SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
November 8, 1999
(Date of earliest event reported)
CINCINNATI BELL INC.
(Exact name of registrant as specified in its charter)
Ohio 1-8519 31-1056105
(State or other (Commission (I.R.S. Employer
jurisdiction of File Identification
organization) Number) Number)
201 East Fourth Street
Cincinnati, Ohio 45201
(Address of principal executive offices) (Zip Code)
(513) 397-9900
(Registrant's telephone number, including area code)
Item 5. Other Events
Pending Transaction
On July 20, 1999, Cincinnati Bell Inc. and IXC entered into an agreement
and plan of merger providing for the merger of Cincinnati Bell and IXC.
Pursuant to the Cincinnati Bell/IXC merger agreement, each share of IXC common
stock that is issued and outstanding immediately prior to the effective time
of the merger will be converted into the right to receive 2.0976 shares of CBI
common stock, par value $0.01 per share. The merger will be accounted for by
the purchase method of accounting. The merger is contingent upon regulatory
approval, among other things, and is expected to close sometime during the
fourth quarter of 1999.
Financial Statements and Exhibits
(a) Financial Statements of IXC
IXC Communications, Inc. 1998 Annual Consolidated
Financial Statements and Notes Thereto:
(i) Report of Ernst & Young LLP
(ii) Reports of Arthur Andersen LLP
(iii) Report of Deloitte & Touche LLP
(iv) IXC Consolidated Balance Sheets as of
December 31, 1998 and 1997
(v) IXC Consolidated Statements of Operations for
the years ended December 31, 1998, 1997 and
1996
(vi) IXC Consolidated Statements of Changes in
Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1997 and 1996
(vii) IXC Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997 and
1996
2
(viii) IXC Notes to Consolidated Financial
Statements
IXC Communications, Inc. March 31, 1999 Quarterly
Condensed Consolidated Financial Statements
and Notes Thereto (unaudited):
(i) Unaudited IXC Condensed Consolidated Balance
Sheets March 31, 1999 and December 31, 1998
(ii) Unaudited IXC Condensed Consolidated
Statements of Operations Three Months Ended
March 31, 1999 and 1998
(iii) Unaudited IXC Condensed Consolidated
Statements of Cash Flows Three Months Ended
March 31, 1999 and 1998
(iv) IXC Notes to Condensed Consolidated Financial
Statements
IXC Communications, Inc. June 30, 1999 Quarterly
Condensed Consolidated Financial Statements and
Notes Thereto (unaudited):
(i) Unaudited IXC Condensed Consolidated Balance
Sheets June 30, 1999 and December 31, 1998
(ii) Unaudited IXC Condensed Consolidated
Statements of Operations Three and Six Months
Ended June 30, 1999 and 1998
(iii) Unaudited IXC Condensed Consolidated
Statements of Cash Flows Six Months Ended
June 30, 1999 and 1998
(iv) IXC Notes to Condensed Consolidated Financial
Statements
3
IXC COMMUNICATIONS, INC.
1998 ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO
4
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
IXC Communications, Inc.
We have audited the accompanying consolidated balance sheets of IXC
Communications, Inc. and its subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Network Long Distance, Inc., including the
subsidiaries Long Distance Telecom, Inc. and National Teleservice,
Incorporated (collectively, Network Long Distance) which was combined with the
Company on June 3, 1998, in a business combination accounted for as a pooling
of interests as described in Note 3 to the consolidated financial statements,
which statements reflect total assets constituting 5.5% of the related 1997
consolidated financial statement totals, and which statements reflect net
loss constituting ($4.6) million and ($6.8) million of the related 1997 and
1996 consolidated financial statement totals, respectively. Those statements
were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to data included for Network Long Distance
is based solely on the reports of the other auditors. The financial statements
of Marca-Tel S.A. de C.V. (Marca-Tel), a corporation in which the Company has
an indirect interest, have been audited by other auditors whose reports have
been furnished to us; insofar as our opinion on the consolidated financial
statements relates to data included for Marca-Tel, it is based solely on their
report. In the consolidated financial statements, the Company's equity in the
net loss of Marca-Tel is stated at ($15.9) million and ($23.6) million, for
1998 and 1997, respectively.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors for
the periods indicated, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IXC
Communications, Inc. and its subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Austin, Texas
February 28, 1999 (except for
Note 20, as to which the date is
March 10, 1999)
5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Network Long Distance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Long Distance, Inc. (a Delaware Corporation) and subsidiaries as of March 31,
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended March 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of National Teleservice,
Incorporated, a company acquired during the year ended March 31, 1998 in a
transaction accounted for as a pooling of interests. Such statements are
included in the consolidated financial statements of Network Long Distance,
Inc., and reflect total assets and total revenues of 28.1% and 30.6%,
respectively, of the related consolidated totals as of and for the year ended
March 31, 1997. These statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to amounts
included for National Teleservice, Incorporated, is based solely upon the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Network Long
Distance, Inc. and subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the years ended March 31, 1998 and 1997,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Jackson, Mississippi
May 18, 1998.
6
To the Shareholders of Grupo Marca Tel, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of GRUPO MARCA
TEL, S.A. DE C.V. and subsidiaries ("the Company"), stated in U.S. dollars, as
of December 31, 1998 and 1997, and the related consolidated statements of
income, statements of changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Grupo Marca Tel, S.A. de C.V.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in accordance with
the accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 9, the Company
has incurred significant operating losses during the years ended December 31,
1998 and 1997, current liabilities exceed current assets by $27,858,588 and it
has accumulated losses of $42,717,907 at December 31, 1998, representing a
reduction of more than two thirds of its capital stock, which may result in a
situation of dissolution according to the Mexican General Law of Mercantile
Organizations. This action could be requested by an interested party through a
judicial order, however Siemens Credit Corporation, the creditor representing
approximately 77% of the company's total liabilities has expressed interest in
financially supporting the company by renegotiating the debt as is described
in Note 5. Additionally, Siemens Credit Corporation participates in the
capital stock in the company with neutral shares (Series "L"). Rights of
Series "L" shares are described in Note 7. Realization of the carrying amounts
of the company's assets and the classification of its liabilities are
dependent on the success of future operations.
/s/ Arthur Andersen
Monterrey, N.L.
February 28, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors
National Teleservice, Incorporated
Winona, Minnesota
We have audited the accompanying consolidated balance sheets of National
Teleservice, Inc. (the Company) as of March 31, 1997 and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997, not separately
presented herein. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of National Teleservice, Inc. at
March 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
July 28, 1997
7
IXC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Cash and cash equivalents................................... $ 264,826 $ 155,855
Accounts receivable, net of allowance for doubtful accounts
of $16,664 in 1998 and $13,119 in 1997.................... 107,558 112,357
Current portion of notes receivable......................... 63,748 739
Note receivable from Westel................................. 9,421 --
Prepaid expenses and other current assets................... 10,965 4,108
---------- ---------
Total current assets............................... 456,518 273,059
Property and equipment, net................................. 983,676 613,874
Non-current marketable securities........................... 219,880 --
Investment in unconsolidated subsidiaries................... 9,505 17,497
Deferred charges and other non-current assets............... 78,658 64,442
---------- ---------
Total assets....................................... $1,748,237 $ 968,872
========== =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Current portion of long-term debt........................... $ 13,984 $ 12,294
Accounts payable-trade...................................... 33,558 86,651
Accrued cost of service..................................... 43,177 56,994
Taxes payable............................................... 23,758 9,426
Accrued interest............................................ 8,768 8,911
Customer deposits........................................... 18,595 13,006
Current portion of unearned revenue......................... 33,640 6,310
Other current liabilities................................... 21,186 12,084
---------- ---------
Total current liabilities.......................... 196,666 205,676
Long-term debt, less current portion........................ 679,016 308,453
Unearned revenue -- noncurrent.............................. 488,395 59,627
Other noncurrent liabilities................................ 8,848 10,419
7 1/4% Convertible Preferred Stock with an aggregate
liquidation preference of $.01 par value; authorized --
3,000,000 shares of all classes of Preferred Stock;
1,074,500 shares issued and outstanding (aggregate
liquidation preference of $107,450) at December 31,
1998...................................................... 103,623 101,239
12 1/2% Exchangeable Preferred Stock; $.01 par value;
authorized -- 3,000,000 shares of all classes of Preferred
Stock; 349,434 shares issued and outstanding (aggregate
liquidation preference of $354,894, including accrued
dividends of $5,460) at December 31, 1998................. 344,235 302,129
Stockholders' equity (deficit):
10% Junior Series 3 Cumulative Preferred Stock, $.01 par
value; authorized -- 3,000,000 shares of all classes of
Preferred Stock; no shares issued and outstanding at
December 31, 1998 and 414 shares issued and outstanding
at December 31, 1997 (aggregate liquidation preference
of $692 at December 31, 1997)........................... -- 1
6 3/4% Cumulative Convertible Preferred Stock, $.01 par
value; authorized -- 3,000,000 shares of all classes of
Preferred Stock; 155,250 shares issued and outstanding
at December 31, 1998 and no shares issued and
outstanding at December 31, 1997 (aggregate liquidation
preference of $155,250 at December 31, 1998)............ 2 --
Common Stock, $.01 par value; authorized-- 100,000,000
shares; 36,409,709 shares and 35,575,325 shares issued
and outstanding at December 31,1998 and December 31,
1997.................................................... 364 356
Additional paid-in capital................................ 253,429 143,355
Accumulated deficit....................................... (326,341) (162,383)
---------- ---------
Total stockholders' deficit........................ (72,546) (18,671)
---------- ---------
Total liabilities, redeemable preferred stock and
stockholders' deficit............................ $1,748,237 $ 968,872
========== =========
See accompanying notes.
8
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
Net operating revenue:
(Net of service credits and bad debt provisions of
$55,113, $20,782, and $6,311, respectively)
Private line service................................... $ 225,358 $ 161,570 $ 99,793
Long distance switched services........................ 414,405 359,288 182,174
Data and Internet services............................. 9,029 759 --
Other.................................................. 19,776 -- --
--------- --------- --------
668,568 521,617 281,967
Operating expenses:
Cost of services....................................... 433,300 395,667 194,881
Operations and administration.......................... 144,536 102,760 71,103
Depreciation and amortization.......................... 113,586 69,139 35,927
Merger costs........................................... 7,955 3,591 --
--------- --------- --------
Operating loss...................................... (30,809) (49,540) (19,944)
Interest income.......................................... 14,339 7,565 2,838
Interest income on escrow under 12 1/2% Senior Notes..... -- 203 7,404
Interest expense......................................... (31,683) (31,702) (37,636)
Equity (loss) from unconsolidated subsidiaries........... (32,986) (23,800) (1,961)
Other, net............................................... 226 29 (200)
--------- --------- --------
Loss before (provision) benefit for income taxes,
minority interest and extraordinary loss............... (80,913) (97,245) (49,499)
(Provision) benefit for income taxes..................... (13,925) (1,359) 5,880
Minority interest........................................ (666) (560) (618)
--------- --------- --------
Loss before extraordinary loss........................... (95,504) (99,164) (44,237)
Extraordinary loss on early extinguishment of debt, net
of benefit for income tax of $6,265.................... (66,952) -- --
--------- --------- --------
Net loss................................................. (162,456) (99,164) (44,237)
Dividends applicable to preferred stock.................. (58,239) (21,636) (1,739)
--------- --------- --------
Net loss applicable to common stockholders............... $(220,695) $(120,800) $(45,976)
========= ========= ========
Basic and diluted loss per share:
Before extraordinary loss.............................. $ (4.28) $ (3.47) $ (1.52)
Extraordinary loss..................................... (1.87) -- --
--------- --------- --------
Net loss............................................... $ (6.15) $ (3.47) $ (1.52)
========= ========= ========
Weighted average shares outstanding...................... 35,868 34,777 30,277
========= ========= ========
See accompanying notes.
