<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999
REGISTRATION NO. 333-76877
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WILLIAMS COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 73-1462856
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM G. VON GLAHN, ESQ.
SENIOR VICE PRESIDENT, LAW
WILLIAMS COMMUNICATIONS GROUP, INC.
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RANDALL H. DOUD, ESQ. MARLENE ALVA, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP DAVIS POLK & WARDWELL
919 THIRD AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 735-3000 (212) 450-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED PRICE PER NOTE OFFERING PRICE(1) REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
____ % senior notes due 2009............ 100% $1,300,000,000 $361,400
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED _____ , 1999
PROSPECTUS
$
[WILLIAMS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
___ % SENIOR NOTES DUE 2009
----------------------
MATURITY The notes will mature on , 2009.
INTEREST PAYMENTS We will pay interest on the notes on and
of each year, beginning ,
1999.
RANKING The notes will rank the same as all our senior debt and
ahead of all our subordinated debt. The notes will rank
behind all liabilities and debt of our subsidiaries.
SUBSIDIARY DEBT At March 31, 1999, assuming that this offering and
several other transactions described in the prospectus
which are to take place at the same time as this
offering had occurred, our subsidiaries would have had
$ million of debt, including $ million of debt
owed to our parent company, The Williams Companies,
Inc.
REDEMPTION We may redeem all or a portion of the notes at any time
on or after , 2004 at the redemption
prices set forth in this prospectus. In addition,
before , 2002, we may redeem up to 35%
of the aggregate principal amount of the notes with the
net proceeds of one or more specified offerings of
securities.
RIGHT TO SELL BACK NOTES If there is a change of control at our company, each
holder of notes may require us to repurchase all or a
portion of its notes.
INVESTING IN THE NOTES INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 12 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public offering price, plus accrued interest from
, 1999..................................... __% $__
Underwriting discount....................................... __% $__
Proceeds, before expenses, to our company................... __% $__
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The notes will be ready for delivery only through The Depository Trust
Company on or about ________ , 1999.
----------------------
<TABLE>
<CAPTION>
Book-Running Manager Co-Lead Managers
<S> <C> <C>
MERRILL LYNCH & CO. LEHMAN BROTHERS SALOMON SMITH BARNEY
</TABLE>
----------------------
The date of this prospectus is ______ , 1999.
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 12
This Prospectus Contains Forward-
Looking Statements............... 24
Use of Proceeds.................... 25
Capitalization..................... 26
Selected Consolidated Financial and
Operating Data................... 27
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 33
Industry Overview.................. 57
Business........................... 64
Regulation......................... 94
Management......................... 101
Principal Stockholders............. 116
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Relationships and Related Party
Transactions..................... 119
Relationship Between Our Company
and Williams..................... 120
Description of the Notes........... 128
Description of Other Indebtedness
and Other Financing
Arrangements..................... 175
Important United States Federal Tax
Considerations of the Notes to
Non-U.S. Holders................. 177
Underwriting....................... 180
Legal Matters...................... 182
Experts............................ 182
Where You Can Find Additional
Information...................... 183
Index to Financial Statements...... F-1
</TABLE>
This prospectus contains the trademark of Williams which is the property of
Williams and is licensed to us.
Our principal executive offices are located at One Williams Center, Tulsa,
Oklahoma 74172 and our telephone number is (918) 573-2000.
Until __________, 1999, all dealers that buy, sell or trade our notes,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE> 4
PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that may
be important to you. You should read the entire prospectus, including the
section entitled "Risk Factors" and our consolidated financial statements and
related notes, before deciding to invest in our notes.
WILLIAMS COMMUNICATIONS GROUP, INC.
We own, operate and are extending a nationwide fiber optic network focused
on providing voice, data, Internet and video services to communications service
providers. We also sell, install and maintain communications equipment and
network services that address the comprehensive voice and data needs of
organizations of all sizes. Our business units are Network, Solutions and
Strategic Investments.
Network offers voice, data, Internet and video services, as well as rights
of use in dark fiber, which is fiber optic cable that is sold without
transmission service, on our low-cost, high-capacity nationwide network. We
focus on providing these services to other communications companies as they seek
to benefit from the growth in communications demand. We plan to extend our
network to encompass a total of 32,000 route miles of fiber optic cable,
utilizing pipeline and other rights of way, to connect 125 cities by the end of
the year 2000.
Solutions distributes and integrates communications equipment from leading
vendors for the voice and data networks of businesses of all sizes as well as
governmental, educational and non-profit institutions. We provide planning,
design, implementation, management, maintenance and optimization services for
the full life cycle of these networks. We also sell the communications services
of select Network customers and other carriers to Solutions' customers.
Through Strategic Investments, we make investments in, or own and operate,
domestic and foreign businesses that create demand for capacity on the Williams
Network, increase our service capabilities, strengthen our customer
relationships, develop our expertise in advanced transmission electronics or
extend our reach. Our domestic strategic investments include our ownership of
Vyvx and minority interests in Concentric Network Corporation, UniDial
Communications, Inc. and UtiliCom Networks Inc. Our international strategic
investments include ownership interests in communications companies located in
Brazil, Australia and Chile.
We enter into strategic alliances with communications companies to secure
long-term, high-capacity commitments for traffic on the Williams Network and to
enhance our service offerings. We currently have strategic relationships with
SBC Communications Inc., Intel Corporation, Telefonos de Mexico, S.A. de C.V.,
known as Telmex, WinStar Communications, Inc., Metromedia Fiber Network, Inc.,
Intermedia Communications Inc. and U S WEST, Inc.
HISTORY OF BUILDING NETWORKS
In 1985, The Williams Companies, Inc. entered the communications business
by pioneering the placement of fiber optic cables in pipelines that were no
longer in use. By 1989, Williams had completed the fourth nationwide digital
fiber optic network covering approximately 9,700 route miles. In January 1995,
Williams sold the majority of its network business to LDDS Communications, Inc.
(now MCI WorldCom, Inc.) for approximately $2.5 billion. In January 1998, upon
the expiration of a non-compete agreement with MCI WorldCom, Williams reentered
the communications network business, announcing its plans to develop the
Williams Network. Many of our current employees worked with Williams in various
capacities during its original communications network build until the subsequent
sale to LDDS.
1
<PAGE> 5
NETWORK
The Williams Network is a packet-based network which transports information
compressed as "packets" over circuits shared simultaneously by several users.
Newly developed equipment based on advanced communications technology enables
packet-based networks to carry voice and data more efficiently and at a lower
cost than traditional telephone networks. The packet-based technology we use is
known as asynchronous transfer mode, or ATM.
We are combining advanced transmission equipment with our innovative
network design to offer highly flexible, efficient and reliable network services
to our customers. Our innovative network design provides high-quality network
services to support voice, data, Internet and video traffic at a lower
investment than other currently deployed networks due to the elimination of
several layers of costly equipment.
The Williams Network currently consists of approximately 20,550 miles of
installed fiber optic cable, of which 18,600 are in operation, or lit. The
Williams Network currently consists of the following (numbers are approximate):
- 9,700 route miles retained from the sale to LDDS
- 5,300 route miles obtained from other carriers
- 5,550 route miles which we began to construct in January 1998
As a result of our focus on the development and expansion of the Williams
Network, we expect a significant change in our revenue mix over the next few
years. Beginning in 1999, we expect Network to contribute an increasing
percentage of our total revenues and by 2001 we expect Network to contribute the
largest percentage of our total revenues and to be the primary source of our
revenue growth.
NETWORK'S STRATEGY
Network's objective is to become the leading nationwide provider of voice,
data, Internet and video services to national and international communications
providers. To achieve this objective, we intend to:
- become the leading provider to communications carriers
- deploy a technologically advanced network
- pursue strategic alliances
- leverage network construction, operation and management experience
- utilize pipeline rights-of-way
- establish international connectivity
- establish a low-cost position
SOLUTIONS
Solutions' broad range of voice and data products and services allows us to
serve as a single-source provider for our customers' communications needs. We
distribute the products and services of a number of leading communications
suppliers and are therefore able to provide our customers with multiple options.
We serve an installed base of approximately 100,000 customer sites in the U.S.
and Canada and maintain a sales organization consisting of approximately 1,200
sales personnel and 110 sales and service offices.
2
<PAGE> 6
SOLUTIONS' STRATEGY
Our objective is to be the premier provider of advanced, integrated
communications solutions to businesses. To achieve this objective, we intend to:
- capitalize on converging voice, data, Internet and video needs
- leverage our engineering and technical resources
- provide advanced professional services
- utilize our nationwide presence and large, installed customer base
- extend the reach of Network's carrier customers
CONCURRENT INVESTMENTS IN OUR COMMON STOCK
SBC. On February 8, 1999, we entered into agreements with SBC under which:
- SBC must first seek to obtain domestic voice and data long distance
services from us for 20 years
- we must first seek to obtain select international wholesale services and
various other services, including toll-free, operator, calling card and
directory assistance services, from SBC for 20 years
- we and SBC will sell each other's products to our respective customers
and provide installation and maintenance of communications equipment and
other services
- SBC will invest $500 million in our company unless it agrees to reduce
its investment to $425 million, in which case the Telmex investment
described below would be increased to $100 million
Intel. On May 24, 1999, we entered into an agreement with Intel under
which:
- Intel Internet Data Services will purchase domestic transport services
from us and may purchase Internet connectivity services from us
- we will purchase from Intel Internet Data Services web hosting services
- Intel will invest $200 million in our company
Telmex. On May 25, 1999, we entered into an agreement with Telmex under
which:
- we and Telmex must each first seek to obtain select international
wholesale services and various other services from the other for 20 years
- we and Telmex will sell each other's products to our respective customers
and will negotiate the terms under which both parties will provide
installation and maintenance of communications equipment and other
services for the other
- Telmex will invest $25 million in our company, which may be increased to
$100 million if SBC agrees to reduce its investment as described above
Each of the concurrent investments by SBC, Intel and Telmex in our common
stock will be at the initial public offering price less the underwriting
discount. The consummation of the SBC investment, the equity offering described
below and the notes offering will occur simultaneously and are each contingent
upon each other. For more information about the concurrent investments, see the
section of this prospectus entitled "Business -- Strategic alliances."
3
<PAGE> 7
CONCURRENT EQUITY OFFERING
Concurrent with the notes offering, we are selling shares of our common
stock in an initial public offering under a separate prospectus. We estimate
that the net proceeds to our company from this initial public offering will be
approximately $610.7 million (or $702.9 million if the underwriters in the
equity offering exercise their over-allotment option in full).
We will apply to have our common stock listed on the New York Stock
Exchange under the symbol "WCG."
4
<PAGE> 8
THE OFFERING
The following is a brief summary of select terms of the notes offering. For
a more complete description of the terms of the notes see the section of this
prospectus entitled "Description of the Notes."
Issuer........................ Williams Communications Group, Inc.
Notes offered................. $______ million aggregate principal amount of
__% senior notes due 2009.
Maturity...................... __________, 2009.
Interest payment dates........ ______ and ______, beginning __________, 1999.
Ranking....................... The notes will be senior unsecured obligations
of our company, ranking equally with all of our
existing and future senior unsecured debt. The
notes will be senior to all our subordinated
debt and junior to our secured debt as to the
assets securing this debt. We are a holding
company with substantially all of our
operations conducted through subsidiaries. We
are dependent upon cash flow from those
entities to meet our obligations, including
obligations under the notes. Accordingly, the
notes effectively will rank junior to all
liabilities of our subsidiaries. The term
"subordinated debt" is defined in the section
of this prospectus entitled "Description of the
Notes -- Certain definitions."
As of March 31, 1999, after giving pro forma
effect to the offerings, the concurrent
investments, the recharacterization of $500
million of paid-in capital to amounts due to
affiliates -- Williams and the financings
described in this prospectus and our use of the
net proceeds from the offerings and the
concurrent investments,
- we would have had outstanding no senior
debt ranking equally with or senior to the
notes
- our subsidiaries would have had $______
million of debt, including $______ million
of debt owed to Williams
Optional redemption........... We may redeem the notes, in whole or in part,
at any time on or after __________, 2004, at
the redemption prices (expressed as percentages
of principal amount at maturity) set forth
below, plus accrued and unpaid interest, if
any, to the redemption date, if redeemed during
the 12-month period beginning on __________ of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C> <C>
2004............................
---------
2005............................
---------
2006............................
---------
2007 and thereafter.............
---------
</TABLE>
5
<PAGE> 9
Equity offering optional
redemption.................... Before __________, 2002, we may redeem up to
35% of the aggregate principal amount of the
notes with the net proceeds of one or more
specified offerings at __% of the principal
amount thereof, plus accrued interest, if at
least 65% of the aggregate principal amount of
the notes originally issued remains outstanding
after such redemption. See the section of this
prospectus entitled "Description of the
Notes -- Optional redemption."
Change of control............. Upon specified change of control events, each
holder of notes may require us to repurchase
all or a portion of its notes at a purchase
price in cash equal to 101% of the principal
amount of the notes, plus accrued and unpaid
interest. We cannot guarantee that we will have
sufficient funds to pay the purchase price for
all of the notes that holders might deliver
upon a change of control. See the sections of
this prospectus entitled "Risk Factors" and
"Description of the Notes -- Change of control
triggering event" for more information.
Covenants..................... The indenture governing the notes will contain
covenants that, among other things, will limit
our ability and the ability of our restricted
subsidiaries to:
- incur additional debt
- pay dividends on, redeem or repurchase our
capital stock
- make investments
- issue or sell capital stock of restricted
subsidiaries
- create certain liens
- sell assets
- enter into sale and leaseback transactions
- make dividend or other payments to us
- in the case of our restricted subsidiaries,
guarantee debt
- engage in transactions with affiliates
- consolidate, merge or transfer all or
substantially all our assets and the assets
of our subsidiaries on a consolidated basis
These covenants are subject to important
exceptions and qualifications, which are
described in the section of this prospectus
entitled "Description of the Notes."
Use of proceeds............... We estimate that the net proceeds from the
notes offering will be approximately $1.3
billion, the net proceeds from the equity
offering will be approximately $610.7 million
and the net proceeds from the concurrent
investments will be approximately $725 million.
We intend to use these proceeds to:
6
<PAGE> 10
- develop and light the Williams Network, to
repay portions of our debt and for working
capital and general corporate purposes.
See the section of this prospectus entitled
"Use of Proceeds" for more information.
Risk factors.................. See the section of this prospectus entitled
"Risk Factors" and the other information in
this prospectus for a discussion of factors you
should carefully consider before deciding to
invest in the notes.
7
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial and operating
data derived from our consolidated financial statements. You should read this
along with the section of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and related notes and information related to EBITDA below.
In January 1995, Williams sold the majority of its network business to LDDS
for approximately $2.5 billion. The sale included the bulk of Williams'
nationwide fiber optic network and the associated consumer, business and carrier
customers. Williams kept the Retained WilTel Network, which is an approximately
9,700 route-mile single fiber optic strand on its original nationwide network,
its telecommunications equipment distribution business and Vyvx, a leading
provider of multimedia fiber transmission for the broadcast industry. The
Retained WilTel Network, along with Vyvx, Solutions and a number of acquired
companies, formed the basis for what is today our company. See Note 2 to our
consolidated financial statements for a description of acquisitions in 1996
through 1998.
Williams has contributed international communications assets to our
company. When we talk about our company and in the presentation of our financial
information, we include the international assets which Williams has contributed
to us.
We have prepared the accompanying table to reflect the historical
consolidated financial information of our company as if we had operated as a
stand alone business throughout the periods presented. The historical financial
information may not be indicative of our future performance and does not
necessarily reflect what our financial position and results of operations would
have been had we operated as a stand alone entity during the periods covered.
The summary pro forma consolidated balance sheet data give effect to the
following transactions as if they had occurred on March 31, 1999:
- the equity offering
- the notes offering
- the concurrent investments
- the recharacterization of $500 million of paid-in capital to amounts due
to affiliates -- Williams
Pro forma earnings per share is based upon an assumed 450 million shares of
capital stock outstanding after the equity offering and the concurrent
investments and does not include any exercise of the over-allotment option by
the underwriters of the equity offering or the issuance of shares of common
stock pursuant to deferred or restricted share awards or option grants under our
company's stock-based plans for directors, officers and other employees.
In connection with the equity offering, we will issue deferred shares of
our common stock and grant options to purchase our common stock to directors and
selected officers and other employees of our company and Williams. Some of the
deferred shares and options are expected to be issued or granted to electing
employees in exchange for existing deferred shares of Williams common stock or
options to purchase Williams common stock on a basis intended to preserve their
economic value and vesting and other terms. We will account for the options
granted in exchange for existing Williams options as new fixed awards and record
compensation expense over the remaining vesting period for the options based on
the difference between the initial public offering price and the exercise price
of the new options. Compensation expense for the deferred shares, whether issued
in exchange for Williams deferred shares or newly issued, will be recorded over
the remaining vesting period based on the initial public offering price. Our
accounting for these options and deferred shares is subject to change depending
upon the final
8
<PAGE> 12
guidance to be provided by the Financial Accounting Standards Board in its
Interpretation of Accounting Principles Board Opinion No. 25, which is expected
to be issued later this year. Assuming that employees elect to exchange all
eligible deferred shares and options and that the initial public offering price
is $ per share, we estimate that the compensation expense relating to the
options and deferred shares will be approximately $____ million over the
relevant remaining vesting periods, of which we estimate that approximately
$____ million will be expensed during the remainder of 1999, and approximately
$____ million of the remaining amount will be expensed annually in 2000, 2001
and 2002.
The Statement of Operations Data reflects the following items and events
that affect comparability with other years:
- In April 1997, we purchased the equipment distribution business of Nortel
Networks Corporation, formerly known as Northern Telecom Limited. We then
consolidated this equipment distribution business with ours to create
Solutions LLC. This combination effectively doubled the size of our
Solutions segment.
- In October 1997, management and ownership of the Retained WilTel Network
were transferred from Strategic Investments to Network and intercompany
transfer pricing was established prospectively.
- In January 1998, the non-compete agreement with MCI WorldCom expired and
Network entered the communications network business.
- Other expense in 1997 includes $44.0 million of charges primarily related
to the decision to sell our learning content business and the write-down
of assets and development expenses associated with other activities in
the Strategic Investments segment. Other expense in 1998 includes a $23.2
million loss related to exiting a venture in the Strategic Investments
segment involved in the transmission of business information for news and
educational purposes.
- In the fourth quarter of 1998, we began to recognize revenues from sales
of dark fiber. Revenues from dark fiber sales for this period were $64.1
million. Revenues from dark fiber sales for the three months ended March
31, 1999 were $51.3 million.
Included in other financial data are EBITDA amounts. EBITDA stands for
earnings before interest, taxes, depreciation and amortization. Consistent with
industry practice, we calculate EBITDA as income or loss from operations
excluding equity earnings or losses, non-recurring or unusual charges included
in operating results, and depreciation and amortization. Accordingly, EBITDA is
calculated excluding non-operating income and expense items including interest
expense, investing income, minority interest in income or loss of consolidated
subsidiaries, gains on sales of subsidiaries or assets, other non-operating
income or expense and provisions or benefits for income taxes. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that an increase in EBITDA is an
indicator of improved ability to service existing debt, to sustain potential
future increases in debt and to satisfy capital requirements. However, EBITDA is
not intended to represent cash flows for the period, nor has it been presented
as an alternative to either operating income (as determined by generally
accepted accounting principles) as an indicator of operating performance or cash
flows from operating, investing and financing activities (as determined by
generally accepted accounting principles) and is thus susceptible to varying
calculations. EBITDA as presented may not be comparable to other similarly
titled measures of other companies. We expect that under our permanent credit
facility, our discretionary use of funds reflected by EBITDA will be limited in
order to conserve funds for capital expenditures and debt service.
