending
immediately before the Change of Control shall equal or exceed 105% of
the conversion price of the convertible notes in effect on the date of
the Change of Control or the public announcement thereof, as applicable,
or
- at least 90% of the consideration in the Change of Control transaction
consists of shares of Capital Stock traded on a U.S. national securities
exchange or quoted on the NASDAQ National Market, and as a result of the
transaction, the convertible notes become convertible into that
consideration.
Our ability to make the payments required to repurchase convertible notes
is subject to restrictions contained in, and payments due under, our senior
secured credit agreement, the indentures under which our currently outstanding
senior notes were issued and the provisions limiting payment described in
"-- Subordination".
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the
convertible notes as a result of a Designated Event. Rule 13e-4 under the
Exchange Act requires, among other things, the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to holders of
the convertible notes. We will comply with this rule to the extent applicable at
that time.
In some Changes of Control, holders of the convertible notes who elect to
convert their convertible notes rather than exercise their change of control put
right will be entitled to receive additional compensation upon conversion of the
convertible notes based upon the present value of the remaining aggregate
interest payments that would have been payable between the date of conversion
and January 15, 2004, as described above under "-- Conversion Rights; Adjustment
of the Conversion Price Upon a Change of Control."
On the date specified for termination of the repurchase offer with respect
to a Designated Event we will, to the extent lawful:
- accept for payment all notes or portions thereof properly tendered;
- deposit with the paying agent an amount equal to the appropriate
repurchase payment in respect of all convertible notes or portions
thereof so tendered; and
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- deliver or cause to be delivered to the trustee the convertible notes so
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions thereof being purchased by us.
On the date specified for payment of the repurchase price, the paying agent
will promptly mail to each holder of convertible notes accepted for payment the
payment for the convertible notes tendered, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the
convertible notes surrendered, if any, provided that each the new convertible
note will be in a principal amount of $1,000 or an integral multiple thereof.
The foregoing provisions would not necessarily afford holders of the
convertible notes protection in the event of highly leveraged or other
transactions involving us that may adversely affect holders.
The right to require us to repurchase notes as a result of a Designated
Event could have the effect of delaying, deferring or preventing a Change of
Control or other attempts to acquire control of XO's unless arrangements have
been made to enable us to repurchase all the convertible notes at the time that
a Designated Event payment is due. Consequently, this right may render more
difficult or discourage a merger, consolidation or tender offer (even if such
transaction is supported by the our board of directors or is favorable to the
shareholders), the assumption of control by a holder of a large block of our
shares and the removal of incumbent management.
Except as described above with respect to a Designated Event, the indenture
does not contain provisions that permit the holders of the convertible notes to
require that we repurchase the convertible notes in the event of a takeover,
recapitalization or similar restructuring. Subject to the limitation on mergers
and consolidations described below, we, our management or our Subsidiaries could
in the future enter into certain transactions, including refinancings, certain
recapitalizations, acquisitions, the sale of all or substantially all of our
assets, our liquidation or similar transactions, that would not constitute a
Designated Event under the indenture, but that would increase the amount of
Senior Debt (or any other indebtedness) outstanding at such time or
substantially reduce or eliminate our assets.
The terms of our existing or future credit or other agreements relating to
indebtedness (including Senior Debt) may prohibit us from purchasing any notes
and may also provide that a Designated Event, as well as certain other
change-of-control events with respect to us, would constitute an event of
default thereunder. In the event a Designated Event occurs at a time when we are
prohibited from purchasing convertible notes, we could seek the consent of our
then-existing lenders to the purchase of convertible notes or could attempt to
refinance the borrowings that contain such prohibition. If we do not obtain such
a consent or repay such borrowings, we would remain prohibited from purchasing
convertible notes. In such case, our failure to purchase tendered convertible
notes would constitute an event of default under the indenture, which may, in
turn, constitute a further default under the terms of other indebtedness that we
have entered into or may enter into from time to time. In such circumstances,
the subordination provisions in the indenture would likely restrict payments to
the holders of the convertible notes.
MERGER AND CONSOLIDATION
The indenture provides that we may not, in a single transaction or a series
of related transactions, consolidate or merge with or into (whether or not we
are the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our properties or assets in one
or more related transactions to, another corporation, person or entity as an
entirety or substantially as an entirety unless:
- either (i) we will be the surviving or continuing corporation or (ii) the
entity or person formed by or surviving the consolidation or merger (if
other than us) or the entity or person that acquires by sale, assignment,
transfer, lease, conveyance or other disposition our properties and
assets substantially as an entirety (x) is a corporation organized and
validly existing under the laws of the United States, any State thereof
or the District of Columbia and (y) assumes the due and punctual payment
of the principal of, and interest on all the convertible notes and the
performance of every covenant of ours under the convertible notes and the
indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the trustee;
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- immediately after the transaction no default or event of default exists;
and
- we or the other person involved in the transaction have delivered to the
trustee an officers' certificate and an opinion of counsel, each stating
that such transaction and the supplemental indenture comply with the
indenture and that all conditions precedent in the indenture relating to
such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more of our
Subsidiaries, the capital stock of which constitutes all or substantially all of
our properties and assets, will be deemed to be the transfer of all or
substantially all of our properties and assets.
Upon any consolidation, merger, sale, assignment, conveyance, lease,
transfer or other disposition in accordance with the foregoing, the successor
person formed by the consolidation or into which we are merged or to which a
sale, assignment, conveyance, lease, transfer or other disposition is made will
succeed to, and be substituted for, and may exercise every right and power of,
us under the indenture with the same effect as if the successor had been named
as us therein, and thereafter (except in the case of a sale, assignment,
transfer, lease, conveyance or other disposition) the predecessor corporation
will be relieved of all further obligations and covenants under the indenture
and the convertible notes.
EVENTS OF DEFAULT AND REMEDIES
An event of default is defined in the indenture as being:
(i) default in payment of the principal on the convertible notes,
whether or not such payment is prohibited by the subordination provisions
of the indenture;
(ii) default for 30 days in payment of any installment of interest on
the convertible notes, whether or not such payment is prohibited by the
subordination provisions of the indenture;
(iii) default in the payment of the due upon the occurrence of a
Designated Event in respect of the convertible notes on the date therefor,
whether or not the payment is prohibited by the subordination provisions of
the indenture;
(iv) failure by us to provide timely notice of a Designated Event;
(v) default by us for 60 days after notice in the observance or
performance of any other covenants in the indenture;
(vi) default under the terms of any instrument evidencing or securing
our debt or any of our material Subsidiaries having an outstanding
principal amount of $10,000,000 individually or in the aggregate, which
default results in the acceleration of the payment of such debt or
constitutes the failure to pay such debt when due;
(vii) the rendering of a judgment or judgments (not subject to appeal)
for the payment of money against us or any of our material Subsidiaries in
an aggregate amount in excess of $10,000,000, which remains undischarged or
unstayed for a period of 45 days after the date on which the right to
appeal all such judgments has expired; and
(viii) certain events of bankruptcy, insolvency or reorganization
affecting us or any of our material Subsidiaries.
If an event of default (other than an event of default specified in clause
(viii) above with respect to us) occurs and is continuing, then and in every
such case the trustee, by written notice to us, or the holders of not less than
25% in aggregate principal amount of the then outstanding convertible notes, by
written notice to us and the trustee, may declare the unpaid principal of, and
accrued and unpaid interest on all of the convertible notes then outstanding to
be due and payable. Upon such declaration, such principal amount, and accrued
and unpaid interest will become immediately due and payable, notwithstanding
anything contained in the indenture or the convertible notes to the contrary,
but subject to the provisions limiting payment described in "-- Subordination."
If any event of default specified in clause (viii) above occurs with respect to
us, all unpaid principal of, and accrued and unpaid interest on the convertible
notes then outstanding will automatically become due and payable, subject to the
provisions described in "-- Subordination," without any declaration or other act
on the part of the trustee or any holder of notes.
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Holders of the convertible notes may not enforce the indenture or the
convertible notes except as provided in the indenture. Subject to the provisions
of the indenture relating to the duties of the trustee, the trustee is under no
obligation to exercise any of its rights or powers under the indenture at the
request, order or direction of any of the holders, unless such holders have
offered to the trustee a security or an indemnity satisfactory to it against any
cost, expense or liability. Subject to all provisions of the indenture and
applicable law, the holders of a majority in aggregate principal amount of the
then outstanding convertible notes have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the trustee or
exercising any trust or power conferred on the trustee. If a default or event of
default occurs and is continuing and is known to the trustee, the indenture
requires the trustee to mail a notice of default or event of default to each
holder within 60 days of the occurrence of such default or event of default,
provided, however, that the trustee may withhold from the holders notice of any
continuing default or event of default (except a default or event of default in
the payment of principal or interest) if it determines in good faith that
withholding notice is in their interest. The holders of a majority in aggregate
principal amount of the convertible notes then outstanding by notice to the
trustee may rescind any acceleration of the convertible notes and its
consequences if all existing events of default (other than the nonpayment of
principal, interest that has become due solely by virtue of such acceleration)
have been cured or waived and if the rescission would not conflict with any
judgment or decree of any court of competent jurisdiction. No such rescission
shall affect any subsequent default or event of default or impair any right
consequent thereto.
The holders of a majority in aggregate principal amount of the convertible
notes then outstanding may, on behalf of the holders of all the convertible
notes, waive any past default or event of default under the indenture and its
consequences, except default in the payment of principal of, or interest on the
convertible notes (other than the non-payment of principal and interest that has
become due solely by virtue of an acceleration that has been duly rescinded as
provided above), or in respect of a covenant or provision of the indenture that
cannot be modified or amended without the consent of all holders of notes, or
with respect to a failure to purchase any notes tendered pursuant to an offer to
repurchase upon the occurrence of a Designated Event.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture and we are required, upon becoming aware of any
default or event of default, to deliver to the trustee a statement specifying
such default or event of default.
FORM, DENOMINATION AND REGISTRATION
Convertible notes that were issued initially in the United States in
reliance on Rule 144A or in offshore transactions in reliance on Regulation S
are be represented by a single, permanent global note in definitive,
fully-registered form without interest coupons. The global note was deposited
with the trustee as custodian for DTC and registered in the name of a nominee of
DTC in New York, New York for the accounts of participants in DTC.
Investors who are Qualified Institutional Buyers and who purchase
convertible notes in reliance on Rule 144A under the Securities Act hold their
interests in the global note directly through DTC if they are DTC participants,
or indirectly through organizations that are DTC participants.
Investors who purchase convertible notes in offshore transactions in
reliance on Regulation S under the Securities Act hold their interests in the
global note directly through Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System and Clearstream Banking, societe
anonyme, if they are participants in such systems, or indirectly through
organizations that are participants in such systems. Euroclear and Clearstream
hold interests in the global note on behalf of their participants through their
respective depositaries, which in turn hold such interests in the global note in
customers' securities accounts in the depositaries' names on the books of DTC.
Convertible notes transferred to institutional accredited investors that
are not Qualified Institutional Buyers are issued and physically delivered in
fully registered, definitive form and may not be represented by interests in the
global note. Otherwise, except in the limited circumstances described below,
holders of notes represented by interests in the global note are not be entitled
to receive notes in definitive form.
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Upon transfer of a convertible note in definitive form to a Qualified
Institutional Buyer pursuant to Rule 144A or in an offshore transaction pursuant
to Regulation S, the definitive note will be exchanged for an interest in the
global note, and the transferee will be required to hold its interest through a
participant in DTC, Euroclear or Clearstream, as applicable.
Except as set forth below, the global note may be transferred, in whole or
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York Uniform Commercial Code;
- 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 was created to hold securities of institutions that have accounts with
DTC and to facilitate the clearance and settlement of securities transactions
among its participants in such securities through electronic book-entry changes
in accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include:
- securities brokers and dealers;
- banks;
- trust companies;
- clearing corporations; and
- certain other organizations.
Access to DTC's book-entry system is also available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
Upon the issuance of the global note, DTC credited, on its book-entry
registration and transfer system, the respective principal amount of the
individual beneficial interests represented by the global note to the accounts
of participants. The accounts credited were designated by the initial purchasers
of the beneficial interests. Ownership of beneficial interests in the global
note is limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in the global note is shown on,
and the transfer of those ownership interests is effected only through, records
maintained by DTC (with respect to participants' interests) and the participants
(with respect to the owners of beneficial interests in the global note other
than participants).
So long as DTC or its nominee is the registered holder and owner of the
global note, DTC or such nominee, as the case may be, will be considered the
sole legal owner of the convertible notes represented by the global note for all
purposes under the indenture and the convertible notes. Except as set forth
below, owners of beneficial interests in the global note will not be entitled to
receive definitive notes and will not be considered to be the owners or holders
of any notes under the global note. We understand that under existing industry
practice, in the event an owner of a beneficial interest in the global note
desires to take any actions that DTC, as the holder of the global note, is
entitled to take, DTC would authorize the participants to take such action, and
that participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions of
beneficial owners owning through them. No beneficial owner of an interest in the
global note will be able to transfer the interest except in accordance with
DTC's applicable procedures, in addition to those provided for under the
indenture and, if applicable, those of Euroclear and Clearstream.
We will make payments of the principal and interest (including interest
make-whole payments, if any) on the convertible notes represented by the global
note registered in the name of and held by DTC or its nominee to DTC or its
nominee, as the case may be, as the registered owner and holder of the global
note.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of the global note, will credit participants' accounts
with payments in amounts proportionate to their
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respective beneficial interests in the principal amount of the global note as
shown on the records of DTC or its nominee. We also expect that payments by
participants and indirect participants to owners of beneficial interests in the
global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for accounts of customers registered in the names of nominees for these
customers. The payments, however, will be the responsibility of the participants
and indirect participants, and neither we, the trustee nor any paying agent will
have any responsibility or liability for:
- any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the global note;
- maintaining, supervising or reviewing any records relating to the
beneficial ownership interests;
- any other aspect of the relationship between DTC and its participants; or
- the relationship between such participants and the owners of beneficial
interests in the global note.
Unless and until it is exchanged in whole or in part for definitive notes
in definitive form, the global note may not be transferred except as a whole by
DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC.
Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same-day funds.