9
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS AND SHARES IN THOUSANDS)
10% 6 3/4% CUMULATIVE
JUNIOR SERIES 3 CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------- ----------------- --------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------ ------ ------- ------- ------ ------ ---------- ----------- -------------
BALANCE AT DECEMBER 31, 1995... 13 $ 13 -- $-- 27,284 $273 $ 42,300 $ (19,105) $ 23,481
Issuance of common stock....... -- -- -- -- 6,533 65 95,849 -- 95,914
Change in fiscal year of merged
entities..................... -- -- -- -- -- -- -- 123 123
Net loss....................... -- -- -- -- -- -- -- (44,237) (44,237)
---- ---- ---- ---- ------ ---- -------- --------- ---------
BALANCE AT DECEMBER 31, 1996... 13 13 -- -- 33,817 338 138,149 (63,219) 75,281
Issuance of common stock....... -- -- -- -- 1,187 12 23,440 -- 23,452
Stock option exercises......... -- -- -- -- 63 1 1,967 -- 1,968
Preferred dividends paid in
kind and accrued............. -- -- -- -- -- -- (20,047) -- (20,047)
Conversion of Series 3
Preferred Stock.............. (12) (12) -- -- 605 6 5 -- (1)
Other.......................... -- -- -- -- (97) (1) (159) -- (160)
Net loss....................... -- -- -- -- -- -- -- (99,164) (99,164)
---- ---- ---- ---- ------ ---- -------- --------- ---------
BALANCE AT DECEMBER 31, 1997... 1 1 -- -- 35,575 356 143,355 (162,383) (18,671)
Effect of pooling of
interests.................... -- -- -- -- -- -- -- (1,502) (1,502)
Redemption of Series 3
Preferred Stock.............. (1) (1) -- -- -- -- (708) -- (709)
Issuance of common stock for
acquisitions................. -- -- -- -- 265 3 14,520 -- 14,523
Stock option exercises......... -- -- -- -- 594 5 6,440 -- 6,445
Issuance of preferred stock.... -- -- 155 2 -- -- 148,061 -- 148,063
Preferred dividends paid in
kind and accrued............. -- -- -- -- -- -- (58,239) -- (58,239)
Net loss....................... -- -- -- -- -- -- -- (162,456) (162,456)
---- ---- ---- ---- ------ ---- -------- --------- ---------
BALANCE AT DECEMBER 31, 1998... -- $ -- 155 $2 36,434 $364 $253,429 $(326,341) $ (72,546)
==== ==== ==== ==== ====== ==== ======== ========= =========
See accompanying notes.
10
IXC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(162,456) $ (99,164) $ (44,237)
Adjustments to reconcile net loss to cash provided by (used
in) operating activities:
Depreciation.............................................. 92,822 51,929 24,509
Amortization.............................................. 21,945 18,912 12,703
Provision for doubtful accounts and service credits....... 55,113 20,782 6,311
Non-cash merger-related costs............................. 1,603 -- --
Equity in net loss of unconsolidated subsidiaries......... 32,986 23,800 1,961
Minority interest in net (income) loss of subsidiaries.... 666 560 618
Compensation expense on stock options and phantom stock... 143 1,447 254
Extraordinary loss on early extinguishment of debt........ 69,952 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable..................................... (56,393) (70,498) (45,958)
Notes receivable from customers and IRU sales........... 50,770 -- --
Other current assets.................................... (5,536) 879 660
Accounts payable -- trade............................... (24,804) 26,242 19,971
Accrued liabilities and accrued service costs........... 2,533 15,903 4,436
Deferred income taxes................................... -- (457) (6,135)
Deferred charges and other non-current assets........... (5,910) (30,513) (3,774)
Unearned revenue........................................ 131,143 60,092 --
Other non-current liabilities........................... (2,237) 1,872 5,752
--------- --------- ---------
Net cash provided by (used in) operating activities... 202,340 21,786 (22,929)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of funds from escrow under 12 1/2% Senior Notes..... -- 69,564 154,244
Deposit into escrow under 12 1/2% Senior Notes.............. -- (18,152) (7,404)
Purchase of property and equipment.......................... (476,382) (315,853) (136,976)
Acquisitions, net of cash acquired and common stock
issued.................................................... (22,698) (2,502) (3,777)
Payments received from notes receivable..................... 5,461 -- --
Proceeds from sale of property and equipment................ 2,224 -- --
Investments in unconsolidated subsidiaries.................. (31,510) (35,497) (7,319)
--------- --------- ---------
Net cash used in investing activities................. (522,905) (302,440) (1,232)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt.............................. 678,000 -- 3,250
Net proceeds from sale of preferred stock................... 148,063 383,321 --
Principal payments on long-term debt and capital lease
obligations............................................... (367,788) (11,499) (16,679)
Payment of debt issue costs................................. (18,063) -- (1,301)
Redemption of preferred stock............................... (709) -- --
Payment of dividends........................................ (13,732) -- --
Issuance of common stock.................................... 5,267 173 94,069
Other financing activities.................................. -- 424 --
--------- --------- ---------
Net cash provided by financing activities............. 431,038 372,419 79,339
--------- --------- ---------
Effect of change in year-end from merged entities........... (1,502) -- 537
--------- --------- ---------
Net increase in cash and cash equivalents................... 108,971 91,765 55,715
Cash and cash equivalents at beginning of year.............. 155,855 64,090 8,375
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 264,826 $ 155,855 $ 64,090
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes.............................................. $ 3,739 $ 516 $ 706
========= ========= =========
Interest, net of amounts capitalized...................... $ 31,052 $ 30,638 $ 38,082
========= ========= =========
See accompanying notes.
11
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND OPERATIONS
Our company, IXC Communications, Inc. and its subsidiaries, is a provider
of telecommunications services based in Austin, Texas. We are a leading
provider of telecommunications transmission, data, Internet, and switched long
distance services with a coast-to-coast digital fiber-optic network containing
over 9,300 digital route miles, with additions to this network continuing to
be constructed. We provide three principal products through both wholesale and
retail distribution channels. We lease dedicated circuits to other companies
for the transmission of voice and data ("private lines"). We transmit long
distance traffic that is processed through our switches ("switched long
distance services"). Finally, we are an Internet services and backbone
provider that provides web hosting and other Internet services, frame relay
and ATM-based switched data services ("Data/Internet").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
We are a Delaware corporation that incorporated in 1992. The accompanying
consolidated financial statements include the accounts of IXC and our
wholly-owned and majority-owned subsidiaries. Less-than-majority-owned
subsidiaries, and subsidiaries for which control is deemed to be temporary,
are accounted for using the equity method. For equity method investments, the
Company's share of income is calculated according to the Company's equity
ownership. Any differences between the carrying amount of an investment and
the amount of the underlying equity in the net assets of the investee are
amortized over the expected life of the investment. Significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Investments over which we do not exercise significant influence
over financial or operating policies are reported using the cost method.
On June 3, 1998, the Company acquired Eclipse Telecommunications, Inc.
("Eclipse", formerly named Network Long Distance, Inc.) in a transaction
accounted for as a pooling of interests. All prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of Eclipse as though
it had always been a part of IXC.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during each
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds and
all investments with an initial maturity of three months or less. All cash
equivalents are recorded at cost and classified as available for sale.
Property and Equipment
Property and equipment, including items acquired under capital lease
arrangements, are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the various assets,
ranging from three to twenty years. Depreciation begins the month after an
asset is placed in service. Purchases of fiber usage rights from other
carriers are recorded at cost and are depreciated over the lesser of the term
of the related agreement or the estimated life of the fiber optic cable.
Maintenance and repairs are charged to operations as incurred. Costs
associated with uncompleted portions of the fiber optic network are
12
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
classified as construction in progress. Upon completion, the costs will be
classified as transmission systems and depreciated over their useful lives.
Interest is capitalized as part of the cost of constructing the fiber
optic network and for amounts invested in companies or joint ventures
accounted for using the equity method during pre-operating periods. Interest
capitalized during construction periods is computed by determining the average
accumulated expenditures for each interim capitalization period and applying
an average effective interest rate. Total interest capitalized during the
years ended December 31, 1998, 1997, and 1996 was $16.2 million, $7.3 million,
and $2.9 million, respectively.
We review long-lived assets for impairment by comparing the undiscounted
cash flows estimated to be generated by those assets with the related carrying
amount of the assets. Upon an indication of an impairment, a loss is recorded
if the discounted cash flows projected for the assets is less than the assets'
carrying value.
The Company's property and equipment consisted of the following as of
December 31, 1998 and 1997 (in thousands):
1998 1997
---------- ---------
Land and rights of way.............................. $ 3,997 $ 4,201
Buildings and improvements.......................... 38,966 22,006
Transmission systems................................ 905,747 446,255
Furniture, vehicles and other....................... 12,211 10,348
Fiber usage rights.................................. 98,882 34,991
Construction in process............................. 133,852 216,481
---------- ---------
1,193,655 734,282
Less: Accumulated depreciation and amortization..... (209,979) (120,408)
---------- ---------
Property and equipment, net................... $ 983,676 $ 613,874
========== =========
Deferred Charges and Other Non-current Assets
Deferred charges consist of deferred financing costs, deferred network
costs, deferred customer acquisition costs, and goodwill. Deferred financing
costs are costs incurred in connection with obtaining long-term financing;
such costs are amortized as interest expense over the terms of the related
debt agreements. Certain costs incurred with the connection of customers to
the switched long distance network and the acquisition costs of retail
customer accounts obtained through an outside sales organization were deferred
and are amortized on a straight-line basis over two years. Goodwill associated
with acquisitions is amortized over the life of that intangible. As of
December 31, 1998, all goodwill is being amortized over 5 years. During 1997
and 1996, non-cash charges were recorded to reduce the carrying amount of
certain customer acquisition costs and goodwill; such write-downs amounted to
approximately $4.0 million in 1997 and $6.3 million in 1996 and are included
in amortization expense. Accumulated amortization on all intangible assets
amounted to $37.7 million and $13.8 million at December 31, 1998 and 1997,
respectively.
Revenue
Private line voice and data circuit revenue is generated primarily by
providing capacity on the fiber optic and microwave transmission networks at
rates established under long-term contractual arrangements or on a
month-to-month basis after contract expiration. Revenue is recognized as
services are provided.
13
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Switched long-distance service revenue is generated primarily by
providing voice communication services. Revenue is generally based on usage
and recognized as services are provided. Customers are billed monthly after
services are rendered.
Data/Internet revenue is generated by providing a number of services,
including Internet service, web hosting and consulting. Revenue is recognized
as services are provided. Customers are billed monthly, generally after the
service is provided.
Sales of indefeasible rights to use fiber or capacity ("IRU") are
recorded as unearned revenue at the earlier of the acceptance of the
applicable portion of the network by the customer or the receipt of cash. The
revenue is recognized over the life of the agreement as services are provided
beginning on the date of customer acceptance. IRU revenue and related
maintenance revenue is included in private line revenue in the accompanying
statement of operations. During 1998 revenue related to the sale of options in
fibers that were jointly owned with another carrier was reported as other
operating revenue, net of our basis in the options.
Fiber Exchange Agreements
In connection with the fiber optic network expansion, we entered into
various agreements to exchange fiber usage rights. Non-monetary exchanges of
fiber usage are recorded at the cost of the asset transferred or, if
applicable, the fair value of the asset received. We account for agreements to
exchange fiber for capacity with other carriers by recognizing the fair value
of the revenue earned and expense incurred under the respective agreements.
Exchange agreements accounted for non-cash revenue and expense (in equal
amounts) of $19.1 million in 1998, $14.0 million in 1997, and $14.0 million in
1996.
Income Taxes
Deferred income taxes are provided for net operating losses and for
temporary differences between the basis of assets and liabilities for
financial reporting and income tax reporting. Investment tax credits are
accounted for by the flow-through method.
Stock-Based Compensation
We account for employee stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations. Under APB 25 compensation expense is recognized when
the exercise price of employee stock options is less than the market price of
the underlying stock on the date of grant.
Basic and Diluted Loss Per Share
Basic earnings per share is calculated using the weighted average number
of common shares outstanding, excluding any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share includes the
weighted average number of common shares outstanding and the number of common
equivalent shares which would be issued related to options and convertible
securities using the treasury method, unless such additional shares are
anti-dilutive.
Reclassifications
We reclassified certain amounts for prior years to conform to the current
year presentation.