9
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Network.............. $ 108,492 $ 21,166 $ 194,936 $ 43,013 $ 11,063
Solutions............ 337,292 327,446 1,367,404 1,189,798 568,072
Strategic
Investments....... 57,985 49,868 205,047 215,583 130,876
Eliminations......... (11,767) (12,187) (50,281) (22,264) (6,425)
----------- ----------- ----------- ----------- -----------
Total
revenues... 492,002 386,293 1,717,106 1,426,130 703,586
Operating expenses:
Cost of sales........ 389,747 288,553 1,294,583 1,043,932 517,222
Selling, general and
administrative.... 122,919 103,673 487,073 323,513 152,484
Provision for
doubtful
accounts.......... 8,437 1,483 21,591 7,837 2,694
Depreciation and
amortization...... 27,578 18,995 84,381 70,663 32,378
Other................ 300 (342) 34,245 45,269 500
----------- ----------- ----------- ----------- -----------
Total
operating
expenses... 548,981 412,362 1,921,873 1,491,214 705,278
----------- ----------- ----------- ----------- -----------
Loss from operations... $ (56,979) $ (26,069) $ (204,767) $ (65,084) $ (1,692)
=========== =========== =========== =========== ===========
Net loss............... $ (74,141) $ (26,498) $ (184,991) $ (35,843) $ (3,514)
=========== =========== =========== =========== ===========
Historical per share
data (basic):
Net loss............. $ (74,141) $ (26,498) $ (184,991) $ (35,843) $ (3,514)
Weighted average
shares
outstanding....... 1,000 1,000 1,000 1,000 1,000
Pro forma per share
data (basic):
Net loss............. $ (.16) $ (.06) $ (.41) $ (.08) $ (.01)
Weighted average
shares
outstanding....... 450,000,000 450,000,000 450,000,000 450,000,000 450,000,000
OTHER FINANCIAL DATA:
EBITDA................. $ (19,242) $ (5,595) $ (80,873) $ 52,005 $ 32,287
Deficiency of earnings
to fixed charges..... (56,505) (26,064) (204,945) (25,697) (1,545)
Net cash provided by
(used in) operating
activities........... (90,225) (109,877) (363,833) 147,858 (1,775)
Net cash provided by
financing
activities........... 587,656 222,691 890,623 225,953 226,009
Net cash used in
investing
activities........... (442,588) (112,491) (496,076) (363,494) (224,186)
Capital expenditures... 151,238 110,117 299,481 276,249 66,900
</TABLE>
10
<PAGE> 14
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 96,847 $2,417,521
Working capital........................................... 501,447 2,822,121
Property, plant and equipment, net........................ 781,324 781,324
Total assets.............................................. 2,868,859 5,189,533
Long-term debt, including long-term debt due within one
year.................................................... 1,144,056 2,629,056
Total liabilities......................................... 1,838,847 3,323,847
Total stockholders' equity................................ 1,030,012 1,865,686
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------
<S> <C>
OPERATING DATA:
Planned route miles......................................... 32,000
Retained WilTel Network route miles....................... 9,700
Route miles to be acquired................................ 8,200
Route miles in construction............................... 14,100
Route miles in operation.................................... 18,600
Planned retained fiber miles................................ 407,000
</TABLE>
A route mile is an actual mile the path over which the fiber optic cable is
installed. Planned route miles are the total route miles that we expect the
Williams Network to traverse upon completion. Retained WilTel Network route
miles are the route miles traversed by the single fiber optic strand that
Williams retained from the sale of its original network to LDDS in 1995. Route
miles to be acquired are those route miles that we plan to acquire through
purchases or exchanges in completing the Williams Network. Route miles in
construction are those route miles (beyond the Retained WilTel Network route
miles) that we either have constructed or plan to construct to complete the
Williams Network. Planned retained fiber miles are those fiber miles of our
completed network that we expect to retain for our use in serving our customers.
Fiber miles are calculated by multiplying the route miles traversed over a given
segment by the number of fibers contained within that segment.
11
<PAGE> 15
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in our notes.
RISKS RELATING TO OUR NETWORK BUSINESS
WE MUST COMPLETE THE WILLIAMS NETWORK EFFICIENTLY AND ON TIME TO INCREASE OUR
REVENUES BUT FACTORS OUTSIDE OUR CONTROL MAY PREVENT US FROM DOING SO, WHICH
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our ability to become a leading, coast-to-coast, facilities-based provider
of communications services to other communications providers and our ability to
increase our revenues will depend in large part upon the successful, timely and
cost-effective completion of the Williams Network. Difficulties in constructing
the Williams Network could increase its estimated costs and delay its scheduled
completion, either of which could have a material adverse effect on our
business.
Factors out of our control include:
- our ability to acquire sites, rights of way to use property of other
parties, or rights of way, and required permits from utilities,
railroads, private landowners and governmental authorities on
satisfactory terms and conditions
- our management of costs related to construction of route segments
- timely performance by contractors
- technical performance of the fiber and equipment used in the Williams
Network
- our ability to attract and retain qualified personnel
- our ability to obtain any needed additional financing
We have embarked upon an aggressive plan to build the Williams Network and
we cannot guarantee that we will be successful in completing the Williams
Network in the time planned.
WE NEED TO INCREASE THE VOLUME OF TRAFFIC ON THE WILLIAMS NETWORK OR THE
WILLIAMS NETWORK WILL NOT GENERATE PROFITS
We must substantially increase the current volume of voice, data, Internet
and video transmission on the Williams Network in order to realize the
anticipated cash flow, operating efficiencies and cost benefits of the Williams
Network. If we do not develop long-term commitments with new large-volume
customers as well as maintain our relationships with current customers, we will
be unable to increase traffic on the Williams Network, which would adversely
affect our profitability.
We believe that an important source of increased traffic will be from the
introduction by regional telephone companies of long distance services within
their historical service areas once they satisfy the applicable requirements
under the Telecommunications Act of 1996. Accordingly, delays in the
introduction of these services could have an adverse effect on our traffic flow.
See the section of this prospectus entitled "Regulation -- General regulatory
environment."
NETWORK OPERATES IN A HIGHLY COMPETITIVE INDUSTRY WITH PARTICIPANTS THAT HAVE
GREATER RESOURCES AND EXISTING CUSTOMERS THAN WE HAVE, WHICH COULD LIMIT OUR
ABILITY TO INCREASE OUR MARKET SHARE
Our success depends upon our ability to increase our share of the carrier
services market by providing high quality services at prices equal to or below
those of our competitors. Increased competition could lead to price reductions,
fewer large-volume sales, under-utilization of resources, reduced operating
margins and loss of market share. Many of our competitors have,
12
<PAGE> 16
and some potential competitors are likely to enjoy, substantial competitive
advantages, including the following:
- greater name recognition
- greater financial, technical, marketing and other resources
- larger installed bases of customers
- well-established relationships with current and potential customers
- more extensive knowledge of the high-volume long distance services
industry
Our competitors include Qwest Communications International, Inc, Level 3
Communications, Inc., IXC Communications, Inc., as well as the three U.S. long
distance fiber optic networks that are owned by each of AT&T Corp., MCI
WorldCom, Inc. and Sprint Corp.
CONSOLIDATION WITHIN THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE OUR MARKET
SHARE AND HARM OUR FINANCIAL PERFORMANCE
Consolidation of some of the major service providers and strategic
alliances in the communications industry have occurred in response to the
passage of the Telecommunications Act and further consolidation could lead to
fewer large-volume sales, reduced operating margins and loss of market share.
Regional telephone companies that fulfill required conditions under the
Telecommunications Act may choose to compete with us. In addition, significant
new and potentially larger competitors could enter our market as a result of
other regulatory changes, technological developments or the establishment of
cooperative relationships. Foreign carriers may also compete in the U.S. market.
PRICES FOR NETWORK SERVICES MAY DECLINE, WHICH MAY REDUCE OUR REVENUES
The prices we can charge our customers for transmission capacity on the
Williams Network could decline for the following reasons:
- installation by us and our competitors, some of which are expanding
capacity on their existing networks or developing new networks, of fiber
and related equipment that provides substantially more transmission
capacity than needed
- recent technological advances that enable substantial increases in, or
better usage of, the transmission capacity of both new and existing fiber
- strategic alliances or similar transactions that increase the parties'
purchasing power, such as purchasing alliances among regional telephone
companies for long distance capacity
If prices for network services decline, we may experience a decline in
revenues which would have a material adverse effect on our operations.
SERVICE INTERRUPTIONS ON THE WILLIAMS NETWORK COULD EXPOSE US TO LIABILITY OR
CAUSE US TO LOSE CUSTOMERS
Our operations depend on our ability to avoid and mitigate any damages from
power losses, excessive sustained or peak user demand, telecommunications
failures, network software flaws, transmission cable cuts or natural disasters.
The failure of any equipment or facility on the Williams Network could result in
the interruption of customer service until we make necessary repairs or install
replacement equipment. Additionally, if a carrier or other service provider
fails to provide the communications capacity that we have leased in order to
provide service to our customers, service to our customers would be interrupted.
If service is not restored in a timely manner, agreements with our customers may
obligate us to provide credits to them, which would reduce our revenues. Service
disruptions could also damage our reputation with customers,
13
<PAGE> 17
causing us to lose existing customers or have difficulty attracting new ones.
Many of our customers' communications needs will be extremely time sensitive,
and delays in signal delivery may cause significant losses to a customer using
the Williams Network. The Williams Network may also contain undetected design
faults and software "bugs" that, despite our testing, may be discovered only
after the Williams Network has been completed and is in use.
WE MAY NEED TO EXPAND OR ADAPT THE WILLIAMS NETWORK IN THE FUTURE IN ORDER TO
REMAIN COMPETITIVE, WHICH COULD BE VERY COSTLY
Any expansion or adaptation of the Williams Network could require
substantial additional financial, operational and managerial resources which may
not be available to us. After we complete the Williams Network, we may have to
expand or adapt its components to respond to the following:
- an increasing number of customers
- demand for greater transmission capacity
- changes in our customers' service requirements
- technological advances
- government regulation
NETWORK HAS GENERATED LOSSES IN ITS LIMITED OPERATING HISTORY, WHICH WE EXPECT
WILL CONTINUE
Network has a limited operating history upon which you can base an
evaluation of our performance. In connection with developing the Williams
Network, we have incurred operating and net losses and working capital deficits
and we expect to continue to do so at least until completion of the Williams
Network. In 1998, Network experienced an operating loss of $27.7 million.
Continued operating losses could limit our ability to obtain the cash needed to
develop the Williams Network, make interest and principal payments on our debt
or fund our other business needs.
WE NEED TO OBTAIN AND MAINTAIN THE NECESSARY RIGHTS OF WAY FOR THE WILLIAMS
NETWORK IN ORDER TO OPERATE THE NETWORK
We must obtain rights of way, encroachment agreements and other permits
from private landowners, utilities, railroads, state highway authorities, local
governments and transit authorities in order to install conduit and related
telecommunications equipment. Rights of way are rights to use the property of
others which we obtain throughout the U.S. from various landowners. If we are
unable to maintain all of our existing rights and permits or obtain and maintain
the additional rights and permits needed to implement our business plan on
acceptable terms, our ability to operate the Williams Network would be
materially adversely affected.
LITIGATION MAY CHALLENGE OUR RIGHTS TO USE PROPERTY, WHICH COULD IMPAIR OUR
ABILITY TO OPERATE THE WILLIAMS NETWORK
Landholders who granted rights to use property to railroad companies in the
past have filed class action lawsuits against communications carriers that
received these rights from railroad companies in order to develop their fiber
optic networks. The landholders claim that these carriers should have obtained
rights to use property directly from the landholders, and not the railroad
companies, and that the carriers' rights to use property are therefore invalid.
Some of the carriers which have granted us fiber optic strands are subject to
these suits and a plaintiff in a similar lawsuit against our company is seeking
to have the matter certified as a class action.
14
<PAGE> 18
WE NEED TO OBTAIN ADDITIONAL CAPACITY FOR THE WILLIAMS NETWORK FROM OTHER
PROVIDERS IN ORDER TO SERVE OUR CUSTOMERS AND KEEP OUR COSTS DOWN
We lease telecommunications capacity and obtain rights to use dark fiber
from both long distance and local telecommunications carriers in order to extend
the range of the Williams Network. Any failure by these companies to provide
service to us would adversely affect our ability to serve our customers or
increase our costs of doing so.
Costs of obtaining local services from other carriers comprise a
significant proportion of the operating expenses of long distance carriers,
including Network. Similarly, a large proportion of the costs of providing
international services consists of payments to other carriers. Changes in
regulation, particularly the regulation of local and international
telecommunications carriers, could indirectly but significantly affect Network's
competitive position; such changes could increase or decrease our costs,
relative to those of our competitors, of providing services.
RISKS RELATING TO OUR SOLUTIONS BUSINESS
SOLUTIONS HAS EXPERIENCED LOSSES WHICH MAY CONTINUE IN THE FUTURE
In 1998, Solutions incurred significant losses. We have had difficulties in
integrating our equipment distribution business with Nortel's equipment
distribution business and in managing the increased complexity of our business.
Since the new systems Solutions is implementing to address these problems have
not yet been fully implemented or tested, we expect that our financial results
in 1999 will continue to be adversely affected by these difficulties. These
difficulties have included an inability to operate and manage our business
effectively with multiple information systems, insufficient management
resources, internal control deficiencies, a high turnover of sales personnel,
lost sales, customer dissatisfaction and increased selling, general and
administrative costs. See the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Solutions" for more information.
TERMINATION OF RELATIONSHIPS WITH KEY VENDORS COULD RESULT IN DELAYS OR
INCREASED COSTS
We have a series of agreements which authorize us to act as a distributor
of communications products for a variety of vendors, most significantly Nortel,
as well as Cisco Systems, Inc., NEC Corp. and others. We cannot assure you that
any vendor with which we do business will elect to continue its relationship
with us on substantially the same terms and conditions. We believe that an
interruption, or substantial modification, of our distribution relationships,
particularly with Nortel, could have a material adverse effect on Solutions'
business, operating results and financial condition, in that we may no longer be
able to provide services and products to our customers, or the cost of doing so
may be more expensive. Periodically, our distribution agreements expire and we
must negotiate new agreements if we desire to continue distributing each
vendor's products at competitive prices. In addition, under our distribution
agreement with Nortel, if we do not purchase a minimum percentage of our total
product mix from Nortel, each party has the option to change the ownership
structure of Solutions LLC. If Nortel is no longer an owner of Solutions LLC,
there is no guarantee that Nortel would continue its distribution agreement with
Solutions once it is no longer required to do so under the terms of the
agreement. See the section of this prospectus entitled "Business --
Solutions -- LLC agreement with Nortel" for more information.
15
<PAGE> 19
SOLUTIONS OPERATES IN A HIGHLY COMPETITIVE INDUSTRY, WHICH COULD REDUCE OUR
MARKET SHARE AND HARM OUR FINANCIAL PERFORMANCE
We face competition from communications equipment manufacturers and
distributors, as well as from network integrators. Increased competition could
lead to price reductions, fewer sales and client projects, under-utilization of
employees, reduced operating margins and loss of market share. Many of our
competitors have significantly greater financial, technical and marketing
resources or greater name recognition than we currently have. We also face
competition from lower cost providers and from new entrants to the market.
RISKS RELATING TO OUR COMPANY
AFTER THE OFFERINGS, WILLIAMS WILL NOT BE REQUIRED TO PROVIDE ADDITIONAL CAPITAL
OR CREDIT SUPPORT TO US, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO MAKE FUTURE
BORROWINGS
We have funded our past capital needs mainly through borrowings or capital
contributions from Williams or through external financings guaranteed by
Williams. Following the offerings, Williams will not be required to provide us
with additional funding or credit support. Without Williams' support, we may
have less borrowing capacity and funds may only be available to us on less
favorable terms.
WE HAVE SUBSTANTIAL DEBT WHICH MAY HINDER OUR GROWTH AND PUT US AT A COMPETITIVE
DISADVANTAGE
Our substantial debt may have important consequences for us, including the
following:
- our ability to obtain additional financing for acquisitions, working
capital, investments and capital or other expenditures could be impaired
or financing may not be available on terms favorable to us
- a substantial portion of our cash flow will be used to make principal and
interest payments on our debt, reducing the funds that would otherwise be
available to us for our operations and future business opportunities
- a substantial decrease in our net operating cash flows or an increase in
our expenses could make it difficult for us to meet our debt service
requirements and force us to modify our operations
- we may have more debt than our competitors, which may place us at a
competitive disadvantage
- our substantial debt may make us more vulnerable to a downturn in our
business or the economy generally
We had substantial deficiencies of earnings to cover fixed charges of
$204.9 million in 1998, $25.7 million in 1997 and $1.5 million in 1996.
WE MAY NOT BE ABLE TO REPAY OUR EXISTING DEBT; FAILURE TO DO SO OR TO REFINANCE
OUR DEBT COULD PREVENT US FROM IMPLEMENTING OUR BUSINESS PLANS AND REALIZING
ANTICIPATED PROFITS
If we are unable to refinance our debt or to raise additional capital on
favorable terms, this may impair our ability to develop the Williams Network and
to implement our other business plans. Upon completion of the offerings and the
concurrent investments and after we pay related expenses, we estimate that we
will have approximately $2.6 billion of long-term debt, approximately $1.9
billion of stockholders' equity and a debt-to-equity ratio of approximately 1.41
to 1. In the future, we also expect to have borrowings under our new revolving
credit agreement which will increase the amount of our outstanding debt and our
debt-to-equity ratio. Our ability to make interest and principal payments on our
debt and borrow additional funds on
16
<PAGE> 20
favorable terms depends on the future performance of our business. If we do not
have enough cash flow in the future to make interest or principal payments on
our debt, we may be required to refinance all or a part of our debt or to raise
additional capital. We do not know if refinancing our debt will be possible at
that time or if we will be able to find someone who will lend us more money, nor
do we know upon what terms we could borrow more money.
RESTRICTIONS AND COVENANTS IN OUR DEBT AGREEMENTS LIMIT OUR ABILITY TO CONDUCT
OUR BUSINESS AND COULD PREVENT US FROM OBTAINING FUNDS WHEN WE NEED THEM IN THE
FUTURE
The notes and some of our other debt and financing arrangements contain a
number of significant limitations that will restrict our ability to conduct our
business and to:
- borrow additional money
- pay dividends or other distributions to our stockholders
- make investments
- create liens on our assets
- sell assets
- enter into transactions with affiliates
- engage in mergers or consolidations
These restrictions may limit our ability to obtain future financing, fund
needed capital expenditures or withstand a future downturn in our business or
the economy.
IF WE ARE UNABLE TO COMPLY WITH THE RESTRICTIONS AND COVENANTS IN OUR DEBT
AGREEMENTS, THERE COULD BE A DEFAULT UNDER THE TERMS OF THESE AGREEMENTS, WHICH
COULD RESULT IN AN ACCELERATION OF PAYMENT DUE OF FUNDS THAT WE HAVE BORROWED
If we are unable to comply with the restrictions and covenants in our debt
agreements, there would be a default under the terms of our agreements. Some of
our debt agreements also require us and certain of our subsidiaries to maintain
specified financial ratios and satisfy financial tests. Our ability to meet
these financial ratios and tests may be affected by events beyond our control;
as a result, we cannot assure you that we will be able to meet such tests. In
the event of a default under these agreements, our lenders could terminate their
commitments to lend to us or accelerate the loans and declare all amounts
borrowed due and payable. Borrowings under other debt instruments that contain
cross-acceleration or cross-default provisions may also be accelerated and
become due and payable. If any of these events occur, we cannot assure you that
we would be able to make the necessary payments to the lenders or that we would
be able to find alternative financing. Even if we could obtain alternative
financing, we cannot assure you that it would be on terms that are favorable or
acceptable to us.