Transfers between participants in Euroclear and Clearstream will be
effected in the ordinary way in accordance with their respective rules and
operating procedures. If a holder requires physical delivery of a definitive
note for any reason, including to sell convertible notes to persons in
jurisdictions that require such delivery of such convertible notes or to pledge
such convertible notes, such holder must transfer its interest in the global
note in accordance with the normal procedures of DTC and the procedures set
forth in the indenture.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(Brussels time). Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the global note in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositaries for
Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in the global note from a DTC
participant will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream, as the case may be)
immediately following the DTC settlement date, and such credit of any
transactions interests in the global note settled during such processing day
will be reported to the relevant Euroclear or Clearstream participant on such
day. Cash received in Euroclear or Clearstream as a result of sales of interests
in the global note by or through a Euroclear or Clearstream participant to a DTC
participant will be received with value on the DTC settlement date, but will be
available in the relevant Euroclear or Clearstream cash account only as of the
business day following settlement in DTC.
We expect that DTC will take any action permitted to be taken by a holder
of convertible notes (including the presentation of convertible notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the global note is credited and only in
respect of the portion of the aggregate principal amount of the convertible
notes as to which the participant or participants has or have given such
direction. However, if there is an event of default under the convertible notes,
DTC will exchange the global note for definitive notes, which it will distribute
to its participants. These definitive notes are subject to certain restrictions
on registration of transfers and will bear appropriate legends restricting their
transfer.
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Although we expect that DTC, Euroclear and Clearstream will agree to the
foregoing procedures in order to facilitate transfers of interests in the global
note among participants of DTC, Euroclear, and Clearstream, DTC, Euroclear and
Clearstream are under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither we nor
the trustee will have any responsibility for the performance by DTC, Euroclear
or Clearstream or their participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling to continue as a depositary for the global
note and a successor depositary is not appointed by us within 90 days, we will
issue definitive notes in exchange for the global note that will be subject to
certain restrictions on registration of transfers and will bear appropriate
legends concerning these restrictions.
MODIFICATION AND WAIVER
Modifications and amendments of the indenture and the convertible notes may
be made with the consent of the holders of a majority of the aggregate principal
amount of the convertible notes outstanding, provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding note affected:
- change the due date of the principal of, or any installment of interest
on, any convertible note;
- reduce the principal amount of, or interest on, convertible notes;
- change the place or currency of payment of principal of, or interest on,
any convertible note;
- impair the right to institute suit for the enforcement of any payment on
or with respect to any convertible note;
- reduce the above stated percentage of outstanding convertible notes
necessary to modify or amend the indenture;
- reduce the percentage of aggregate principal amount of outstanding
convertible notes necessary for waiver of compliance with certain
provisions of the indenture or for waiver of certain defaults;
- modify any provisions of the indenture relating to the modification and
amendment of the indenture or the waiver of past defaults or covenants,
except as otherwise specified;
- following the mailing of any notice of a Designated Event offer, modify
such Designated Event offer in a manner materially adverse to the holders
of convertible notes; or
- except as permitted by the indenture, increase the conversion price or,
other than as set forth in the next paragraph, modify the provisions of
the indenture relating to conversion of the convertible notes in a manner
adverse to the holders thereof.
Notwithstanding the foregoing, without the consent of any holder of
convertible notes, we and the trustee may amend or supplement the indenture or
the convertible notes to:
- cure any ambiguity, defect or inconsistency;
- provide for uncertificated convertible notes in addition to or in place
of certificated convertible notes;
- provide for the assumption of our obligations to holders of convertible
notes in the case of a merger or consolidation;
- provide for conversion rights of holders of convertible notes in certain
events such as a consolidation, merger or sale of all or substantially
all of our assets;
- reduce the conversion rate;
- make any change that would provide any additional rights benefits to
holders of convertible notes or that does not adversely affect the legal
rights under the indenture of any such holder; or
- comply with requirements of the SEC in order to maintain the
qualification of the indenture under the Trust indenture Act of 1939, as
amended.
The holders of a majority in aggregate principal amounts of the outstanding
convertible notes, on behalf of all holders of convertible notes, may waive our
compliance with certain restrictive provisions of the indentures. Subject to
certain rights of the trustee, as provided in the indenture, the holders of a
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majority in aggregate principal amount of the outstanding convertible notes, on
behalf of all holders of convertible notes, may waive any past default or event
of default under the indenture, except a default in the payment of principal or
interest, or in respect of a covenant or provision of the indenture that cannot
be modified or amended without the consent of all holders of convertible notes,
or a default arising from failure to purchase any note tendered pursuant to an
offer to repurchase as a result of a Designated Event offer.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the indenture while convertible
notes remain outstanding if all outstanding convertible notes will become due
and payable at their scheduled maturity within one year or we have:
- deposited with the trustee an amount sufficient to pay and discharge all
outstanding convertible notes on the date of their scheduled maturity;
and
- paid all other sums then payable by us under the indenture.
GOVERNING LAW
The indenture provides that the convertible notes are governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange convertible notes in accordance with the
indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and we may
require a holder to pay any taxes and fees required by law or permitted by the
indenture.
The registered holder of a convertible note will be treated as the owner of
it for all purposes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
None of our directors, officers, employees, incorporator or stockholders,
as such, has any liability for any of our obligations under the convertible
notes or the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of convertible notes by
accepting a convertible note, waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the convertible notes.
The waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that such waiver is against public
policy.
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any convertible notes are outstanding, we will file with the SEC and furnish to
the trustee and the holders of convertible notes all quarterly and annual
financial information (without exhibits) required to be contained in a filing
with the SEC on Forms 10-Q and 10-K, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual consolidated financial statements only, a report thereon by our
independent auditors. We are not required to file any report or other
information with the SEC if the SEC does not permit such filing.
THE TRUSTEE
On June 26, 2001, The Bank of New York, a corporation organized and
existing under the laws of the State of New York, succeeded to substantially all
the corporate trust business of U.S. Trust Company, National Association and, in
accordance with Section 612 of the indenture, become the successor to the
trustee. You may contact the trustee through U.S. Trust Company, National
Association, agent for the trustee, by mail at 114 West 47th Street, New York,
NY 10036, Attention: Patricia Gallagher or by telephone at (212)852-1664.
The indenture provides that, except during the continuance of an event of
default, the trustee will perform only such duties as are specifically set forth
in the indenture. In case an event of default occurs (and is not cured) and
holders of the convertible notes have notified the trustee, the trustee will be
required to exercise its powers with the degree of care and skill of a prudent
person in the conduct of that
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person's own affairs. Subject to these provisions, the trustee is under no
obligation to exercise any of its offer to the trustee security and indemnity
satisfactory to it.
The indenture contains certain limitations on the rights of the trustee,
should it become our creditor, to obtain payment of claims in certain cases or
to realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions,
provided, however, that if it acquires any conflicting interest, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
A "Change of Control" will be deemed to have occurred at such time as any
of the following occur:
- any person or any persons acting together that would constitute a "group"
for purposes of Section 13(d) of the Securities Exchange Act of 1934, or
any successor provision thereto (other than Eagle River Investments,
L.L.C., Mr. Craig O. McCaw and their respective affiliates or an
underwriter engaged in a firm commitment underwriting on behalf of us)
shall beneficially own (within the meaning of Rule 13d-3 under the
Exchange Act, or any successor provision thereto) more than 50% of the
aggregate voting power of all classes of our Voting Stock;
- neither Mr. Craig O. McCaw nor any person designated by him to us as
acting on his behalf shall be a director of XO Communications; or
- during any period of two consecutive years, individuals who at the
beginning of such period constituted our board of directors (together
with any new directors whose election by our board of directors or whose
nomination for election by the shareholders was proposed by a vote of a
majority of our directors then still in office who were either directors
at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of our board of directors then in office.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Current Market Price" of class A common stock for any day means the last
reported per share sale price, regular way on such day, or, if no sale takes
place on such day, the average of the reported closing per share bid and asked
prices on such day, regular way, in either case as reported on the NASDAQ
National Market or, if the class A common stock is not quoted or admitted to
trading on such quotation system, on the principal national securities exchange
or quotation system on which the class A common stock may be listed or admitted
to trading or quoted, or, if not listed or admitted to trading or quoted on any
national securities exchange or quotation system, the average of the closing per
share bid and asked prices of the class A common stock on the over-the-counter
market on the day in question as reported by the National Quotation Bureau
Incorporated, or similar generally accepted reporting service, or, if not so
available in such manner, as furnished by any NASDAQ member firm selected from
time to time by our board of directors for that purpose, or, if not so available
in such manner, as otherwise determined in good faith by our board of directors.
A "default" means any event that is, or after notice or passage of time or
both would be, an event of default.
A "Designated Event" means:
- a Change of Control; or
- a Termination of Trading, provided that our credit agreement has
terminated or the lenders under our credit agreement have waived certain
restrictions with respect to the incurrence of indebtedness under Section
6.1 thereof.
"Designated Senior Debt" means our obligations under any particular Senior
Debt in which the instrument creating or evidencing the same or the assumption
or guarantee thereof, or related agreements or documents to which we are a
party, expressly provides that such indebtedness shall be designated Senior Debt
for purposes of the indenture. The instrument, agreement or other document
evidencing any Designated Senior Debt may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect from time to time.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i)(a) for borrowed money (including, but not
limited to, any indebtedness secured by a security interest, mortgage or other
lien on our assets that is (1) given to secure all or part of the purchase price
of property subject thereto, whether given to the vendor of such property or to
another, or (2) existing on property at the time of acquisition thereof), (b)
evidenced by a note, debenture, bond or other written instrument, (c) under a
lease required to be capitalized on the balance sheet of the lessee under GAAP
or under any lease or related document (including a purchase agreement) that
provides that we are contractually obligated to purchase or cause a third party
to purchase and thereby guarantee a minimum residual value of the lease property
to the lessor and our obligations under such lease or related document to
purchase or to cause a third party to purchase such leased property, (d) in
respect of letters of credit, bank guarantees or bankers' acceptances (including
reimbursement obligations with respect to any of the foregoing), (e) with
respect to Indebtedness secured by a mortgage, pledge, lien, encumbrance, charge
or adverse claim affecting title or resulting in an encumbrance to which the
property or assets of such person are subject, whether or not the obligation
secured thereby shall have been assumed by or shall otherwise be such person's
legal liability, (f) in respect of the balance of deferred and unpaid purchase
price of any property or assets, (g) under interest rate or currency swap
agreements, cap, floor and collar agreements, spot and forward contracts and
similar agreements and arrangements; (ii) with respect to any obligation of
others of the type described in the preceding clause (i) or under clause (iii)
below assumed by or guaranteed in any manner by such person or in effect
guaranteed by such person through an agreement to purchase (including, without
limitation, "take or pay" and similar arrangements), contingent or otherwise
(and the obligations of such person under any such assumptions, guarantees or
other such arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
"Issue Date" means the date on which the convertible notes are first issued
and authenticated under the indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization, limited liability company or
government or any agency or political subdivision thereof.
"Senior Debt" means the principal, and interest on, rent under, and any
other amounts payable on or in or in respect of any of our Indebtedness
(including, without limitation, any Obligations in respect of such Indebtedness
and, in the case of Designated Senior Debt, any interest accruing after the
filing of a petition by or against us under any bankruptcy law, whether or not
allowed as a claim after such filing in any proceeding under such bankruptcy
law), whether outstanding on the date of the indenture or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by us (including all
deferrals, renewals, extensions or refundings of, or amendments, modifications
or supplements to the foregoing); provided, however, that Senior Debt does not
include (v) Indebtedness evidenced by the convertible notes, (w) any liability
for federal, state, local or other taxes owed or owing by us, (x) our
Indebtedness to any Subsidiary except to the extent such Indebtedness is of a
type described in clause (ii) of the definition of Indebtedness, (y) our trade
payables for goods, services or materials purchased in the ordinary course of
business (other than, to the extent they may otherwise constitute such trade
payables, any obligations of the type described in clause (ii) of the definition
of Indebtedness), and (z) any particular Indebtedness in which the instrument
creating or evidencing the same expressly provides that such Indebtedness shall
not be senior in right of payment to, or is pari passu with, or is subordinated
or junior to, the convertible notes.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries
thereof or (ii) any other Person (other than a corporation) in which such Person
and
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one or more other Subsidiaries of such Person or such Person and one or more
other Subsidiaries thereof, directly or indirectly, has at least a majority
ownership and power to direct policies, management and affairs thereof.
A "Termination of Trading" will be deemed to have occurred if the class A
common stock (or other Capital Stock into which the convertible notes are then
convertible) is neither listed for trading on a United States national
securities exchange nor approved for trading on an established automated
over-the-counter trading market in the United States.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relating to the purchase, ownership and disposition of the
convertible notes and of class A common stock into which convertible notes may
be converted. For purposes of this summary, (1) the Internal Revenue Code of
1986, as amended, is referred to as "the Code" and (2) the Internal Revenue
Service is referred to as "the IRS."
This summary:
- does not purport to be a complete analysis of all the potential tax
considerations that may be relevant to holders in light of their
particular circumstances;
- is based on laws, rulings and decisions now in effect, all of which are
subject to change, possibly on a retroactive basis;
- deals only with holders that will hold convertible notes and class A
common stock into which convertible notes may be converted as "capital
assets" within the meaning of Section 1221 of the Code;
- does not address tax considerations applicable to investors that may be
subject to special tax rules, such as partnerships, banks, tax-exempt
organizations, insurance companies, dealers in securities or currencies,
or persons that will hold convertible notes as a position in a hedging
transaction, "straddle," or "conversion transaction" for tax purposes, or
persons deemed to sell convertible notes or class A common stock under
the constructive sale provisions of the Code; and
- discusses only the tax considerations applicable to the initial
purchasers of the convertible notes who purchase the convertible notes at
their "issue price" as defined in Section 1273 of the Code and does not
discuss the tax considerations applicable to subsequent purchasers of the
convertible notes.
We have not sought any ruling from the IRS with respect to the statements
made and the conclusions reached in the following summary, and the IRS may not
agree with the statements and conclusions expressed in this summary. In
addition, the IRS is not precluded from adopting a contrary position. This
summary does not consider the effect of any applicable foreign, state, local, or
other tax laws.
Investors considering the purchase of convertible notes should consult
their own tax advisors with respect to the application of the United States
federal income and estate tax laws to their particular situations, as well as
any tax consequences arising under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
As used herein, the term "United States Holder" means a beneficial owner of
a note or class A common stock that is, for United States federal income tax
purposes:
- a citizen or resident, as defined in Section 7701(b) of the Code, of the
United States;
- a corporation or other entity that is taxable as a corporation created or
organized under the laws of the United States or any political
subdivision thereof;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- in general, a trust subject to the primary supervision of a United States
court and the control of one or more United States persons.