14
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. ACQUISITIONS
Eclipse Merger
On June 3, 1998, we completed the acquisition of Eclipse through a merger
of a subsidiary with Eclipse, by exchanging approximately 4,051,970 shares of
our common stock for all of the outstanding common stock of Eclipse. Each
share of Eclipse common stock was exchanged for .2998 shares of our common
stock. In addition, outstanding Eclipse stock options were converted at the
same exchange factor into options to purchase shares of our common stock.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests. Accordingly, all prior period consolidated
financial statements have been restated to show our results of operations,
financial position and cash flows combined with Eclipse. Prior to the merger,
Eclipse utilized a March 31 fiscal year end. For purposes of the combined
results of operations for the years ended December 31, 1997 and 1996, the
amounts include Eclipse's historical results of operations for the years
ended March 31, 1998 and 1997, respectively. In order to report cash flow for
1998, a $1.5 million adjustment is included in the 1998 statements of
stockholders' equity (deficit) and cash flows, representing Eclipse's first
quarter 1998 net income, which is in both the beginning retained earnings
balance and the fiscal 1998 net income amount. We had no transactions with
Eclipse prior to the merger; however, certain reclassifications, primarily
related to the presentation of certain excise taxes and bad debt provisions,
were made to conform Eclipse's accounting policies to our accounting
policies. The results of operations for the separate companies and the
combined amounts presented in the restated consolidated financial statements
follow (in thousands):
ECLIPSE IXC ADJUSTMENTS COMBINED
-------- -------- ----------- --------
1997
Operating revenue.............. $105,823 $420,710 $(4,916) $521,617
Operating expenses............. 110,204 465,945 (4,992) 571,157
Net income (loss).............. (4,609) (94,555) -- (99,164)
1996
Operating revenue.............. $ 86,005 $203,761 $(7,799) $281,967
Operating expenses............. 91,933 217,777 (7,799) 301,911
Net income (loss).............. (6,789) (37,448) -- (44,237)
A reconciliation of the Company's historical loss per share to the loss
per share as restated due to the Eclipse merger is as follows:
1997 1996
------ ------
Loss per share, as previously reported...................... $(3.75) $(1.42)
Effect of Eclipse's income (loss)........................... (0.15) (0.25)
Effect of change in weighted average shares
Outstanding............................................... 0.43 0.15
------ ------
Restated basic and diluted loss per share......... $(3.47) $(1.52)
====== ======
The effect of change in the weighted average shares outstanding
represents the addition of shares issued to Eclipse's former shareholders in
order to complete the merger. The effect of Eclipse's income (loss) represents
the impact of adding Eclipse's net income or loss to our historical results.
We recorded in 1998 a charge of $8.0 million for merger related costs,
including professional services associated with the merger, termination costs
associated with duplicate functions, costs of exiting excess office space, and
the write-off of duplicate equipment and software.
15
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Other Acquisitions
Prior to the merger with Eclipse, both we and Eclipse had entered into
several business combinations and customer base acquisitions. Certain of those
combinations were accounted for using the pooling of interests method, and the
results of operations of those acquired businesses are included herein for all
periods presented. The results of operations of other businesses acquired
through purchase transactions are included herein for only the periods
subsequent to their respective purchase. No pro forma financial information
for any of the business combinations has been presented in these consolidated
financial statements as the revenue, results of operations, and assets of the
previously acquired businesses are not material.
The acquisitions recorded as purchases were paid for with cash or common
stock. The consideration paid and assets acquired during the years ended
December 31, 1998, 1997, and 1996 are as follows (in thousands):
1998 1997 1996
-------- -------- -------
Fair value of tangible assets acquired...... $ 10,822 $ (85) $ 776
Liabilities assumed......................... (3,362) -- --
Excess of cost over net assets acquired..... 29,761 26,039 4,863
Value of common stock issued................ (14,523) (23,452) (1,862)
-------- -------- -------
Cash paid for acquisitions........ $ 22,698 $ 2,502 $ 3,777
======== ======== =======
Pending Coastal Acquisition
In January 1999 we entered into an agreement to purchase Coastal
Telephone Company for approximately $100 million, of which $25 million is
anticipated to be paid in stock. Coastal is a retail long distance reseller.
Closing is expected to occur in the second quarter of 1999 and is subject to
certain terms and conditions.
4. NOTES RECEIVABLE
We sold an IRU to a customer in 1996. The customer elected to pay for the
IRU with a series of notes. Notes amounting to $94.1 million were agreed to by
the customer in 1998, of which $45.0 million was received in 1998. The
remaining balance due at December 31, 1998, was $49.1 million, of which $48.0
million is classified as current. The notes bear interest at 12% and are
payable in 6 quarterly installments beginning on the date the applicable
portion of the IRU was accepted. In March 1999, the customer repaid the total
amount of the note.
We sold a $14.1 million capacity IRU to a customer in 1998. The customer
agreed to pay for the IRU with $3.0 million in cash and an $11.1 million note.
We received $1.0 million in payments on the note in 1998. The remaining $10.1
million of the note is due in 1999 and is classified as a current note
receivable.
We accepted a $14.9 million note receivable from Westel, a partner in the
Marca-Tel investment, to repay us for certain contributions previously made to
Progress International, LLC, which holds the investment in Marca-Tel. The note
is secured by Westel's interest in Progress. The note bears interest at 12%,
and $9.4 million is outstanding and classified as current at December 31,
1998.
16
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in and advances to unconsolidated subsidiaries accounted for
using the equity method are as follows at December 31, 1998 and 1997 (in
thousands):
BALANCE OF INVESTMENTS
AND ADVANCES
OWNERSHIP -----------------------
INTEREST 1998 1997
--------- ---------- ---------
Marca-Tel S.A. de C.V.................... 24.5% $(11,827) $11,638
Applied Theory, Inc...................... 34% 10,727 --
Unidial Communications, Services, LLC.... 20% 7,931 --
Storm Telecommunications Ltd............. 40% 2,674 5,859
-------- -------
Total.......................... $ 9,505 $17,497
======== =======
The combined results of operations and financial position from all the
investees accounted for using the equity method during 1998 as well as the
Company's share of their income (loss) are summarized below (in thousands):
1998 1997 1996
-------- -------- -------
COMBINED RESULTS OF OPERATIONS:
Net revenue.................................. $ 51,162 $ 5,786 $ --
Gross profit (loss).......................... 7,071 (4,556) (3,110)
Net loss..................................... (37,378) (23,395) (3,120)
IXC's share of losses from equity-method
investees.................................. $(23,477) $(23,800) $(1,961)
IXC's share of loss from PSINet investment... (9,509) -- --
-------- -------- -------
Losses from equity-method investments........ $(32,986) $(23,800) $(1,961)
======== ======== =======
COMBINED BALANCE SHEET DATA:
Current assets............................... $ 49,275 $ 10,123
Non-current assets........................... 97,989 80,351
Current liabilities.......................... 60,455 18,431
Non-current liabilities...................... 78,454 51,831
Marca-Tel
At December 31, 1998, we indirectly owned 24.5% of Marca-Tel S.A. de C.V.
("Marca-Tel") through our ownership of 50% of Progress, which owned 49% of
Marca-Tel. The remaining 51% of Marca-Tel was owned by a Mexican individual
and Formento Radio Beep, S.A. de C.V. ("Radio Beep"). The other 50% of
Progress was owned by Westel International, Inc. ("Westel"). In June 1998 we
obtained a note receivable from Westel for $14.9 million of advances that we
had made to Progress International on Westel's behalf. The note receivable
from Westel is secured by a portion of Westel's investment in Progress. During
the fourth quarter of 1998 we ceased recognition of additional losses from
Marca-Tel since our investment in Marca-Tel, net of the note receivable from
Westel, was reduced to a negative amount. See Note 20 for discussion of
matters related to the Westel note in March 1999.
Applied Theory, Inc.
In May 1998 we purchased a 34% interest in Applied Theory Communications,
Inc., a New York-based Internet Service Provider. Applied Theory, Inc. was
formed in 1996 to provide high quality Internet services
17
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
for the New York state research and education community. During 1998 we
invested almost $13 million in Applied Theory, Inc.
UniDial Communications Services, LLC
In December 1997 we formed a joint venture with UniDial Communications to
sell UniDial products over our network. The joint venture is named UniDial
Communications Services, LLC. We provide the joint venture with a full range
of voice, video, Internet, and data services which are private labeled under
the UniDial Communications name. The products are marketed through a full-time
national sales force of UniDial Communications network consultants.
Storm Telecommunications Ltd.
In October 1997, Storm Telecommunications, Ltd. was formed. Storm is a
joint venture with Telenor AS, the Norwegian national telephone company, to
provide telecommunication services to carriers and resellers in Europe. The
joint venture is owned 40 percent by us, 40 percent by Telenor Global Services
AS, and 20 percent by Clarion Resources Communications Corporation, a
U.S.-based telecommunications company in which Telenor owns a controlling
interest. We have two out of five seats on the joint venture's board.
6. MARKETABLE SECURITIES
Investment in PSINet Common Stock
In February 1998 we entered into an agreement to provide PSINet an IRU in
10,000 miles of OC-48 transmission capacity on our network over a 20-year
period in exchange for approximately 10.2 million shares of PSINet's common
stock. The agreement provided that PSINet would pay us additional cash or
common stock if the market value of the 10.2 million shares did not reach $240
million within a specified time. In January 1999 the value of PSINet's common
stock exceeded the $240 million valuation threshold, thereby eliminating any
obligation of PSINet to make any additional payments. The market value of the
10.2 million shares at March 30, 1999 was $448.2 million. These shares may be
sold by us or pledged as collateral against indebtedness. The amount of fair
value which exceeds the $240 million threshold will be credited to
stockholders' equity going forward.
From February 1998 through May 1998 we accounted for the investment in
PSINet using the equity method since we considered ourselves to have
significant influence over PSINet based upon our level of ownership and
control. We recognized losses of approximately $9.5 million during that
period. In June 1998 we changed from the equity method to the cost method due
to a change in the level of ownership and control. At December 31, 1998, our
investment in PSINet was carried at $202.1 million and is included in
non-current marketable securities in the accompanying consolidated balance
sheet. The fair value of the investment as of December 31, 1998, was $211.6.
The difference between the fair value of the investment and the carrying value
results from losses recognized when the investment was accounted for using the
equity method.
A corresponding balance of $210.7 million is included in unearned revenue
because PSINet agreed to either pay us in cash or stock an amount up to $240
million for the IRU if the shares' value was less than $240 million. The
amount in unearned revenue is being recognized as IRU revenue over the 20-year
life of the agreement as the capacity is delivered. Additionally, we began
receiving a maintenance fee that, as the full capacity is used by PSINet, is
expected to increase to approximately $11.5 million per year.
18
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Investment in DCI Telecommunications, Inc. Common Stock
In November 1998 we entered into an agreement to acquire common stock of
DCI Telecommunications, Inc. ("DCI"), as consideration for payment of amounts
due from on of our customers that was also a vendor of DCI. The agreement
provides that DCI will issue us additional common stock if the market value of
the shares does not reach $18 million by June 1, 1999. The investment in DCI
is included in non-current marketable securities in the accompanying
consolidated balance sheet. The fair value of the investment is equal to the
carrying value due to the guarantee to receive additional shares if the price
of the stock is outside a specified range.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following
at December 31, 1998 and 1997 (in thousands):
1998 1997
-------- --------
Amounts due under Revolving Credit Facility............ $200,000 $ --
9% Senior Subordinated Notes........................... 450,000 --
NTFC Credit Facility................................... 23,800 --
12 1/2% Senior Notes, net of unamortized discount of
$6,862 in 1997....................................... 815 278,138
Capital lease obligations.............................. 16,115 36,595
Other debt............................................. 2,270 6,014
-------- --------
Total long-term debt and capital lease
obligations................................ 693,000 320,747
Less current portion................................... (13,984) (12,294)
-------- --------
Long-term debt and capital lease obligations........... $679,016 $308,453
======== ========
Revolving Credit Facility
In October 1998 we entered into a $600 million credit facility with a
syndicate of financial institutions. The credit facility provides for: 1) a
$150 million revolving loan facility (which also includes letter of credit
availability of up to $20 million); 2) a term loan facility in the amount of
$200 million; and 3) an uncommitted special-purpose loan facility that can be
used under certain terms and conditions. Loans outstanding under the credit
facility bear interest at either LIBOR or the lead commercial bank's prime
rate plus applicable margins. At December 31, 1998, we selected the LIBOR
option resulting in a combined interest rate of 7.75%. The facility has a
five-year term and is secured by the assets of certain of our subsidiaries. In
October 1998, we drew down $200 million under the facility, net of $4.2
million of transaction costs. We must comply with various financial and other
covenants on an ongoing basis in addition to meeting the covenants on a pro
forma basis prior to drawing additional amounts under the credit facility.