IF WE ARE UNABLE TO SECURE ANY NEEDED ADDITIONAL FINANCING OUR ABILITY TO
CONDUCT OUR BUSINESS COULD BE ADVERSELY AFFECTED
We may need additional capital to complete the build of the Williams
Network and meet our long-term business strategies. If we need additional funds,
our inability to raise them may have an adverse effect on our operations. If we
decide to raise funds through the incurrence of additional debt, we may become
subject to additional or more restrictive financial covenants and ratios. The
actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of financial, business and other
factors, many of which are beyond our control. Our ability to arrange financing
and the costs of financing depend upon many factors, including:
- general economic and capital markets conditions
- conditions in the communications market
17
<PAGE> 21
- regulatory developments
- credit availability from banks or other lenders
- investor confidence in the telecommunications industry and our company
- the success of the Williams Network
- provisions of tax and securities laws that are conducive to raising
capital
WE MUST ATTRACT AND RETAIN QUALIFIED EMPLOYEES TO ENSURE THE GROWTH AND SUCCESS
OF OUR COMPANY
We believe that our growth and future success will depend in large part on
our ability to attract and retain highly skilled and qualified personnel. Any
inability of ours in the future to hire, train and retain a sufficient number of
qualified employees could impair our ability to manage and maintain our business
and our customers' communications infrastructures. Some of the problems
experienced by Solutions in 1998 were due to high turnover of managerial,
technical and sales personnel, as well as insufficient management resources to
run our Solutions business. The competition for qualified personnel in the
communications industry is intense.
SBC COULD TERMINATE OUR STRATEGIC ALLIANCE WHICH COULD HARM OUR BUSINESS
If SBC terminates our strategic alliance, there could be a material adverse
effect on our business, financial condition and results of operations. Because
SBC is a major customer of ours, termination of our agreements with SBC would
result in decreased revenues and increased marginal costs. Our alliance
agreements with SBC are material to us and SBC may terminate these agreements in
certain cases, including the following:
- if SBC does not complete its proposed acquisition of Ameritech Corp. or
if regulators impose conditions on the acquisition that SBC refuses to
accept
- if we begin to offer retail long distance or local exchange services on
the Williams Network under some circumstances
- if the action or failure to act of any regulatory authority materially
frustrates or hinders the purpose of any of our agreements with SBC
- if we materially breach our agreements with SBC causing a material
adverse effect on the commercial value of the relationship to SBC
- if we have a change of control
- if SBC acquires an entity which owns a nationwide fiber optic network in
the U.S. and determines not to sell us several long distance assets
WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS
We currently derive a large percentage of the revenue generated by Network
and Vyvx from a small number of customers. There is no guarantee that these
customers will continue to do business with us after the termination of their
commitments with us.
COMMUNICATIONS TECHNOLOGY CHANGES VERY RAPIDLY AND OUR TECHNOLOGY COULD BE
RENDERED OBSOLETE
We expect that new products and technologies will emerge and that existing
products and technologies, including voice transmission over the Internet and
high speed transmission of packets of data, will further develop. These new
products and technologies may reduce the prices for our services or they may be
superior to, and render obsolete, the products and services we offer and the
technologies we use. As a result, our most significant competitors in the future
may be new entrants to our markets which would not be burdened by an installed
base of older equipment. It may be very expensive for us to upgrade our products
and technology in order to continue to compete effectively. Our future success
depends, in part, on our ability to anticipate
18
<PAGE> 22
and adapt in a timely manner to technological changes, including wider
acceptance and usage of voice transmission over the Internet.
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT, WHICH COULD EXPOSE US TO LIABILITY
FROM THIRD PARTIES
We, and the companies with which we do business, must upgrade our computer
systems and software products to accept four-digit entries that distinguish the
year 2000 from the year 1900. Due to the limited availability and cost of
trained personnel, the difficulty in locating all relevant computer code and our
reliance on third-party suppliers and vendors, serious systems failures may
occur. These systems failures may result in litigation with our vendors,
suppliers or customers, particularly for Solutions, given the nature of its
extensive product offerings, its maintenance obligations and broad customer
base.
We cannot assure you that we will achieve full year 2000 compliance before
the end of 1999 or that we will develop and implement effective contingency
plans for all possible scenarios. We have identified two areas that would most
likely result in significant problems for our business. First, the system
replacements scheduled for completion during 1999 may be delayed. Second, we may
not be able to remedy a material systems failure. Either of these could lead to
lost revenues, increased operating costs, loss of customers or other business
interruptions of a material nature, and potential litigation claims including
mismanagement, misrepresentation or breach of contract. See the section of this
prospectus entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 readiness disclosure" for more
information.
IF WE DO NOT HAVE SOPHISTICATED INFORMATION AND BILLING SYSTEMS, WE MAY NOT BE
ABLE TO ACHIEVE DESIRED OPERATING EFFICIENCIES
Sophisticated information and billing systems are vital to our growth and
ability to monitor costs, bill customers, fulfill customer orders and achieve
operating efficiencies. Our plans for developing and implementing our
information and billing systems rely primarily on the delivery of products and
services by third party vendors. We may not be able to develop new business,
identify revenues and expenses, service customers, collect revenues or develop
and maintain an adequate work force if any of the following occur:
- vendors fail to deliver proposed products and services in a timely and
effective manner or at acceptable costs
- we fail to adequately identify all of our information and processing
needs
- our related processing or information systems fail
- we fail to upgrade systems when necessary
- we fail to integrate our systems with those of our major customers
OUR BUSINESS IS SUBJECT TO REGULATION THAT COULD CHANGE IN AN ADVERSE MANNER
The communications business is subject to federal, state, local and foreign
regulation. Regulation of the telecommunications industry is changing rapidly,
with ongoing effects on our opportunities, competition and other aspects of our
business. We cannot assure you that future regulatory, judicial or legislative
activities will not have a material adverse effect on us. The regulatory
environment varies substantially from state to state. Generally, we must obtain
and maintain certificates of authority from regulatory bodies in most states
where we offer intrastate services or in order to use eminent domain powers to
obtain rights-of-way. We also must obtain prior regulatory approval of tariffs
for our intrastate services in most of these jurisdictions. In addition, some of
our alliance partners are subject to extensive regulation, which could adversely
19
<PAGE> 23
affect the expected benefits of our arrangements with them. For example, while
the terms of our agreements with SBC are intended to comply with restrictions on
SBC's provision of long distance services, various aspects of these arrangements
have not been tested under the Telecommunications Act.
FAILURE TO DEVELOP THE "WILLIAMS COMMUNICATIONS" BRAND COULD ADVERSELY AFFECT
OUR BUSINESS
We believe that brand recognition is very important in the communications
industry. If the "Williams Communications" brand awareness does not increase or
is weakened, it could decrease the attractiveness of our company's product and
service offerings to potential customers, which could result in decreased
revenues. We have licensed the use of the Williams trademark from Williams for
so long as Williams owns at least 50% of our outstanding capital stock. The loss
of this license would require us to establish a new brand and build new brand
recognition.
OUR INTERNATIONAL OPERATIONS AND INVESTMENTS MAY EXPOSE US TO RISKS WHICH COULD
HARM OUR BUSINESS
We have operations based in Canada, Australia and Mexico and investments in
companies with operations in Brazil and Chile. We are exposed to risks inherent
in international operations. These include:
- general economic, social and political conditions
- the difficulty of enforcing agreements and collecting receivables through
certain foreign legal systems
- tax rates in some foreign countries may exceed those in the United States
and foreign earnings may be subject to withholding requirements or the
imposition of tariffs, exchange controls or other restrictions
- required compliance with a variety of foreign laws and regulations which
impose a range of restrictions on the companies' operations, corporate
governance and shareholders, with penalties for noncompliance including
loss of license and monetary fines
- changes in United States laws and regulations relating to foreign trade
and investment
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Our international operations will cause our results of operations and the
value of our assets to be affected by the exchange rates between the U.S. dollar
and the currencies of the additional countries in which we have operations and
assets. Fluctuations in foreign currency rates may adversely affect reported
earnings and the comparability of period-to-period results of operations. On
January 13, 1999, the Brazilian Central Bank removed the limits on the valuation
of the Brazilian Real compared to the U.S. dollar, allowing free market
fluctuation of the exchange rate. As a result, the value of the Real in U.S.
dollars has declined approximately 30% from December 31, 1998 to March 31, 1999.
The ultimate duration and severity of the conditions in Brazil may have a
material adverse effect on our investments there. In addition, Mexico and Chile
have historically experienced exchange rate volatility. Changes in currency
exchange rates may affect the relative prices at which we and foreign
competitors sell products in the same market. In addition, changes in the value
of the relevant currencies may affect the cost of items required in our
operations.
20
<PAGE> 24
RISKS RELATING TO OUR RELATIONSHIP WITH WILLIAMS
WILLIAMS HAS SIGNIFICANT CONTROL OVER OUR COMPANY, WHICH COULD ADVERSELY AFFECT
HOLDERS OF OUR NOTES
After completion of the equity offering and the concurrent investments,
Williams will hold 100% of our Class B common stock and will therefore own
approximately ____% of the voting power of our company, or approximately ____%
of the voting power if the underwriters in the equity offering exercise their
over-allotment option in full.
As long as Williams continues to beneficially own shares of capital stock
representing more than 50% of the combined voting power of our outstanding
capital stock, Williams will be able to exercise a controlling influence over
our company, including:
- composition of our board of directors and, through it, the direction and
policies of our company, including the appointment and removal of
officers
- mergers or other business combinations involving our company
- acquisition or disposition of assets by our company
- future issuances of common stock or other securities of our company
- incurrence of debt by our company
- amendments, waivers and modifications to the agreements between us and
Williams being entered into in connection with the offerings
- payment of dividends on our common stock
- treatment of items in our tax returns that are consolidated or combined
with Williams' tax returns
CONFLICTS OF INTEREST MAY ARISE BETWEEN US AND WILLIAMS WHICH COULD BE RESOLVED
IN A MANNER UNFAVORABLE TO OUR COMPANY
Conflicts of interest could arise relating to the nature, quality and
pricing of services or products provided by us to Williams or by Williams to us,
any payment of dividends by us to Williams, any prepayment of the borrowings by
us from Williams and general issues relating to maintaining or increasing our
profitability. In addition, one of our directors is both a senior officer and
director, and six of our directors are also senior officers, of Williams and
some of these individuals and a number of our executive officers own substantial
amounts of Williams stock and options for shares of Williams stock. Although we
believe that these directors and officers will be able to fulfill their
fiduciary duties to our stockholders despite their positions with Williams and
their ownership of Williams stock, there could be potential conflicts of
interest when these directors and officers are faced with decisions that could
have different implications for our company and Williams.
We have agreed not to compete with Williams in the energy industry for five
years and Williams has agreed not to compete with us for five years in any area
of the telecommunications industry in which we currently have operations,
subject to some exceptions. During this five-year period, Williams will be able
to take advantage of a competitive corporate opportunity if we first decline to
act on the opportunity. After this period, Williams will have no obligation to
refrain from acting on corporate opportunities and may act on corporate
opportunities without liability to us or our stockholders, even if these
opportunities would seem to be natural extensions of our business or activities.
See the section of the prospectus entitled "Relationship Between Our Company and
Williams" for more information.
Our directors who are also directors or executive officers of Williams will
have obligations to both companies and may have conflicts of interest with
respect to matters potentially or actually involving or affecting us, such as
acquisitions, financings and other corporate opportunities that
21
<PAGE> 25
may be suitable for both us and Williams. Our restated certificate of
incorporation contains provisions designed to facilitate resolution of these
potential conflicts which we believe will assist the directors of our company in
fulfilling their fiduciary duties to our stockholders. By becoming a stockholder
in our company, you will be considered to have consented to these provisions of
our restated certificate of incorporation. Although these provisions are
designed to resolve conflicts between us and Williams fairly, we cannot assure
you that this will occur. See the section of this prospectus entitled
"Description of Capital Stock -- Provisions of our restated certificate of
incorporation and by-laws" for more information.
WE RELY ON WILLIAMS FOR ADMINISTRATIVE SERVICES WHICH WILLIAMS COULD CEASE TO
PROVIDE TO US
We have never operated as a stand alone company. While Williams is
contractually obligated to provide us with certain administrative services, we
cannot assure you that these services will be sustained at the same level as
when we were wholly owned by Williams or that we will obtain the same benefits.
We will also lease and sub-lease office and manufacturing facilities from
Williams. We cannot assure you that, after the expiration of these various
arrangements, we will be able to replace the administrative services or enter
into appropriate leases in a timely manner or on terms and conditions, including
cost, as favorable as those we will receive from Williams.
These agreements were made in the context of a parent-subsidiary
relationship. The prices charged to us under these agreements may be higher or
lower than the prices that may be charged by unaffiliated third parties for
similar services. For more information about these arrangements, see the section
of this prospectus entitled "Relationship Between Our Company and Williams."
RISKS RELATING TO OUR NOTES
YOUR RIGHT TO RECEIVE PAYMENT ON THE NOTES IS JUNIOR TO OUR EXISTING DEBT AND
POSSIBLY ALL FUTURE BORROWINGS
We depend on our subsidiaries to provide us with funds to meet our obligations
but they are not obligated to repay the notes
We are a holding company with limited direct operations and few assets
other than the stock of our subsidiaries. We are dependent on the cash flows of
our subsidiaries to meet our obligations, including the payment of principal of
and interest on the notes. Our subsidiaries are separate legal entities that
will have no obligation to pay any amounts due under the notes or to make any
funds available for payment of amounts due under the notes, whether by
dividends, loans or other payments, unless they are required to become
guarantors of the notes. Initially, none of our subsidiaries will guarantee the
payment of the notes. In addition, the ability of our subsidiaries to make any
payments or advances to us is limited by the laws of the relevant jurisdictions
in which our subsidiaries are organized or located. In some cases, prior or
subsequent approval of any such payments or advances may be required from
applicable regulatory bodies or other governmental entities. See the sections of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and capital resources,"
"Business" and "Description of the Notes" for more information.
Your right to receive payments on the notes is junior to all existing and
future debt of our subsidiaries
22
<PAGE> 26
The notes will effectively rank junior to all existing and future
liabilities of our subsidiaries, including trade payables. At March 31, 1999,
after giving pro forma effect to the offerings, the concurrent investments, the
recharacterization of $500 million of paid-in capital to amounts due to
affiliates -- Williams, the financings described in this prospectus and the
application of the net proceeds from the offerings and the concurrent
investments, our subsidiaries had approximately $3.3 billion of outstanding
liabilities, including $1.3 billion of debt owed to Williams. The terms of the
indenture for the notes will permit our subsidiaries to incur substantial
amounts of debt.
We may incur debt in the future that is secured by our assets and that would
rank senior to the notes
The notes will effectively rank junior to all our secured debt to the
extent of the value of the assets securing our secured debt. The terms of the
indenture for the notes permit us to, and our other debt agreements will permit
us and our subsidiaries to, incur secured debt.
WE MAY NOT BE PERMITTED TO REPURCHASE THE NOTES AS REQUIRED BY THE INDENTURE OR
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO PAY FOR THE NOTES
If there is a change of control of our company and the rating of the notes
declines, unless we have given a notice of redemption, each holder of notes will
have the right to require us to repurchase all or any part of that holder's
notes at a purchase price in cash equal to 101% of the principal amount, plus
accrued and unpaid interest, if any. However, our ability to repurchase notes
may be limited by the terms of then-existing contractual obligations of our
company and of our subsidiaries. If this is the case, then in order to
repurchase notes upon a change of control, we would have to repay all of our
obligations under these agreements or would have to obtain the consent of
holders of this debt. We cannot assure you that we will have adequate financial
resources to repurchase the notes in the event of a change of control,
particularly if we have to refinance other indebtedness. If we are unable to
repurchase the notes upon a change of control, our failure to purchase tendered
notes would constitute an event of default under the indenture.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES
There is currently no trading market for the notes and we cannot guarantee
that a market for the notes will develop in the future. In addition, we cannot
guarantee the price at which holders might sell their notes. If a trading market
were to develop, the notes could trade at prices that may be higher or lower
than the initial offering price of the notes. We do not intend to apply for
listing or quotation of the notes on any securities exchange or inter-dealer
quotation system. Prevailing market prices from time to time will depend on many
factors, including then-existing interest rates, our operating results and cash
flow and the market for similar securities.
The underwriters have advised us that they currently intend to make a
market in the notes after the consummation of the notes offering. However, the
underwriters are not obligated to do so and they may discontinue any
market-making with respect to the notes at any time without notice. Accordingly,
even if a trading market for the notes does develop, we cannot make any
assurances as to the liquidity of that market. See the section of this
prospectus entitled "Underwriting" for more information.
In addition, the liquidity of and trading market for the notes may be
adversely affected by declines in the market for high-yield securities
generally. Such a decline may adversely affect liquidity and trading markets
independent of our financial performance and prospects.
23
<PAGE> 27
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are principally contained in the sections "Prospectus Summary,"
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. Forward-
looking statements include but are not limited to:
- our expectations and estimates as to completion dates, construction costs
and subsequent maintenance and growth of the Williams Network
- our ability to implement successfully our operating strategy and attract
sufficient capacity volumes on the Williams Network
- future financial performance, including growth in net sales and earnings
- our continuing relationship with Williams
- our plan to address the Year 2000 issue, the costs associated with Year
2000 compliance and the results of Year 2000 non-compliance by us or one
or more of our customers, suppliers or other strategic business partners
In addition to factors that may be described in our filings with the
Securities and Exchange Commission and this prospectus, the following factors,
among others, could cause our actual results to differ materially from those
expressed in any forward-looking statements we make:
- the effects of and changes in political and/or economic conditions,
including inflation, interest rates and monetary conditions, and in
communications, trade, monetary, fiscal and tax policies in international
markets, including Mexico, Canada, Brazil, Australia and Chile
- changes in external competitive market factors or in our internal
budgeting process which might affect trends in our results of operations
- intense competition from other communications companies
- rapid, unpredictable and dramatic changes in the technological,
regulatory or business environment applicable to us or the communications
industry generally
- changes in the prices of equipment, supplies, rights of way or
construction expenses necessary to complete the Williams Network
You should carefully review our consolidated financial statements and
related notes included in this prospectus as well as the risk factors described
in this prospectus before deciding to invest in our notes.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions, as they relate to our management, are intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties.
24
<PAGE> 28
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the notes offering
will be approximately $1.3 billion. We estimate that the net proceeds we will
receive from the sale of the ________ shares of common stock will be
approximately $610.7 million, or approximately $702.9 million if the
underwriters of the equity offering exercise their over-allotment option in
full, based on an assumed initial public offering price of $________per share.
In addition, we estimate that we will receive approximately $725 million in net
proceeds from the concurrent investments.
We intend to use the net proceeds from the offerings and the concurrent
investments to develop and light the Williams Network, to fund operating losses,
to repay portions of our debt and for working capital and general corporate
purposes.
At the time of the offerings we anticipate that we will have approximately
$900 million in borrowings outstanding under our interim loan facility. We plan
to repay borrowings outstanding under this interim loan facility with proceeds
from the offerings. The commitment under the interim loan facility bears
interest at a variable rate based on a spread over 3 month LIBOR per annum and
matures on September 30, 1999. Borrowings under the interim loan facility were
used to repay $385 million of bank borrowings under our revolving credit
facility to pay for Network's capital expenditures and to fund other cash needs.
25
<PAGE> 29
CAPITALIZATION
The following table sets forth our capitalization at March 31, 1999 on an
actual basis and as adjusted to give effect to the equity offering, the notes
offering, the concurrent investments and the recharacterization of $500 million
of paid-in capital to amounts due to affiliates -- Williams, after deducting
underwriting discounts and commissions and estimated expenses, and after
application of the net proceeds to repay debt. The adjustments for the equity
offering are based on an assumed initial public offering price of $ per
share. The table assumes that the underwriters of the equity offering do not
exercise their over-allotment option. The table does not take into consideration
any additional shares of our common stock issued pursuant to deferred or
restricted share awards and does not take into consideration any option grants
as described in the section of this prospectus entitled "Management -- New
stock-based and incentive plans of our company -- Treatment of specified
Williams stock awards."