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A "Foreign Holder" is a beneficial owner of convertible notes or class A
common stock that is not a United States Holder for United States Federal income
tax purposes.
UNITED STATES HOLDERS
PAYMENT OF INTEREST
Interest on a note generally will be includable in the income of a United
States Holder as ordinary income at the time such interest is received or
accrued, in accordance with such United States Holder's regular method of
accounting for United States federal income tax purposes. It is anticipated that
the notes will not be issued with original issue discount.
SALE, EXCHANGE OR REDEMPTION OF A NOTE
Upon the sale, exchange or redemption of a convertible note, a United
States Holder generally will recognize capital gain or loss equal to the
difference between (1) the amount of cash proceeds and the fair market value of
any property received on the sale, exchange or redemption, except to the extent
such amount is attributable to accrued interest not previously included in
income, which is taxable as ordinary income, and (2) such United States Holder's
adjusted tax basis in the note. A United States Holder's adjusted tax basis in a
note generally will equal the cost of the note to such United States Holder plus
the amount, if any, included in income on an adjustment to the conversion rate
of the convertible notes , as described in "-- Adjustments to Conversion Rate"
below. The deductibility of capital losses is subject to limitations.
If a United States Holder exercises his right to put a convertible note to
us upon a "Designated Event Offer" and we elect to fund the put by issuing
shares of class A common stock to the holder, the exchange should have the tax
consequences described below under "-- Conversion of the Convertible Notes,"
provided that the convertible note qualifies as "security" for federal income
tax purposes. Although we intend to treat the convertible notes as "securities"
for federal income tax purposes, the IRS is not precluded from adopting a
contrary position. If the convertible notes do not qualify as "securities," then
the exchange will constitute a taxable transaction with the consequences
described in the preceding paragraph.
ADJUSTMENTS TO CONVERSION RATE
The conversion rate of the convertible notes is subject to adjustment under
certain circumstances, as described under "Description of the Convertible
Notes -- Conversion Rights." Section 305 of the Code and the Treasury
Regulations issued thereunder may treat the holders of the convertible notes as
having received a constructive distribution, resulting in dividend treatment (as
described below) to the extent of our current and/or accumulated earnings and
profits, if, and to the extent that, certain adjustments in the conversion rate
(or certain other corporate transactions) increase the proportionate interest of
a holder of convertible notes in the fully diluted class A common stock
(particularly an adjustment to reflect a taxable dividend to holders of class A
common stock), whether or not the holder ever exercises its conversion
privilege. Moreover, if there is not a full adjustment to the conversion rate of
the convertible notes to reflect a stock dividend or other event increasing the
proportionate interest of the holders of outstanding class A common stock in the
assets or earnings and profits of XO, then such increase in the proportionate
interest of the holders of the class A common stock may be treated as a
distribution to the holders, taxable as a dividend (as described below) to the
extent of our current and/or accumulated earnings and profits.
CONVERSION OF THE CONVERTIBLE NOTES
A United States Holder generally will not recognize any income, gain or
loss upon conversion of a note into class A common stock except with respect to
cash received in lieu of a fractional share of class A common stock. A United
States Holder's tax basis in the class A common stock received on conversion of
a convertible note will be the same as such United States Holder's adjusted tax
basis in the convertible note at the time of conversion, reduced by any basis
allocable to a fractional share interest, and the holding period for the class A
common stock received on conversion will generally include the holding period of
the convertible note converted. However, to the extent that any class A common
stock received upon conversion is considered attributable to accrued interest
not previously included in income by the
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United States Holder, it will be taxable as ordinary income. A United States
Holder's tax basis in shares of class A common stock considered attributable to
accrued interest generally will equal the amount of such accrued interest
included in income, and the holding period for such shares shall begin on the
date of conversion.
Cash received in lieu of a fractional share of class A common stock upon
conversion will be treated as a payment in exchange for the fractional share of
class A common stock. Accordingly, the receipt of cash in lieu of a fractional
share of class A common stock generally will result in capital gain or loss,
measured by the difference between the cash received for the fractional share
and the United States Holder's adjusted tax basis in the fractional share, and
will be taxable as described below under "-- Sale of Class A Common Stock."
Under certain conditions following a "change of control" as defined under
"Description of the Convertible Notes -- Repurchase at Option of Holders Upon a
Designated Event," a United States Holder may be entitled upon conversion to
receive additional consideration in the form of cash or securities of an issuer
other than XO. See "Description of the Convertible Notes -- Conversion." To the
extent that a United States Holder receives consideration other than our class A
common stock upon conversion, a United States Holder will be required to
recognize gain (but not loss), if any, to the extent of the lesser of (a) the
amount of gain realized upon such conversion and (b) the amount of the cash and
the fair market value of such securities received upon conversion. The amount of
gain realized, if any, would be equal to the excess of (a) the sum of the cash,
the fair market value of such securities and the fair market value of the shares
of class A common stock received upon conversion of the convertible note over
(b) such United States Holder's adjusted tax basis in the convertible note. A
United States Holder's adjusted tax basis in a convertible note generally will
equal the cost of the convertible note to such United States Holder plus the
amount, if any, included in income on an adjustment to the conversion rate of
the convertible notes , as described in "-- Adjustments to Conversion Rate"
above. Unites States Holders should consult their own tax advisors with respect
to the specific tax treatment of the receipt of such consideration in their
particular situations.
DIVIDENDS
Distributions, if any, paid or deemed paid on the class A common stock (or
deemed distributions on the convertible notes as described above under
"-- Adjustments to Conversion Rate") generally will be includable in the income
of a United States Holder as ordinary income to the extent of the Company's
current or accumulated earnings and profits as determined for U.S. federal
income tax purposes. Dividends paid to holders that are United States
corporations may qualify for the dividends received deduction. To the extent, if
any, that a United States Holder receives distributions on shares of class A
common stock that would otherwise constitute dividends for United States federal
income tax purposes but that exceed our current and accumulated earnings and
profits, such distributions will be treated first as a non-taxable return of
capital, reducing the holder's basis in the shares of class A common stock. Any
distributions in excess of the holder's basis in the shares of class A common
stock generally will be treated as capital gains.
SALE OF CLASS A COMMON STOCK
Upon the sale or exchange of class A common stock, a United States Holder
generally will recognize capital gains or losses equal to the difference between
(1) the amount of cash and the fair market value of any property received upon
the sale or exchange and (2) the United States Holder's adjusted tax basis in
the class A common stock (as described above under "-- United States Holders,
Sale, Exchange or Redemption of a Note"). The deductibility of capital losses is
subject to limitations.
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FOREIGN HOLDERS
STATED INTEREST
Payments of interest on a note to a Foreign Holder will not be subject to
United States federal withholding tax provided that:
- the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of XO entitled to
vote (treating, for such purpose, convertible notes held by a holder as
having been converted into class A common stock of the Company);
- the holder is not a controlled foreign corporation that is related to XO
through stock ownership; and
- either (A) the beneficial owner of the convertible note, under penalties
of perjury, provides us or our agent with its name and address and
certifies that it is not a United States person or (B) a securities
clearing organization, bank, or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") certifies to us or our agent, under penalties of
perjury, that such a statement has been received from the beneficial
owner by it or another financial institution and furnishes to the Company
or its agent a copy thereof.
For purposes of this summary, we refer to this exemption from U.S. federal
withholding tax as the "Portfolio Interest Exemption." Under new United States
Treasury regulations that went into effect for payments made after December 31,
2000, subject to certain transition rules, the certification described in clause
(3) above may also be provided by a qualified intermediary on behalf of one or
more beneficial owners or other intermediaries, provided that such intermediary
has entered into a withholding agreement with the IRS and certain other
conditions are met.
The gross amount of payments to a Foreign Holder of interest that does not
qualify for the Portfolio Interest Exemption and that is not effectively
connected to a United States trade or business will be subject to United States
federal withholding tax at the rate of 30%, unless a United States income tax
treaty applies to reduce or eliminate withholding.
A Foreign Holder will generally be subject to tax in the same manner as a
United States Holder with respect to payments of interest if such payments are
effectively connected with the conduct of a trade or business by the Foreign
Holder in the United States and, if an applicable tax treaty so provides, such
gain is attributable to an office or other fixed place of business maintained in
the United States by such holder. Such effectively connected income received by
a Foreign Holder which is a corporation may in certain circumstances be subject
to an additional "branch profits tax" at a 30% rate or, if applicable, a lower
treaty rate.
Foreign Holders should consult their own tax advisors regarding applicable
income tax treaties, which may provide different rules.
To claim the benefit of a tax treaty or to claim exemption from withholding
because the income is effectively connected with a U.S. trade or business, the
Foreign Holder must provide a properly executed IRS Form W-8BEN or W-8ECI, as
applicable, prior to the payment of interest. These forms must be periodically
updated. United States Treasury regulations, which are effective for payments
made after December 31, 2000, subject to certain transition rules, require
Foreign Holders or, under certain circumstances, a qualified intermediary to
file a withholding certificate with the Company's withholding agent to obtain
the benefit of an applicable tax treaty providing for a lower rate of
withholding tax. Such certificate must contain, among other information, the
name and address of the Foreign Holder.
SALE, EXCHANGE OR REDEMPTION OF A CONVERTIBLE NOTE
A Foreign Holder generally will not be subject to United States federal
income tax or withholding tax on gain realized on the sale or exchange of
convertible notes unless (1) the holder is an individual who was present in the
United States for 183 days or more during the taxable year, and certain other
conditions are met, (2) the gain is effectively connected with the conduct of a
trade or business of the holder in the United States and, if an applicable tax
treaty so provides, such gain is attributable to an office or other fixed place
of business maintained in the United States by such holder or (3) the Company is
or has been a United States real property holding corporation ("USRPHC") at any
time during the shorter of the five-
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year period preceding the date of the disposition or the holder's holding period
(in which case the gain will be treated as effectively connected income as
described in (2)), unless (i) the convertible notes are considered to be
"regularly traded" on an "established securities market" under applicable
Treasury Regulations and (ii) the holder at no time during the shorter of the
five-year period preceding the date of the disposition or the holder's holding
period owned (actually or constructively) more than 5% of the total value of the
convertible notes. In the case of (2), the effectively connected income received
by a Foreign Holder which is a corporation may in certain circumstances be
subject to an additional "branch profits tax" at a 30% rate or, if applicable, a
lower treaty rate. Additionally, in the case of (3), it is possible that a
Foreign Holder that initially owns 5% or less of the total value of the
convertible notes may subsequently be considered to own more than 5% of the
total value of the convertible notes due to other holders' conversion of
convertible notes into class A common stock. Regardless of whether a disposition
of any convertible note is taxable to the seller pursuant to the rules regarding
USRPHCs, the withholding requirements of Section 1445 of the Code generally will
not be applicable to a purchaser of the convertible notes or a financial
intermediary involved in any such transaction if the convertible notes are
considered to be "regularly traded" on an "established securities market" under
applicable Treasury Regulations.
CONVERSION OF A CONVERTIBLE NOTE
In general, no United States federal income tax or withholding tax will be
imposed upon the conversion of a convertible note into class A common stock by a
Foreign Holder except (1) to the extent the class A common stock is considered
attributable to accrued interest not previously included in income, which may be
taxable under the rules set forth in "-- Stated Interest," (2) with respect to
the receipt of cash in lieu of fractional shares by Foreign Holders upon
conversion of a convertible note, in each case where the conditions described in
(1), (2) or (3) above under "-- Sale, Exchange or Redemption of a Convertible
Note" is satisfied. Regardless of whether a conversion of any convertible note
is taxable to the seller pursuant to the rules regarding USRPHCs, the
withholding requirements of Section 1445 of the Code generally will not be
applicable to us or a financial intermediary involved in any such transaction if
the convertible notes are considered to be "regularly traded" on an "established
trading market" under applicable Treasury Regulations.
SALE OR EXCHANGE OF CLASS A COMMON STOCK
A Foreign Holder generally will not be subject to United States federal
income tax or withholding tax on the sale or exchange of class A common stock
unless either of the conditions described in (1) or (2) above under "-- Sale,
Exchange or Redemption of a Convertible Note" is satisfied or we are or have
been a USRPHC for United States federal income tax purposes at any time within
the shorter of the five year period preceding such disposition or the Foreign
Holder's holding period. We believe that, based upon our current assets, we are
not, and anticipate that we will not become, a USRPHC. In general, we will be
treated as a USRPHC if the fair market value of our U.S. real property interests
equals or exceeds 50% of the total fair market value of our U.S. and non-U.S.
real property and our other assets used or held in a trade or business. If we
are, or become, a USRPHC, so long as the class A common stock continues to be
regularly traded on an established securities market within the meaning of
Section 897(c)(3) of the Code, only a Foreign Holder who holds or held directly,
indirectly or constructively, at any time during the shorter of the five-year
period preceding the date of disposition or the holder's holding period, more
than 5% of the class A common stock will be subject to U.S. federal income tax
on the disposition of the class A common stock. For purposes of the ownership
test described above, a Foreign Holder of convertible notes will be considered
as constructively owning the class A common stock into which such convertible
notes are convertible. Regardless of whether a disposition of class A common
stock is taxable to the seller pursuant to the rules regarding USRPHCs, the
withholding requirements of Section 1445 of the Code generally will not be
applicable to a purchaser of the class A common stock or a financial
intermediary involved in any such transaction.
DIVIDENDS
Distributions by us with respect to the class A common stock that are
treated as dividends paid or deemed paid (including a deemed distribution on the
convertible notes or class A common stock as described above under "United
States Holders; Adjustments to Conversion Rate") to a Foreign Holder,
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excluding dividends that are effectively connected with the conduct of a trade
or business in the United States by the holder, will be subject to United States
federal withholding tax at a 30% rate, or lower rate provided under any
applicable income tax treaty. Except to the extent that an applicable tax treaty
otherwise provides, a Foreign Holder will be subject to tax in the same manner
as a United States Holder on dividends paid or deemed paid that are effectively
connected with the conduct of a trade or business in the United States by the
Foreign Holder. If the Foreign Holder is a foreign corporation, it may in
certain circumstances also be subject to a United States "branch profits tax" on
such effectively connected income at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. Even though such effectively
connected dividends are subject to income tax, and may be subject to the branch
profits tax, they will not be subject to U.S. withholding tax if the Foreign
Holder delivers IRS Form W-8ECI to the payer.