Certain of the covenants become more restrictive over time. From time to time
we have discussions with the commercial banks to ensure that we will remain in
compliance with these covenants on a prospective basis.
9% Senior Subordinated Notes
In 1998 we issued $450.0 million of 9% Senior Subordinated Notes due 2008
(the "9% Notes"). In connection with the sale of the 9% Notes, we announced a
tender offer to purchase for cash all of the outstanding 12 1/2% Senior Notes.
The 9% Notes are general unsecured obligations and are subordinate in right of
payment to all existing and future senior indebtedness and other liabilities
of our subsidiaries. The indenture related to the 9% Notes requires us to
comply with various financial and other covenants and restricts us from
incurring certain additional indebtedness.
19
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12 1/2% Senior Notes
In a tender offer in 1998, $284.2 million (out of $285.0 million) in
aggregate principal amount of the 12 1/2% Senior Notes was tendered and
accepted for payment. The 12 1/2% Senior Notes indenture was amended to
eliminate substantially all of its restrictive covenants and guarantees. We
used approximately $342.7 million of the $435.6 million net proceeds of the 9%
Notes offering to pay the tender offer price for the 12 1/2% Senior Notes.
With the early extinguishment of the 12 1/2% Senior Notes a net charge of
approximately $67.0 million was recorded as an extraordinary item in 1998.
NTFC Credit Facility
In 1997 we entered into a $28 million secured equipment financing
facility with NTFC Capital Corporation. Advances borrowed under this facility
bear interest at 8.85% and are due in 2003.
Capital Leases
We have acquired certain facilities and equipment using capital leases.
The gross amount of assets recorded under capital leases at December 31, 1998
and 1997 was $41.7 million and $39.6 million, respectively. The related
accumulated depreciation was $25.0 million and $17.9 million at December 31,
1998 and 1997, respectively.
Annual maturities of long-term debt and minimum payments under capital
leases for the five years subsequent to December 31, 1998, are as follows (in
thousands):
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
1999................................... $ 7,870 $ 7,624 $ 15,494
2000................................... 5,600 6,177 11,777
2001................................... 5,600 3,506 9,106
2002................................... 5,600 839 6,439
2003................................... 201,400 162 201,562
Thereafter............................. 450,815 -- 450,815
-------- ------- --------
676,885 18,308 695,193
Less amounts related to interest....... -- (2,193) (2,193)
-------- ------- --------
676,885 16,115 693,000
Less current portion................... (7,870) (6,114) (13,984)
-------- ------- --------
$669,015 $10,001 $679,016
======== ======= ========
8. REDEEMABLE PREFERRED STOCK
7 1/4% Junior Convertible Preferred Stock Due 2007
In 1997 we issued $100 million (1,000,000 shares) of 7 1/4% Junior
Convertible Preferred Stock Due 2007. The 7 1/4% Convertible Preferred Stock
is convertible at the option of the holder into shares of common stock at a
conversion rate of 4.263 shares of common stock for each share of 7 1/4%
Convertible Preferred Stock. On March 31, 2007, the 7 1/4% Convertible
Preferred Stock must be redeemed at a price equal to the liquidation
preference ($100 per share) plus accrued and unpaid dividends. Because it is
mandatorily redeemable, it is not included in stockholders' equity. Dividends
payable on or before March 31, 1999 are payable in either cash or additional
shares of 7 1/4% Convertible Preferred Stock. Thereafter, dividends will
accrue at 8 3/4% if we elect to pay the dividend through the issuance of
additional shares of 7 1/4% Convertible Preferred Stock. The difference
20
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
between the carrying value of the 7 1/4% Convertible Preferred Stock and its
redemption value is being accreted to additional paid-in-capital through the
mandatory redemption date; the accretion is included in dividends applicable
to preferred stock.
12 1/2% Junior Exchangeable Preferred Stock Due 2009
In 1997 we issued $300 million (300,000 shares) of 12 1/2% Junior
Exchangeable Preferred Stock Due 2009. We may elect to exchange all of the
12 1/2% Exchangeable Preferred Stock for 12 1/2% Subordinated Exchange
Debentures Due 2009 ("Exchange Debentures"). The exchange would be made
based on a principle amount equal to the liquidation preference of the
12 1/2% Exchangeable Preferred Stock at the time of the exchange. If
exchanged, the Exchange Debentures will bear interest at the rate of
12 1/2%. The Exchange Debentures would be general unsecured obligations and
would be subordinated in right of payment to all existing and future senior
indebtedness. On August 15, 2009, the 12 1/2% Exchangeable Preferred Stock
must be redeemed at a price equal to its liquidation preference ($1,000 a
share) plus accrued and unpaid dividends. Because it is mandatorily
redeemable, it not included in stockholders' equity. Dividends on the 12
1/2% Exchangeable Preferred Stock accrue at 12 1/2% of the liquidation
preference (including unpaid dividends) and are payable quarterly in
arrears. Dividends payable prior to or on February 15, 2001, may be paid in
either cash or additional shares of 12 1/2% Exchangeable Preferred Stock.
After February 15, 2001, dividends on the 12 1/2% Exchangeable Preferred
Stock may be paid only in cash. The difference between the carrying value
and the redemption value of the 12 1/2% Exchangeable Preferred Stock is
being accreted to additional paid-in-capital through the mandatory
redemption date; the accretion is included in dividends applicable to
preferred stock.
9. STOCKHOLDERS' EQUITY
Common Stock
During 1996, we issued 6,440,000 shares of common stock in an initial
public offering and a private placement, resulting in net proceeds of $94.1
million. At December 31, 1998, we had reserved common shares for future
issuance as follows:
Shares reserved for issuance under stock option plans....... 6,420,137
7 1/4% Convertible Preferred Stock.......................... 4,580,594
6 3/4% Cumulative Convertible Preferred Stock............... 2,134,377
----------
Total............................................. 13,135,108
==========
Stockholder Rights Plan
In September 1998 the Board of Directors declared a dividend of one
Preferred Share Purchase Right (a "Right") on each outstanding share of its
Common Stock. Each Right entitles the holder to buy one
one-thousandth of a share of new Series A Junior Participating Preferred Stock
at an exercise price of $210.00 per Right. The Rights will be exercisable if a
person or group acquires 20% or more of the common stock (or if a stockholder
currently holding more than 20% of the outstanding stock acquires any
additional shares of common stock) or announces a tender offer for 20% or more
of the common stock. We will be entitled to redeem the Rights at one cent per
Right at any time before any such person acquires 20% or more of the
outstanding common stock. Each Right will entitle its holder to purchase, at
the Right's exercise price, a number of shares of common stock having a market
value at that time of twice the Right's exercise price. Rights held by the 20%
or more holder will become void and will not be exercisable to purchase shares
at the bargain purchase price. If we are acquired after a person acquires 20%
or more of our common stock, each Right will entitle its holder to purchase,
at the Right's then-cu rrent exercise price, a number of the acquiring
company's common shares having a market value at that time of twice the
Right's exercise price. The dividend
21
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
distribution was payable to stockholders of record on September 20, 1998. The
Rights will expire on September 20, 2008.
6 3/4% Cumulative Convertible Preferred Stock
In 1998 we sold 155,250 shares of 6 3/4% Cumulative Convertible Preferred
Stock for gross proceeds of $155.3 million. The 6 3/4% Convertible Preferred
Stock can be converted at any time at the option of the holder into Common
Stock. The conversion rate is 13.748 shares of common stock per share of
6 3/4% Convertible Preferred Stock. Dividends on the 6 3/4% Convertible
Preferred Stock are payable quarterly in arrears in cash or common stock
commencing on July 1, 1998.
Junior Series 3 Cumulative Redeemable Preferred Stock
In 1997 and 1998 we redeemed the Junior Series 3 Cumulative Redeemable
Preferred Stock by exchanging it for shares of common stock. Holders of Junior
Series 3 Cumulative Redeemable Preferred Stock received approximately 49.85
shares of common stock for each share of Junior Series 3 Cumulative Redeemable
Preferred Stock.
Stock-Based Compensation
We adopted several stock option plans that provide for the issuance of
non-qualified or incentive stock options to employees and directors. Options
under these plans are generally awarded at the discretion of the Board of
Directors and generally are awarded with exercise prices at least equal to the
fair market value of the underlying common stock at the date of grant. Certain
options granted in 1996 under one plan were granted at an exercise price less
than fair market value, resulting in the recognition of additional
compensation expense of $0.1 million in 1998, $0.2 million in 1997, and $0.2
million in 1996. Options generally expire after 10 years and vest over periods
ranging from three to five years. In the event of a change in control, certain
of the options outstanding will vest fully.
In 1996 we adopted a phantom stock plan (the "Directors' Plan"), pursuant
to which $20,000 per year of outside director's fees for certain directors is
deferred and treated as if it were invested in shares of our common stock.
Prior to 1998 no shares of common stock were actually purchased and the
participants receive cash benefits equal to the value of the shares that they
are deemed to have purchased under the Directors' Plan. Distribution of
benefits generally will occur three years after the deferral. Compensation
expense is determined based on the market price of the shares deemed to have
been purchased and is charged to expense over the related period. In 1998,
1997 and 1996, the Company recognized $.1 million, $.1 million and $.1 million
as compensation expense related to the Directors' Plan. We amended the
Directors' Plan in 1998 to allow benefits to be paid in either cash or shares
of common stock.
Prior to the pooling-of-interests transaction Eclipse granted stock
options to various parties from time to time. The terms and conditions of the
Eclipse options, including exercise prices and option expiration periods, were
set by Eclipse's board of directors. In connection with the Eclipse merger,
all outstanding Eclipse options were converted into substitute options at an
exchange rate of .2998 IXC option for each Eclipse option. Such substitute
options provided for substantially the same terms and conditions as the
original Eclipse options. Under the terms of a stock option agreement with a
former officer of a subsidiary of Eclipse, a $1.1 million charge for
compensation was recorded in fiscal 1997.
We account for employee stock options under APB 25 and only make fair
value disclosures for option grants. The fair value disclosures assumes that
fair value for option grants was calculated at the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates of 5.6% in 1998, from 5.2% to 6.4% in 1997, and 5.3% to 6.7% in
1996; no dividend yield; volatility of .804 in
22
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1998, .551 in 1997 and .523 for 1996 (for Eclipse options, fair value was
calculated assuming volatility factors of .376 in 1997 and .478 in 1996); and
expected option lives of 4 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma
loss per share information is as follows (in thousands except for loss per
share information):
1998 1997 1996
--------- --------- --------
Pro forma loss applicable to common
stockholders.............................. $(237,008) $(125,564) $(46,791)
Pro forma basic and diluted loss per share.. (6.61) (3.61) (1.55)
Stock option activity and related information for the years ended
December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at
beginning of year.... 3,144,947 $17.12 2,018,961 $11.90 1,006,240 $11.67
Granted................ 3,199,401 34.34 1,324,347 25.43 1,165,333 12.55
Exercised.............. (594,107) 8.87 (62,976) 11.22 (19,702) 3.01
Forfeited.............. (305,729) 25.01 (135,385) 24.16 (132,910) 17.02
---------- ---------- ----------
Outstanding at end of
year................. 5,444,512 22.71 3,144,947 17.12 2,018,961 11.90
========== ========== ==========
Exercisable at end of
year................. 1,140,334 984,742 525,948
========== ========== ==========
Weighted average fair
value of options
granted during the
year................. $ 21.96 $ 14.67 $ 7.50
========== ========== ==========
The following table summarizes outstanding options at December 31, 1998,
by price range:
OUTSTANDING EXERCISABLE
------------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE
OPTIONS EXERCISE PRICES PRICE LIFE OPTIONS PRICE
- --------- ---------------- -------- ----------- --------- --------
555,433 $3.01 $ 3.01 6.0 457,316 $ 3.01
131,426 $15.38 to $26.25 15.38 6.8 76,155 15.38
2,113,408 $15.38 to $26.28 22.08 9.1 324,972 22.18
1,318,219 $26.29 to $36.88 29.54 8.5 281,891 29.03
562,026 $36.89 to $45.00 42.17 8.8 -- --
764,000 $45.00 to $60.00 51.46 8.6 -- --
- --------- ---------
5,444,512 $ 3.01 to $60.00 22.71 8.4 1,140,334 15.73
========= =========
10. LOSS PER SHARE
No potentially dilutive securities were included in the basic and diluted
loss per share calculation as they would have been anti-dilutive. The
following table summarizes additional common shares that would, if converted,
dilute earnings. The number of common shares for each item is based on the
number of potentially dilutive securities outstanding as of the end of the
year presented. The figures presented for the 6 3/4% Converti-
23
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
ble Preferred Stock and the 7 1/4% Convertible Preferred Stock assume that
each preferred share was converted into 13.748 common shares and 4.263 common
shares, respectively. Certain shares of common stock were held in escrow under
the terms of purchase agreements related to acquisitions made during 1995 and
1996. Additionally, shares are held in escrow related to certain former owners
of our Eclipse subsidiary. All shares held in escrow are excluded from the
calculation of weighted average shares outstanding.