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Cash and cash equivalents.................................. $ 96,847 $2,417,521
========== ==========
Long-term debt due within one year......................... $ 622 $ 622
========== ==========
Long-term debt:
Due to affiliates........................................ $ 825,044 1,325,044
__% senior notes due 2009................................ -- 1,300,000
Other.................................................... 318,390 3,390
---------- ----------
Total long-term debt.................................. 1,143,434 2,628,434
Stockholders' equity:
Common stock, $0.01 par value per share:
________ and ________ shares authorized; 1,000 and
1,000 shares issued and outstanding................. 1
Class B common stock, $0.01 par value per share:
No shares authorized; and no shares issued and
outstanding......................................... --
Preferred stock, $0.01 par value per share:
No shares authorized; ________ shares issued or
outstanding......................................... -- --
Capital in excess of par value........................... 1,356,891
Accumulated deficit...................................... (396,153) (396,153)
Accumulated other comprehensive income................... 69,273 69,273
---------- ----------
Total stockholders' equity......................... 1,030,012 1,865,686
---------- ----------
Total capitalization............................ $2,173,446 $4,494,120
========== ==========
</TABLE>
26
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
In the table below, we provide you with historical selected consolidated
financial and operating data derived from our consolidated financial statements.
We have prepared the financial information using our consolidated financial
statements for the five years ended December 31, 1998 and the three months ended
March 31, 1999 and 1998. Our consolidated balance sheets as of December 31, 1998
and 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998 have been audited by Ernst & Young LLP, independent auditors, whose
report is based in part on the reports of Arthur Andersen S/C, independent
public accountants. When you read these historical selected consolidated
financial and operating data, it is important that you also read the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included in this prospectus.
In January 1995, Williams sold the majority of its network business to LDDS
for approximately $2.5 billion. The sale included the bulk of Williams'
nationwide fiber optic network and the associated consumer, business and carrier
customers. Williams continued to own the Retained WilTel Network, its
telecommunications equipment distribution business and Vyvx, a leading provider
of multimedia fiber transmission for the broadcast industry. The Retained WilTel
Network, along with Vyvx, Solutions and a number of acquired companies, formed
the basis for what is today our company. See Note 2 to our consolidated
financial statements for a description of acquisitions in 1996 through 1998.
Williams has contributed international communications assets to our
company. When we talk about our company and in the presentation of our financial
information, we include the international assets which Williams has contributed
to us.
We have prepared the accompanying table to reflect the historical
consolidated financial information of our company as if we had operated as a
stand alone business throughout the periods presented. The historical financial
information may not be indicative of our future performance and does not
necessarily reflect what our financial position and results of operations would
have been had we operated as a separate, stand alone entity during the periods
covered.
Pro forma earnings per share is based upon an assumed 450 million shares of
capital stock outstanding after the equity offering and the concurrent
investments and does not include any exercise of the overallotment option by the
underwriters of the equity offering or the issuance of shares of common stock
pursuant to deferred or restricted share awards or option grants under our
company's stock-based plans for directors, officers and other employees.
In connection with the equity offering, we will issue deferred shares of
our common stock and grant options to purchase our common stock to directors and
selected officers and other employees of our company and Williams. Some of the
deferred shares and options are expected to be issued or granted to electing
employees in exchange for existing deferred shares of Williams common stock or
options to purchase Williams common stock on a basis intended to preserve their
economic value and vesting and other terms. We will account for the options
granted in exchange for existing Williams options as new fixed awards and record
compensation expense over the remaining vesting period for the options based on
the difference between the initial public offering price and the exercise price
of the new options. Compensation expense for the deferred shares, whether issued
in exchange for Williams deferred shares or newly issued, will be recorded over
the remaining vesting period based on the initial public offering price. Our
accounting for these options and deferred shares is subject to change depending
upon the final guidance to be provided by the Financial Accounting Standards
Board in its Interpretation of
27
<PAGE> 31
Accounting Principles Board Opinion No. 25, which is expected to be issued later
this year. Assuming that employees elect to exchange all eligible deferred
shares and options and that the initial public offering price is at the midpoint
of the price range, we estimate that the compensation expense relating to the
options and deferred shares will be approximately $____ million over the
relevant remaining vesting periods, of which we estimate that approximately
$ ____ million will be expensed during the remainder of 1999, and approximately
$ ____ million of the remaining amount will be expensed annually in 2000, 2001
and 2002.
Included in other financial data are EBITDA amounts. EBITDA stands for
earnings before interest, taxes, depreciation and amortization. Consistent with
industry practice, we calculate EBITDA as income or loss from operations
excluding equity earnings or losses, non-recurring or unusual charges included
in operating results, and depreciation and amortization. Accordingly, EBITDA is
calculated excluding non-operating income and expense items including interest
expense, investing income, minority interest in income or loss of consolidated
subsidiaries, gains on sales of subsidiaries or assets, other non-operating
income or expense and provisions or benefits for income taxes. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that an increase in EBITDA is an
indicator of improved ability to service existing debt, to sustain potential
future increases in debt and to satisfy capital requirements. However, EBITDA is
not intended to represent cash flows for the period, nor has it been presented
as an alternative to either operating income as determined by generally accepted
accounting principles nor as an indicator of operating performance or cash flows
from operating, investing and financing activities as determined by generally
accepted accounting principles. EBITDA is thus susceptible to varying
calculations. EBITDA as presented may not be comparable to other similarly
titled measures of other companies. We expect that under our permanent credit
facility, our discretionary use of funds reflected by EBITDA will be limited in
order to conserve funds for capital expenditures and debt service.
The Statement of Operations Data reflects the following items and events
that affect comparability with other years as follows:
- In January 1995, Williams sold the majority of its network business to
LDDS for approximately $2.5 billion. The sale included the bulk of
Williams' nationwide fiber optic network and the associated consumer,
business and carrier customers. We accounted for the sale as a disposal
of a business segment and accordingly have reported the results of the
sold business as discontinued operations.
- In 1996, we recognized a gain of $15.7 million from the sale of
communications frequency rights for approximately $38.0 million.
- In April 1997, we purchased Nortel's equipment distribution business,
which we then combined with our equipment distribution business to create
Solutions LLC. This combination effectively doubled the size of our
Solutions segment. We recorded the 30% ownership reduction in our
operations contributed to Solutions LLC as a sale to Nortel and
recognized a gain of $44.5 million based on the excess of the fair value
over the net book value. In 1997, we began to recognize a minority
interest in income (loss) of subsidiaries.
- In October 1997, management and ownership of the Retained WilTel Network
were transferred from Strategic Investments to Network and intercompany
transfer pricing was established prospectively. In addition, consulting,
outsourcing and the management of Williams' internal telephone
operations, activities previously performed within Strategic Investments,
were transferred to Network. For comparative purposes, the 1996 and 1997
consulting, outsourcing and internal telephone management activities
previously performed
28
<PAGE> 32
in Strategic Investments that were transferred to Network have been
reflected in Network's segment results. See Note 3 to our consolidated
financial statements for more information regarding segment disclosures.
- Other expense in 1997 includes $44.0 million of charges primarily related
to the decision to sell our learning content business and the write-down
of assets and development expenses associated with other activities in
the Strategic Investments segment. Other expense in 1998 includes a $23.2
million loss related to exiting a venture in the Strategic Investments
segment involved in the transmission of business information for news and
educational purposes.
- Williams has historically been the primary funding source for our
activities. In 1997, most of our funding was through direct capital
contributions. Prior to 1997 and in 1998, funding included
interest-bearing related party borrowings. In 1997 and 1998, we began the
process of capitalizing interest associated with the construction of
assets.
- In the fourth quarter of 1998, we began to recognize revenues from dark
fiber sales. Dark fiber revenues for this period were $64.1 million.
Revenues from dark fiber sales for the three months ended March 31, 1999
were $51.3 million.
- Under our tax sharing arrangement with Williams, after the equity
offering we will generally receive the benefit of net operating losses
only while we remain part of Williams' consolidated tax group and only to
the extent we would be able to utilize them if we filed separate income
tax returns. If we had filed separate federal income tax returns for 1997
and 1998, the deferred federal income tax benefit would have been
increased by approximately $12.8 million and $5.6 million. These amounts
reflect the benefit of a net deferred tax asset for federal net operating
loss carryforwards to the extent of the existing net deferred tax
liability that would have been reflected by us on a separate filing
basis.
29
<PAGE> 33
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------
1999 1998 1998 1997
------------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Network................. $ 108,492 $ 21,166 $ 194,936 $ 43,013
Solutions............... 337,292 327,446 1,367,404 1,189,798
Strategic Investments... 57,985 49,868 205,047 215,583
Eliminations............ (11,767) (12,187) (50,281) (22,264)
------------ ------------ ------------ ------------
Total
revenues..... 492,002 386,293 1,717,106 1,426,130
Operating expenses:
Cost of sales........... 389,747 288,553 1,294,583 1,043,932
Selling, general and
administrative....... 122,919 103,673 487,073 323,513
Provision for doubtful
accounts............. 8,437 1,483 21,591 7,837
Depreciation and
amortization......... 27,578 18,995 84,381 70,663
Other................... 300 (342) 34,245 45,269
------------ ------------ ------------ ------------
Total operating
expenses..... 548,981 412,362 1,921,873 1,491,214
------------ ------------ ------------ ------------
Income (loss) from
operations.............. (56,979) (26,069) (204,767) (65,084)
Interest accrued.......... (10,536) (1,739) (18,650) (8,714)
Interest capitalized...... 4,135 1,739 15,575 7,781
Investing income.......... 1,025 369 1,931 670
Minority interest in
(income) loss of
subsidiaries............ 5,836 (1,460) 15,645 (13,506)
Gain on sale of interest
in subsidiary........... -- -- -- 44,540
Gain on sale of assets.... -- -- -- --
Other income (loss),
net..................... (174) (104) 178 508
------------ ------------ ------------ ------------
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Network................. $ 11,063 $ -- $ --
Solutions............... 568,072 494,940 396,883
Strategic Investments... 130,876 43,907 18,247
Eliminations............ (6,425) -- --
------------ ------------ ------------
Total
revenues..... 703,586 538,847 415,130
Operating expenses:
Cost of sales........... 517,222 402,336 316,891
Selling, general and
administrative....... 152,484 93,560 78,552
Provision for doubtful
accounts............. 2,694 2,932 3,866
Depreciation and
amortization......... 32,378 21,050 18,554
Other................... 500 (1,240) (224)
------------ ------------ ------------
Total operating
expenses..... 705,278 518,638 417,639
------------ ------------ ------------
Income (loss) from
operations.............. (1,692) 20,209 (2,509)
Interest accrued.......... (17,367) (13,999) (7,405)
Interest capitalized...... -- -- --
Investing income.......... 296 405 41
Minority interest in
(income) loss of
subsidiaries............ -- -- --
Gain on sale of interest
in subsidiary........... -- -- --
Gain on sale of assets.... 15,725 -- --
Other income (loss),
net..................... (108) 148 44
------------ ------------ ------------
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------
1999 1998 1998 1997
------------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C>
Income (loss) from
continuing operations
before income taxes..... (56,693) (27,264) (190,088) (33,805)
(Provision) benefit for
income taxes............ (17,448) 766 5,097 (2,038)
------------ ------------ ------------ ------------
Loss from continuing
operations.............. (74,141) (26,498) (184,991) (35,843)
Income from discontinued
operations.............. -- -- -- --
------------ ------------ ------------ ------------
Net income (loss)......... $ (74,141) $ (26,498) $ (184,991) $ (35,843)
============ ============ ============ ============
Historical per share data
(basic):
Loss from continuing
operations........... $ (74,141) $ (26,498) $ (184,991) $ (35,843)
Income from discontinued
operations........... $ -- $ -- $ -- $ --
Net income (loss)....... $ (74,141) $ (26,498) $ (184,991) $ (35,843)
Weighted average shares
outstanding.......... 1,000 1,000 1,000 1,000
Pro forma per share data
(basic):
Loss from continuing
operations........... $ (.16) $ (.06) $ (.41) $ (.08)
Income from discontinued
operations........... $ -- $ -- $ -- $ --
Net income (loss)....... $ (.16) $ (.06) $ (.41) $ (.08)
Weighted average shares
outstanding.......... 450,000,000 450,000,000 450,000,000 450,000,000
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C>
Income (loss) from
continuing operations
before income taxes..... (3,146) 6,763 (9,829)
(Provision) benefit for
income taxes............ (368) (8,380) (2,710)
------------ ------------ ------------
Loss from continuing
operations.............. (3,514) (1,617) (12,539)
Income from discontinued
operations.............. -- 1,018,800 94,001
------------ ------------ ------------
Net income (loss)......... $ (3,514) $ 1,017,183 $ 81,462
============ ============ ============
Historical per share data
(basic):
Loss from continuing
operations........... $ (3,514) $ (1,614) $ (12,539)
Income from discontinued
operations........... $ -- $ 1,018,800 $ 94,001
Net income (loss)....... $ (3,514) $ 1,017,183 $ 81,462
Weighted average shares
outstanding.......... 1,000 1,000 1,000
Pro forma per share data
(basic):
Loss from continuing
operations........... $ (.01) $ -- $ (.03)
Income from discontinued
operations........... $ -- $ 2.26 $ .21
Net income (loss)....... $ (.01) $ 2.26 $ .18
Weighted average shares
outstanding.......... 450,000,000 450,000,000 450,000,000
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------
1999 1998 1998 1997
------------- ------------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA.................... $ (19,242) $ (5,595) $ (80,873) $ 52,005
Ratio of earnings to fixed
charges................. -- -- -- --
(Deficiency) excess of
earnings to cover fixed
charges................. $ (56,505) $ (26,064) $ (204,945) $ (25,697)
Net cash provided by (used
in) operating
activities.............. (90,225) (109,877) (363,833) 147,858
Net cash provided by
financing activities.... 587,656 222,691 890,623 225,953
Net cash used in investing
activities.............. (442,588) (112,491) (496,076) (363,494)
Capital expenditures...... 151,238 110,117 299,481 276,249
BALANCE SHEET DATA:
Working capital........... $ 501,447 $ 253,495 $ 330,533 $ 150,965
Net assets of discontinued
operations.............. -- -- -- --
Property, plant and
equipment, net.......... 781,324 503,091 695,725 407,652
Total assets.............. 2,868,859 1,557,337 2,333,484 1,506,034
Long-term debt, including
long-term debt due
within one year......... 1,144,056 128,708 624,420 126,941
Total liabilities......... 1,838,847 594,036 1,330,864 643,332
Total stockholders'
equity.................. 1,030,012 963,301 1,002,620 862,702
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA.................... $ 32,287 $ 41,331 $ 15,802
Ratio of earnings to fixed
charges................. -- 1.43 --
(Deficiency) excess of
earnings to cover fixed
charges................. $ (1,545) $ 6,856 $ (9,829)
Net cash provided by (used
in) operating
activities.............. (1,775) 34,144 41,389
Net cash provided by
financing activities.... 226,009 47,022 27,764
Net cash used in investing
activities.............. (224,186) (81,189) (58,844)
Capital expenditures...... 66,900 32,412 12,616
BALANCE SHEET DATA:
Working capital........... $ 145,865 $ 80,989 $ 64,110
Net assets of discontinued
operations.............. -- -- 743,622
Property, plant and
equipment, net.......... 174,091 98,128 70,415
Total assets.............. 721,687 413,630 1,086,329
Long-term debt, including
long-term debt due
within one year......... 2,702 189,031 164,067
Total liabilities......... 194,434 319,409 340,831
Total stockholders'
equity.................. 527,253 94,221 745,498
</TABLE>
32
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes included in this
prospectus. You can find additional information concerning our businesses and
strategic investments and alliances in the section of this prospectus entitled
"Business."
OVERVIEW
We own, operate and are extending a nationwide fiber optic network and
provide a comprehensive array of communications products and services for
organizations of all sizes through our business units, Network and Solutions.
Through our third business unit, Strategic Investments, we make investments in,
or own and operate, domestic and foreign businesses that create demand for
capacity on the Williams Network, increase our service capabilities, strengthen
our customer relationships, develop our expertise in advanced transmission
electronics or extend our reach. We also enter into strategic alliances with
communications companies to secure long-term, high-capacity commitments for
traffic on the Williams Network and to enhance our service offerings.
In January 1995, Williams sold the majority of its network business to LDDS
for approximately $2.5 billion. The sale included the bulk of Williams'
nationwide fiber optic network and the associated consumer, business and carrier
customers. Williams continued to own the Retained WilTel Network, its
telecommunications equipment distribution business and Vyvx. The Retained WilTel
Network, along with Vyvx, Solutions and a number of acquired companies, formed
the basis for what is today our company. See Note 2 to our consolidated
financial statements for a description of acquisitions in 1996 through 1998.
Williams has contributed international communications assets to our
company. When we talk about our company and in the presentation of our financial
information, we include the international assets which Williams has contributed
to us.
In October 1997, management and ownership of the Retained WilTel Network
were transferred from Strategic Investments to Network and intercompany transfer
pricing was established prospectively. In addition, consulting, outsourcing and
the management of Williams' internal telephone operations, activities previously
performed within Strategic Investments, were transferred to Network. For
comparative purposes, the 1996 and 1997 consulting, outsourcing and internal
telephone management activities previously performed in Strategic Investments
that were transferred to Network have been reflected in Network's segment
results. See Note 3 to our consolidated financial statements for more
information regarding segment disclosure.
Our consolidated financial statements and this section have been prepared
to reflect the historical consolidated financial information of our company as
if we had operated as a stand alone business throughout the periods presented.
As a result of the expansion of our fiber optic network, we expect a
significant change in our revenue mix over the next few years. In 1998, Network
contributed approximately 11% of our total consolidated revenues, Solutions
contributed approximately 80% of our total consolidated revenues and Strategic
Investments primarily contributed the remainder. Beginning in 1999, we expect
Network to contribute an increasing percentage of our total consolidated
revenues and by 2001 we expect Network to contribute the largest percentage of
our revenues and to be the primary source of our income from operations on a
consolidated basis. Over the next few years revenue increases in Solutions are
expected to be modest, with higher revenue growth expected during the same
period in Strategic Investments.
33
<PAGE> 37
NETWORK
Our Network business consists of network services and sales of dark fiber.
Network's services include:
- packet-based data services
- private line services
- voice services
- local services
- dim fiber leases
- network design and operational support
These services are provided under capacity service arrangements. Capacity
service arrangements typically have terms ranging from months to many years.
Pricing is generally based on the amount of capacity provided, minutes of use,
distance of communication, jurisdiction regulating the service and other
factors, and is often based on a form of agreement which requires minimum
payments regardless of the amount of service used. These agreements are known as
take-or-pay commitments. Customers are typically billed for capacity services on
a monthly basis and the agreements generally have payment terms of 30 days.
Network's revenues also include intercompany and affiliate revenues for our
management of Williams' internal telephone operations and our management of the
Retained WilTel Network. We also intend to engage in transactions that allow a
customer exclusive long-term use of a portion of the transmission capacity of a
fiber optic strand, rather than the entire fiber strand. These transactions are
called dim fiber leases.
Beginning in 1998, our revenues also included dark fiber sales. A dark
fiber sale conveys rights to use strands of fiber optic cable on the Williams
Network with the purchaser providing its own optical equipment to transmit light
signals over the fiber optic strands. An agreement for a dark fiber sale
typically has a term which approximates the economic life of a fiber optic
strand, which is generally 20 to 30 years. Usually, the customer pays for the
dark fiber with a down payment due upon execution of the agreement and the
balance due upon delivery to and acceptance by the customer of the fiber.
Revenue is generally recorded at the time of delivery and acceptance of the
fiber. The customer also pays for the use of equipment space in sites along the
route of the fiber optic cable and for Network's maintenance of the cable.
Network's cost of sales for capacity service arrangements include off-net
capacity costs, which are costs of network capacity attributable to using other
carrier networks, local access costs, which are the costs of connecting the
Williams Network to customer locations via local access facilities, and
operations and maintenance personnel costs. Construction costs associated with
the sale of dark fiber primarily include cable installation, construction of
buildings to house equipment, acquisition of rights-of-way and real estate
purchase costs determined on an average cost basis for the applicable portion of
the network route sold.
As a result of our expansion of the Williams Network and as a result of our
alliances with SBC, Intel and Telmex, we expect a significant change in our
Network revenue mix over the next few years. In 1998, approximately 33% of total
Network revenues were generated from sales of dark fiber. We expect that the
percentage of total Network revenues attributable to dark fiber sales will
increase in 1999 but will decrease as a percentage of total Network revenues
after 1999. By 2001, Network revenues are expected to consist primarily of
switched voice and data services.