Under new United States Treasury Regulations that generally are effective
for payments made after December 31, 2000, subject to certain transition rules,
a Foreign Holder of class A common stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
requirements. In addition, under current United States Treasury Regulations, in
the case of class A common stock held by a foreign partnership, or other
fiscally transparent entities, the certification requirement generally is
applied to the partners of the partnership and the partnership is required to
provide certain information to the payer. The Treasury Regulations also provide
look-through rules for tiered partnerships.
DEATH OF A FOREIGN HOLDER
A convertible note held by an individual who is not a citizen or resident
of the United States at the time of death will not be includable in the
decedent's gross estate for United States estate tax purposes, provided that
such holder or beneficial owner did not at the time of death actually or
constructively own 10% or more of the combined voting power of all classes of
our stock entitled to vote, and provided that, at the time of death, payments
with respect to the convertible note would not have been effectively connected
with the conduct by such Foreign Holder of a trade or business within the United
States.
Class A common stock actually or beneficially held, other than through a
foreign corporation, by an individual who is not a citizen or resident of the
United States at the time of his or her death, or previously transferred subject
to certain retained rights or powers, will be subject to United States federal
estate tax unless otherwise provided by an applicable estate tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a convertible note, dividends on
class A common stock, and payments of the proceeds of the sale of a note or
class A common stock to a United States Holder, and a 31% backup withholding tax
may apply to such payment if the United States Holder (1) fails to establish
properly that it is entitled to an exemption, (2) fails to furnish or certify
his correct taxpayer identification number to the payer in the manner required,
(3) is notified by the IRS that he has failed to report payments of interest or
dividends property or (4) under certain circumstances, fails to certify that he
has not been notified by the IRS that he is subject to backup withholding for
failure to report interest or dividend payments.
Information reporting requirements will apply to payments of interest or
dividends to Foreign Holders where such interest or dividends are subject to
withholding or are exempt from United States withholding tax pursuant to a tax
treaty, or where such interest is exempt from United States tax under the
Portfolio Interest Exemption. Copies of these information returns may be made
available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Foreign Holder resides.
Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal on the convertible notes by us
to a Foreign Holder if the Foreign Holder certifies as to its status as a
Foreign Holder under penalties of perjury or otherwise establishes an exemption
(provided that neither we nor our paying agent has actual knowledge that the
holder is a United States person or that the conditions of any other exemption
are not, in fact, satisfied).
The payment of the proceeds from the disposition of convertible notes or
class A common stock to or through the United States office of any broker,
United States or foreign, will be subject to information
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reporting and possible backup withholding unless the owner certifies as to its
non-United States status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a United States person or that the conditions of any other exemption
are not, in fact, satisfied.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
The preceding discussion of certain United States federal income tax
consequences is for general information only and is not tax advice. Accordingly,
holders of the convertible notes should consult their own tax advisors as to
particular tax consequences to them or purchasing, holding and disposing of the
convertible notes and the class A common stock, including the applicability and
effect of any state, local or foreign tax laws, and of any proposed changes in
applicable law.
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DESCRIPTION OF OUTSTANDING CAPITAL STOCK
We have summarized some of the terms and provisions of our capital stock in
this section. The summary is not complete. You should read our amended and
restated Certificate of Incorporation, our restated by-laws and the certificate
of designations relating to the applicable capital stock for additional
information before you purchase any of our capital stock, or securities
convertible into shares of our capital stock, including the notes.
AUTHORIZED COMMON STOCK
Total Shares. We have the authority to issue a total of 1,120,000,000
shares of common stock consisting of:
- 1,000,000,000 shares of Class A common stock, par value $0.02 per share;
and
- 120,000,000 shares of Class B common stock, par value $0.02 per share.
Class A Common Stock. As of June 30, 2001, the number of shares of Class A
common stock issued and outstanding was 317,075,246.
Class B Common Stock. As of June 30, 2001, the number of shares of Class B
common stock issued and outstanding was 105,414,226.
Preemptive Rights. The holders of Class A common stock and Class B common
stock do not have preemptive rights to purchase or subscribe for any of our
stock or other securities.
CLASS A COMMON STOCK
Voting Rights. Each outstanding share of Class A common stock is entitled
to one vote per share and votes with the Class B common stock as a single class
on all matters on which holders of common stock are entitled to vote.
Dividends. Class A common stock participates equally in any dividend, when
and as declared by our board of directors out of funds lawfully available
therefor, with the Class B common stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, and subject to the rights, if any, of
any outstanding shares of preferred stock, the Class A common stock participates
equally with the Class B common stock.
CLASS B COMMON STOCK
Voting Rights. Each outstanding share of Class B common stock is entitled
to ten votes per share and votes with the Class A common stock as a single class
on all matters on which holders of common stock are entitled to vote.
Dividends. Class B common stock participates equally in any dividend, when
and as declared by our board of directors out of funds lawfully available
therefor, with the Class A common stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, and subject to the rights, if any, of
any outstanding shares of preferred stock, the Class B common stock participates
equally with the Class A common stock.
Conversion. Each share of Class B common stock is convertible, at any time
and at the option of the holder thereof, into one share of Class A common stock.
In addition, each share of Class B common stock is convertible, at the option of
our board of directors, into one share of our Class A common stock at any time
the Class B common stock is transferred or presented to us for transfer on our
records by the holder thereof.
PREFERRED STOCK
At June 30, 2001, we had eight series of preferred stock outstanding. These
series, the respective number of shares issued and outstanding, and the
respective aggregate liquidation preferences, which
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amounts are equal to the respective redemption amounts, are summarized in the
table below (dollars in thousands):
<Table>
<Caption>
AGGREGATE
SHARES ISSUED & LIQUIDATION
OUTSTANDING AS OF PREFERENCE AS OF
JUNE 30, 2001 JUNE 30, 2001
----------------- ----------------
14% Series A Senior Exchangeable Redeemable Preferred
Shares.................................................... 10,233,065 $ 511,653
6 1/2% Series B Cumulative Convertible Preferred Stock...... 2,122,795 106,140
Series C Cumulative Convertible Participating Preferred
Stock..................................................... 584,375 584,375
Series D Convertible Participating Preferred Stock.......... 265,625 265,625
13 1/2% Series E Senior Redeemable Exchangeable Preferred
Stock..................................................... 222,778 222,778
7% Series F Convertible Redeemable Preferred Stock.......... 57,126 57,126
Series G Cumulative Convertible Participating Preferred
Stock..................................................... 268,750 268,750
Series H Convertible Participating Preferred Stock.......... 131,250 131,250
---------- ----------
Total.................................................. 13,885,764 $2,147,697
========== ==========
</Table>
We have summarized all material terms of our issued and outstanding
preferred stock in this section, including the terms set forth in the amendments
made to the certificates of designations for our series C, series D, series G
and series H preferred stock in connection with the June 2001 closing of an
equity investment in XO. However, you should read our amended and restated
certificate of incorporation, our restated bylaws and the certificate of
designations relating to the applicable series of the preferred stock that we
file with the SEC for additional information before you purchase any of our
preferred stock.
14% SERIES A SENIOR EXCHANGEABLE REDEEMABLE PREFERRED SHARES
Voting Rights. Holders of series A preferred stock are not entitled to
vote on any matter required or permitted to be voted upon by our stockholders
except where such vote will effect their liquidation priority, their rights
under our certificate of incorporation or bylaws, or result in a prohibited
merger, acquisition or asset sale.
Dividends. Holders of series A preferred stock are entitled to a dividend
of 14% of the liquidation preference per share, when, as and if declared by the
board of directors, out of funds legally available, payable quarterly. No
interest shall be payable in respect to any dividends that may be in arrears.
All dividends shall be cumulative, whether or not earned or declared, on a daily
basis from their date of issuance and shall be payable quarterly in arrears on
each Dividend Payment Date (as defined in the certificate of designation of the
series A preferred stock). Dividends are payable in cash, except that on each
dividend payment date that occurs on or before February 1, 2002, we may, at our
option, pay the dividend by issuing additional shares of series A preferred
stock with an aggregate liquidation preference equal to the amount of such
dividend.
Exchange. The series A preferred stock is exchangeable, at our option, for
our 14% senior subordinated notes due 2009. The exchange rate is $1.00 principal
amount of our 14% senior subordinated notes due 2009 for each $1.00 of aggregate
liquidation preference of series A preferred stock. If we exchange the series A
preferred stock, we must comply with specified notice and other administrative
provisions. The exchange can occur only on a scheduled dividend payment date for
the series A preferred stock. We may not exchange the series A preferred stock
unless on the date of the exchange there are no accumulated and unpaid dividends
(including the dividend payable on the exchange date) on the series A preferred
stock or other contractual impediments to the exchange. In addition, we may not
execute the exchange if a default or event of default under either the indenture
governing the 14% senior subordinated notes or our 12 1/2% Senior Notes due
2006, would exist immediately after the exchange.
Conversion. Holders of our series A preferred stock have no rights to
convert the shares into or exchange the shares for shares of any other class of
our capital stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series A preferred stock shall
receive its liquidation preference on parity with the distribution to our series
E preferred stock, but prior to any distribution to our series B, series C,
series D, series F, series G and series H preferred stock and each class of our
common stock.
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Redemption. We are required to redeem all of the series A preferred stock
outstanding on February 1, 2009 at a redemption price equal to 100% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of redemption. Subject to provisions of our indentures, we may amend our
certificate of incorporation to provide for redemption of the series A preferred
stock, in whole or in part, at our option, at any time on or after February 1,
2002, at redemption rates expressed as a percentage of the liquidation
preference, commencing with 107% on February 1, 2002 and declining to 100% on
February 1, 2006, plus accumulated and unpaid dividends to the date of
redemption.
6 1/2% SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
Voting Rights. Holders of series B preferred stock are not entitled to
vote on any matter required or permitted to be voted upon by our stockholders
except where such vote will effect their liquidation priority, their rights
under our certificate of incorporation or bylaws, or result in a prohibited
merger, acquisition or asset sale.
Dividends. Holders of series B preferred stock are entitled to a dividend
of 6 1/2% of the liquidation preference per share, when, as and if declared by
the board of directors, out of funds legally available, payable quarterly. No
interest shall be payable in respect to any dividends that may be in arrears.
All dividends shall be cumulative, whether or not earned or declared, on a daily
basis from their date of issuance and shall be payable quarterly in arrears on
each Dividend Payment Date (as defined in the certificate of designation of the
series B preferred stock). Dividends are payable in cash.
Conversion. Each share of our series B preferred stock is convertible, at
the option of the holder, into 4.58 shares, subject to specified adjustments, of
our Class A common stock. We can cause this conversion right to expire at any
time from April 15, 2001 through and including April 15, 2006, upon notice, if
the closing price of our Class A common stock is greater than $13.10, subject to
specified adjustments, for 20 trading days in any period of 30 consecutive
trading days. We cannot cause the conversion right to expire if there are any
accrued but unpaid dividends on the series B preferred stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series B preferred stock shall
receive its liquidation preference after the distribution to our series A,
series C, series D, series E, series G, and series H preferred stock, on parity
with the distribution to our series F preferred stock and, but prior to any
distribution to each class of our common stock.
Redemption. We are required to redeem all of the series B preferred stock
outstanding on March 31, 2010 at a redemption price equal to 100% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of redemption. We may redeem the series B preferred stock any time after
April 16, 2006 at a redemption price equal to 100% of the liquidation
preference. In May 2000, certain holders of the series B preferred stock
converted their shares into approximately 8.1 million shares of our Class A
common stock based on a conversion rate of 4.58 shares of Class A common stock
for each share of series B preferred stock converted, in consideration for our
cash payment of approximately $4.7 million, which has been reported as a
preferred stock dividend in the second quarter of 2000.
SERIES C CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK
Voting Rights. Holders of series C preferred stock are entitled to vote on
an as-converted basis with all classes of our common stock as a single class on
all matters presented to the holders of all classes of our common stock for a
vote, other than the election of directors. The holders of the series C
preferred stock are entitled to vote their shares as a separate series for the
election of one director nominated by the holders of the series C preferred
stock.
Dividends. Holders of series C preferred stock are entitled to a dividend
of $54.5455 per share in cash, per annum, when, as and if declared by the board
of directors, out of funds legally available. All dividends shall be cumulative,
whether or not earned or declared, on a daily basis from their date of issuance
and shall be payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year.
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Conversion. Each share of our series C preferred stock is convertible, at
the option of the holder, into the number of shares of our Class A common stock
equal to the Aggregate Series C Conversion Shares.
The Aggregate Series C Conversion Shares is calculated as follows:
- First, determine the sum of $727.273 and all accrued and unpaid dividends
on the series C preferred stock through the date of conversion. Multiply
this sum by the total number of shares of series C preferred stock
outstanding.
- Second, divide the total received in step one by, if calculable, the
gross proceeds per share received or to be received by the holder of a
share of series C preferred stock in connection with the sale of the
shares of Class A common stock issuable upon conversion of the series C
preferred stock or, in all other cases, 97% of the current market price
of a share of Class A common stock.
- Third, determine the aggregate Liquidation Preferences of the shares of
series C preferred stock and series D preferred stock. The Liquidation
Preference for each of the series C and series D preferred stock is equal
to the total number of shares of the relevant series of preferred stock
outstanding at the time of conversion multiplied by the sum of $1,000 and
all accrued and unpaid dividends on a share of the relevant series of
preferred stock at the time of the conversion.
- Fourth, divide the aggregate Liquidation Preferences of the series C and
series D preferred stock by $17.00, subject to specified adjustments.
This amount is called the Aggregate Conversion Shares.
- Fifth, if the Aggregate Conversion Shares is greater than the total
received in step 2, determine the amount of the excess. Multiply this
excess by .375.
- Sixth, add the step two result to the step five result and divide this
amount by the total number of shares of series C preferred stock
outstanding at the time of the conversion. This product is the Aggregate
Series C Conversion Shares.
Upon the exercise of this conversion option, a proportional amount of the
series D preferred stock automatically converts into shares of our Class A
common stock in accordance with the terms of the certificate of designations of
the series D preferred stock. We will select the shares of series D preferred
stock called for automatic conversion in accordance with the terms of the
certificate of designations for the series D preferred stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series C preferred stock shall
receive its liquidation preference after the distribution to our series A and
series E preferred stock, on parity with the distribution to our series D,
series G, and series H preferred stock, but prior to any distribution to our
series B and series F preferred stock and any distribution to each class of our
common stock.