1998 1997 1996
---------- --------- ---------
7 1/4% Convertible Preferred Stock........ 4,580,594 4,499,030 --
6 3/4% Convertible Preferred Stock........ 2,134,377 -- --
Stock options............................. 5,444,512 3,149,947 2,018,961
Stock in escrow from acquisitions......... 26,008 26,008 26,008
Other stock in escrow..................... 93,941 93,941 187,881
---------- --------- ---------
Total additional common share
equivalents................... 12,279,432 7,768,926 2,232,850
========== ========= =========
11. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially create concentrations of credit
risk consist primarily of cash equivalents and trade receivables. We place
cash equivalents in quality investments with reputable financial institutions.
We may be subject to credit risk due to concentrations of receivables
from companies which are telecommunications providers, Internet service
providers, and cable television companies. We perform ongoing credit
evaluations of customers' financial condition and we typically do not require
a significant amount of collateral.
Revenue from Excel Communications amounted to 14%, 23%, and 25% of total
revenue for each of the years ended December 31, 1998, 1997 and 1996. In 1998
the revenue was generated 11% in the long distance segment and 3% in the
private line segment. In 1997 and 1996 the revenue was generated in the long
distance segment only. In addition, MCIWorldCom accounted for 6.6% of 1998
revenue, all of which was private line revenue.
24
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows as of December 31, 1998
and 1997 (in thousands):
1998 1997
--------- --------
DEFERRED TAX ASSETS:
Tax credit carryforwards........................ $ 4,524 $ 2,068
Net operating loss carryforwards................ 22,053 37,999
Investment in unconsolidated subsidiaries....... 42,638 9,465
Deferred revenue................................ 97,577 19,787
Reserve for bad debts........................... 17,591 4,938
Accrued expenses................................ 3,344 3,537
--------- --------
Gross deferred tax assets.................... 187,727 77,794
Valuation allowances......................... (123,331) (56,776)
--------- --------
Net deferred tax asset.......................... 64,396 21,018
--------- --------
DEFERRED TAX LIABILITIES:
Tax over book depreciation...................... (65,233) (21,738)
Other liability accruals........................ (917) (1,034)
--------- --------
Gross deferred tax liabilities.................. (66,150) (22,772)
--------- --------
Net deferred tax liabilities................. $ (1,754) $ (1,754)
========= ========
AS RECORDED IN THE CONSOLIDATED BALANCE SHEETS:
Current deferred tax assets..................... $ 4,961 $ 947
Noncurrent deferred tax liability............... (6,715) (2,701)
--------- --------
Gross deferred tax liabilities.......... $ (1,754) $ (1,754)
========= ========
At December 31, 1998, we had net operating loss carryforwards of
approximately $55.1 million for income tax purposes that expire through 2012.
The Company has minimum tax and investment tax credit carryforwards at
December 31, 1998 of approximately $3.2 million and $1.4 million,
respectively. The minimum tax credits can be carried forward indefinitely. The
investment tax credits expire in 2001.
Valuation allowances were established to offset a portion of the
Company's deferred tax assets at December 31, 1998 and 1997, respectively.
During the years ended December 31, 1998, 1997 and 1996, the valuation
allowance was increased by $66.6 million, $37.5 million and $18.5 million,
respectively.
The increase in the current tax provision in 1998 relates to deferred tax
assets created by continuing operations which have not been benefitted, net
operating losses attributable to the extraordinary item, and the non-qualified
stock option deduction which was not benefitted. Significant components of the
benefit
25
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(provision) for income taxes attributable to current operations for the years
ended December 31, 1998, 1997, and 1996, are as follows (in thousands):
1998 1997 1996
-------- ------- ------
CURRENT:
Federal................................... $ (7,128) $ -- $ (5)
State..................................... (6,797) (1,816) (250)
-------- ------- ------
Total Current..................... (13,925) (1,816) (255)
-------- ------- ------
DEFERRED:
Federal................................... -- 393 4,869
State..................................... -- 64 1,266
-------- ------- ------
Total deferred.................... -- 457 6,135
-------- ------- ------
Benefit (provision) for income taxes...... $(13,925) $(1,359) $5,880
======== ======= ======
Reconciliations of the income tax benefit (provision) attributable to
continuing operations computed at the U.S. federal statutory tax rates to
income tax benefit (provision) for the years ended December 31, 1998, 1997,
and 1996, are as follows (in thousands):
1998 1997 1996
-------- -------- --------
Tax benefit at federal statutory rate....... $ 28,320 $ 34,126 $ 17,260
State income tax benefit (provision)........ (292) 3,690 3,106
Tax attributes not benefitted............... (39,699) (37,529) (18,491)
Resolution of tax examinations.............. -- -- 3,511
Permanent and other differences............. (2,254) (1,646) 494
-------- -------- --------
Benefit (provision) for income taxes........ $(13,925) $ (1,359) $ 5,880
======== ======== ========
13. RELATED PARTY TRANSACTIONS
A law firm, of which a director and stockholder is a principal, provided
legal services in the amount of approximately $3.3 million in 1998, $4.3
million in 1997, and $3.5 million in 1996.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating its fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheets for accounts receivable and accounts payable approximate
fair value.
Notes receivable: The carrying amounts reported in the balance sheet for
notes receivable approximate fair value because of the short-term nature of
the notes and because their interest rates are comparable to current rates.
Marketable securities: The fair values of marketable securities are based
on quoted market prices and the presence of contractually guaranteed values.
Long-term debt: The fair value of the 9% Notes is estimated at $450.6
million based on their last trading price in 1998. The carrying values of the
capital lease obligations and $200 million credit facility approximate
26
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
fair values because the interest rates on these obligations are comparable to
the interest rates that could have been obtained at the date of the balance
sheet.
Preferred stock: The fair values of the 7 1/4% Convertible Preferred
Stock and the 12 1/2% Exchangeable Preferred Stock were not determined due to
the impracticability of such a calculation based on their limited market and
lack of an actively quoted price.
15. COMMITMENTS AND CONTINGENCIES
From time to time we are involved in various legal proceedings, all of
which have arisen in the ordinary course of business and some of which are
covered by insurance. In the opinion of management, none of the claims
relating to such proceedings will have a material adverse effect on our
financial condition or results of operations.
We lease certain facilities, equipment and transmission capacity under
noncancellable operating leases. Future minimum annual lease payments under
these lease agreements at December 31, 1998, are as follows (in thousands):
OPERATING
LEASES
---------
1999....................................................... $38,844
2000....................................................... 21,414
2001....................................................... 16,774
2002....................................................... 10,953
2003....................................................... 7,909
Thereafter................................................. 16,830
Lease expense relating to facilities, equipment and transmission capacity
leases, excluding amortization of fiber exchange agreements, was approximately
$120.5 million, $99.1 million and $50.6 million for the years ended December
31, 1998, 1997 and 1996, respectively.
There is a defined contribution retirement and 401(k) savings plan which
covers all full-time employees with one year of service. The Company
contributes 6% of eligible compensation, as defined in the plan, and matches
100% of the employee's contributions up to a maximum of 3% of the employee's
compensation. Employees vest in the Company's contribution over five years.
Benefit expense for 1998, 1997, and 1996 was approximately $2.8 million, $1.3
million, and $0.8 million, respectively. We also continue to operate certain
defined contribution benefit plans that were operated by Eclipse prior to the
merger. Contributions to these plans amounted to $68,000 and $90,000 in 1997
and 1996, respectively.
16. VALUATION AND QUALIFYING ACCOUNTS
Activity in the allowance for doubtful accounts and service credits was
as follows (in thousands):
BALANCE AT
BEGINNING CHARGED TO BALANCE AT
FOR THE YEARS ENDED OF PERIOD REVENUE DEDUCTIONS END OF PERIOD
------------------- ---------- ---------- ---------- -------------
December 31, 1998......... $13,119 $55,113 $51,568 $16,664
December 31, 1997......... $ 6,407 $20,782 $14,070 $13,119
December 31, 1996......... $ 2,842 $ 6,311 $ 2,746 $ 6,407
27
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
17. QUARTERLY RESULTS
Unaudited quarterly results are as follows (in thousands except per share
amounts):
THREE MONTH PERIOD ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- --------- ------------- ------------
Net operating revenue.............. $157,583 $ 155,935 $185,269 $169,781
Gross profit....................... 49,634 48,342 75,285 62,007
Net loss........................... (17,895) (102,507) (15,301) (26,753)
Basic and diluted net loss per
share:........................... $ (0.83) $ (3.30) $ (0.85) $ (1.17)
THREE MONTH PERIOD ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- --------- ------------- ------------
Net operating revenue.............. $106,882 $ 113,812 $136,829 $164,094
Gross profit....................... 21,988 22,833 35,794 45,335
Net loss........................... (22,498) (27,914) (31,172) (17,580)
Basic and diluted net loss per
share:........................... $ (0.67) $ (0.87) $ (1.09) $ (0.84)
18. SEGMENT REPORTING
Our financial reporting segments are based on the way management
organizes the company for making operating decisions and assessing
performance. These segments are based on the different types of products we
offer. The segments consist of the private line segment, the switched long
distance segment, and the data/ Internet segment. The segments are separately
evaluated because the products or services sold by each business unit are
subject to different market forces and sales strategies. Management reviews
the gross profits of each reporting segment and views the costs of the network
and administrative functions as supporting all business segments. Therefore,
assets (other than accounts receivable), liabilities, general and
administrative expense, interest expense and income, and other expenses are
not charged to any one segment. Losses from equity method subsidiaries are not
charged to any one segment because those subsidiaries may have operations in
multiple segments. All operating revenue shown is der ived from sales to
external customers. Revenue
28
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
related to the sale of options in fibers that are jointly owned with other
carriers are not reported in any segment. The summarized segment data for
1998, 1997, and 1996 is as follows:
SWITCHED LONG DATA &
PRIVATE LINE DISTANCE INTERNET UNALLOCATED TOTAL
------------ ------------- -------- ----------- --------
1998
Net operating revenue.................... $225,358 $414,405 $ 9,029 $19,776 $668,568
Cost of service.......................... 85,800 334,109 13,391 -- 433,300
-------- -------- ------- ------- --------
Gross profit............................. 139,558 80,296 (4,362) 19,776 235,268
Operations and administration............ 144,536
Depreciation and amortization............ 113,586
Merger costs............................. 7,955
--------
Operating loss........................... (30,809)
Interest income.......................... 14,339
Interest expense......................... (31,683)
Equity (loss) from unconsolidated
subsidiaries........................... (32,986)
Other, net............................... 226
--------
Loss before provision for income taxes,
minority interest, and extraordinary
loss................................... $(80,913)
========
Identifiable Assets:
Accounts Receivable...................... $ 32,780 $ 72,269 $ 2,144 $ 365 $107,558
======== ======== ======= ======= ========
1997
Net operating revenue.................... $161,570 $359,288 $ 759 $ -- $521,617
Cost of service.......................... 72,719 319,247 3,701 -- 395,667
-------- -------- ------- ------- --------
Gross profit............................. 88,851 40,041 (2,942) -- 125,950
Operations and administration............ 102,760
Depreciation and amortization............ 69,139
Merger costs............................. 3,591
--------
Operating loss........................... (49,540)
Interest income.......................... 7,768
Interest expense......................... (31,702)
Equity (loss) from unconsolidated
subsidiaries........................... (23,800)
Other, net............................... 29
--------
Loss before provision for income taxes,
minority interest, and extraordinary
loss................................... $(97,245)
========
Identifiable Assets:
Accounts Receivable...................... $ 27,925 $ 82,830 $ -- $ 1,602 $112,357
======== ======== ======= ======= ========
29
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
SWITCHED LONG DATA &
PRIVATE LINE DISTANCE INTERNET UNALLOCATED TOTAL
------------ ------------- -------- ----------- --------
1996
Net operating revenue.................... $ 99,793 $182,174 $ -- $ -- $281,967
Cost of service.......................... 60,129 134,752 -- -- 194,881
-------- -------- ------- ------- --------
Gross profit............................. 39,664 47,422 -- -- 87,086
Operations and administration............ 71,103
Depreciation and amortization............ 35,927
Merger costs............................. --
--------
Operating loss........................... (19,944)
Interest income.......................... 10,242
Interest expense......................... (37,636)
Equity (loss) from unconsolidated
subsidiaries........................... (1,961)
Other, net............................... (200)
--------
Loss before provision for income taxes,
minority interest, and extraordinary
loss................................... $(49,499)
========
Significantly all of the Company's revenue is generated in the United States.
19. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Since we had no items of other
comprehensive income in any of the periods presented, there was no impact from
the adoption of SFAS No. 130 on reporting or display of financial information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that derivative instruments be
recorded in the balance sheet as either an asset or liability measured at its
fair value. Because we have not entered into derivative financial instruments,
the implementation of SFAS No. 133 will not have an impact on the results of
operations or financial position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the costs of Start-Up
Activities." The SOP requires costs of start-up activities and organization
costs to be expensed as incurred, and is effective for our fiscal year ended
December 31, 1999. This new standard will have no material impact on our
financial position or results of operations.
In March 1998 the Accounting Standards Executive Committee issued SOP
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard provides guidance on accounting for certain costs
incurred for software developed for internal use and will be effective for our
fiscal year ended December 31, 1999. Upon adoption, January 1, 1999, this
standard will not have a material impact on our financial position or results
of operations.
30
IXC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
20. SUBSEQUENT EVENTS
In March 1999 we entered into an agreement with Westel whereby Westel
agreed to transfer certain of its Progress share interest collateral to us as
repayment of Westel's note payable to us. We gave Westel the right to
repurchase such share interests no later than May 31, 1999.
In February 1999 Marca-Tel and its primary creditor agreed to allow
Marca-Tel to defer certain payments to the creditor until June 1999. The
creditor was given the right to acquire up to 10% of Marca-Tel, and the
creditor acquired additional shares which diluted our indirect interest to
24%.
31
IXC COMMUNICATIONS, INC.
MARCH 31, 1999 QUARTERLY CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO (UNAUDITED)
32
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
Cash and cash equivalents................................... $ 261,741 $ 264,826
Accounts and other receivables, net of allowance for
doubtful accounts of $21,606 at March 31, 1999 and $16,664
at December 31, 1998...................................... 119,187 107,558
Current portion of notes receivable......................... 6,910 63,748
Note receivable from Westel................................. 8,671 9,421
Other current assets........................................ 12,048 10,965
---------- ----------
Total current assets.................................... 408,557 456,518
Property and equipment...................................... 1,337,793 1,193,655
Less: accumulated depreciation.............................. (241,826) (209,979)
---------- ----------
Property and equipment, net............................. 1,095,967 983,676
Non-current marketable securities........................... 453,165 219,880
Investments in unconsolidated subsidiaries.................. 12,854 9,505
Deferred charges and other non-current assets............... 75,555 78,658
---------- ----------
Total assets........................................ $2,046,098 $1,748,237
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt and capital lease
obligations............................................... $ 13,551 $ 13,984
Accounts payable trade...................................... 97,562 33,558
Accrued service cost........................................ 43,973 43,177
Accrued liabilities......................................... 82,688 72,307
Current portion of unearned revenue......................... 55,547 33,640
---------- ----------
Total current liabilities............................... 293,321 196,666
Long-term debt and capital lease obligations, less current
portion................................................... 676,016 679,016
Unearned revenue -- noncurrent.............................. 530,317 488,395
Other noncurrent liabilities................................ 80,776 8,848
7 1/4% Junior Convertible Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock authorized;
1,074,500 shares issued and outstanding at March 31, 1999 and
December 31, 1998 (aggregate liquidation preference of
$107,450 at March 31, 1999).............................. 103,733 103,623
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock
authorized; 360,356 and 349,434 shares issued and
outstanding at March 31, 1999 and December 31, 1998
respectively (aggregate liquidation preference of $365,976
at March 31, 1999 including accrued dividends of
$5,620)................................................... 355,575 344,235
Stockholders' equity (deficit):
6 3/4% Cumulative Convertible Preferred Stock, $.01 par
value; 3,000,000 shares of all classes of Preferred Stock
authorized; 155,250 shares issued and outstanding at March 31,
1999 and December 31, 1998 (aggregate liquidation
preference of $155,250 at March 31, 1999)................. 2 2
Common Stock, $.01 par value; 100,000,000 shares authorized;
36,640,351 shares issued and outstanding at March 31, 1999
and 36,409,709 shares issued and outstanding at December
31, 1998.................................................. 366 364
Additional paid-in capital.................................. 241,374 253,429
Unrealized gain on marketable securities.................... 133,195 --
Accumulated deficit......................................... (368,577) (326,341)
---------- ----------
Total stockholders' equity (deficit)........................ 6,360 (72,546)
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)...................... $2,046,098 $1,748,237
========== ==========
See accompanying notes.
33
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
-------- --------
(UNAUDITED)
Net operating revenue:
Private line service...................................... $ 70,864 $ 43,340
Long distance switched services........................... 77,747 113,767
Data and Internet services................................ 5,175 476
Other..................................................... 7,572 --
-------- --------
161,358 157,583
Operating expenses:
Cost of services.......................................... 104,804 107,949
Operations and administration............................. 51,809 29,336
Depreciation and amortization............................. 36,278 20,152
Merger costs.............................................. 55 (36)
-------- --------
Operating loss......................................... (31,588) 182
Interest income............................................. 5,824 1,597
Interest expense............................................ (11,017) (6,311)
Equity (loss) from unconsolidated subsidiaries.............. (2,871) (11,265)
Other, net.................................................. 35 143
-------- --------
Loss before provision for income taxes and minority
interest.................................................. (39,617) (15,654)
Provision for income taxes.................................. (2,411) (2,068)
Minority interest........................................... (208) (173)
-------- --------
Net loss.................................................... (42,236) (17,895)
-------- --------
Dividends applicable to preferred stock..................... (16,018) (11,736)
-------- --------
Net loss applicable to common stockholders.................. (58,254) (29,631)
-------- --------
Other comprehensive income, net of tax effect of $71,720:
Unrealized gain on marketable securities.................... 133,195 --
-------- --------
Comprehensive income (loss)................................. $ 74,941 $(29,631)
======== ========
Basic and diluted loss per share............................ $ (1.60) $ (.83)
======== ========
Weighted average shares outstanding......................... 36,411 35,522
======== ========
See accompanying notes.
34
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
--------- --------
(UNAUDITED)
Net cash provided by (used in) operating activities......... $ 114,502 $(15,379)
--------- --------
Investing activities:
Purchase of property and equipment........................ (108,081) (64,585)
Proceeds from payments of notes receivable................ 750 --
Investments in unconsolidated subsidiaries................ (6,220) (7,880)
--------- --------
Net cash used in investing activities....................... (113,551) (72,465)
--------- --------
Financing activities:
Proceeds from sale of 9% Senior Notes..................... -- 128,000
Proceeds from debt and capital lease obligations.......... 48 9,016
Principal payments on debt and capital lease
obligations............................................ (3,481) (2,942)
Stock option exercises.................................... 3,965 1,445
Payment of dividends on preferred stock................... (4,568) --
Other financing activities................................ -- (748)
--------- --------
Net cash provided by (used in) financing activities......... (4,036) 134,771
--------- --------
Net increase (decrease) in cash and cash equivalents........ (3,085) 46,927
Cash and cash equivalents at beginning of period............ 264,826 155,855
--------- --------
Cash and cash equivalents at end of period.................. $ 261,741 $202,782
========= ========
See accompanying notes.
35
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation for the periods indicated have
been included. Operating results for the three month periods ended March
31, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999. The accompanying unaudited Condensed
Consolidated Financial Statements have been restated for all periods
presented to include the operations of Eclipse Telecommunications, Inc.,
formerly Network Long Distance, Inc. ("Eclipse"),which was acquired on
June 3 , 1998, in a transaction accounted for as a pooling of interests. The
Condensed Consolidated Balance Sheet at December 31, 1998 has been derived
from the audited financial statements for the Company but does not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. The accompanying financial
statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended
December 31, 1998. Certain amounts shown in the Company's 1998 financial
statements have been reclassified to conform to the 1999 presentation.
2. MARKETABLE SECURITIES
We own approximately 10.2 million shares of common stock of PSINet,
Inc. This investment had a fair market value of approximately $435.4
million as of March 31, 1999. Of the total fair value, $240.0 million was
recorded as unearned revenue because it represented the sale to PSINet of
an agreement for an indefeasible right to use ("IRU") capacity on our
network. We accounted for the remaining fair value of $204.9 million as an
Unrealized Gain on Marketable Securities because the PSINet investment is
considered to be "available- for-sale" as defined in Statement of Financial
Accounting Standards #115. The change in the unrealized gain amount is
included, net of tax, in Other Comprehensive Income on the accompanying
condensed consolidated statement of operations.
We own an investment in common stock of DCI Telecommunications, Inc.
("DCI"). The stock acquisition agreement under which we acquired the
investment requires DCI to issue us additional cash or common stock if the
market value of our shares does not reach $18 million by June 1, 1999. On
April 30, 1999, trading on DCI's common stock was suspended pending
resolution of certain accounting issues by DCI. The fair value of our
investment is equal to its carrying value due to the guarantee to receive
additional consideration if the price of the stock is outside of the
specified range.
3. INCOME TAXES
The provision for income taxes recorded during interim periods is
calculated based on an estimated annual effective tax rate. For 1999, the
effective tax rate is negative and includes the impact of IRU transactions
anticipated to occur during the year. We have applied a valuation allowance
against the deferred tax assets arising during 1999 due to uncertainty
regarding their realizability.
4. COMMITMENTS AND CONTINGENCIES
From time to time we are involved in legal proceedings arising in the
ordinary course of business, some of which are covered by insurance. In the
opinion of management, none of the claims relating to such proceedings will
have a material adverse effect on our financial condition or results of
operations.