34
<PAGE> 38
SOLUTIONS
Solutions' revenues primarily consist of sales and installation of voice
and data communications equipment and the service and maintenance of this
equipment. Revenues from voice equipment are derived from sales of private
branch exchange systems and key systems and the applications and upgrades
associated with these systems. A private branch exchange system is a switching
system within an office building which allows calls from outside the building to
be routed to the individual instead of through a central number. A key system is
an on-site telephone system for smaller organizations. Like a private branch
exchange system, a key system switches calls to and from the public network as
well as within an organization. Applications and upgrades associated with these
systems include voice messaging and call centers. Revenues from data equipment
consist mainly of the sale of routers, switches, hubs and other equipment that
comprise corporate networks.
We expect the provision of professional services will generate an
increasing portion of Solutions' revenue growth. Professional services include
enterprise data network design and maintenance, call center design and
installation and Internet network design and implementation. Professional
services are typically higher margin services due to the increased complexity
and expertise required. These services are billed in one of three ways:
- as part of an equipment or network package
- separately as a contract
- separately on an hourly basis
Solutions' cost of sales consists primarily of cost of goods, labor costs
for design and installation and operations and maintenance personnel costs.
Issues relating to Solutions' business performance. Solutions' sales and
operating losses were $1.37 billion and $59.0 million in 1998 compared to sales
and operating income of $1.19 billion and $37.1 million in 1997. In April 1997,
we purchased Nortel's equipment distribution business, which we then combined
with our equipment distribution business to create Solutions LLC. On a pro forma
basis assuming the two businesses had been combined for the entire year, sales
and operating income would have been $1.44 billion and $45.6 million in 1997. We
have experienced difficulties in integrating our equipment distribution business
with Nortel's equipment distribution business and in managing the increased
complexity of our business. These difficulties include:
- inability to operate and manage our business effectively with the
multiple non-integrated management information systems which we have as a
result of the combination with Nortel as well as acquisition activity by
both us and Nortel prior to our business combination
- insufficient resources at management levels to manage the operations and
finances of the combined business
- management turnover
- sales force turnover, including the loss of approximately 200 sales
representatives, or approximately 25% of our total of approximately 850
sales representatives, in the first quarter of 1998
- inability to accurately track customers' orders, billings and collections
- lack of brand recognition due to the change from the "WilTel" and
"Nortel" names
- lower customer satisfaction due to service and delivery disruptions and
billing errors
- inability to manage employee productivity and achieve operational
efficiencies
- inability to accurately track selling, general and administrative
expenses
35
<PAGE> 39
- inability to accurately calculate sales compensation in a timely manner
- increased selling, general and administrative costs
Solutions' operating results in 1998 were also negatively affected by the
expansion of our professional services business, which led to increased
administrative costs for 1998 without the corresponding revenue benefit we would
expect from this expenditure going forward.
We are taking the following initiatives to address these issues:
- implementing standard operating and financial management information
systems throughout our organization, a process which will continue
throughout 1999
- continuing to rebuild our sales force by adding approximately 200 sales
representatives in 1998, correcting sales compensation issues and
implementing sales training and development programs
- adding additional resources to address internal control issues
- realignment of our administrative and operating functions in the fourth
quarter of 1998, eliminating approximately $19 million of annualized
overhead costs
- hiring an external marketing consulting company and investing in an
advertising campaign, both of which will assist us in establishing brand
awareness and improving sales productivity
These and other initiatives began in the second quarter of 1998 and are
continuing throughout 1999. However, we expect that our financial results in
1999 will continue to be adversely affected by the difficulties outlined above.
STRATEGIC INVESTMENTS
We make investments in, or own and operate, companies that create demand
for capacity on the Williams Network, increase our service capabilities,
strengthen our customer relationships, develop our expertise in advanced
transmission electronics or extend our reach. We have investments in Concentric
Network Corporation, UniDial Communications, Inc. and UtiliCom Networks Inc. Our
investments in these three domestic companies represent less than a 20%
ownership, and accordingly we account for these investments using the cost
method of accounting. Under the cost method, our financial results are not
impacted by our percentage ownership interest in the results and operations of
these companies.
Williams has contributed to us its interests in communications ventures in
Brazil, Australia and Chile. Our financial results include the international
assets. Our investment in Brazil is accounted for under the equity method. Our
investment in Australia is consolidated. We account for our investment in Chile
under the cost method. In addition, Williams has granted us an option to acquire
its entire equity and debt interests in Lightel S.A. -- Tecnologia da
Informacao, a Brazilian telecommunications company, at net book value. We may
exercise this option at any time from January 1, 2000 to January 1, 2001 and pay
the exercise price entirely in our Class B common stock. See the section of this
prospectus entitled "Business -- Strategic
Investments -- International -- Lightel" for more information.
For segment reporting purposes, equity losses are accounted for as a
reduction of revenues and equity income is accounted for as an increase in
revenues.
In addition, revenues from Strategic Investments are derived from Vyvx and
other businesses which we own and operate. These businesses provide:
- distribution of video and audio signals of televised sports and news
events from live events to television networks
- distribution of advertisements and other media to local television
stations
36
<PAGE> 40
- audio and video conferencing services
- closed-circuit video broadcasting services for businesses
Strategic Investments' cost of sales consists primarily of off-net capacity
costs and operations and maintenance personnel costs.
Management is currently assessing some of the business activities within
Strategic Investments which may ultimately result in the impairment of or the
sale of these businesses. Although our evaluation of the future cash flows
attributable to the assets contemplated for possible sale continues to support
the carrying value of these assets, based on our expectation of the selling
price less costs to sell the assets, if such sale occurs, it could result in
losses of up to $30 million. No definitive agreements or formal plans have been
reached relating to the businesses under review.
RESULTS OF OPERATIONS
In order to meet our strategic objectives, we must increase substantially
the volume of traffic on the Williams Network. As a result, we do not believe
that our financial condition or results of operations for prior years serve as a
meaningful indication of our future financial condition or results of
operations. We expect to incur substantial net operating losses for the
foreseeable future and there can be no assurance that we will be able to achieve
or sustain operating profitability in the future.
The table below summarizes our percentage of revenue by source and
operating expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ---------------------------
1999 1998 1998 1997 1996
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Network.......................... 22.0% 5.5% 11.4% 3.0% 1.6%
Solutions........................ 68.6 84.8 79.6 83.4 80.7
Strategic investments............ 11.8 12.9 11.9 15.1 18.6
Eliminations..................... (2.4) (3.2) (2.9) (1.5) (0.9)
----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of sales.................... 79.2 74.7 75.4 73.2 73.5
Selling, general and
administrative................ 25.0 26.8 28.4 22.7 21.7
Provision for doubtful
accounts...................... 1.7 0.4 1.3 0.5 0.4
Depreciation and amortization.... 5.6 4.9 4.9 5.0 4.6
Other............................ 0.1 (0.1) 2.0 3.2 0.1
----- ----- ----- ----- -----
Total operating expenses...... 111.6 106.7 112.0 104.6 100.3
----- ----- ----- ----- -----
Loss from operations............... (11.6)% (6.7)% (12.0)% (4.6)% (0.3)%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
CONSOLIDATED RESULTS
We experienced a net loss of $74.1 million for the three months ended March
31, 1999 compared to a net loss of $26.5 million for the three months ended
March 31, 1998, an increase of $47.6 million from the prior period. The increase
in net loss included an increase in losses from operations of $30.9 million and
increased net interest expense of $6.4 million, somewhat offset by a change in
minority interest results of $7.3 million. Net loss was also increased by $17.6
million of deferred taxes pursuant to our tax sharing agreement with Williams
and an
37
<PAGE> 41
increase in losses from operations. The depreciation scheduled in 1999 on the
Williams Network results in a significant deferred tax expense for us in 1999
with no current benefit for the net operating losses generated under the tax
sharing agreement. Our provision for taxes for the three months ended March 31,
1999 increased $18.2 million from a benefit of $0.8 million for the three months
ended March 31, 1998 to a provision of $17.4 million for the three months ended
March 31, 1999.
Network accounted for $9.6 million of the increase in losses from
operations, Solutions accounted for $10.7 million of the increase in losses from
operations and Strategic Investments accounted for $10.6 million of the increase
in losses from operations. We discuss these results in detail below by segment.
NETWORK
The table below summarizes Network's results for the three months ended
March 31, 1999 and 1998 and for the last three fiscal years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ------------------------------
1999 1998 1998 1997 1996
-------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Dark fiber sales................... $ 51,321 $ -- $ 64,100 $ -- $ --
Leased capacity and other.......... 42,129 7,218 73,367 16,637 --
Intercompany....................... 11,633 12,070 49,759 21,159 6,145
Affiliates......................... 3,409 1,878 7,710 5,217 4,918
-------- ------- -------- -------- --------
Total revenues.................. 108,492 21,166 194,936 43,013 11,063
Operating expenses:
Cost of sales...................... 102,642 16,464 157,379 29,211 4,681
Selling, general and
administrative.................. 17,994 10,778 51,499 6,512 632
Provision for doubtful accounts.... 10 36 136 -- --
Depreciation and amortization...... 5,800 2,235 13,228 4,012 --
Other.............................. 2 -- 410 -- --
-------- ------- -------- -------- --------
Total operating expenses........ 126,448 29,513 222,652 39,735 5,313
-------- ------- -------- -------- --------
Income (loss) from operations........ $(17,956) $(8,347) $(27,716) $ 3,278 $ 5,750
======== ======= ======== ======== ========
</TABLE>
Network's revenues increased $87.3 million, or 412%, to $108.5 million for
the three months ended March 31, 1999 from $21.2 million for the same period in
1998. The increase was due primarily to $51.3 million of revenues from the sale
of dark fiber and $32.0 million of revenues from services provided to customers
of the Williams Network.
Network's gross profit increased to $5.9 million for the three months ended
March 31, 1999 from $4.7 million for the same period in 1998 while gross margin
decreased to 5.4% for the three months ended March 31, 1999 from 22.2% for the
three months ended March 31, 1998. Network's cost of sales increased $86.2
million, or 524%, to $102.6 million for the three months ended March 31, 1999
from $16.4 million for the same period in 1998, due primarily to $40.8 million
of construction costs associated with the sale of dark fiber, $29.4 million of
higher off-net capacity costs incurred prior to the completion of the Williams
Network and $5.9 million of higher operating and maintenance expenses.
Network's selling, general and administrative expenses increased $7.2
million, or 67%, to $18.0 million for the three months ended March 31, 1999 from
$10.8 million for the same period
38
<PAGE> 42
in 1998, due primarily to an increase in the number of employees and the
expansion of the infrastructure to support the Williams Network.
Network's depreciation and amortization increased $3.6 million, or 160%, to
$5.8 million for the three months ended March 31, 1999 from $2.2 million for the
same period in 1998, reflecting the impact of completing the construction of
various segments of the Williams Network.
SOLUTIONS
The table below summarizes Solutions' results for the three months ended
March 31, 1999 and 1998 and for the last three fiscal years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------
1999 1998 1998 1997 1996
-------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
New systems and upgrades....... $193,610 $179,587 $ 791,518 $ 674,604 $306,110
Maintenance and customer
service orders.............. 137,721 145,254 556,392 508,319 251,221
Other.......................... 4,717 1,835 16,029 5,363 9,379
Affiliates..................... 1,244 770 3,465 1,512 1,362
-------- -------- ---------- ---------- --------
Total revenues.............. 337,292 327,446 1,367,404 1,189,798 568,072
Operating expenses:
Cost of sales.................. 246,769 241,365 1,009,475 881,112 435,490
Selling, general and
administrative.............. 82,551 76,631 355,014 234,615 105,891
Provision for doubtful
accounts.................... 8,079 778 19,231 5,622 1,526
Depreciation and
amortization................ 10,571 9,018 36,637 30,142 16,023
Other.......................... 263 (132) 6,013 1,255 255
-------- -------- ---------- ---------- --------
Total operating expenses.... 348,233 327,660 1,426,370 1,152,746 559,185
-------- -------- ---------- ---------- --------
Income (loss) from operations.... $(10,941) $ (214) $ (58,966) $ 37,052 $ 8,887
======== ======== ========== ========== ========
</TABLE>
Solutions' revenues increased $9.8 million, or 3%, to $337.3 million for
the three months ended March 31, 1999 from $327.5 million for the same period in
1998. Increases in new systems and upgrades as well as increases in professional
services were offset by decreases in maintenance and customer service orders.
The increase in professional services is primarily attributable to the October
1998 acquisition of Computer Networking Group, Inc.
Solutions' gross profit increased to $90.5 million for the three months
ended March 31, 1999 from $86.1 million for the same period in 1998, while gross
margin increased to 26.8% for the three months ended March 31, 1999 from 26.3%
for the same period in 1998. Solutions' cost of sales increased $5.4 million, or
2.2%, to $246.8 million for the three months ended March 31, 1999 from $241.4
million for the same period in 1998, due primarily to the increased revenue.
Solutions' selling, general and administrative expenses increased $5.9
million, or 8%, to $82.6 million for the three months ended March 31, 1999 from
$76.6 million for the same period in 1998. Cost reduction initiatives
implemented in the fourth quarter of 1998 were offset by higher costs
attributable to the CNG acquisition and expansion of the professional services
business.
Solutions' provision for doubtful accounts increased $7.3 million to $8.1
million for the three months ended March 31, 1999 from $0.8 million for the same
period in 1998. The increase in
39
<PAGE> 43
the provision reflects adjustments to our reserves based on unresolved billing
and collection issues.
Solutions' depreciation and amortization increased $1.6 million, or 17%, to
$10.6 million for the three months ended March 31, 1999 from $9.0 million for
the same period in 1998, due primarily to the CNG acquisition and depreciation
related to systems infrastructure.
STRATEGIC INVESTMENTS
The table below summarizes Strategic Investments' results for the three
months ended March 31, 1999 and 1998 and for the last three fiscal years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------
1999 1998 1998 1997 1996
-------- -------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Vyvx services.................. $ 39,287 $ 40,130 $ 161,201 $ 162,009 $ 99,974
PowerTel....................... 11,542 -- 11,248
ATL and other equity losses.... (10,159) (1,479) (16,363) (2,383) (1,601)
Other.......................... 17,315 11,217 48,961 55,957 32,503
-------- -------- --------- --------- ---------
Total revenues.............. 57,985 49,868 205,047 215,583 130,876
Operating expenses:
Cost of sales.................. 52,103 42,911 178,010 155,873 83,476
Selling, general and
administrative.............. 22,373 16,262 80,560 82,386 45,961
Provision for doubtful
accounts.................... 348 669 2,224 2,215 1,168
Depreciation and
amortization................ 11,207 7,742 34,516 36,509 16,355
Other.......................... 36 (208) 27,822 44,014 245
-------- -------- --------- --------- ---------
Total operating expenses.... 86,067 67,376 323,132 320,997 147,205
-------- -------- --------- --------- ---------
Loss from operations............. $(28,082) $(17,508) $(118,085) $(105,414) $ (16,329)
======== ======== ========= ========= =========
</TABLE>
Strategic Investments' revenues increased $8.1 million, or 16%, to $58.0
million for the three months ended March 31, 1999 from $49.9 million for the
same period in 1998. The increase is primarily attributable to $11.5 million in
international activity as a result of the August 1998 acquisition of PowerTel
and $6.2 million in increases related to audio and video conferencing and
closed-circuit video broadcasting services for businesses. These increases are
offset by $8.7 million of increased equity losses attributable to the March 1998
investment in ATL-Algar Telecom Leste S.A. As described in Note 7 of notes to
the financial statements, our equity losses for the three months ended March 31,
1999 decreased by $12.5 million compared to the same period in 1998 as a result
of the adoption of a new accounting pronouncement which became effective January
1, 1999. For segment reporting purposes, equity losses are reported as
reductions of revenues and equity income is accounted for as an increase in
revenues.
Strategic Investments' gross profit decreased to $5.9 million for the three
months ended March 31, 1999 from $7.0 million for the same period in 1998, while
gross margin decreased to 10.1% for the three months ended March 31, 1999 from
14.0% for the same period in 1998. Strategic Investments' cost of sales
increased $9.2 million, or 21%, to $52.1 million for the three months ended
March 31, 1999 from $42.9 million for the same period in 1998, primarily due to
$11.7 million in increased costs attributable to the August 1998 acquisition of
PowerTel.
Strategic Investments' selling, general and administrative expenses
increased $6.1 million, or 38%, to $22.4 million for the three months ended
March 31, 1999 from $16.3 million for the
40
<PAGE> 44
same period in 1998, primarily as a result of the $5.3 million impact of the
August 1998 acquisition of PowerTel.
CONSOLIDATED NON-OPERATING COSTS
Our net interest expenses for the three months ended March 31, 1999
increased $6.4 million from the same period of the prior year as interest
expense incurred to finance operations and capital expenditures exceeded amounts
capitalized for the quarter by $6.4 million. Our minority interest (income) loss
is attributable to Nortel's 30% ownership of Solutions LLC as well as the other
stockholders' 78% ownership of PowerTel. The change in minority interest
resulted in an increase in income for the three months ended March 31, 1999 of
$5.8 million compared to a reduction in income for the same period in 1998 of
$1.5 million. The 1999 amount attributable to Nortel is $2.7 million and the
1999 amount attributable to PowerTel is $3.1 million. In 1998, the minority
interest amount was all attributable to Nortel.
For the three months ended March 31, 1999, we recorded a tax provision of
$17.4 million, compared to a tax benefit of $0.8 million for the same period in
1998. The increase in our tax provision is primarily due to an increase in our
deferred taxes pursuant to our tax sharing agreement with Williams. The
depreciation of the Williams Network that has begun resulted in a significant
deferred tax expense for us in 1999 with no current benefit for the net
operating losses generated under the tax sharing agreement. Under our tax
sharing agreement with Williams, after the equity offering we will generally
receive the benefit of net operating losses only while we remain part of the
Williams consolidated tax group and only to the extent we would be able to
utilize them if we filed separate income tax returns.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED RESULTS
We experienced a net loss of $185.0 million in 1998 compared to a net loss
of $35.8 million in 1997, an increase of $149.2 million from 1997. The increase
in our net loss is primarily attributable to an increase in losses from
operations of $139.7 million, which we discuss in detail below by segment. The
increase in net loss is offset somewhat by a change in minority interest results
of $29.2 million and a tax benefit of $5.1 million compared with a tax expense
of $2.0 million in 1997. Our 1997 results were also affected by the occurrence
of a $44.5 million non-recurring gain on the sale of a 30% interest in Solutions
LLC to Nortel.
Network accounted for $31.0 million of the increase in losses from
operations, Solutions accounted for $96.0 million of the increase in losses from
operations and Strategic Investments accounted for $12.7 million of the increase
in losses from operations.
NETWORK
Network's revenues increased $151.9 million, or 353%, to $194.9 million in
1998 from $43.0 million in 1997. The increase in 1998 was due primarily to $64.1
million of revenues from the sale of dark fiber, $49.5 million of revenues from
services provided to new long-term customers of the Williams Network and $28.6
million higher intercompany revenues following the transfer of the Retained
WilTel Network from Applications to Network in October 1997 and the
establishment of intercompany transfer pricing.
Network's gross profit increased to $37.6 million in 1998 from $13.8
million in 1997, while gross margin decreased to 19.2% in 1998 from 32.1% in
1997. Network's cost of sales increased $128.2 million, or 439%, to $157.4
million in 1998 from $29.2 million in 1997, due primarily to $38.5 million of
construction costs associated with the sale of dark fiber, $54.8 million of
off-net capacity costs incurred prior to completion of the Williams Network and
$17.1 million of higher
41
<PAGE> 45
operating and maintenance expenses. Costs associated with higher intercompany
revenues primarily account for the remainder of the increased cost.
Network's selling, general and administrative expenses increased $45.0
million, or 692%, to $51.5 million in 1998 from $6.5 million in 1997, due
primarily to an increase in the number of employees and the expansion of the
infrastructure to support the Williams Network, including $8.0 million of
increased information systems costs and $8.0 million for a new national
advertising campaign.