Redemption. Holders of the series C preferred stock may require us to
redeem those shares during the 180-day period commencing January 20, 2010 at a
redemption price equal to 100% of the liquidation preference. We may redeem the
series C preferred stock at any time after the later of January 20, 2005 and the
date when we have redeemed our 12 1/2% Senior Notes due 2006 in full.
Right of First Purchase. Holders of our series C preferred stock have a
right of first purchase with respect to specified issuances of capital stock
that rank senior to our Class A common stock, other than public offerings and
specific private offerings to institutional investors of this senior capital
stock.
SERIES D CONVERTIBLE PARTICIPATING PREFERRED STOCK
Voting Rights. Holders of series D preferred stock are entitled to vote on
an as-converted basis with all classes of our common stock as a single class on
all matters presented to the holders of all classes of
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our common stock for a vote, other than the election of directors. The holders
of the series D preferred stock are entitled to vote their shares as a separate
series for the election of one director nominated by the holders of the series D
preferred stock.
Dividends. If we pay a dividend in cash on our common stock, holders of
series D preferred stock are entitled to a dividend of 62.5% of the amount of
dividends that would be paid with respect to the series C preferred stock and
the series D preferred stock taken together if converted into common stock on
the record date for the dividend.
Conversion. Each share of our series D preferred stock is convertible,
automatically or at the option of the holder, into the number of shares of our
Class A common stock equal to the Aggregate Series D Conversion Shares.
The Aggregate Series D Conversion Shares is calculated as follows:
- First, determine the sum of $727.273 and all accrued and unpaid dividends
on the series C preferred stock through the date of conversion. Multiply
this sum by the total number of shares of series C preferred stock
outstanding.
- Second, divide the total received in step one by, if calculable, the
gross proceeds per share received or to be received by the holder of a
share of series D preferred stock in connection with the sale of the
shares of Class A common stock issuable upon conversion of the series D
preferred stock or, in all other cases, 97% of the current market price
of a share of Class A common stock.
- Third, compare the result received in step two to the Aggregate
Conversion Shares, which is defined in connection with the description of
the conversion terms of the series C preferred stock. If the Aggregate
Conversion Shares is greater, determine the excess. If the result
received in step two is greater, the shares of series D preferred stock
are not then convertible.
- Fourth, multiply the excess of the Aggregate Conversion Shares over the
result received in step two by .625. Divide this product by the total
number of shares of series D preferred stock outstanding at the time of
the conversion. This product is the Aggregate Series D Conversion Shares.
As discussed above in connection with the explanation of the conversion
terms of the series C preferred stock, each time that shares of our series C
preferred stock are converted into shares of our Class A common stock, a
proportional amount of the series D preferred stock automatically converts into
the number of shares of our Class A common stock equal to the Aggregate Series D
Conversion Shares. We will select the shares of series D preferred stock called
for automatic conversion in accordance with the requirements of the principal
national securities exchange, if any, on which the shares of the series D
preferred stock are then listed. If the shares of the series D preferred stock
are not so listed, we will select the called shares on a pro rata basis, by lot
or by another method that we determine is fair and appropriate.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series D preferred stock shall
receive its liquidation preference after the distribution to our series A and
series E preferred stock, on parity with the distribution to our series C,
series G, and series H preferred stock, but prior to any distribution to our
series B and series F preferred stock and any distribution to each class of our
common stock.
Redemption. Holders of the series D preferred stock may require us to
redeem those shares during the 180-day period commencing January 20, 2010. We
may redeem the series D preferred stock at any time after the later of January
20, 2005 and the date when we have redeemed our 12 1/2% Senior Notes due 2006 in
full.
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Right of First Purchase. Holders of our series D preferred stock have a
right of first purchase with respect to specified issuances of capital stock
that rank senior to our Class A common stock, other than public offerings and
specific private offerings to institutional investors of this senior capital
stock.
13 1/2% SERIES E SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK DUE 2010
Voting Rights. Holders of series E preferred stock are not entitled to
vote on any matter required or permitted to be voted upon by our stockholders.
However, upon the occurrence of certain events, series E preferred stockholders
may be permitted to elect additional directors to the board of directors.
Dividends. Holders of series E preferred stock are entitled to a dividend
of 13 1/2% of the liquidation preference per share, when, as and if declared by
the board of directors, out of funds legally available. All dividends shall be
cumulative, whether or not earned or declared, on a daily basis from their date
of issuance and shall be payable quarterly in arrears on each of March 1, June
1, September 1, and December 1 of each year. Dividends are payable in cash,
except that on each dividend payment date occurring on or prior to June 1, 2003,
dividends may be paid, at our option, by the issuance of additional shares of
series E preferred stock having an aggregate liquidation preference equal to the
amount of such dividend.
Exchange. The series E preferred stock is exchangeable, at our option, for
our 13 1/2% senior subordinated debentures due 2010. The exchange rate is $1.00
principal amount of our 13 1/2% senior subordinated debentures due 2010 for each
$1.00 of aggregate liquidation preference of series E preferred stock. If we
exchange the series E preferred stock, we must comply with specified notice and
other administrative provisions. The exchange can occur only on a scheduled
dividend payment date for the series E preferred stock. We may not exchange the
series E preferred stock unless on the date of the exchange there are no
accumulated and unpaid dividends (including the dividend payable on the exchange
date) on the series E preferred stock or other contractual impediments to the
exchange. In addition, we may not execute the exchange if a default or event of
default under the indenture governing the 13 1/2% senior subordinated debentures
would exist immediately after the exchange.
Conversion. Holders of our series E preferred stock have no rights to
convert the shares into or exchange the shares for shares of any other class of
our capital stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series E preferred stock shall
receive its liquidation preference on parity with the distribution to our series
A preferred stock, but prior to any distribution to our series B, series C,
series D, series F, series G, and series H preferred stock and each class of our
common stock.
Redemption. We are required to redeem the series E preferred stock at
their liquidation preference, plus accumulated and unpaid dividends, on June 1,
2010. We may redeem the series E preferred stock in whole or in part, at any
time on or after June 1, 2003, at redemption rates expressed as a percentage of
the liquidation preference commencing with 106.75% on June 1, 2003, and
declining to 100% on June 1, 2008, plus accumulated and unpaid dividends to the
date of redemption.
7% SERIES F CONVERTIBLE REDEEMABLE PREFERRED STOCK DUE 2010
Voting Rights. Except as required by law, holders of series F preferred
stock are not entitled to vote on any matter required or permitted to be voted
upon by our stockholders.
Dividends. Holders of series F preferred stock are entitled to a dividend
of 7% of the liquidation preference per share, when, as and if declared by the
board of directors, out of funds legally available. All dividends shall be
cumulative, whether or not earned or declared, on a daily basis from their date
of issuance and shall be payable quarterly in arrears on each of March 1, June
1, September 1, and December 1 of each year. Dividends are payable in cash,
except that dividends may be paid, at our option,
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by the issuance of additional shares of series F preferred stock having an
aggregate liquidation preference equal to the amount of such dividend.
Conversion. Each share of our series F preferred stock is convertible, at
the option of the holder, into the number of shares of our Class A common stock
equal to the aggregate liquidation preference on the shares of series F
preferred stock to be converted (plus, in the event the shares are converted on
a date other than a dividend payment date, accrued and unpaid dividends on the
shares through the date of the conversion), divided by the conversion price of
$31.0258, subject to specified adjustments.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series F preferred stock shall
receive its liquidation preference after the distribution to our series A,
series C, series D, series E, series G, and series H preferred stock, on parity
with the distribution to our series B preferred stock, but prior to any
distribution to each class of our common stock.
Redemption. We are required to redeem the series F preferred stock at
their liquidation preference, plus accumulated and unpaid dividends, on
September 1, 2010. We may redeem the series F preferred stock, in whole or in
part, at any time on or after June 1, 2003, at redemption rates commencing with
105.125%, and declining to 100% on June 1, 2010.
SERIES G CUMULATIVE CONVERTIBLE PARTICIPATING PREFERRED STOCK
Voting Rights. Holders of series G preferred stock are entitled to vote on
an as-converted basis with all classes of our common stock as a single class on
all matters presented to the holders of all classes of our common stock for a
vote, other than for election of directors. So long as the holders of series C
preferred stock are entitled to designate and elect a director nominated by such
holders, the holders of series G preferred stock are not entitled to vote for
the election of any directors. If the holders of series C preferred stock no
longer have such right, the holders of series G preferred stock are entitled to
vote their shares as a separate series for the election of one director
nominated by the holders of series G preferred stock.
Dividends. Holders of series G preferred stock are entitled to receive a
dividend of $55.814 per share in cash, per annum, when, as and if declared by
the board of directors, out of funds legally available. All dividends shall be
cumulative, whether or not earned or declared, on a daily basis from their date
of issuance and shall be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year.
Conversion. Each share of our series G preferred stock is convertible, at
the option of the holder, into the number of shares of our Class A common stock
equal to the Aggregate Series G Conversion Shares.
The Aggregate Series G Conversion Shares is calculated as follows:
- First, determine the sum of $706.9767 and all accrued and unpaid
dividends on the series G preferred stock through the date of conversion.
Multiply this sum by the total number of shares of series G preferred
stock outstanding.
- Second, divide the total received in step one by, if calculable, the
gross proceeds per share received or to be received by the holder of a
share of series G preferred stock in connection with the sale of the
shares of Class A common stock issuable upon conversion of the series G
preferred stock or, in all other cases, 97% of the current market price
of a share of Class A common stock.
- Third, determine the aggregate Liquidation Preferences of the shares of
series G preferred stock and series H preferred stock. The Liquidation
Preference for each of the series G and series H preferred stock is equal
to the total number of shares of the relevant series of preferred stock
outstanding at the time of conversion multiplied by the sum of $1,000 and
all accrued and unpaid dividends on a share of the relevant series of
preferred stock at the time of the conversion.
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- Fourth, divide the aggregate Liquidation Preferences of the series G and
series H preferred stock by $17.00, subject to specified adjustments.
This amount is called the Aggregate Conversion Shares.
- Fifth, if the Aggregate Conversion Shares is greater than the total
received in step 2, determine the amount of the excess. Multiply this
excess by .375.
- Sixth, add the step two result to the step five result and divide this
amount by the total number of shares of series G preferred stock
outstanding at the time of the conversion. This product is the Aggregate
Series G Conversion Shares.
Upon the exercise of this conversion option, a proportional amount of the
series H preferred stock automatically converts into shares of our Class A
common stock in accordance with the terms of the certificate of designations of
the series H preferred stock. We will select the shares of series H preferred
stock called for automatic conversion in accordance with the terms of the
certificate of designations for the series H preferred stock.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series G preferred stock shall
receive its liquidation preference after the distribution to our series A and
series E preferred stock, on parity with the distribution to our series C,
series D, and series H preferred stock, but prior to any distribution to our
class of series B and series F preferred stock and any distribution to each
class of our common stock.
Redemption. Holders of the series G preferred stock may require us to
redeem those shares during the 180-day period commencing on July 6, 2010. We may
redeem the series G preferred stock at any time after the later of July 6, 2005
and the date when we have redeemed our 12 1/2% Senior Notes due 2006 in full.
Right of First Purchase. Holders of our series G preferred stock have a
right of first purchase with respect to specified issuances of capital stock
that rank senior to our Class A common stock, other than public offerings and
specific private offerings to institutional investors of this senior capital
stock.
SERIES H CONVERTIBLE PARTICIPATING PREFERRED STOCK
Voting Rights. Holders of series H preferred stock are entitled to vote on
an as-converted basis with all classes of our common stock as a single class on
all matters presented to the holders of all classes of our common stock for a
vote, other than for election of directors. So long as the holders of series D
preferred stock are entitled to designate and elect a director nominated by such
holders, the holders of series H preferred stock are not entitled to vote for
the election of any directors. If the holders of series D preferred stock no
longer have such right, the holders of series H preferred stock are entitled to
vote their shares as a separate series for the election of one director
nominated by the holders of series H preferred stock.
Dividends. If we pay a dividend in cash on our common stock, holders of
the Series H preferred stock are entitled to a dividend of 62.5% of the amount
of dividends that would be paid with respect to the series G preferred stock and
the series H preferred stock taken together if converted into common stock on
the record date for the dividend.
Conversion. Each share of our series H preferred stock is convertible,
automatically or at the option of the holder, into the number of shares of our
Class A common stock equal to the Aggregate Series H Conversion Shares.
The Aggregate Series H Conversion Shares is calculated as follows:
- First, determine the sum of $706.9767 and all accrued and unpaid
dividends on the series G preferred stock through the date of conversion.
Multiply this sum by the total number of shares of series G preferred
stock outstanding.
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- Second, divide the total received in step one by, if calculable, the
gross proceeds per share received or to be received by the holder of a
share of series H preferred stock in connection with the sale of the
shares of Class A common stock issuable upon conversion of the series H
preferred stock or, in all other cases, 97% of the current market price
of a share of Class A common stock.
- Third, compare the result received in step two to the Aggregate
Conversion Shares, which is defined in connection with the description of
the conversion terms of the series G preferred stock. If the Aggregate
Conversion Shares is greater, determine the excess. If the result
received in step two is greater, the shares of series H preferred stock
are not then convertible.
- Fourth, multiply the excess of the Aggregate Conversion Shares over the
result received in step two by .625. Divide this product by the total
number of shares of series H preferred stock outstanding at the time of
the conversion. This product is the Aggregate Series H Conversion Shares.
As discussed above in connection with the explanation of the conversion
terms of the series G preferred stock, each time that shares of our series G
preferred stock are converted into shares of our Class A common stock, a
proportional amount of the series H preferred stock automatically converts into
the number of shares of our Class A common stock equal to the Aggregate Series H
Conversion Shares. We will select the shares of series H preferred stock called
for automatic conversion in accordance with the requirements of the principal
national securities exchange, if any, on which the shares of the series H
preferred stock are then listed. If the shares of series H preferred stock are
not so listed, we will select the called shares on a pro rata basis, by lot or
by another method that we determine is fair and appropriate.
Liquidation Rights. In the event of the liquidation or distribution of our
assets, whether voluntary or involuntary, the series H preferred stock shall
receive its liquidation preference after the distribution to our series A and
series E preferred stock, on parity with the distribution to our series C,
series D, and series G preferred stock, but prior to any distribution to our
series B and series F preferred stock and any distribution to each class of our
common stock.