36
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SEGMENT REPORTING
Our financial reporting segments are based on the way management
organizes the company for making operating decisions and assessing
performance. These segments are based on the different types of products we
offer. The segments consist of the private line segment, the switched long
distance segment, and the data/ Internet segment. The segments are
separately evaluated because the products or services sold are subject to
different market forces and sales strategies. Management reviews the gross
profits of each reporting segment, but views the costs of the network and
administrative functions as supporting all business segments. Therefore,
assets (other than accounts receivable), liabilities, general and
administrative expenses, interest expense and income, and other expenses
are not charged to any one segment. Losses from equity method subsidiaries
are not charged to any one segment because those subsidiaries may have
operations in multiple segments. All operating revenue shown is derived
from sales to e xternal customers. Revenue related to the sale of options
in fibers that are jointly owned with other carriers are not reported in
any segment. The summarized segment data for the quarters ended March 31,
1999 and 1998 are as follows:
PRIVATE SWITCHED LONG DATA &
1999 LINE DISTANCE INTERNET UNALLOCATED TOTAL
---- ------- ------------- -------- ----------- --------
Net operating revenue..................... $70,864 $ 77,747 $ 5,175 $7,572 $161,358
Cost of service........................... 26,104 74,329 4,371 -- 104,804
------- -------- ------- ------ --------
Gross profit.............................. 44,760 3,418 804 7,572 56,554
Operations and administration............. 51,809
Depreciation and amortization............. 36,278
Merger costs.............................. 55
--------
Operating loss............................ (31,588)
Interest income........................... 5,824
Interest expense.......................... (11,017)
Loss from unconsolidated subsidiaries..... (2,871)
Other, net................................ 35
--------
Loss before provision for income taxes,
minority interest, and extraordinary
loss.................................... $(39,617)
========
PRIVATE SWITCHED LONG DATA &
1998 LINE DISTANCE INTERNET UNALLOCATED TOTAL
---- ------- ------------- -------- ----------- --------
Net operating revenue..................... $43,340 $113,767 $ 476 $ -- $157,583
Cost of service........................... 19,189 86,917 1,843 -- 107,949
------- -------- ------- ------ --------
Gross profit.............................. 24,151 26,850 (1,367) -- 49,634
Operations and administration............. 29,336
Depreciation and amortization............. 20,152
Merger costs.............................. (36)
--------
Operating loss............................ 182
Interest income........................... 1,597
Interest expense.......................... (6,311)
Loss from unconsolidated subsidiaries..... (11,265)
Other, net................................ 143
--------
Loss before provision for income taxes,
minority interest, and extraordinary
loss.................................... $(15,654)
========
37
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUBSEQUENT EVENTS
On May 10, 1999, we acquired Coastal Telecom Limited Company, and
other related companies under common control ("Coastal"). Coastal is a
retail long distance reseller. The purchase price amounted to approximately
$100 million and was paid with a combination of $62.5 million of cash, $35
million of notes payable, and stock warrants to purchase 75,000 shares of
common stock. Of the $35 million of notes payable, we are obligated to pay
up to $25 million in either cash or common stock by June 3, 1999. In
connection with the acquisition we completed a credit agreement with a
commercial bank pursuant to which our Eclipse subsidiary borrowed $27
million and used the proceeds to fund a portion of the Coastal purchase
price. The credit agreement has a 3 year term, may be extended for
successive one-year terms, and is subject to a borrowing base calculation
based on eligible accounts receivable. Amounts outstanding thereunder bear
interest at either the bank's prime rate or LIBOR plus a 2.25% margin. The
credit agreement is secured by the assets of our Eclipse subsidiary,
including the assets acquired in the Coastal transaction. We must comply
with various financial covenants under the credit agreement, including
maintaining certain minimum cash flow ratios.
On May 11, 1999, we announced that we will begin to scale back
operations in the switched wholesale business. As a result, we expect to
record a non-recurring charge in the second quarter of $25-$35 million. The
planned charge will include costs related to staffing reductions,
termination costs, equipment write-downs and decommissioning costs. The
restructuring should result in future cost savings in bad debt expense,
back office support costs, access costs, off-net transmission expense and
network facility and administrative costs.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or
liability measured at its fair value. Because we have not entered into
derivative financial instruments, the implementation of SFAS No. 133 will
not have an impact on the results of operations or financial position.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-5, "Reporting on the costs of Start-Up
Activities." The SOP requires costs of start-up activities and organization
costs to be expensed as incurred, and is effective for fiscal years
beginning after December 15, 1998. Adoption of this standard did not have a
material impact on our financial position or results of operations.
In March 1998 the Accounting Standards Executive Committee issued SOP
98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." This standard provides guidance on accounting for
certain costs incurred for software developed for internal use. We began
following the provisions of this standard this quarter, and adoption did
not have a material impact on our financial position or results of
operations.
38
IXC COMMUNICATIONS, INC.
JUNE 30, 1999 QUARTERLY CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO (UNAUDITED)
39
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
Cash and cash equivalents................................... $ 98,562 $ 264,826
Accounts and other receivables, net of allowance for
doubtful accounts of $31,047 at June 30, 1999 and $16,664
at December 31, 1998...................................... 95,662 107,558
Current portion of notes receivable......................... -- 63,748
Note receivable from Westel................................. -- 9,421
Other current assets........................................ 22,752 10,965
---------- ----------
Total current assets.............................. 216,976 456,518
Property and equipment...................................... 1,523,344 1,193,655
Less: accumulated depreciation.............................. (272,054) (209,979)
---------- ----------
Property and equipment, net....................... 1,251,290 983,676
Non-current marketable securities........................... 452,553 219,880
Investments in unconsolidated subsidiaries.................. 8,414 9,505
Deferred charges and other non-current assets, net.......... 172,260 78,658
---------- ----------
Total assets...................................... $2,101,493 $1,748,237
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current portion of long-term debt and capital lease
obligations............................................... $ 12,804 $ 13,984
Accounts payable trade...................................... 97,755 33,558
Accrued service cost........................................ 59,667 43,177
Accrued liabilities......................................... 116,038 72,307
Current portion of unearned revenue......................... 53,453 33,640
---------- ----------
Total current liabilities......................... 339,717 196,666
Long-term debt and capital lease obligations, less current
portion................................................... 760,239 679,016
Unearned revenue -- noncurrent.............................. 532,965 488,395
Other noncurrent liabilities................................ 85,329 8,848
7 1/4% Junior Convertible Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock authorized;
1,074,500 shares issued andoutstanding at June 30, 1999 and
December 31, 1998 (aggregate liquidation preference of
$107,450 at June 30, 1999)................................ 103,849 103,623
12 1/2% Junior Exchangeable Preferred Stock; $.01 par value;
3,000,000 shares of all classes of Preferred Stock authorized;
371,618 and 349,434 shares issued and outstanding at
June 30, 1999 and December 31, 1998 (aggregate liquidation
preference of $377,413 at June 30, 1999 including accrued
dividends of $5,806)...................................... 367,263 344,235
Stockholders' deficit:
6 3/4% Cumulative Convertible Preferred Stock, $.01 par
value; 3,000,000 shares of all classes of Preferred
Stock authorized; $155,250 shares issued and outstanding
at June 30, 1999 and December 31, 1998 (aggregate liquidation
preference of $155,250 at June 30, 1999)................ 2 2
Common Stock, $.01 par value; 100,000,000 shares authorized;
37,390,765 shares issued and outstanding at June 30, 1999
and 36,409,709 shares issued and outstanding at
December 31, 1998....................................... 374 364
Additional paid-in capital................................. 253,392 253,429
Unrealized gain on marketable securities................... 141,091 --
Accumulated deficit........................................ (482,728) (326,341)
---------- ----------
Total stockholders' deficit................................ (87,869) (72,546)
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' deficit................................... $2,101,493 $1,748,237
========== ==========
See accompanying notes.
40
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net operating revenue:
Private line service...................... $ 73,569 $ 49,232 $ 144,433 $ 92,572
Long distance switched services........... 74,898 105,502 152,645 219,269
Data and Internet services................ 5,353 1,201 10,528 1,677
Other..................................... 4,072 -- 11,644 --
--------- --------- --------- ---------
157,892 155,935 319,250 313,518
Operating expenses:
Cost of services.......................... 108,289 107,593 213,093 215,542
Operations and administration............. 60,948 29,992 112,757 59,328
Restructuring charges..................... 25,826 -- 25,826 --
Depreciation and amortization............. 39,565 22,636 75,843 42,788
Merger and other infrequent costs......... 90 7,681 145 7,645
--------- --------- --------- ---------
Operating loss.................... (76,826) (11,967) (108,414) (11,785)
Interest income............................. 1,839 3,324 7,663 4,921
Interest expense............................ (9,092) (8,530) (20,109) (14,841)
Equity (loss) from unconsolidated
subsidiaries.............................. (13,111) (10,754) (15,982) (22,019)
Other, net.................................. (12,760) 33 (12,725) 176
--------- --------- --------- ---------
Loss before provision for income taxes and
minority interest......................... (109,950) (27,894) (149,567) (43,548)
Provision for income taxes.................. (3,900) (4,551) (6,311) (6,619)
Minority interest........................... (301) (252) (509) (425)
--------- --------- --------- ---------
Loss before extraordinary loss.............. (114,151) (32,697) (156,387) (50,592)
--------- --------- --------- ---------
Extraordinary loss, net..................... -- (69,810) -- (69,810)
--------- --------- --------- ---------
Net loss.................................... (114,151) (102,507) (156,387) (120,402)
--------- --------- --------- ---------
Dividends applicable to preferred stock..... (16,372) (15,471) (32,390) (27,207)
--------- --------- --------- ---------
Net loss applicable to common
stockholders.............................. (130,523) (117,978) (188,777) (147,609)
--------- --------- --------- ---------
Other comprehensive income, net of tax
of $4,252 and $75,972:
Change in unrealized gain on marketable
securities................................ 7,896 -- 141,091 --
--------- --------- --------- ---------
Comprehensive income (loss)................. $(122,627) $(117,978) $ (47,686) $(147,609)
========= ========= ========= =========
Basic and diluted loss per share:
Before extraordinary loss................. $ (3.53) $ (1.35) $ (5.14) $ (2.18)
Extraordinary loss........................ -- (1.95) -- (1.96)
--------- --------- --------- ---------
Net loss.................................. $ (3.53) $ (3.30) $ (5.14) $ (4.14)
========= ========= ========= =========
Weighted average shares outstanding......... 36,946 35,785 36,714 35,653
========= ========= ========= =========
See accompanying notes.
41
IXC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
1999 1998
--------- ---------
Net cash provided by operating activities................... $ 105,451 $ 41,311
--------- ---------
Investing activities:
Purchase of property and equipment........................ (261,642) (239,627)
Proceeds from collection of notes receivable.............. 750 --
Acquisitions, net of cash acquired........................ (73,247) (22,699)
Investments in unconsolidated subsidiaries................ (6,220) (12,431)
--------- ---------
Net cash used in investing activities....................... (340,359) (274,757)
--------- ---------
Financing activities:
Proceeds from sale of 9% Senior Notes..................... -- 450,000
Proceeds from sale of 6 3/4% Cumulative Convertible
Preferred Stock........................................ -- 147,213
Net proceeds from issuance of debt........................ 79,156 --
Proceeds from debt and capital lease obligations.......... -- 12,704
Principal payments on debt and capital lease
obligations............................................ (9,112) (353,094)
Redemption of 10% Junior Series 3 Cumulative Preferred
Stock.................................................. -- (708)
Stock option exercises.................................... 5,116 2,842
Payment of dividends on preferred stock................... (6,516) (1,948)
Other financing activities................................ -- (3,186)
--------- ---------
Net cash provided by financing activities................... 68,644 253,823
--------- ---------
Effect of differing year-ends from merged entities.......... -- (1,502)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (166,264) 18,875
Cash and cash equivalents at beginning of period............ 264,826 155,855
--------- ---------
Cash and cash equivalents at end of period.................. $ 98,562 $ 174,730
========= =========
See accompanying notes.
42
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation for the periods indicated have been included. Operating results
for the three and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. The accompanying unaudited Condensed Consolidated Financial Statements
have been restated for 1998 to include the operations of Eclipse
Telecommunications, Inc., formerly Network Long Distance, Inc. ("Eclipse"),
which was acquired on June 3, 1998, in a transaction accounted for as a
pooling of interests. The Condensed Consolidated Balance Sheet at December 31,
1998 has been derived from our audited financial statements but does not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. The accompanying
financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended
December 31, 1998. Certain amounts shown in our 1998 financial statements have
been reclassified to conform to the 1999 presentation.
2. MARKETABLE SECURITIES
PSINET INVESTMENT
We own approximately 10.2 million shares of common stock of PSINet, Inc.
This investment had a fair market value of approximately $447.6 million as of
June 30, 1999. Of the total fair value, $240.0 million was recorded as
unearned revenue because it represented the sale to PSINet of an agreement for
an indefeasible right to use ("IRU") capacity on our network. We accounted for
the remaining fair value, net of tax, as Unrealized Gain on Marketable
Securities because the PSINet investment is "available-for-sale" as defined in
Statement of Financial Accounting Standards ("SFAS") No. 115. The change in
the unrealized gain amount is included in Other Comprehensive Income on the
accompanying condensed consolidated statement of operations.
The accompanying balance sheet includes approximately $52.0 million
representing amounts received from a financial institution in June 1999 in
connection with a prepaid, forward-sale contract of 1.5 million shares of
PSINet common stock. This amount is accounted for as a note payable and is
secured by the 1.5 million shares of stock. The forward-sale obligation may be
settled at a specified date in the second quarter of 2002 for a maximum amount
of 1.5 million shares of PSINet stock, or, at our option, the equivalent value
of PSINet stock in cash. We are accruing interest expense on this liability at
an effective interest rate of 6.8%.