Network's depreciation and amortization increased $9.2 million, or 230%, to
$13.2 million in 1998 from $4.0 million in 1997, due to the transfer of the
Retained WilTel Network from Strategic Investments to Network.
SOLUTIONS
In 1997 and 1998, several integration issues relating to the combination of
Nortel's equipment distribution business with ours had an adverse impact on
Solutions' operating results. Although these issues began in 1997, our financial
results were not materially adversely impacted until 1998. See the section above
entitled "-- Overview -- Solutions -- Issues relating to Solutions' business
performance." Write-offs of previously capitalized software costs in favor of
new systems, end of the year severance plans and the modification of an employee
benefit plan also had an adverse impact on the operating results. Consequently,
Solutions' total segment operating results declined from operating income of
$37.1 million in 1997 to an operating loss of $59.0 million in 1998.
Solutions' revenues increased $177.6 million, or 15%, to $1.37 billion in
1998 from $1.19 billion in 1997, due primarily to an increase of $195.5 million
arising from the additional four months of combined operations with Nortel's
equipment distribution business in 1998 as compared to 1997. While maintenance
contract revenues increased in 1998, the increase was offset by a reduction in
new system sales and fewer customer service orders due, in part, to competitive
pressures and the integration issues discussed above. See the section above
entitled "-- Overview -- Solutions -- Issues relating to Solutions' business
performance."
Solutions' gross profit increased to $357.9 million in 1998 from $308.7
million in 1997, while gross margin increased to 26.2% in 1998 from 25.9% in
1997. Solutions' cost of sales increased $128.4 million, or 15%, to $1.01
billion in 1998 from $881.1 million in 1997, due primarily to an increase of
$121.0 million arising from an additional four months of combined operations
with Nortel in 1998 as compared to 1997. $49.4 million of the increased costs
are attributable to direct costs associated with new systems and upgrades
revenues and $43.5 million of the increased costs are direct costs associated
with maintenance and customer service orders revenues. $31.6 million of the
increased costs are attributable to higher indirect costs which are primarily
attributable to maintenance and customer service orders revenues.
Solutions' selling, general and administrative expenses increased $120.4
million, or 51%, to $355.0 million in 1998 from $234.6 million in 1997. The
increase was due to an increase of $48.4 million arising from an additional four
months of combined operations with Nortel. Also contributing to the increase was
$23.0 million of increased information systems costs associated with
infrastructure expansion and enhancement and the continued costs of maintaining
multiple systems while common systems were being developed. In addition, $36.0
million of increased costs was due to additions to sales personnel and support
staff and higher sales commission rates than anticipated. Selling, general and
administrative costs in 1998 also included fourth quarter charges of $8.7
million. The charges consisted of $5.8 million related to the modification of
Solutions' employee benefits program to increase the number of vested days in
the new paid time off policy, including a change with regard to sick pay. The
remaining charge of $2.9 million was
42
<PAGE> 46
for the severance of 133 employees who were terminated in December 1998 and to
whom we paid severance benefits during January 1999. Additionally, an expansion
of our professional services business increased administrative expenses.
Provision for doubtful accounts increased $13.6 million, or 242%, to $19.2
million in 1998 from $5.6 million in 1997. This increase was due to our
inability to accurately bill our customers and to collect payment from our
customers in a timely manner.
Solutions' depreciation and amortization increased $6.5 million, or 22%, to
$36.6 million in 1998 from $30.1 million in 1997, due primarily to an increase
of $5.4 million arising from an additional four months of combined operations
with Nortel in 1998 as compared to 1997. The combination with Nortel resulted in
additional goodwill of approximately $180.0 million which is being amortized
over 25 years, resulting in annual amortization expense of approximately $7.2
million.
Solutions' other operating expense increased $4.7 million, or 379%, to $6.0
million in 1998 from $1.3 million in 1997, due primarily to a fourth quarter
non-cash charge of $5.6 million related to the abandonment of capitalized
software costs in favor of new systems.
STRATEGIC INVESTMENTS
Strategic Investments' revenues decreased $10.5 million, or 5%, to $205.0
million in 1998 from $215.6 million in 1997, due primarily to the $13.7 million
impact of exiting our learning content business. In late 1997, we decided to
sell our learning content business. During 1998, a substantial portion of the
learning content business was sold at its approximate carrying value. Partially
offsetting the decline in revenues was a $9.1 million increase from audio and
video conferencing and closed-circuit video broadcasting services for
businesses.
ATL-Algar Telecom Leste S.A. is a company formed in March 1998 to acquire a
concession for cellular licenses in Brazil in the states of Rio de Janeiro and
Espirito Santo. As of March 31, 1999, following the contribution from Williams,
our investment in ATL totaled $415 million, representing a 55% economic
interest, an option for an additional 10% economic interest, a 49% voting
interest and an option for an additional 30% voting interest. On March 25, 1999,
Williams pledged 49% of its common and all of its preferred stock as collateral
for a U.S. dollar-denominated $521 million loan from Ericsson Project Finance AB
to ATL. The loan matures on March 25, 2002.
For segment reporting purposes, equity losses are accounted for as a
reduction of revenues and equity income is accounted for as an increase in
revenues. Accordingly, the table above reflects 1998 equity losses in ATL of
$12.7 million. ATL incurred significant pre-operational losses in the
construction of a digital cellular network in 1998.
PowerTel Limited is a public company in Australia which plans to build, own
and operate communications networks serving the cities of Brisbane, Melbourne
and Sydney and which plans to provide local services in the central business
districts of these three cities. Following the contribution from Williams, our
total investment will represent a 36% economic interest in PowerTel, which will
increase to 45% after we make all of our required cash contributions of $65
million. Williams will also transfer to us options which, if exercised, would
increase our interest by 4%. PowerTel's revenues for the period from Williams'
investment on August 14, 1998 through December 31, 1998 consisted of fixed
telephone line revenues of $7.3 million and cellular phone revenues of $3.9
million. Since PowerTel is accounted for under the principles of consolidation
despite our less than 50% ownership, our consolidated financial statements
reflect revenues of $11.2 million and operating expenses of $14.5 million.
43
<PAGE> 47
Strategic Investments' gross profit decreased to $27.0 million in 1998 from
$59.7 million in 1997, while gross margin decreased to 13.2% in 1998 from 27.7%
in 1997. Strategic Investments' cost of sales increased $22.1 million, or 14%,
to $178.0 million in 1998 from $155.9 million in 1997, due primarily to $15.0
million of costs relating to the existence of intercompany transfer pricing
following the transfer of the Retained WilTel Network to Network in October 1997
and $9.9 million due to our investment in PowerTel. Cost of sales of PowerTel
included $6.8 million related to fixed telephone line revenues and $3.1 million
related to cellular telephone revenues. Other changes in Strategic Investments'
cost of sales included the $6.7 million impact of increased activity in audio
and video conferencing and closed-circuit video broadcasting services, partially
offset by $5.6 million in lower costs as a result of our exiting the learning
content business.
Strategic Investments' selling, general and administrative expenses
decreased $1.8 million, or 2%, to $80.6 million in 1998 from $82.4 million in
1997, due primarily to our exiting the learning content business, partially
offset by $3.7 million in expenses related to PowerTel.
Strategic Investments' depreciation and amortization decreased $2.0
million, or 5%, to $34.5 million in 1998 from $36.5 million in 1997, due
primarily to the absence of depreciation and amortization of $3.9 million
associated with our exiting the learning content business. Decreases in
depreciation associated with the transfer of the Retained WilTel Network to
Network in October 1997 were offset by increases related to new video and
teleport equipment. Depreciation and amortization related to PowerTel totaled
$0.9 million.
Strategic Investments' other operating expense decreased $16.2 million, or
37%, to $27.8 million in 1998 from $44.0 million in 1997. The 1998 amount
included a $23.2 million write-down related to our abandonment of a venture
involved in the technology and transmission of business information. The
write-down occurred as a result of our decision to exit the venture and not to
make further investments in the venture. The write-down was recorded in the
third quarter and we abandoned the venture during the fourth quarter. The
write-down primarily consisted of $17.0 million from the impairment of the total
carrying value of the investment and $5.0 million from the recognition of
contractual obligations that continued after the abandonment. During the fourth
quarter of 1998, $2.0 million of these contractual obligations were paid. Other
operating expenses in 1997 included charges totaling $44.0 million related to
our decision and commitment to sell the learning content business ($22.7
million) and the write-down of assets and development costs. The write-down of
assets and development costs was a result of management's evaluation of certain
business activities because of indications that their carrying values might not
be recoverable.
CONSOLIDATED NON-OPERATING COSTS
Our net interest expense increased $2.1 million to $3.0 million in 1998
from $0.9 million in 1997 as a result of our increased borrowings in 1998
compared to 1997, and was offset somewhat by increased capitalization of
interest related to assets under construction. Our cash from financing
activities increased $664.7 million, or 294%, to $890.6 million in 1998 from
$225.9 million in 1997. Most of our 1998 funding was provided by borrowings from
Williams, while most of our 1997 funding was provided by capital contributions
from Williams.
Our minority interest (income) loss is attributable to Nortel's 30%
ownership of Solutions LLC as well as the other stockholders' 78% ownership of
PowerTel. The change in minority interest resulted in an increase in income in
1998 of $15.6 million compared to a reduction of income in 1997 of $13.5
million. This change of $29.1 million was due primarily to operating losses
attributable to Solutions in 1998 as compared to operating profit in 1997. In
1997, we
44
<PAGE> 48
recognized a $44.5 million gain on the sale of a 30% ownership in Solutions LLC
to Nortel based on the excess of the fair value over the net book value of the
assets conveyed to Nortel.
In 1998, we recorded a tax benefit of $5.1 million compared to a tax
provision of $2.0 million in 1997. The notes to our consolidated financial
statements include a reconciliation of the expected benefit for income taxes at
the federal statutory rate to the actual provision or benefit. In 1998, the
expected benefit was largely offset by unused operating losses.
Under our tax sharing agreement with Williams, after the equity offering we
will generally receive the benefit of net operating losses only while we remain
part of Williams' consolidated tax group and only to the extent we would be able
to utilize them if we filed separate income tax returns. If we had filed
separate federal income tax returns for 1997 and 1998, the provision (benefit)
for income taxes would generally be unchanged for 1997, and for 1998 the
deferred federal income tax benefit would have been increased by approximately
$5.6 million. This amount reflects the benefit of a net deferred tax asset for
federal net operating loss carryforwards to the extent of the existing net
deferred tax liability that would have been reflected by us on a separate filing
basis.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED RESULTS
We incurred a net loss of $35.8 million in 1997 compared to a net loss of
$3.5 million in 1996, representing an increase in net loss of $32.3 million, or
920%, from the prior year. The increase in net loss was due to increased losses
from operations of $63.4 million and the recording of minority interest expense
of $13.5 million attributable to Nortel's 30% share of the 1997 results of
Solutions LLC. These results were offset by lower net interest expense of $16.4
million and the recognition of a $44.5 million gain on the sale of a 30%
interest in Solutions LLC to Nortel. Our 1996 results were affected by a
non-recurring gain on the sale of communications assets of $15.7 million.
Network accounted for $2.5 million of the increase in losses from
operations. These losses were offset somewhat by an increase in Solutions'
operating income of $28.2 million. Strategic Investments accounted for $89.1
million of the increase in losses from operations.
NETWORK
Network's revenues increased $31.9 million, or 289%, to $43.0 million in
1997 from $11.1 million in 1996, due primarily to $14.0 million in consulting
and outsourcing revenues attributable to the March 1997 acquisition of Critical
Technologies, Inc., a company which designs and manages outsourced
communications networks. The increase in revenues was also primarily due to an
increase of $15.0 million in intercompany revenues, including revenues from the
transfer of the Retained WilTel Network from Strategic Investments to Network in
October 1997.
Network's gross profit improved to $13.8 million in 1997 from $6.4 million
in 1996, while gross margin percentages declined to 32.1% in 1997 from 57.7% in
1996. Network's cost of sales increased $24.5 million, or 524%, to $29.2 million
in 1997 from $4.7 million in 1996, due primarily to the $15.0 million impact of
the transfer of the Retained WilTel Network from Strategic Investments to
Network and the $8.0 million impact of the acquisition of Critical Technologies.
Network's selling, general and administrative expenses increased $5.9
million to $6.5 million in 1997 from $0.6 million in 1996 as a result of the
acquisition of Critical Technologies.
45
<PAGE> 49
Network's depreciation and amortization was none in 1996 and increased to
$4.0 million in 1997 as a result of the transfer of the Retained WilTel Network
from Strategic Investments to Network and the acquisition of Critical
Technologies.
SOLUTIONS
Solutions' revenues increased $621.7 million, or 109%, to $1.19 billion in
1997 from $568.1 million in 1996, due primarily to acquisitions which
contributed revenues of approximately $556.0 million, including $536.0 million
from the April 1997 combination of Nortel's equipment distribution business with
ours.
During 1997, Solutions modified its basic contract structure for new
systems and upgrades to separately state prices for the equipment and services
portions of a contract. As a result of this contract structure, revenues related
to the equipment portion of new systems and upgrade contracts are recognized
when the equipment is received by, and title passes to, the customer. Revenues
related to the services portion of the new systems and upgrades contracts
continue to be recognized based on the relationship of the accumulated service
costs incurred to the estimated total service costs upon completion. This new
contract structure increased revenues by $38.0 million and operating profit by
$6.7 million in 1997. Increased business activity resulted in an $81.0 million
increase in new system sales, partially offset by a $46.0 million decrease in
system upgrade revenues.
Solutions' gross profit increased to $308.7 million in 1997 from $132.6
million in 1996, while gross margin percentages increased to 25.9% in 1997 from
23.3% in 1996. Solutions' cost of sales increased $445.6 million, or 102%, to
$881.1 million in 1997 from $435.5 million in 1996. The increase was due
primarily to the $393.0 million impact of the combination with Nortel. The
remaining increase was attributable to the modification of the contract
structure discussed above, resulting in increased costs of $31.3 million, and to
increased business activity.
Solutions' selling, general and administrative expenses increased $128.7
million, or 122%, to $234.6 million in 1997 from $105.9 million in 1996, due
primarily to the approximately $109.3 million impact of the combination with
Nortel with the remaining costs attributable to expanding the infrastructure and
sales support for anticipated future growth.
Solutions' depreciation and amortization increased $14.1 million, or 88%,
to $30.1 million in 1997 from $16.0 million in 1996, due primarily to the
combination with Nortel.
STRATEGIC INVESTMENTS
Strategic Investments' revenues increased $84.7 million, or 65%, to $215.6
million in 1997 from $130.9 million in 1996, due primarily to acquisitions which
contributed revenues of $81.0 million. Strategic Investments' revenues in 1997
also included revenues from our learning content business for which, in late
1997, we developed a plan for disposal and defined as an asset held for sale. As
detailed in our consolidated financial statements, a series of acquisitions were
completed in 1996 and 1997 which expanded Strategic Investments' product
offerings to include satellite links, audio and video conferencing,
closed-circuit video broadcasting for businesses and advertising distribution.
Strategic Investments' gross profit increased to $59.7 million in 1997 from
$47.4 million in 1996, while gross margins decreased to 27.7% in 1997 from 36.2%
in 1996. Cost of sales increased $72.4 million, or 87%, to $155.9 million in
1997 from $83.5 million in 1996, due primarily to the $68.0 million impact of
the acquired operations.
46
<PAGE> 50
Strategic Investments' selling, general and administrative expenses
increased $36.4 million, or 79%, to $82.4 million in 1997 from $46.0 million in
1996, primarily attributable to the acquired operations.
Strategic Investments' depreciation and amortization increased $20.1
million, or 123%, to $36.5 million in 1997 from $16.4 million in 1996, primarily
attributable to the acquired operations.
Strategic Investments' other expenses increased $43.8 million to $44.0
million from $0.2 million in 1996, due primarily to charges totaling $42.0
million in 1997 related to our decision and commitment to sell our learning
content business, resulting in a $22.7 million charge, and the write-down of
assets and development costs. The $22.7 million charge consisted of a $21.0
million impairment of the assets to fair value less cost to sell and recognition
of $1.7 million in exit costs, which primarily consisted of employee-related
costs and contractual obligations. Fair value was based on management's estimate
of the expected net proceeds to be received. The write-down of assets and
development costs was a result of management's evaluation of certain of
Strategic Investments' business activities because of indications that their
carrying values might not be recoverable. This resulted in impairments of $17.0
million based on management's estimate as to the ultimate recoverable value of
these business activities.
CONSOLIDATED NON-OPERATING COSTS
Our net interest expense decreased $16.4 million to $0.9 million in 1997
from $17.4 million in 1996 as a result of our funding needs and resources in
1997 as compared to 1996 and as a result of the capitalization of interest
beginning in 1997 for network construction projects. Our cash from financing
activities decreased $0.1 million to $225.9 million in 1997 from $226.0 million
in 1996. Most of our 1997 funding was provided by capital contributions from
Williams, while in 1996 funding included both borrowings and capital
contributions from Williams.
Our minority interest expense in 1997 is attributable to Nortel's 30%
ownership of Solutions LLC and resulted in expense in 1997 of $13.5 million
compared to none in 1996. This change was due to the April 1997 combination with
Nortel.
We recognized a $44.5 million gain in 1997 on the sale of the 30% ownership
interest in Solutions LLC to Nortel based on the excess of the fair value over
the net book value of the assets conveyed to Nortel. In 1996, we recorded a gain
of $15.7 million from the sale of communication assets for $38.0 million.
In 1997, we recorded a tax expense of $2.0 million compared to a tax
expense of $0.4 million in 1996. The notes to our consolidated financial
statements include a reconciliation of the expected benefit to the actual
provision or benefit. The 1997 and 1996 expenses reflect our inability to
utilize net operating losses under our tax sharing agreement with Williams.
LIQUIDITY AND CAPITAL RESOURCES
Our operations currently do not provide positive cash flow. Accordingly, we
have funded capital expenditures, acquisitions and other cash needs through a
combination of borrowings and capital contributions from Williams as well as
external borrowings when required. After the completion of the offerings, we
plan on financing future cash outlays through internally generated and external
funds without relying on cash advances, credit support or contributions from
Williams.
47
<PAGE> 51
HISTORICAL FUNDING SOURCES AND USES
Total cash expended from January 1, 1996 to March 31, 1999 to fund capital
expenditures and investments, pay debt and make acquisitions was approximately
$1.84 billion. Of this amount, approximately $795.6 million was expended for
acquisitions and approximately $793.9 million was used for capital expenditures,
of which approximately $747.0 million was spent to construct and light the
Williams Network. In addition, total cash used in operating activities was
approximately $308.0 million during the same period.
Cash provided during this same period by loans and capital contributions
from Williams totaled approximately $1.78 billion, of which approximately $380
million was for the buildout of the Williams Network. Total cash provided by
external borrowings was approximately $466.5 million. As of March 31, 1999,
working capital was $501.4 million. At December 31, 1998, 1997 and 1996, working
capital was approximately $330.5 million, $151.0 million and $145.9 million,
respectively.
Beginning in July 1997, Solutions became a borrower under the revolving
credit facility among Williams and other Williams subsidiaries. Solutions had a
commitment of $300 million under this credit facility. In January 1999, we also
became a borrower under this credit facility and agreed that our borrowings
under this facility would not exceed $400 million, including Solutions'
availability. Our borrowings under this facility other than borrowings by
Solutions are guaranteed by Williams. As of March 31, 1999, there were $315
million in borrowings outstanding. As of the date of this prospectus, there are
no borrowings outstanding under this facility.
During 1998, we entered into an asset defeasance program in the form of an
operating lease agreement covering a portion of the Williams Network with a
group of financial institutions. As of March 31, 1999, we had spent
approximately $368.1 million in cash under this program. Our obligations under
the lease are partially guaranteed by Williams.