Redemption. Holders of the series H preferred stock may require us to
redeem those shares during the 180-day period commencing on July 6, 2010. We may
redeem the series H preferred stock at any time after the later of July 6, 2005
and the date when we have redeemed our 12 1/2% Senior Notes due 2006 in full.
Right of First Purchase. Holders of our series H preferred stock have a
right of first purchase with respect to specified issuances of capital stock
that rank senior to our Class A common stock, other than public offerings and
specific private offerings to institutional investors of this senior capital
stock.
DESCRIPTION OF OTHER MATERIAL INDEBTEDNESS
The following is a description of all material terms of our material
outstanding indebtedness. Copies of our senior secured credit facility and the
indentures to which each outstanding issue of notes relates are available upon
request to us.
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SENIOR SECURED CREDIT FACILITY
In February 2000, we entered into a $1,000.0 million senior secured credit
facility underwritten by a syndicate of banks and other financial institutions.
The credit facility consists of a $387.5 million tranche A term loan facility, a
$225.0 million tranche B term loan facility and a $387.5 million revolving
credit facility. As of June 30, 2001, we had borrowed $612.5 million under this
facility and in July 2001 we borrowed the remaining availability of $387.5
million.
All obligations under the credit facility are secured by the
telecommunications assets purchased using the proceeds thereof, other assets up
to $125.0 million, all intercompany receivables owed to us by our subsidiaries
and the stock of our direct subsidiaries. Our subsidiaries have guaranteed
$125.0 million of the obligations allocated ratably among the credit facility.
Both the revolving credit facility and the tranche A term loan facility
mature on December 31, 2006, and the tranche B term loan facility matures on
June 30, 2007. The maturity date for each of the facilities will automatically
be accelerated to October 31, 2005, unless we have refinanced our $350.0 million
12 1/2% Senior Notes by April 15, 2005.
Amounts drawn under the revolving credit facility and the term loans bear
interest, at our option, at the alternate base rate or reserve-adjusted London
Interbank Offered Rate (LIBOR) plus, in each case, applicable margins. As of
June 30, 2001, the interest rate on the amount outstanding under our tranche A
term loan was 6.9% for the first borrowing of $150.0 million and 6.8% for the
second borrowing of $237.5 million and under our tranche B term loan was 7.4%.
There were no outstanding borrowings under our revolving credit facility as of
June 30, 2001. In July 2001, we borrowed the remaining availability of $387.5
million under our revolving credit facility.
The credit agreement requires us to meet and maintain specific financial
ratios and tests. The following ratios and tests are applicable through the
first fiscal quarter of 2003:
- a minimum revenues test;
- a minimum access lines test;
- a maximum senior secured debt to capitalization ratio;
- a maximum total net debt to total capitalization ratio;
- a maximum total senior secured debt to gross property, plant and
equipment ratio; and
- a maximum senior secured debt to annualized adjusted EBITDA ratio.
Beginning with the second fiscal quarter of 2003, the credit agreement
requires us to meet and maintain the following financial ratios:
- a maximum total senior secured debt to annualized consolidated EBITDA
ratio;
- a maximum consolidated total debt to annualized consolidated EBITDA
ratio;
- a minimum consolidated EBITDA to consolidated cash interest expense
ratio; and
- a minimum annualized consolidated EBITDA to pro forma consolidated debt
service ratio.
The credit agreement also contains customary negative covenants restricting
and limiting our ability to engage in certain activities, including but not
limited to:
- limitations on indebtedness, guarantee obligations and the incurrence of
liens;
- restrictions on sale lease back transactions, consolidations, mergers,
liquidations, dissolutions, leases, sales of assets, transactions with
affiliates, loans, advances and investments;
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- restrictions on issuance of preferred stock, dividends and distributions
on capital stock and other similar distributions; and
- optional payments and modifications of other debt instruments,
transactions with affiliates, changes in fiscal year, and engaging in any
business other than the telecommunications and data and voice
transmission business (including enhanced services delivered over data
and/or telecommunications networks).
The secured credit facility contains customary events of default. Upon a
change of control, we must prepay in full the outstanding principal amount of
all loans under the credit facility, together with all accrued interest, fees
and other expenses owing under the credit facility and related agreements.
SENIOR NOTES AND SENIOR DISCOUNT NOTES
As of June 30, 2001, we had outstanding ten issues of senior notes and
senior discount notes totaling $4,086.1 million in principal amount and accreted
value, as follows:
<Table>
<Caption>
AS OF
JUNE 30, 2001
----------------------
(DOLLARS IN THOUSANDS)
12 1/2% Senior Notes due 2006............................. $ 350,000
9 5/8% Senior Notes due 2007.............................. 400,000
9% Senior Notes due 2008.................................. 334,547
9.45% Senior Discount Notes due 2008...................... 539,959
10 3/4% Senior Notes due 2008............................. 500,000
10 3/4% Senior Notes due 2009............................. 675,000
12 1/4% Senior Discount Notes due 2009.................... 416,452
10 1/2% Senior Notes due 2009............................. 400,000
12 1/8% Senior Discount Notes due 2009.................... 304,401
12 3/4% Senior Notes due 2007............................. 165,707
----------
Total..................................................... $4,086,066
==========
</Table>
The senior notes and senior discount notes are our unsecured senior
obligations and will rank equally in right of payment with one another, with all
our other existing senior obligations and with our future senior obligations.
They will rank senior in right of payment to our existing subordinated notes and
to any subordinated notes we issue in the future.
Each of the indentures governing each of our senior notes and senior
discount notes restricts, among other things, our ability to incur additional
indebtedness, pay dividends or make certain other restricted payments, incur
certain liens to secure debt which is subordinated to or ranks equally with such
notes, engage in any sale and leaseback transaction, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of our assets, enter
into certain transactions with affiliates, or incur indebtedness that is
subordinate in right of payment to any senior indebtedness and senior in right
of payment to such notes. Each such indenture permits, under certain
circumstances, our subsidiaries to be deemed unrestricted subsidiaries and thus
not subject to the restrictions of such indenture.
Except in connection with a Change of Control or an Asset Disposition (as
defined in each such indenture), we are not required to make mandatory
redemption or sinking fund payments with respect to such notes. In connection
with a Change of Control, we must make an offer to purchase all of our then
outstanding senior notes and senior discount notes at a purchase price of 101%
of their principal amount plus accrued and unpaid interest to the date of
purchase. In connection with an Asset Disposition, we must use the proceeds to
make an offer to purchase all of our then outstanding senior notes and senior
discount notes at a purchase price of 100% of their principal amount plus
accrued and unpaid interest to
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the date of purchase, unless such repurchase is prohibited by any Bank Credit
Agreement or Vendor Financing Facility (as defined in each such indenture) then
in place.
Each such indenture contains standard events of default, including:
- defaults in the payment of principal, premium or interest;
- defaults in the compliance with covenants contained in the indenture;
- cross defaults on more than $10 million of other indebtedness;
- failure to pay more than $10 million of judgments; and
- certain events of our subsidiaries.
DESCRIPTION OF THE 12 1/2% SENIOR NOTES DUE 2006
General. We, together with XO Capital, Inc., our wholly owned subsidiary,
issued $350 million of 12 1/2% Senior Notes due April 15, 2006 pursuant to an
indenture among us, XO Capital and United States Trust Company of New York, as
trustee.
Principal, Maturity and Interest. The 12 1/2% Notes due 2006 are limited
in aggregate principal amount to $350 million and will mature on April 15, 2006.
Interest on the 12 1/2% Notes due 2006 accrues at 12 1/2% per annum and is
payable semi-annually in arrears on April 15 and October 15 of each year.
Optional Redemption. The 12 1/2% Notes due 2006 are redeemable on or after
April 15, 2001, at our option, in whole or in part, at the following redemption
prices, expressed as percentages of principal amount, plus accrued interest, if
redeemed during the twelve-month period beginning on April 15 of the years
indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2001........................................................ 106.250%
2002........................................................ 104.167%
2003........................................................ 102.083%
2004 and thereafter......................................... 100.000%
</Table>
DESCRIPTION OF THE 9 5/8% SENIOR NOTES DUE 2007
General. We issued $400 million of 9 5/8% Senior Notes due 2007 pursuant
to an indenture between us and United States Trust Company of New York, as
trustee.
Principal, Maturity and Interest. The 9 5/8% Notes due 2007 are limited in
aggregate principal amount to $400 million and will mature on October 1, 2007.
Interest on the 9 5/8% Notes due 2007 accrues at 9 5/8% per annum and is payable
semi-annually in arrears on April 1 and October 1 of each year.
Optional Redemption. The 9 5/8% Notes due 2007 are redeemable on or after
October 1, 2002, at our option, in whole or in part, at the following redemption
prices, expressed as percentages of principal amount, plus accrued interest, if
redeemed during the twelve-month period beginning on October 1 of the years
indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2002........................................................ 104.813%
2003........................................................ 103.208%
2004........................................................ 101.604%
2005 and thereafter......................................... 100.000%
</Table>
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DESCRIPTION OF THE 9% SENIOR NOTES DUE 2008
General. We issued $335 million of 9% Senior Notes due 2008 pursuant to an
indenture between us and United States Trust Company of New York, as trustee.
Principal, Maturity and Interest. The 9% Notes due 2008 are limited in
aggregate principal amount to $335 million and will mature on March 15, 2008.
Interest on the 9% Notes due 2008 accrues at 9% per annum and is payable
semi-annually in arrears on March 15 and September 15 of each year.
Optional Redemption. The 9% Notes due 2008 are redeemable on or after
March 15, 2003, at our option, in whole or in part, at the following redemption
prices, expressed as percentages of principal amount, plus accrued interest, if
redeemed during the twelve-month period beginning on March 15 of the years
indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2003........................................................ 104.500%
2004........................................................ 103.000%
2005........................................................ 101.500%
2006 and thereafter......................................... 100.000%
</Table>
DESCRIPTION OF THE 9.45% SENIOR DISCOUNT NOTES DUE 2008
General. We issued $636,974,000 aggregate principal amount at stated
maturity of 9.45% Senior Discount Notes due 2008 under an indenture between us
and United States Trust Company of New York, as trustee.
Principal, Maturity and Interest. The 9.45% Notes due 2008 are limited to
$636,974,000 aggregate principal amount at stated maturity and will mature on
April 15, 2008. The 9.45% Notes due 2008 were issued at a discount from their
principal amount to generate aggregate gross proceeds of approximately $400
million. The 9.45% Notes due 2008 accrete at a rate of 9.45% compounded
semi-annually to an aggregate principal amount of $636,974,000 by April 15,
2003. No interest will accrue on the 9.45% Notes due 2008 prior to April 15,
2003. The 9.45% Notes due 2008 bear interest at 9.45% per annum payable
semi-annually on April 15 and October 15 of each year, commencing October 15,
2003, accruing from April 15, 2003, or from the most recent interest payment
date to which interest has been paid or provided.
Optional Redemption. The 9.45% Notes due 2008 are redeemable on or after
April 15, 2003, at our option, in whole or in part, and prior to maturity in
amounts of $1,000 principal amount at maturity or an integral multiple of $1,000
at the following redemption prices, expressed as percentages of the principal
amount, plus accrued interest, if redeemed during the twelve-month period
beginning on April 15 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2003........................................................ 104.725%
2004........................................................ 103.150%
2005........................................................ 101.575%
2006 and thereafter......................................... 100.000%
</Table>
DESCRIPTION OF THE 10 3/4% SENIOR NOTES DUE 2008
General. We issued $500 million principal amount of 10 3/4% Senior Notes
due 2008 under an indenture between us and United States Trust Company of New
York, as trustee.
Principal, Maturity and Interest. The 10 3/4% Notes due 2008 are limited
in aggregate principal amount to $500 million and will mature on November 15,
2008. Interest on the 10 3/4% Notes due 2008
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accrues at 10 3/4% per annum and is payable semi-annually in arrears on May 15
and November 15 of each year.
Optional Redemption. The 10 3/4% Notes due 2008 are redeemable on or after
November 15, 2003, at our option, in whole or in part, at the following
redemption prices, expressed as percentages of principal amount, described below
plus accrued interest, if redeemed during the twelve-month period beginning on
November 15 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2003........................................................ 105.375%
2004........................................................ 103.583%
2005........................................................ 101.792%
2006 and thereafter......................................... 100.000%
</Table>
In addition, at any time on or before November 15, 2001, we may redeem up
to 33 1/3% of the original aggregate principal amount of the 10 3/4% Notes due
2008 with the net proceeds of a sale of common equity at a redemption price
equal to 112.75% of the principal amount thereof, plus accrued interest,
provided that at least 66 2/3% of the original aggregate principal amount of
10 3/4% Notes due 2008 remains outstanding after such redemption.
DESCRIPTION OF THE 12 1/4% SENIOR DISCOUNT NOTES DUE 2009
General. We issued $588,926,000 aggregate principal amount at stated
maturity of 12 1/4% Senior Discount Notes due 2009 under an indenture between us
and U.S. Trust Company of Texas, as trustee.
Principal, Maturity and Interest. The 12 1/4% Notes due 2009 are limited
to $588,926,000 aggregate principal amount at stated maturity and will mature on
June 1, 2009. The 12 1/4% Notes due 2009 were issued at a discount from their
principal amount to generate aggregate gross proceeds of approximately $325
million. The 12 1/4% Notes due 2009 accrete at a rate of 12 1/4% compounded
semi-annually to an aggregate principal amount of $588,926,000 by June 1, 2004.
No interest will accrue on the 12 1/4% Notes due 2009 prior to June 1, 2004. The
12 1/4% Notes due 2009 bear interest at 12 1/4% per annum payable semi-annually
on June 1 and December 1 of each year, commencing December 1, 2004, accruing
from June 1, 2004, or from the most recent interest payment date to which
interest has been paid or provided.
Optional Redemption. The 12 1/4% Notes due 2009 are redeemable on or after
June 1, 2004, at our option, in whole or in part, and prior to maturity in
amounts of $1,000 principal amount at maturity or an integral multiple of $1,000
at the following redemption prices, expressed as percentages of principal
amount, plus accrued interest, if redeemed during the twelve-month period
beginning on June 1 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2004........................................................ 106.125%
2005........................................................ 104.083%
2006........................................................ 102.042%
2007 and thereafter......................................... 100.000%
</Table>
In addition, at any time on or before June 1, 2002, we may redeem up to
33 1/3% of the original aggregate principal amount of the 12 1/4% Notes due 2009
with the net proceeds of a sale of common equity at a redemption price equal to
112.25% of the Accreted Value (as defined in the indenture relating to the
12 1/4% Notes due 2009), plus accrued and unpaid interest, provided that at
least 66 2/3% of the original principal amount of the 12 1/4% Notes due 2009
remains outstanding after such redemption.