DCI TELECOMMUNICATIONS
In November 1998 we entered into an agreement to acquire common stock of
DCI Telecommunications, Inc. ("DCI"), as consideration for payment of amounts
due from one of our customers that was also a vendor of DCI. The agreement
provided that DCI was to issue us additional common stock if the market value
of the shares we owned did not reach $17.7 million by June 1, 1999. As of June
1, 1999, and subsequent thereto, the market value of the shares we owned was
less than the $17.7 million guaranteed in the November 1998 agreement. DCI has
publicly disclosed that it does not intend to issue additional shares to us.
We intend to vigorously pursue the remedies to which we are entitled under the
November 1998 agreement. As of June 30, 1999, we have reduced our investment
in DCI as a result of these uncertainties. This writedown is included in
"other, net" in the accompanying statement of operations. The investment in
DCI is included in non-current marketable securities in the accompanying
consolidated balance sheet.
43
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INCOME TAXES
The provision for income taxes recorded during interim periods is
calculated based on an estimated annual effective tax rate. For 1999, the
effective tax rate includes the impact of IRU transactions anticipated to
occur during the year. We have applied a valuation allowance against the
deferred tax assets arising during 1999 due to uncertainty regarding their
realizability.
4. COMMITMENTS AND CONTINGENCIES
From time to time we are involved in legal proceedings arising in the
ordinary course of business, some of which are covered by insurance. In the
opinion of management, none of the claims relating to such proceedings will
have a material adverse effect on our financial condition or results of
operations.
5. SEGMENT REPORTING
Our financial reporting segments are based on the way management
organizes the company for making operating decisions and assessing
performance. These segments are based on the different types of products we
offer. The segments consist of the private line segment, the switched long
distance segment, and the data/ Internet segment. The segments are separately
evaluated because the products or services sold are subject to different
market forces and sales strategies. Management reviews the gross profits of
each reporting segment, but views the costs of the network and administrative
functions as supporting all business segments. Therefore, assets (other than
accounts receivable), liabilities, general and administrative expenses,
interest expense and income, and other expenses are not charged to any one
segment. Losses from equity method subsidiaries are not charged to any one
segment because those subsidiaries may have operations in multiple segments.
All operating revenue shown is derived from sales to e xternal customers.
Revenue related to the sale of options in fibers that are jointly owned with
other carriers are not reported in any segment. The summarized segment data
are as follows (in thousands):
PRIVATE SWITCHED DATA &
LINE LONG DISTANCE INTERNET UNALLOCATED TOTAL
------------ ------------- -------- ----------- ---------
THREE MONTHS ENDED JUNE 30, 1999
Net operating revenue................... $ 73,569 $ 74,898 $ 5,353 $4,072 $ 157,892
Cost of service......................... 26,130 77,310 4,849 -- 108,289
-------- -------- ------- ------ ---------
Gross profit............................ 47,439 (2,412) 504 4,072 49,603
Operations and administration........... 60,948
Restructuring charges................... 25,826
Depreciation and amortization........... 39,565
Merger and other infrequent costs....... 90
---------
Operating loss.......................... (76,826)
Interest income......................... 1,839
Interest expense........................ (9,092)
Equity (loss) from unconsolidated
subsidiaries.......................... (13,111)
Other, net.............................. (12,760)
---------
Loss before provision for income taxes,
minority interest, and extraordinary
loss.................................. $(109,950)
=========
44
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PRIVATE SWITCHED DATA &
LINE LONG DISTANCE INTERNET UNALLOCATED TOTAL
------------ ------------- -------- ----------- ---------
THREE MONTHS ENDED JUNE 30, 1998
Net operating revenue................... $ 49,232 $105,502 $ 1,201 $ -- $ 155,935
Cost of service......................... 22,448 82,342 2,803 -- 107,593
-------- -------- ------- ------- ---------
Gross profit............................ 26,784 23,160 (1,602) -- 48,342
Operations and administration........... 29,992
Depreciation and amortization........... 22,636
Merger and other infrequent costs....... 7,681
---------
Operating loss.......................... (11,967)
Interest income......................... 3,324
Interest expense........................ (8,530)
Equity (loss) from unconsolidated
subsidiaries.......................... (10,754)
Other, net.............................. 33
---------
Loss before provision for income taxes,
minority interest, and extraordinary
loss.................................. $ (27,894)
=========
PRIVATE SWITCHED DATA &
LINE LONG DISTANCE INTERNET UNALLOCATED TOTAL
------------ ------------- -------- ----------- ---------
SIX MONTHS ENDED JUNE 30, 1999
Net operating revenue................... $144,433 $152,645 $10,528 $11,644 $ 319,250
Cost of service......................... 52,233 151,639 9,221 -- 213,093
-------- -------- ------- ------- ---------
Gross profit............................ 92,200 1,006 1,307 11,644 106,157
Operations and administration........... 112,757
Restructuring charges................... 25,826
Depreciation and amortization........... 75,843
Merger and other infrequent costs....... 145
---------
Operating loss.......................... (108,414)
Interest income......................... 7,663
Interest expense........................ (20,109)
Equity (loss) from unconsolidated
subsidiaries.......................... (15,982)
Other, net.............................. (12,725)
---------
Loss before provision for income taxes,
minority interest, and extraordinary
loss.................................. $(149,567)
=========
45
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PRIVATE SWITCHED DATA &
LINE LONG DISTANCE INTERNET UNALLOCATED TOTAL
------------ ------------- -------- ----------- ---------
SIX MONTHS ENDED JUNE 30, 1998
Net operating revenue................... $ 92,572 $219,269 $ 1,677 $ -- $ 313,518
Cost of service......................... 41,637 169,261 4,644 -- 215,542
-------- -------- ------- ------- ---------
Gross profit............................ 50,935 50,008 (2,967) -- 97,976
Operations and administration........... 59,328
Depreciation and amortization........... 42,788
Merger and other infrequent costs....... 7,645
---------
Operating loss.......................... (11,785)
Interest income......................... 4,921
Interest expense........................ (14,841)
Equity (loss) from unconsolidated
subsidiaries.......................... (22,019)
Other, net.............................. 176
---------
Loss before provision for income taxes,
minority interest, and extraordinary
loss.................................. $ (43,548)
=========
6. ACQUISITION OF COASTAL TELECOM LIMITED COMPANY
On May 10, 1999, we acquired Coastal Telecom Limited Company, and other
related companies under common control ("Coastal"). Coastal is a retail long
distance reseller. The purchase price amounted to approximately $110 million
and was paid with a combination of $73.2 million of cash (including
approximately $10 million paid for working capital items), $10 million of
notes payable, $25.0 million of our common stock, and warrants to purchase
75,000 shares of our common stock. Assets acquired included approximately $103
million of goodwill and approximately $7 million of property and equipment. In
connection with the acquisition we completed a credit agreement with a
commercial bank pursuant to which Eclipse, our wholly owned subsidiary,
borrowed $27 million and used the proceeds to fund a portion of the Coastal
purchase price. The credit agreement has a three-year term beginning in May
1999, may be extended for successive one-year terms, and is subject to a
borrowing base calculation based on eligible acco unts receivable. Amounts
outstanding thereunder bear interest at either the bank's prime rate or LIBOR
plus a 2.25% margin. The credit agreement is secured by the assets of Eclipse,
including the assets acquired in the Coastal transaction. We must comply with
various financial covenants under the credit agreement, including maintaining
certain minimum cash flow ratios.
7. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
At December 31, 1998, we were owed $9.4 million by Westel, our partner in
Progress International LLC ("Progress"). The note was secured by Westel's
ownership in Progress, and repayment was due on May 31, 1999. Westel failed to
make scheduled payments on the note and thereby transferred their share rights
to us. As a result of that forfeiture, we now own 65.4% of Progress.
In February 1999 Marca-Tel S.A. de C.V. and its primary creditor agreed
to allow MarcaTel to defer certain payments to the creditor until June 1999.
The creditor was given the right to acquire up to 10% of MarcaTel and the
creditor acquired additional shares which diluted our indirect interest from
32.1% (after taking into consideration the additional share rights forfeited
by Westel) to 30.5%. In June 1999 MarcaTel did not pay the creditor, and a
default was declared on the loan. Management of MarcaTel, IXC and the creditor
are anticipated to meet during the third quarter to attempt to work out the
default provisions. However, there is no assurance that the default provisions
will be waived.
46
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RESTRUCTURING CHARGE
In the second quarter of 1999, we recorded a charge of approximately
$25.8 million to exit certain operations in the switched wholesale business.
This charge resulted from our plan to reduce traffic, operations, and
administrative headcount by exiting this under-performing business. The
restructuring charge includes costs associated with workforce reduction, asset
write-downs, network decommissioning costs, and fees to terminate certain
lease contracts. The workforce reduction of 94 people includes both employees
in the sales organization and employees contributing to network operations.
These employees were notified of the workforce reduction in June 1999. All of
the $2.9 million associated with the workforce reduction is expected to be
paid in cash during the remainder of 1999. The costs accrued related to
network decommissioning include labor, lease rentals, and other operating
costs expected to be paid to decommission various network assets. We have
adjusted the remaining useful lives of equipment being decommissioned to
extend only to the date the asset is expected to be removed from service. All
of the decommissioning costs are expected to be paid in cash within twelve
months. The asset write-downs are non-cash in nature and include leasehold
improvements related to facilities to be vacated and reserves for accounts
receivable related to customers whose traffic we are removing from our
network. We believe that collection of the identified accounts receivable is
unlikely as a direct result of our decision to unilaterally terminate the
affected customers' service under their contracts. The costs to terminate
leases which are being abandoned are expected to be paid in cash over the next
nine months. The restructuring activities are expected to be substantially
complete by June 30, 2000. Activity in the accrued restructuring liability
during the quarter ended June 30, 1999 is as follows (in thousands):
ACCRUAL
RESTRUCTURING COSTS BALANCE AT
CHARGE PAID JUNE 30, 1999
------------- ----- -------------
Severance.............................................. $ 2,864 $249 $ 2,615
Network decommissioning................................ 3,872 -- 3,872
Asset write-downs...................................... 12,722 -- 12,722
Terminate contractual obligations and exit
facilities........................................... 6,368 2 6,366
------- ---- -------
Total restructuring costs.................... $25,826 $251 $25,575
======= ==== =======
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 2000. We have not yet assessed the impact of SFAS No.
133 on our results of operations and financial position.
10. SUBSEQUENT EVENTS
MERGER AGREEMENT WITH CINCINNATI BELL, INC.
On July 20, 1999, we entered into an agreement to merge with Cincinnati
Bell Inc. ("CBI") at a fixed exchange ratio of 2.0976 shares of CBI common
stock for each share of our common stock. Also on July 20, 1999, General
Electric Pension Trust ("GEPT") entered into an agreement with CBI in which
CBI agreed to purchase approximately 5.0 million shares of our common stock
from GEPT for $50 per share. Shareholders representing approximately 40% of
the outstanding shares of IXC have committed to vote in favor of the merger.
The merger is expected to close near the end of 1999 and is subject to
shareholder and regulatory approval.
On July 21, July 23, and July 27, 1999, five purported stockholder class
action suits were filed in the Delaware Court of Chancery against us, certain
current and former members of our board of directors, and in
47
IXC COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
two suits, also against CBI. These complaints allege, among other things that
the defendants have breached their fiduciary duties to our stockholders in
establishing the merger consideration in the merger agreement with CBI. The
complaints seek, among other things, a court order enjoining completion of the
merger. We and CBI believe that the complaints are without merit and intend to
vigorously defend against the complaints.
PSINET STOCK SALE
In July 1999 we received $59.8 million from a financial institution in
connection with a prepaid, forward-sale contract of an additional 1.5 million
shares of PSINet common stock. This amount is accounted for as a note payable
and is secured by the additional 1.5 million shares of stock. The forward-sale
obligation may be settled at a specified date in the second quarter of 2002
for a maximum amount of 1.5 million shares of PSINet stock, or, at our option,
the equivalent value of the PSINet stock in cash.
BUSINESS REORGANIZATION
In connection with the hiring of the new chief executive officer and the
new chief financial officer, we are reviewing plans to streamline our
operations, including reducing the number of middle-management positions and
re-evaluating our information technology initiatives. A restructuring charge
associated with this review is expected to be recorded during the third
quarter. Although the plans are still being formulated, initial projections
indicate that the amount of the charge will be at least $10 million.
48
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CINCINNATI BELL INC.
by: /s/ Thomas E. Taylor
-------------------------
Name: Thomas E. Taylor
Title: General Counsel and
Secretary
Date: November 8, 1999
49