In 1999, we accelerated the schedule for completion of the Williams
Network. In order to provide for additional financing needed prior to completion
of the offerings, we entered into a $1.4 billion interim loan facility on April
16, 1999. Our obligations under the interim loan facility are guaranteed by
Williams. The facility terminates on September 30, 1999. As of the date of this
prospectus, $450 million in principal was outstanding under the interim
facility.
We intend to replace the current revolving credit facility and interim loan
facility after the offerings, but on or before September 30, 1999, with a
permanent credit facility. Our permanent credit facility will not be guaranteed
by Williams.
Upon the completion of the offerings and the recharacterization of $500
million from paid-in capital to amounts due to affiliates -- Williams, we
estimate we will have approximately $1.3 billion in borrowings from Williams. We
will pay a floating interest rate on borrowings from Williams equal to LIBOR
plus a margin based on our credit rating.
NETWORK CAPITAL EXPENDITURE PLAN
We have developed a capital expenditure plan totaling $4.7 billion which we
anticipate will fund capital expenditures related to the Williams Network
through December 31, 2000. Of the $4.7 billion total, we expect that
approximately $1.9 billion will be required for construction costs including the
purchase and deployment of fiber optic cable, approximately $2.6 billion will be
required for equipment costs and approximately $200 million will be required for
other costs, including capitalized interest and software. A significant portion
of the equipment costs will be for advanced optical electronics, voice switches
and routers, which will support increased capacity
48
<PAGE> 52
on the Williams Network and additional network services particularly in the
areas of data and voice.
Network's construction contracts typically cover all or a portion of a
cable construction project. While Network may use the same contractors on
different projects, it has no long-term construction agreements. Network has
long-term equipment purchase contracts with Nortel and Ascend Communications,
Inc.
We intend to fund the $4.7 billion capital expenditure plan using the
sources set forth in the table below. As of March 31, 1999, we had expended
approximately $747.0 million of this $4.7 billion.
PLANNED FUNDING SOURCES
(IN MILLIONS)
<TABLE>
<S> <C>
Amount funded by Williams................................... $ 380
Borrowings under bank facilities............................ 795
Asset defeasance program.................................... 750
Net proceeds from the equity offering....................... 750
Net proceeds from the notes offering........................ 1,300
Net proceeds from the concurrent investments................ 725
------
Total............................................ $4,700
======
</TABLE>
We estimate that we will have spent approximately $1.4 billion under our
Network capital expenditure plan by June 30, 1999. Some of the capital
expenditures funding sources are described below.
- We intend to enter into a new permanent credit facility which we will use
to replace the current revolving credit facility and the $1.4 billion
interim loan facility. We will make new borrowings under this new
permanent credit facility as and when needed. Dark fiber sales may allow
us to reduce the amount of our borrowings.
- During 1998, we entered into an asset defeasance program in the form of
an operating lease agreement covering a portion of the Williams Network.
The total estimated cost of the network assets to be covered by this
lease agreement is $750 million. The lease term will include an interim
term, during which the covered network assets will be constructed, which
is anticipated to end no later than December 31, 1999, and a base term.
The interim and base terms are expected to total five years, and if
renewed, could total seven years. At March 31, 1999, $368.1 million of
construction costs had been incurred.
- Concurrently with the notes offering we expect to consummate the equity
offering.
- We expect to receive approximately $725 million from the concurrent
investments.
OTHER CAPITAL COMMITMENTS
In addition to the Network capital expenditure plan described above, we
have the following other capital commitments which we plan to fund with
borrowings from our credit facilities if operating cash flows are not
sufficient:
With respect to Network, we have an approximately $316 million commitment
to acquire wireless capacity under our agreement with WinStar described in
"Business -- Strategic alliances -- WinStar," payable over the next four years.
49
<PAGE> 53
With respect to Solutions, we have committed approximately $50 million for
Solutions to complete its transition to common information systems during 1999.
We also have commitments to purchase Nortel's interest in Solutions under
certain circumstances. After 1999, Nortel may require us to purchase up to
one-third of its 30% interest in Solutions at the then-fair market value. Nortel
may also require us to purchase its entire interest in Solutions at market value
in the event of a change in control of either us or Nortel or in the event
Solutions' purchases of Nortel equipment do not meet certain targets. If
operating cash flows are not sufficient or if we are not able to borrow
sufficient funds for the purchase under our bank facilities, we would need to
obtain additional funding from other sources, including equity sales.
With respect to Strategic Investments, we expect to invest an additional
$33 million in PowerTel over the next year. We are also committed to making
additional capital contributions to ATL to the extent necessary for it to
maintain a 70-to-30 debt to contributed capital ratio.
In addition, the companies in which we have made strategic investments have
their own funding requirements. We expect that these companies will obtain
required funding from third parties to the extent sufficient funds are not
generated from internal operations. To the extent internally-generated funds or
third party borrowings are unavailable, we may invest additional funds or lend
additional money to these companies in order for them to meet their capital
needs. Anticipated funding needs of these companies include:
- approximately $805 million for ATL over the next three years, a portion
of which is to pay amounts required under its Brazilian cellular license
bid
- approximately $186 million for MetroCom over the next three years to
construct a network to provide communications services in the Santiago,
Chile metropolitan area
- approximately $225 million for PowerTel over the next three years to
construct communications networks to serve Brisbane, Melbourne and
Sydney, Australia
Our debt agreements will contain restrictive covenants and require us to
meet certain financial ratios and tests. These agreements will restrict our
ability to borrow additional money, pay dividends or other distributions to
stockholders, make investments, create liens on our assets and sell assets.
We believe that the financing sources described above will be sufficient to
satisfy our anticipated cash requirements at least through the end of 2000.
However, we cannot assure you that our capital expenditures will not exceed the
amounts we have estimated or that we will be able to obtain the required funds
on terms acceptable to us, either from the sources described above or other
sources. If we are unable to obtain the necessary funds, we may be required to
scale back or defer our planned capital expenditures and, depending on the cash
flow from our then-existing businesses, reduce the scope of our planned
operations. In addition, our ability to expand our business and enter into new
customer relationships may depend on our ability to obtain additional financing
for these projects.
For more detail regarding the financing arrangements referred to above that
will continue in place following the completion of the offerings, see the
section of this prospectus entitled "Description of Other Indebtedness and Other
Financing Arrangements." For more detail regarding the SBC investment, see the
section of this prospectus entitled "Business -- Strategic alliances -- SBC."
50
<PAGE> 54
INFLATION
Inflation has not significantly affected our operations during the past
three years.
ACCOUNTING PRONOUNCEMENTS
We adopted the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5) effective January 1, 1999. SOP 98-5 requires that all start-up costs be
expensed and that the effect of adopting SOP 98-5 be reported as the cumulative
effect of a change in accounting principle. The effect of adopting SOP 98-5 on
our results of operations was immaterial.
We adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," during
the fourth quarter of 1998. SFAS No. 131 established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers.
On January 21, 1999, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus regarding EITF Issue 98-13,
"Accounting by an Equity Method Investor for Investee Losses When the Investor
Has Loans to and Investments in Other Securities of the Investee." EITF Issue
98-13 was applied prospectively beginning January 1, 1999 and reduces the equity
method interest used to record earnings and losses from ATL.
MARKET RISK DISCLOSURES
INTEREST RATE RISK
Our interest rate risk exposure primarily results from our debt portfolio
consisting principally of long-term debt due affiliates, representing variable
rate borrowings for which the carrying value of the obligation approximates fair
value. At March 31, 1999, long-term debt due to Williams of $818.1 million
accrued interest at a floating interest rate which is currently 5.65%.
FOREIGN CURRENCY RISK
We have international investments, primarily in Australia, Brazil, Canada
and Chile, that could affect our financial results if the investments incur a
permanent decline in value as a result of changes in foreign currency exchange
rates and the economic conditions in foreign countries.
At March 31, 1999, we had approximately $339 million in investments,
accounted for on the cost method, whose operations are located in South America.
Approximately 93% of these investments relate to a preferred stock investment in
a Brazilian telecommunications venture. Management believes the fair value of
these investments approximates their carrying value. However, estimating cash
distributions from these ventures by year is not practicable, given that the
time period for cash distributions from, or liquidation of, these investments is
uncertain. In recent months, the Brazilian economy has experienced significant
volatility resulting in a 30% reduction of the Brazilian Real against the U.S.
dollar. The ultimate duration and severity of the conditions in Brazil remains
uncertain, as does the long-term impact on our interest in this venture.
Management continues to monitor currency fluctuations in this region and
considers the employment of strategies to hedge currency movements when cash
flows from these investments warrant the need for such consideration.
At March 31, 1999, the net assets of operations located in various other
countries throughout the world approximated 6% of our total net assets. These
foreign operations, whose functional currency is the local currency, do not have
significant transactions or financial instruments denominated in other
currencies. However, these investments do have the potential
51
<PAGE> 55
to impact our financial position, due to fluctuations in these local currencies
arising from the process of remeasuring the local functional currency into the
U.S. dollar. Management continually monitors fluctuations in these respective
currencies and considers investment alternatives if any currency devaluation is
considered to be significant.
YEAR 2000 READINESS DISCLOSURE
OUR STATE OF READINESS
Beginning on January 1, 2000, installed computer systems and software
products must either accept four digit entries to distinguish the year 2000 and
all subsequent years from the year 1900 or be modified to recognize the change
of the century even though there are only two digits being used.
We, with Williams, established a plan in 1997 to address Year 2000 issues
relating to the areas of our business that could be impacted by the date and
time change from 1999 to 2000. We are reviewing our products and services as
well as our internal systems in order to identify and modify the products,
services and systems that are date-and time-sensitive. These areas include:
- traditional informational technology
- non-traditional informational technology
- external interfaces with our customers and vendors
Our traditional information technology, or IT, includes our software,
applications, data and related computer hardware equipment, such as mainframe
and personal or midrange computers. Our non-traditional technology, or Non-IT,
includes all computer hardware, network hardware, plant equipment and other
embedded items that contain date-sensitive code. Examples of Non-IT include
elevator control systems, card key access systems and telecommunications
equipment.
Also in 1997, Williams established a Year 2000 committee to oversee
management and execution of the plan. The Year 2000 issue is being addressed in
the following phases:
- awareness
- inventory and assessment
- renovation and replacement
- testing and validation
The initial phase, awareness, is a continuing process intended to heighten
awareness of Year 2000 issues both within our company and among our customers.
We have completed the inventory and assessment phase. During this phase, we
inventoried and classified all systems with possible Year 2000 implications into
the following categories:
- highest, compliance is business critical
- high, compliance necessary within a short period of time following
January 1, 2000
- medium, compliance necessary within 30 days from January 1, 2000
- low, compliance desirable but not required
- unnecessary
We designated the first three categories above as critical and as our major
focus. Critical systems are systems that directly support customer systems and
applications for our products and services customer base. Examples of critical
systems include Solutions' "SIMS" database which holds Solutions' customer
records and Network's provisioning and ordering fulfillment system.
52
<PAGE> 56
We split the inventory and assessment phase into two categories, IT and
Non-IT. We hired an external contractor as a consultant to provide support
services for the IT assessment. Third-party software information was compared
with the contractor's master product compliance database to determine Year 2000
compliance status. Vendors were contacted for software not found in this master
database. The systems identified in the assessment phase included all date-and
time-sensitive hardware and embedded items. The Non-IT assessment was developed
to ensure that all computer hardware, network hardware and plant equipment
continues to operate without interruption up to and beyond the rollover to the
year 2000. The systems identified in the assessment included both manned sites
and unmanned Network sites as well as other Non-IT systems.
For the testing and validation phases, a Year 2000 test lab capable of
testing almost any software is in place and operational. As of April 30, 1999,
approximately 70% of our IT systems have been fully tested or otherwise
validated as compliant. An example of another way a system is validated as
compliant is when a business process is determined not to be date- and time-
sensitive. Approximately 18% of our IT systems, which are deemed compliant by
vendors or employees, have not yet been validated; of this 18%, we have
categorized 87% as critical. Approximately 12% have been identified as not Year
2000 compliant; of this 12%, we have categorized 90% as critical. Approximately
79% of our Non-IT systems have been tested and were found to be compliant.
Approximately 16% remain to be tested; of this 16%, we have categorized 25% as
critical. The remaining 5% of the Non-IT systems are not compliant and have been
characterized as critical.
We expect to complete the renovation and replacement and testing and
validation phases for most of the critical systems by August 31, 1999. Some
non-critical systems that will not have a material impact on our business may
not be compliant until after January 1, 2000.
We have initiated a formal communications process with customers, vendors,
service providers and other companies to determine the extent to which these
companies are addressing Year 2000 compliance. In connection with this process,
as of April 30, 1999 we had sent approximately 7800 letters and questionnaires
to third parties who have conducted business with us during the last three
years. While the response rate has been 36% overall, the response rate is higher
from our critical business partners. For example, there is a 72% response rate
from our IT business partners, a 78% response rate from our Non-IT partners and
a 40% response rate from our lessors. Virtually all of these companies have
indicated that they are already compliant or will be compliant on a timely
basis. We have identified the most critical business partners and are currently
in the process of determining the amount of risk to which we may be exposed.
Where necessary, we will be working with key business partners to reduce the
risk of a break in service or supply and with non-compliant companies to
mitigate any material adverse effect on our business.
We have utilized both internal resources and external contractors to
complete the Year 2000 compliance project. We have a core group of 13 people who
are responsible for coordinating, organizing, managing, communicating, and
monitoring the project and another estimated 80 staff members are responsible
for completing the project. Depending on which phase the project is in and what
area is being focused on at any given point in time, there can be an additional
50 to 250 employees working on completion of the project. The estimated cost of
our external contractors is approximately $3.5 million.
COSTS OF YEAR 2000 COMPLIANCE
We expect to incur total costs of $11.8 million to address the Year 2000
issue. Of this total, approximately $2.2 million is expected to be incurred for
new software and hardware
53
<PAGE> 57
purchases and will be capitalized with the remaining amounts expensed.
Approximately $5.2 million has been expensed to date and $233,000 has been
capitalized. The $11.8 million in total costs has been or is expected to be
spent as follows:
- First quarter 1998. Prior to and during the first quarter of 1998, we
conducted the project awareness and inventory and assessment phases of
the project and incurred costs totaling $200,000.
- Second quarter 1998. We spent $700,000 on renovation and replacement and
the completion of the inventory and assessment phase.
- Third and fourth quarter 1998. We focused on the renovations and
replacement, and testing and validation phases in which a cost of
approximately $2.5 million was incurred.
- First quarter 1999. Renovations and replacement and testing and
validation continued, and contingency planning began. We spent
approximately $2 million during the first quarter of 1999.
- Second quarter 1999. Our primary focus will shift to testing and
validation, and contingency planning and final testing with $4 million
expected to be spent.
- Third and fourth quarters 1999. We will focus primarily on contingency
planning and final testing and estimate that we will spend $2.4 million.
Of the approximately $6.4 million of future costs necessary to complete the
project on schedule, approximately $4.4 million will be expensed and the
remainder capitalized. This estimate does not include our potential share of
Year 2000 costs that may be incurred by partnerships and joint ventures in which
we participate but are not the operator. The costs of previously planned system
replacements are not considered to be Year 2000 costs and are therefore excluded
from the amounts discussed above.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Our estimates of costs associated with the project and of the completion
dates are based on our best estimates, which we derived utilizing numerous
assumptions of future events, including the continued availability of resources,
third-party Year 2000 compliance modifications plans and other factors. We
expect the necessary modifications will be made on a timely basis and do not
believe that the cost of these modifications will have a material adverse effect
on our business, financial conditions and operating results. However, in part
due to the unavailability and high cost of trained personnel, the difficulty
locating all relevant computer code, reliance on third-party suppliers and
vendors and the ability to implement interfaces between the new systems and the
systems being replaced, there is a possibility of service interruptions due to
non-compliance. For example, power failures along the Williams Network would
cause both customer and internal service interruptions. We cannot guarantee that
these estimates or completion dates will be achieved, and actual results could
differ materially from these estimates.
We have attempted to minimize our risks for the Year 2000 rollover by
taking actions, which include the following:
- following a comprehensive project methodology
- ongoing coordination with the legal and audit departments
- completing an audit of the software, hardware and firmware in use at our
facilities
- determining the business criticality of the items identified and
formulating appropriate action plans
- maintaining centralized storage of project documentation and
communication with critical files kept and logged as vital records
- contacting vendors, suppliers and business partners regarding their Year
2000 compliance efforts
54
<PAGE> 58
- issuing consistent and approved responses to external requests regarding
Year 2000 status
- conducting ongoing management reporting and awareness and training
programs for employees
- contacting customers and notifying them of plans and changes (potential
or tangible) relating to our business
- taking appropriate legal actions where required based on contractual
agreements, warranties and representations (including Year 2000 wording
in contracts, warranties, and purchase orders)
- preventing the purchase or construction of any system, tools or processes
that are not Year 2000 compliant or upgradeable before January 1, 2000
Although all critical systems over which we have control are planned to be
compliant and tested before the Year 2000, we have identified two areas of
concern. First is the possibility of service interruptions to us and/or our
customers due to non-compliance by third parties. Second is the delay in system
replacements scheduled for completion during 1999. We are closely monitoring the
status of these systems to reduce the chance of delays in completion. We believe
the most reasonably likely worst possible scenario would be a systems failure
beyond our control to remedy, which could materially prevent us from operating
our business. We believe that such a failure would likely lead to lost revenues,
increased operations costs, loss of customers or other business interruptions of
a material nature, in addition to potential claims including mismanagement,
misrepresentation or breach of contract.
CONTINGENCY PLANS
We began initial contingency planning during 1998 and significant focus on
that phase of the project is taking place in 1999. Guidelines for that process
were issued in January 1999 in the form of a formal business continuity plan. An
external contractor is working within each business unit to review existing
business continuity plans and to modify these plans to include Year 2000
contingency plans for the critical business processes, critical business
partners, suppliers and system replacements that may experience significant
delays.
Our Year 2000 contingency plan methodology is as follows:
- assess each business process for business risk and potential need for
contingency plans
- create business process contingency plans as needed based on the risk
analysis
- test the completed plans, evaluate the test results and revise plans
accordingly
- store completed plans both on-site and off-site
- maintain plan copies at the appropriate Year 2000 offices
- review and modify contingency plans as part of an ongoing change
management process
These plans should be defined by August 31, 1999 and implemented where
appropriate. However, due to the general uncertainty inherent in the Year 2000
issue and the inability to anticipate all potential risks, we cannot ensure our
ability to timely and cost effectively resolve all post-Year 2000 problems
associated with the Year 2000 issue that may affect our operations and business
or expose us to third party liability.
In addition to the Year 2000 committee which serves all of our business
units, Solutions has established a Year 2000 team to assist in making its
customer base Year 2000 compliant. The team consists of marketing, legal,
operations and other shared services personnel who assess, test and validate the
telecommunications products for Solutions' customer base. Monetary support for
the team and the Solutions Year 2000 project is provided for out of each
department's budget.
55
<PAGE> 59
The Solutions team's purpose is to educate and inform customers and
employees about Year 2000 related issues and proactively seek to implement
upgrades to bring our customers into compliance. The majority of the upgrades
and new products needed to support the customer migration are available from the
manufacturers. Solutions has launched extensive efforts including direct and
mass mailings to inform its customer base of the need to take action to assess
and if necessary, upgrade, their products to be Year 2000 compliant.
Although Solutions believes it has sufficient resources to provide timely
support to its customers that require product migrations or upgrades, Solutions
has set a June 30, 1999 target date for its products and services contingency
plan. This contingency plan will address both potential spikes in the demand for
customer support and potential problems with its suppliers. Based on customer
demand, Solutions will be reviewing its work projects to address customer
service. To ensure timely delivery from its suppliers, Solutions is proactively
monitoring and seeking assurances from its key suppliers. However, since the
effort to provide Year 2000 compliant products and essential services to its
customers is heavily dependent on its major suppliers, interruptions or
disruptions in this supply could have an adverse material impact on Solutions.