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DESCRIPTION OF THE 10 3/4% NOTES DUE 2009
General. We issued $675 million principal amount of 10 3/4% Senior Notes
due 2009 under an indenture between us and United States Trust Company of New
York, as trustee.
Principal, Maturity and Interest. The 10 3/4% Notes due 2009 are limited
in aggregate principal amount to $675 million and will mature on June 1, 2009.
Interest on the 10 3/4% Notes due 2009 accrues at 10 3/4% per annum and is
payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on December 1, 1999.
Optional Redemption. The 10 3/4% Notes due 2009 are redeemable on or after
June 1, 2004, at our option, in whole or in part, at the following redemption
prices, expressed as percentages of principal amount, plus accrued interest, if
redeemed during the twelve-month period beginning on June 1 of the years
indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2004........................................................ 105.375%
2005........................................................ 103.583%
2006........................................................ 101.792%
2007 and thereafter......................................... 100.000%
</Table>
In addition, at any time on or before June 1, 2002, we may redeem up to
33 1/3% of the original aggregate principal amount of the 10 3/4% Notes due 2009
with the net proceeds of a sale of common equity at a redemption price equal to
110.75% of the principal amount thereof, plus accrued interest, provided that at
least 66 2/3% of the original aggregate principal amount of 10 3/4% Notes due
2009 remains outstanding after such redemption.
DESCRIPTION OF THE 12 1/8% SENIOR DISCOUNT NOTES DUE 2009
General. We issued $455 million aggregate principal amount of 12 1/8%
Senior Discount Notes due 2009 under an indenture between us and U.S. Trust
Company of Texas, as trustee.
Principal, Maturity And Interest. The 12 1/8% Notes due 2009 are limited
to an aggregate principal amount of $455 million at stated maturity and will
mature on December 1, 2009. The 12 1/8% Notes due 2009 were issued at a discount
from their principal amount to generate aggregate gross proceeds of $251.4
million. The 12 1/8% Notes due 2009 accrue at a rate of 12 1/8% compounded
semi-annually to an aggregate principal amount of $455 million by December 1,
2004. No interest will accrue on the 12 1/8% Notes due 2009 prior to December 1,
2004. The 12 1/8% Notes due 2009 bear interest at 12 1/8% per annum, payable
semi-annually on June 1 and December 1 of each year, commencing June 1, 2005,
accruing from December 1, 2004 or from the most recent interest payment date
from which interest has been paid or provided.
Optional Redemption. The 12 1/8% Notes due 2009 are redeemable on or after
December 1, 2004, at our option, in whole or in part, at the following
redemption prices, expressed as percentages of principal amount, plus accrued
interest, if redeemed during the twelve-month period beginning on December 1 of
the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2004........................................................ 106.063%
2005........................................................ 104.042%
2006........................................................ 102.021%
2007 and thereafter......................................... 100.000%
</Table>
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In addition, at any time on or before December 1, 2002, we may redeem up to
33 1/3% of the original aggregate principal amount of the 12 1/8% Notes due 2009
with the net proceeds of a sale of common equity at a redemption price equal to
112.125% of the principal amount thereof, plus accrued interest, provided that
at least 66 2/3% of the original aggregate principal amount of 12 1/8% Notes due
2009 remains outstanding after such redemption.
DESCRIPTION OF THE 10 1/2% SENIOR NOTES DUE 2009
General. We issued $400 million principal amount of 10 1/2% Senior Notes
due 2009 under an indenture between us and United States Trust Company of New
York, as trustee.
Principal, Maturity And Interest. The 10 1/2% Notes due 2009 are limited
in aggregate principal amount to $400 million and will mature on December 1,
2009. Interest on the 10 1/2% Notes accrues at 10 1/2% per annum and is payable
semi-annually in arrears on June 1 and December 1 of each year, commencing on
June 1, 2000.
Optional Redemption. The 10 1/2% Notes due 2009 are redeemable on or after
December 1, 2004, at our option, in whole or in part, at the following
redemption prices, expressed as percentages of principal amount, plus accrued
interest, if redeemed during the twelve-month period beginning on December 1 of
the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2004........................................................ 105.250%
2005........................................................ 103.500%
2006........................................................ 101.750%
2007 and thereafter......................................... 100.000%
</Table>
In addition, at any time on or before June 1, 2002, we may redeem up to
33 1/3% of the original aggregate principal amount of the 10 1/2% Notes due 2009
with the net proceeds of a sale of common equity at a redemption price equal to
110.5% of the principal amount thereof, plus accrued interest, provided that at
least 66 2/3% of the original aggregate principal amount of 10 1/2% Notes due
2009 remains outstanding after such redemption.
DESCRIPTION OF THE 12 3/4% SENIOR NOTES DUE 2007
General. In connection with the Concentric merger, we assumed $150 million
principal amount of 12 3/4% Senior Notes due 2007 issued by Concentric under an
indenture between Concentric and Chase Manhattan Bank and Trust Company,
National Association, as trustee.
Principal, Maturity and Interest. The 12 3/4% Notes due 2007 are limited
in aggregate principal amount to $150 million and will mature on December 15,
2007. Interest on the 12 3/4% Notes due 2007 accrues at 12 3/4% per annum and is
payable semi-annually in arrears on June 15 and December 15 of each year,
commencing on June 15, 1998.
Optional Redemption. The 12 3/4% Notes due 2007 are redeemable on or after
December 15, 2002, at our option, in whole or in part, at the following
redemption prices, expressed as percentages of principal
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amount, plus accrued interest, if redeemed during the twelve-month period
beginning on December 15 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2002........................................................ 106.375%
2003........................................................ 104.250%
2004........................................................ 102.125%
2005 and thereafter......................................... 100.000%
</Table>
SUBORDINATED NOTES
Our subordinated notes are unsecured obligations and will rank equally in
right of payment with one another, with all our other existing subordinated
obligations and with our future subordinated obligations.
We are not required to make any mandatory or sinking fund payments with
respect to our subordinated notes.
The indenture governing our subordinated notes contains standard events of
default, including:
- defaults in the payment of principal, premium or interest;
- defaults in the compliance with covenants contained in the indenture;
- cross defaults on more than $10 million of other indebtedness;
- failure to pay more than $10 million of judgments; and
- certain events of our subsidiaries.
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2009
General. On January 12, 2001 we issued $517.5 million principal amount of
5 3/4% Convertible Subordinated Notes due 2009 under an indenture between us and
U.S. Trust Company, National Association, as trustee.
Principal, Maturity And Interest. The 5 3/4% Notes due 2009 are limited in
aggregate principal amount to $517.5 million and will mature on January 15,
2009. Interest on the 5 3/4% Notes due 2009 accrues at 5 3/4% per annum and is
payable semi-annually in arrears on January 15 and July 15 of each year,
commencing on July 15, 2001.
Redemption. The 5 3/4% Notes due 2009 are not redeemable prior to
maturity.
Conversion. The 5 3/4% Notes due 2009 are convertible at any time prior to
maturity into 39.1484 shares of our class A common stock for each $1,000 of
outstanding principal amount, equivalent to a conversion price of approximately
$25.5438 per share of Class A common stock, subject to adjustment as set forth
in the indenture. On or after January 18, 2003, we may terminate the conversion
rights of holders. We may terminate the conversion rights only if the current
market price of our Class A common stock equals or exceeds 150%, on or prior to
January 18, 2004, or 135%, thereafter, of the conversion price then in effect
for at least 20 trading days in any 30-day trading period, including the last
day of the period. If the conversion termination date occurs on or before
January 18, 2004, we will make a make-whole payment in cash with respect to the
notes converted into Class A common stock after the date of the press release
announcing the termination. The amount of the make-whole payment will be the
present value of all interest payments that thereafter would have been payable
on the notes on each semi-annual interest payment date from the conversion
termination date through January 15, 2004. If the conversion termination date
occurs on or after January 19, 2004, we will not make any make-whole payment.
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SELLING HOLDERS
The convertible notes were originally issued by us and sold by Salomon
Smith Barney and Goldman, Sachs & Co., the initial purchasers, in a transaction
exempt from the registration requirements of the Securities Act, to persons
reasonably believed by the initial purchaser to be "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) and outside the
United States to non-U.S. Persons in reliance on Regulation S. The selling
holders (which term includes their transferees, pledges donees or their
successors) may from time to time offer and sell any or all of the convertible
notes and class A common stock issued upon conversion of the convertible notes.
The following table sets forth information, as of August 29, 2001, with
respect to the selling holders and the respective principal amounts of
convertible notes and amounts of class A common stock they beneficially own that
may be offered pursuant to this prospectus. The information is based on
information provided by or on behalf of the selling holders.
The selling holders may offer all, some or none of the convertible notes or
the class A common stock issuable upon conversion of the convertible notes.
Therefore, we cannot estimate the amount of the convertible notes or the class A
common stock that will be held by the selling holders upon termination of any
sales. In addition, the selling holders identified below may have sold,
transferred or otherwise disposed of all or a portion of their convertible notes
since the date on which they provided the information regarding their
convertible notes in transactions exempt from the registration requirements of
the Securities Act. With the exception of the initial purchasers, none of the
selling holders has had any material relationship with us within the past three
years.
<Table>
<Caption>
NUMBER OF SHARES OF
PRINCIPAL AMOUNT OF CLASS A COMMON STOCK
CONVERTIBLE NOTES ISSUABLE UPON
BENEFICIALLY OWNED CONVERSION OF
NAMES OF SELLING HOLDERS AND OFFERED CONVERTIBLE NOTES
------------------------ ------------------- --------------------
Leonardo, L.P........................................... $52,332,000 2,048,714
First Union Securities, Inc. ........................... $42,500,000 1,663,807
Alta Partners Holdings, Inc. ........................... $41,000,000 1,605,084
Aristeia International, Limited......................... $24,048,000 941,440
Fidelity Financial Trust: Fidelity Convertible
Securities Fund....................................... $21,880,000 856,566
Tribeca Investments L.L.C. ............................. $15,000,000 587,226
BNP Paribas Equity Strategies SNC....................... $15,000,000 587,226
Silvercreek II Limited.................................. $12,796,000 500,942
Salomon Smith Barney Inc. .............................. $10,000,000 391,484
Aristeia Partners, L.P. ................................ $ 9,352,000 366,115
JMG Capital Partners, LP................................ $ 9,000,000 352,335
Onex Industrial Partners Limited........................ $ 8,374,000 327,828
Nomura Securities International, Inc. .................. $ 8,000,000 313,187
JMG Triton Offshore Fund Ltd. .......................... $ 7,000,000 274,038
Silvercreek Limited Partnership......................... $ 6,030,000 236,064
F.I.S.T. Convertible Securities Fund.................... $ 6,000,000 234,890
R2 Investments, LDC..................................... $ 5,500,000 215,316
De Am Convertible Arbitrage Fund........................ $ 4,350,000 170,295
Credit Suisse First Boston Corporation.................. $ 4,000,000 156,593
UBS O'Conner LLC........................................ $ 4,000,000 156,593
TQA Master Fund, Ltd. .................................. $ 3,900,000 152,678
Bear Stearns & Co. Inc. ................................ $ 3,750,000 146,806
White River Securities L.L.C. .......................... $ 3,750,000 146,806
Pebble Capital Inc. .................................... $ 3,330,000 130,364
State of Oregon -- Equity............................... $ 2,875,000 112,551
</Table>
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<Table>
<Caption>
NUMBER OF SHARES OF
PRINCIPAL AMOUNT OF CLASS A COMMON STOCK
CONVERTIBLE NOTES ISSUABLE UPON
BENEFICIALLY OWNED CONVERSION OF
NAMES OF SELLING HOLDERS AND OFFERED CONVERTIBLE NOTES
------------------------ ------------------- --------------------
Ramius Capital Group.................................... $ 2,600,000 101,785
TQA Master Plus Fund, Ltd. ............................. $ 2,450,000 95,913
Coastal Convertibles Ltd. .............................. $ 1,500,000 58,722
AIG Soundshore Holdings Ltd. ........................... $ 1,200,000 46,978
Dresdner Kleinwort Wasserstein-Grantchester Securities
Inc................................................... $ 1,000,000 39,148
KBC Financial Products USA.............................. $ 1,000,000 39,148
Pacific Life Insurance Company.......................... $ 1,000,000 39,148
Delaware PERS........................................... $ 850,000 33,276
Boilermakers Blacksmith Pension Trust................... $ 825,000 32,297
AIG Soundshore Strategic Holding Fund Ltd. ............. $ 800,000 31,318
RCG Latitude Master Fund................................ $ 700,000 27,403
Bankers Trust Company................................... $ 500,000 19,574
Zurich Institutional Benchmarks Master Fund Ltd. ....... $ 450,000 17,616
Palladin Securities LLC................................. $ 400,000 15,659
Lancer Securities Cayman Ltd. .......................... $ 250,000 9,787
LDG Limited............................................. $ 250,000 9,787
Zeneca Holdings Trust................................... $ 225,000 8,808
Highbridge International LLC............................ $ 182,900 7,160
Syngenta AG............................................. $ 150,000 5,872
Brown and Williamson Tobacco Master Retirement Trust.... $ 75,000 2,936
F.R. Convertible Security Fund.......................... $ 75,000 2,936
Viacom Inc. Pension Plan Master Trust................... $ 60,000 2,348
Lexington Vantage Fund, Ltd. ........................... $ 50,000 1,957
Goldman Sachs & Company................................. $ 49,000 1,918
Jefferies & Company Inc. ............................... $ 11,000 430
Security Trend Partners................................. $ 5,000 195
</Table>
Information concerning the selling holders may change from time to time and
any changed information will be set forth in supplements to this prospectus if
and when necessary. In addition, the per share conversion price, and therefore
the number of shares of class A common stock issuable upon conversion of the
convertible notes, is subject to adjustment. As a result, the aggregate
principal amount of convertible notes and the number of shares of class A common
stock issuable upon conversion thereof may increase or decrease.
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PLAN OF DISTRIBUTION
The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the convertible notes and class
A common stock offered into which the convertible notes are convertible directly
to purchasers or through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
selling holders or the purchasers. These discounts, concessions or commissions
as to any particular underwriter, broker-dealer or agent may be in excess of
those customary in the types of transactions involved.
The convertible notes and class A common stock may be sold from time to
time in one or more transactions at fixed prices, at prevailing market prices at
the time of sale, at prices related to the prevailing market prices, at varying
prices determined at the time of sale or at negotiated prices. These sales may
be effected in transactions (which may involve crosses or block transactions):
- on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the convertible notes
or the class A common stock may be listed or quoted at the time of sale;
- in the over-the-counter market;
- in transactions otherwise than on these exchanges or in the
over-the-counter market;
- through the writing of options, whether the options are listed on an
options exchange or otherwise; or
- through the settlement of short sales.
In connection with the sale of the convertible notes and class A common
stock, the selling holders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the convertible notes or class A common stock in the course of
hedging the positions they assume. The selling holders may also sell the
convertible notes or class A common stock short and deliver theses securities to
close out their short positions, or loan or pledge the convertible notes or
class A common stock to broker-dealers that in turn may sell these securities.
The aggregate proceeds to the selling holders from the sale of the
convertible notes or class A common stock offered by them will be the purchase
price of the convertible notes or class A common stock less discounts and
commissions, if any. Each of the selling holders reserves the right to accept
and, together with their agents from time to time, to reject, in whole or in
part, any proposed purchase of convertible notes or class A common stock to be
made directly or through agents. We will not receive any of the proceeds from
this offering.
Our class A common stock is listed for trading on the Nasdaq National
Market. The convertible notes are currently eligible for trading on the PORTAL
System of the Nasdaq Stock Market.
In order to comply with the securities laws of some states, if applicable,
the convertible notes and class A common stock may be offered or sold in these
states only through registered or licensed brokers or dealers. In addition, in
some states, the convertible notes and class A common stock may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or any exemption from registration or qualification is available
and is complied with.
The selling holders and any underwriters, broker-dealers or agents that
participate in the distribution of convertible notes and class A common stock
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, and any discounts, commissions, concessions or profit received
by them from any resale of convertible notes or class A common stock may be
deemed to be underwriting discounts and commissions under the Securities Act.
The selling holders have acknowledged that they understand their obligations to
comply with the provisions of the Exchange Act and the rules thereunder,
particularly Regulation M.
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Any initial purchaser who is also a selling holder may be, depending on
facts and circumstances, a statutory underwriter and must acknowledge in writing
prior to resale that it will deliver a prospectus in connection with any resale
of the convertible notes or underlying class A common stock. By so acknowledging
and delivering a prospectus, an initial purchaser who is also a selling holder,
will not be deemed to admit that it is an underwriter with the meaning of the
Securities Act.
Any securities covered by this prospectus which qualify for sale pursuant
to Rule 144, Rule 144A or Regulation S under the Securities Act may be sold
pursuant to Rule 144, Rule 144A or Regulation S rather than pursuant to this
prospectus.
To the extent required, the specific convertible notes or shares of our
class A common stock to be sold, the names of selling holders, the respective
purchase prices and public offering prices, the names of any agent, dealer or
underwriter, and any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement or,
if appropriate, a post-effective amendment to the registration statement of
which this prospectus is a part.
We entered into a registration rights agreement for the benefit of the
holders of the convertible notes to register their convertible notes and our
class A common stock under applicable federal and state securities laws under
specific circumstances and at specific times. The registration rights agreement
provides for cross-indemnification of the selling holders and us and our
respective directors, officers and controlling persons against specific
liabilities in connection with the offer and sale of the convertible notes and
our class A common stock, including liabilities under the Securities Act. We
will pay substantially all of the expenses incurred by the selling holders
incident to the offering and sale of the convertible notes and class A common
stock. We estimate that our total expenses of the offering of the convertible
notes and class A common stock will be approximately $179,190.24.
LEGAL MATTERS
Willkie Farr & Gallagher, New York, New York, will pass upon legal matters
regarding the issuance of the convertible notes and the validity of the shares
of our class A common stock being issued upon conversion of the convertible
notes.
EXPERTS
The consolidated financial statements of XO (formerly NEXTLINK
Communications, Inc.) as of December 31, 2000 and for each of the three years in
the period ended December 31, 2000, included in the annual report on Form 10-K
of XO Communications for the year ended December 31, 2000, incorporated by
reference in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in its report with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in giving such report.
The consolidated financial statements and financial statement schedule of
Concentric Network Corporation for the year ended December 31, 1999,
incorporated by reference in this prospectus from our Form 8-K/A, filed with the
SEC on August 21, 2000 and our Form 8-K/A filed with the SEC on January 18,
2001, have been audited by Ernst & Young LLP, independent auditors as set forth
in their report thereon incorporated by reference and incorporated herein by
reference. Such consolidated financial statements and financial statement
schedule are incorporated herein by reference in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
XO is subject to the informational requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, files reports and other information
with the SEC. Our reports and other information we file can be inspected and
copied at the Public Reference Section of the SEC located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these
materials can be obtained from the Public Reference Section of the SEC at
prescribed rates. Please call the SEC at 1-800-SEC-0330 for more information on
the Public Reference Section. The SEC maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements and other information on
a delayed basis regarding registrants, including us, that file electronically
with the SEC.
Our Class A common stock is listed on The Nasdaq National Market and any
reports, proxy and information statements and other information we file with the
SEC may also be inspected and copied at the offices of the National Association
of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20001.
Effective as of October 25, 2000 we changed our name from NEXTLINK
Communications, Inc. to XO Communications, Inc. The reports and other
information that we filed with the SEC prior to October 25, 2000 will be under
the NEXTLINK name.
INCORPORATION OF DOCUMENTS BY REFERENCE
Some of the information that you may want to consider in deciding whether
to invest in any of our securities is not included in this prospectus, but
rather is incorporated by reference to specific reports that we have filed with
the SEC. This allows us to disclose important information to you by referring
you to those documents rather than repeating them in full in this prospectus.
The information incorporated by reference in this prospectus contains important
business and financial information. In addition, information that we file with
the SEC after the date of this prospectus automatically updates and supersedes
the information contained in this prospectus and incorporated filings. We have
previously filed the following documents with the SEC (File No. 0-30900) and are
incorporating them by reference into this prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2000;
- Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2001;
- Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2001;
- Proxy Statement on Schedule 14A filed with the SEC on May 1, 2001;
- Information Statement on Schedule 14C filed with the SEC on May 14, 2001;
- Current Report on Form 8-K/A filed with the SEC on July 19, 2001;
- Current Report on Form 8-K, filed with the SEC on July 6, 2001;
- Current Report on Form 8-K, filed with the SEC on April 30, 2001;
- Current Report on Form 8-K/A filed with the SEC on January 18, 2001;
- Current Report on Form 8-K/A, filed with the SEC on August 21, 2000
(filed under the name NEXTLINK Communications, Inc.); and
- The description of our Class A common stock set forth in the Registration
Statement on Form 8-A, dated and filed on August 4, 1997, as amended by
the description of our Class A common stock set forth in the Registration
Statement on Form 8-A/A-1, dated and filed on September 18, 1997.
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64
We also incorporate by reference all documents subsequently filed by us
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date of this prospectus until our offering is completed.
We will provide you, upon written or oral request, with a copy of any of
these documents, at no cost. You should direct your request, either in writing
or by telephone, to:
XO Communications, Inc.
11111 Sunset Hills Road
Reston, Virginia 20190
Attn: Corporate Secretary
Telephone: (703) 547-2000
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65
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$517,500,000
XO COMMUNICATIONS, INC.
$517,500,000 5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2009
AND
20,259,319 SHARES OF CLASS A COMMON STOCK
ISSUABLE UPON CONVERSION OF THE NOTES
-----------
PROSPECTUS
DATED , 2001
-----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
66
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Company in connection with the sale of
the securities being registered. All of the amounts shown are estimates except
for the SEC registration fee.
<Table>
<Caption>
ITEM AMOUNT
---- -----------
SEC registration fee........................................ $ 29,190.24
Printing and Engraving Expenses............................. 50,000*
Legal Fees and Expenses..................................... 65,000*
Accounting Fees and Expenses................................ 25,000*
Miscellaneous............................................... 10,000*
-----------
Total............................................. $179,190.24
</Table>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
XO Communications, Inc. is a Delaware corporation. In its Certificate of
Incorporation, we have adopted the provisions of Section 102(b)(7) of the
Delaware General Corporation Law (the "Delaware Law"), which enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for monetary damages
for breach of the director's fiduciary duty, except (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware Law
(providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions) or (iv) for any transaction from which
a director will personally receive a benefit in money, property or services to
which the director is not legally entitled.
We have also adopted indemnification provisions pursuant to Section 145 of
the Delaware Law, which provides that a corporation may indemnify any person who
is or was a party to any actual or threatened legal action, whether criminal,
civil, administrative or investigative, by reason of the fact that the person is
or was an officer, director or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer or agent of another
corporation, partnership or other enterprise, against expenses (including
attorney's fees), judgments, fines and settlement payments reasonably and
actually incurred by him or her in connection with such proceeding, if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe was unlawful,
except that, with respect to any legal action by or in the right of the
corporation itself, an officer, director or agent of the corporation is entitled
to indemnification only for expenses (including attorney's fees) reasonably and
actually incurred, and is not entitled to indemnification in respect of any
claim, issue or matter as to which he or she is found liable to the corporation,
unless the court determines otherwise.
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ITEM 16. EXHIBITS.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
*4.1 Indenture, dated as of January 12, 2001, between the XO
Communications, Inc and the Trustee, relating to the Notes.
*4.2 Registration Rights Agreement, dated as of January 12, 2001,
between XO Communications, Inc and Salomon Smith Barney Inc.
and Goldman Sachs & Co., as the Initial Purchasers.
5.1 Opinion of Willkie Farr & Gallagher.
8.1 Tax Opinion of Willkie Farr & Gallagher.
*12.1 Statement of computation of ratio of earnings to fixed
charges.
*12.2 Statement of computation of ratio of earnings to fixed
charges and preference dividends.
23.1 Consent of Arthur Andersen LLP, independent public
accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
*24.1 Power of Attorney (See p. II-4 of this Registration
Statement).
*25.1 Statement of Eligibility and Qualification on Form T-1 of
Trustee under the Trust Indenture Act of 1939, as amended.
*27.1 Financial Data Schedule (Incorporated by Reference to
Quarterly Report on Form 10-Q of XO Communications, Inc.
dated and filed with the SEC May 15, 2001).
</Table>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the Registration Statement is on Form S-3, Form
S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the Registrant
pursuant to section 13 or section 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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68
(3) To remove from registration by means of a post-effective amendment
any of the entities being registered which remain unsold at the termination
of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The Registrant hereby undertakes to deliver or cause to be delivered
with the Shelf Registration Statement, to each person to whom the Shelf
Registration Statement is sent or given, the latest annual report to security
holders that is incorporated by reference in the Shelf Registration Statement
and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Exchange Act; and, where interim financial information required
to be presented by Article 3 of Regulation S-X are not set forth in the Shelf
Registration Statement, to deliver, or cause to be delivered to each person to
whom the Shelf Registration Statement is sent or given, the latest quarterly
report that is specifically incorporated by reference in the Shelf Registration
Statement to provide such interim financial information.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing Form S-3 and has duly caused this amendment no. 1 to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Reston and State of Virginia, on the 29th day of
August, 2001
XO COMMUNICATIONS, INC.
By: /s/ GARY D. BEGEMAN
------------------------------------
Name: Gary D. Begeman
Title: Senior Vice President,
General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<Table>
* Chairman, Chief Executive August 29, 2001
- --------------------------------------------------- Officer (Principal Executive
DANIEL F. AKERSON Officer) and Director
* Senior Vice President, Chief August 29, 2001
- --------------------------------------------------- Financial Officer (Principal
WAYNE M. REHBERGER Financial Officer and Principal
Accounting Officer)
* Director and President and Chief August 29, 2001
- --------------------------------------------------- Operating Officer
NATHANIEL A. DAVIS
* Director August 29, 2001
- ---------------------------------------------------
JOSEPH L. COLE
* Director August 29, 2001
- ---------------------------------------------------
SANDRA J. HORBACH
* Director August 29, 2001
- ---------------------------------------------------
NICOLAS KAUSER
* Director August 29, 2001
- ---------------------------------------------------
CRAIG O. MCCAW
* Director August 29, 2001
- ---------------------------------------------------
SHARON L. NELSON
* Director August 29, 2001
- ---------------------------------------------------
HENRY R. NOTHHAFT
* Director August 29, 2001
- ---------------------------------------------------
JEFFREY S. RAIKES
* Director August 29, 2001
- ---------------------------------------------------
PETER C. WAAL
</Table>
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70
<Table>
Director August 29, 2001
- ---------------------------------------------------
DENNIS M. WEIBLING
</Table>
*Gary D. Begeman by signing his name hereto, does hereby execute this amendment
no. 1 to the registration statement on behalf of the directors and officers of
the registrant indicated above by asterisks, pursuant to powers of attorney
duly executed by such directors and officers, which were previously filed with
the Securities and Exchange Commission on behalf of such directors and
officers.
By: /s/ GARY D. BEGEMAN
-----------------------------------
Gary D. Begeman
Attorney-in-Fact
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71
EXHIBITS INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
*4.1 Indenture, dated as of January 12, 2001, between the XO
Communications, Inc and the Trustee, relating to the Notes.
*4.2 Registration Rights Agreement, dated as of January 12, 2001,
between XO Communications, Inc and Salomon Smith Barney Inc.
and Goldman Sachs & Co., as the Initial Purchasers.
5.1 Opinion of Willkie Farr & Gallagher.
8.1 Tax Opinion of Willkie Farr & Gallagher.
*12.1 Statement of computation of ratio of earnings to fixed
charges.
*12.2 Statement of computation of ratio of earnings to fixed
charges and preference dividends.
23.1 Consent of Arthur Andersen LLP, independent public
accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
*24.1 Power of Attorney (See p. II-4 of this Registration
Statement).
*25.1 Statement of Eligibility and Qualification on Form T-1 of
Trustee under the Trust Indenture Act of 1939, as amended.
*27.1 Financial Data Schedule (Incorporated by Reference to
Quarterly Report on Form 10-Q of XO Communications, Inc.
dated and filed with the SEC May 15, 2001).
</Table>
- ---------------
* Previously filed.
II-6