56
<PAGE> 60
INDUSTRY OVERVIEW
Telecommunications is the transmission of data, voice or video signals
across a distance. Data signals connect computers in networks such as the
Internet, or connect other devices, such as facsimile machines. Voice signals
usually connect people in telephone conversations. Video signals include video
conferencing and television signals. Telecommunications services are typically
divided into long distance and local services. The demand for all types of
telecommunications services has been increasing, with especially rapid growth in
high-speed data services, including the Internet. The telecommunications
industry includes telecommunications services, equipment, and technical services
for creating and operating telecommunications networks.
Recently, the telecommunications industry has been characterized by rapid
technological change, changes in the industry structure and increased demand for
services and equipment. A February 1999 report of the President's Council of
Economic Advisers estimated total U.S. telecommunications services and equipment
revenues in 1998 of $408 billion, up from approximately $250 billion in 1993.
Over the past several years, the telecommunications industry has undergone
significant structural change. Many of the largest equipment and service
providers have achieved growth through acquisitions and mergers. These
combinations have provided access to new markets, new products, and economies of
scale. Despite this consolidation, the number of new entrants is increasing and
small new entrants are gaining market share from the large and established
providers. In this highly competitive environment, telecommunications providers
are increasingly focusing on core activities and core competencies and
outsourcing non-core activities to other providers. This trend is a significant
change from the traditional integrated model that has prevailed in the industry
since its inception.
INDUSTRY TRENDS
ADVANCES IN TELECOMMUNICATIONS AND NETWORKING TECHNOLOGY
Telecommunications providers transmit voice, data and video signals
primarily over coaxial cable, copper cables, microwave systems, satellites and
fiber optic cables. Beginning in the 1960s, microwave systems began to replace
copper cable and by 1990, fiber optic cables had largely replaced copper cable
for long distance transmission. Fiber optic cables use light to transmit
information in digital format through ultra-thin strands of glass. Compared to
copper, fiber optic cables provide significantly greater capacity at lower cost
with fewer errors and increased reliability.
Several advances in switching and electronics have further increased the
bandwidth, or transmission capacity, of telecommunications networks. Dense
wavelength division multiplexing is a technology which allows the transmission
of multiple light signals through a single optical fiber and can currently
increase the bandwidth of fiber optic cables by up to 128 times the original
fiber optic technology.
Historically, carriers have built telecommunications networks based on
circuit switching. Circuit switching establishes and keeps open a dedicated path
until the call is terminated. While circuit switching has worked well for
decades to provide voice communications, it does not efficiently use
transmission capacity. Once a circuit is dedicated, it is unavailable to
transmit any other information, even when the particular users of that circuit
are not speaking or otherwise transmitting information. Packet switching is
replacing circuit switching. Packet switching divides data into small "packets"
which are then independently transmitted to their destination via the quickest
path. Upon their arrival, the packets are reassembled. Packet switching
57
<PAGE> 61
provides more efficient use of the capacity in the network because the network
does not establish inefficient dedicated circuits, which waste unused capacity.
The new packet networking technologies operate at very high speeds ranging
from 1.544 million bits per second, or DS-1, to 2.488 billion bits per second,
or OC-48, and beyond. A bit is the smallest unit of information a computer can
process and is the basic unit of data communications. By comparison, one voice
call requires roughly 64,000 bits per second. Packet networks are especially
efficient at carrying data signals.
CONVERGENCE OF VOICE AND DATA SERVICES
Telecommunications network designs have traditionally created separate
networks using separate equipment for voice, data and video signals. The
evolution from analog to digital technologies, which convert voice and other
signals into a stream of "1"s and "0"s, erases the traditional distinctions
between voice, data and video transmission services. High-bandwidth networks
that use advanced packet-switched technology transmit mixed digital voice, data
and video signals over the same network. This enables telecommunications
customers to use a single device for voice, data and video communications.
Although these devices are new to the market, customer interest and acceptance
are rapidly growing.
Each evolution, from copper to fiber optic cables, from one to many light
signals, from circuit switching to packet switching and from analog to digital
signals, has produced significant increases in network capacity. When considered
together, these evolutions have produced enormous increases in the ability to
transfer large amounts of information across vast distances almost
instantaneously. With each new leap in transmission capacity, end-users have
come to rely on their ability to access and manipulate ever greater amounts of
information quickly and easily. This reliance has consistently created demand
that outstrips the available capacity.
HISTORY OF THE MODERN TELECOMMUNICATIONS INDUSTRY
In the first half of the twentieth century, AT&T Corp. created the Bell
System, a nationwide collection of telecommunications network assets. For most
of the century, the Bell System operated as a regulated monopoly providing
telecommunications services in most areas of the U.S. Even in those areas where
a non-Bell System carrier, such as GTE Corp., provided local service, that local
carrier was a regulated monopoly providing local service, and AT&T provided
regulated monopoly long distance service.
The 1982 antitrust consent decree between AT&T and the U.S. Department of
Justice strongly influenced the current structure of the communications
industry. The consent decree was intended, among other things, to spur
competition in providing long distance service and supplying telecommunications
equipment. The decree required AT&T to divest its Bell Operating Companies to
seven newly created Regional Bell Operating Companies, or RBOCs, and divided the
country into approximately 200 local access and transport areas which delineate
the areas between which the RBOCs are prohibited from providing long distance
services and in which the RBOCs are authorized to provide local exchange
services. The RBOCs remained regulated monopolists, operating network assets and
providing exchange services, including local telecommunications service, access
to long distance carriers and toll service within the exchange area. However,
the RBOCs were prohibited from providing services between the different local
areas and from manufacturing telecommunications equipment. AT&T continued to
operate the long distance network assets and provide long distance services.
Long distance competition has increased significantly since the AT&T
divestiture. MCI, Sprint Corp. and Williams created nationwide fiber optic
networks to compete with AT&T. Other long distance providers purchased services
primarily from these three new networks or
58
<PAGE> 62
AT&T in order to compete for long distance market share. According to the
Federal Communications Commission, AT&T's market share fell from approximately
90% in 1984 to approximately 45% in 1997. In 1997, MCI, Sprint and LDDS, which
acquired Williams' original fiber optic network in 1995, had approximately 19%,
10%, and 7% market share respectively. All other long distance providers
accounted for the remaining 20% market share.
Similarly, supplying telecommunications equipment has become highly
competitive. Following the AT&T divestiture, the RBOCs were no longer required
to purchase from AT&T's equipment division (now Lucent Technologies Inc.). As a
result, other equipment providers, including Nortel, Siemens AG, and Alcatel
S.A. gained market share in both the carrier and business markets. Increasing
competition in all telecommunications segments encouraged innovation in
equipment features and helped the market grow. Until 1997, virtually all of
AT&T/Lucent's equipment sales to businesses were direct sales through
AT&T/Lucent's sales employees. Lucent is increasingly using independent vendors
to sell its products. Likewise, in 1997, Nortel shifted virtually all of its
business equipment sales to independent vendors.
The Telecommunications Act replaced the restrictions on the RBOCs from the
1982 consent decree and enhanced the development of competition in
telecommunications services. The Telecommunications Act:
- prohibits states from enforcing barriers to entry
- requires incumbent local exchange carriers, or ILECs, to interconnect
with competing carriers on non-discriminatory terms
- requires ILECs to lease parts of their networks, including the telephone
lines that connect an end-user to a local exchange carrier's switch, to
competing carriers at cost-based prices
- requires ILECs to provide service at wholesale rates to competing
carriers for resale to end-users
- allows an RBOC to provide interexchange services originating from
wireless equipment or from non-wireless equipment outside of the RBOC's
exchange areas. An RBOC will be allowed to provide interexchange service
originating from non-wireless equipment within its exchange areas if the
FCC finds that the RBOC has complied with certain requirements. See the
section of this prospectus entitled "Regulation -- General regulatory
environment" for more information.
By allowing providers to offer additional services, the Telecommunications
Act also stimulated competition for virtually all communications services,
including local exchange service, long distance service and enhanced services.
Providers are increasingly bundling these services and providing one-stop
shopping for end-user customers.
In the telecommunications market, a new industry model is replacing the
original model of a single regulated monopolist building and operating
end-to-end assets and providing all products and services. In this market,
carriers who do not operate their own nationwide transmission network serve an
increasing percentage of the market. The Telecommunications Act requirement that
RBOCs provide carrier services has led a large number of providers to offer
local services without owning local assets. Increasingly, providers are offering
telecommunications customers end-to-end services without having to own and
operate the end-to-end assets. Other companies are focusing on operating the
assets as efficiently and effectively as possible. In the equipment market,
independent network integrators are providing an increasing share of products to
businesses.
59
<PAGE> 63
RELEVANT MARKET SEGMENTS
THE MARKET FOR INTEREXCHANGE VOICE, DATA, INTERNET AND VIDEO SERVICES
Interexchange carriers provide telecommunications services between
exchanges. An exchange is a franchised geographical area within which a call
between any two exchange customers is considered a local call. Many
interexchange carriers offer some mix of retail services, which are those
provided directly to an end-user, and carrier services, which are those provided
to other carriers. Carriers provide interexchange services over their own
facilities, over the facilities of other carriers, or over a combination of
both.
The market for interexchange services has been growing rapidly due to lower
rates and increased transport of data. According to the President's Council of
Economic Advisers, in 1997 long distance usage was 500 billion minutes, up from
370 billion minutes in 1993. FCC statistics show that total operating revenues
for interexchange carriers increased to about $89 billion in 1997 from less than
$45 billion in 1987. Although much of the decline in AT&T's market share is
attributable to gains by MCI WorldCom and Sprint, the numerous interexchange
carriers with small individual market shares accounted for approximately 20% of
the market in 1997.
There has also been strong demand for increasing capacity in long distance
networks to accommodate the growth in Internet traffic. According to the
President's Council of Economic Advisers, the number of Internet host computers
was estimated at 35 million in early 1998, up from 20 million only six months
earlier and from fewer than 3 million in 1993. The U.S. Department of Commerce
in 1998 cited estimates that Internet traffic doubles every 100 days.
High-volume, high-speed and high-capacity interexchange services are almost
exclusively provided by facilities-based interexchange carriers such as AT&T,
MCI WorldCom and Sprint, which operate networks principally using their own
transmission facilities and extensive geographically dispersed switching
equipment. Recently, other interexchange carriers have been building national or
regional networks to provide service using primarily their own fiber optic
transmission facilities, including ourselves, Qwest, Level 3, IXC, GTE and
Frontier Corp.
All interexchange carriers lease some of their transmission facilities from
other carriers. The dependence of an interexchange carrier on leased facilities
varies widely:
- interexchange carriers with national networks that provide services
primarily using their own facilities still lease some amount of
transmission capacity from other carriers to back up their service
routing, augment areas where they may have traffic bottlenecks or cover a
particular geographic area not covered by their own networks
- many other interexchange carriers own switches but obtain transmission
capacity primarily by leasing other interexchange carriers' transmission
services
- other interexchange carriers depend entirely on leasing transmission and
switching services from other interexchange carriers
The types of high-volume interexchange services purchased by carriers also
vary widely. High-volume interexchange services can be priced based on minutes
of usage or amount of capacity leased. These leases can vary in duration from
one day to many years.
THE MARKET FOR EQUIPMENT MANUFACTURING AND DISTRIBUTION
The telecommunications equipment industry in the U.S. has grown
substantially in the last several years through sales to local and long distance
carriers, end-users, Internet and other data service providers. The President's
Council of Economic Advisers reports that total sales of
60
<PAGE> 64
telecommunications equipment in 1997 exceeded $70 billion and are estimated to
have reached $120 billion in 1998, up from a total of $40 billion in 1993. The
dramatic growth of the telecommunications and data networking equipment industry
stems in part from the development of new technologies, including technologies
which allow systems to provide integrated voice and data services, and from
increased capacity demands, which require both established and new carriers to
expand and upgrade their facilities. Manufacturers distribute telecommunications
equipment through their own sales forces as well as through agents.
THE MARKET FOR COMMUNICATIONS AND DATA SOLUTIONS
Businesses seek solutions to the challenges of selecting, maintaining and
upgrading information and communications technologies and services amid rapid
technological advances. Under these conditions, the demand for consultants'
services in systems integration and communications networks has been growing
strongly. Businesses such as Solutions, Norstan, Inc. and International Network
Services assess customers' communications and information technology needs,
evaluate equipment and services options, procure equipment and services,
implement efficient network solutions and manage the combination of
technologies.
THE MARKET FOR EXCHANGE SERVICES
Today, ILECs continue to provide the vast majority of exchange services
within their markets. However, as a result of regulatory and technological
changes over the past few years, a number of competitive local exchange
providers, or CLECs, have begun to compete with the ILECs.
The FCC reports that in 1996 local service revenues totaled approximately
$97 billion, with 109 CLECs accounting for about $1 billion in revenues. The
market share of CLECs has grown rapidly in the last few years. According to the
President's Council of Economic Advisers, at the end of 1998 CLECs served about
five million lines, or 2% to 3% of local lines in the U.S.; because CLECs have
focused on serving the largest and most profitable customers, CLECs accounted
for about 5% of the exchange services market by revenue in 1998.
Leading CLECs include MCI WorldCom (through its MFS Network Technologies,
Inc. and Brooks Fiber Properties, Inc. subsidiaries), AT&T (through its Teleport
Communications Group, Inc. subsidiary), WinStar, Intermedia and ICG
Communications, Inc. Often, in addition to exchange services, CLECs provide
interexchange services and other services such as mobile telephony, video and/or
Internet-related services. Cable television systems provide local
telecommunications services in many areas. Cellular and other wireless service
providers also provide exchange services.
THE U.S. MARKET FOR INTERNATIONAL LONG DISTANCE SERVICES
The U.S. international long distance market is growing due to increased
competition (including through World Trade Organization agreements),
deregulation, price decreases, growth in usage and revenues and development of
new services. According to the FCC, total international services revenues of
U.S. carriers exceeded $19 billion in 1997, up from about $5 billion in 1987.
The largest U.S. international carriers by market share in 1997 were AT&T, MCI
WorldCom and Sprint. Carriers with small individual market shares accounted for
a total market share of 21.8%.
61
<PAGE> 65
RELEVANT FOREIGN TELECOMMUNICATIONS MARKETS
We have significant investments and operations in foreign communications
carriers. For information regarding our investments in Brazil, Australia and
Chile, see the section of this prospectus entitled "Business -- Strategic
Investments."
Canada. Supplying telecommunications equipment and services is open to
competition in Canada. Competitive long distance carriers have been operating in
Canada since 1990 as resellers and since 1992 with their own facilities. The
national Canadian regulatory agency, CRTC, opened the local telecommunications
markets to competition in 1997, and allowed competition in the international
services market in 1998.
In addition to Solutions, leading providers of communications equipment to
businesses in Canada include Bell Canada, BCT. Telus Communications Inc., Lucent
Technologies Canada Inc. and Mitel Corporation.
Brazil. Until a few years ago, almost all telecommunications services in
Brazil were provided by government-owned monopoly carriers, the largest of which
were Telecomunicacoes Brasileiras S.A., known as Telebras, in local services,
and Empresa Brasileira de Telecomunicacoes S.A., known as Embratel, in long
distance services.
In recent years, the telecommunications sector in Brazil has been
progressively opened to competition and privatized. The Brazilian
telecommunications market experienced a sharp increase in demand in the 1990s,
which outstripped the capacity of the telecommunications infrastructure. The
desire to improve the networks' capacity to handle this increased demand,
accompanied by advances in telecommunications technology, led the government in
1998 to privatize the incumbent carriers. Buyers paid approximately $19 billion
to purchase these carriers. The twelve new carriers provide local, long distance
and cellular services and cover separate geographic regions. In addition, the
government is allowing private Brazilian and foreign companies to compete in the
telecommunications market through competitive wireless and non-wireless
licenses.
The Brazilian government auctioned additional regional licenses in 1997;
the new carriers began cellular service in 1998 and 1999. The government has
indicated that after 2000 it may sell additional licenses for wireless voice and
data services.
In 1997, Brazil had 2.75 mobile telephone subscribers per 100 inhabitants
and 10.66 non-wireless telephone access lines per 100 inhabitants for a total of
17 million access lines, according to the International Telecommunication Union.
We expect that the market for telecommunications services in Brazil will grow
rapidly as the private carriers expand their networks, improve service quality
and drive down prices through competition.
Australia. The Australian government has pursued a staged transition from
a government-owned monopoly of telecommunications services and infrastructure to
open competition. Between 1991 and 1997, the Australian government established a
duopoly between Telstra Corporation Limited and Cable & Wireless Optus Ltd. for
the provision of fixed telecommunications infrastructure. The Australian
government also established an oligopoly among Telstra, Optus and a subsidiary
of Vodafone Group PLC for the provision of mobile telephony services. On July 1,
1997, the Australian government opened all sectors of the Australian
telecommunications industry to competition. Telstra continues to be the dominant
non-wireless carrier.
The International Telecommunication Union reports that in 1997 Australia,
with a total of approximately 9 million non-wireless telephone access lines, had
50.45 telephone lines and 26.40 mobile telephone subscribers per 100
inhabitants.
62
<PAGE> 66
Chile. Chile was the first Latin American country to eliminate the state
monopoly provision of telecommunications services and today has the most
competitive telecommunications sector in Latin America. The process of
privatization and opening up of monopoly telecommunications markets in Chile
began in 1982 with the General Telecommunications Law, which allowed companies
to provide service and develop telecommunications infrastructure without
geographic restriction or exclusive rights to serve. There has been competition
in non-wireless services since 1994.
With privatization and competition, telecommunications has been one of the
most dynamic sectors in Chile's economy. By 1997, according to the International
Telecommunication Union, Chile's non-wireless network consisted of approximately
2.7 million lines, for a penetration rate of approximately 17.98 telephone lines
for every 100 inhabitants; Chile had a mobile telephone penetration of 2.80
cellular subscribers per 100 inhabitants.
63
<PAGE> 67
BUSINESS
WILLIAMS COMMUNICATIONS GROUP, INC.
We own, operate and are extending a nationwide fiber optic network focused
on providing voice, data, Internet and video services to communications service
providers. We also sell, install and maintain communications equipment and
network services that address the comprehensive voice and data needs of
organizations of all sizes. Our business units are Network, Solutions and
Strategic Investments.
Network offers voice, data, Internet and video services as well as rights
of use in dark fiber on our low-cost, high-capacity nationwide network, which is
based on a high-quality transmission technology using packet switching. The
communications companies we serve include long distance carriers, local service
providers, Internet service providers, international carriers and utilities.
Long distance carriers include providers which sell services on their own
networks or utilize other providers' networks to sell services. We plan to
extend the Williams Network to encompass a total of 32,000 route miles of fiber
optic cable, utilizing pipeline and other rights-of-way, to connect 125 cities
by the end of the year 2000. The Williams Network currently consists of
approximately 20,550 route miles of installed fiber optic cable, with 18,600 of
those miles in operation, or lit.
Solutions distributes and integrates communications equipment from leading
vendors for the voice and data networks of businesses of all sizes as well as
governmental, educational and non-profit institutions. We provide planning,
design, implementation, management, maintenance and optimization services for
the full life cycle of these networks. We also sell the communications services
of select Network customers and other carriers to Solutions' customers. We serve
an installed base of approximately 100,000 customer sites in the U.S. and
Canada. Solutions has approximately 1,200 sales personnel, approximately 2,400
technicians and approximately 800 engineering personnel in 110 offices.
Through Strategic Investments, we make investments in, or own and operate,
domestic and foreign businesses that create demand for capacity on the Williams
Network, increase our service capabilities, strengthen our customer
relationships, develop our expertise in advanced transmission electronics or
extend our reach. Our domestic strategic investments include ownership interests
in Concentric, UniDial and UtiliCom. Our international strategic investments
include ownership interests in communications companies located in Brazil,
Australia and Chile. Businesses we own and operate include Vyvx, a leading video
transmission service for major broadcasters and advertisers, and other
communications businesses.
We enter into strategic alliances with communications companies to secure
long-term, high-capacity commitments for traffic on the Williams Network and to
enhance our service offerings. We currently have strategic relationships with
SBC, Intel, Telmex, Metromedia Fiber Networks, WinStar, Intermedia and U S WEST.
We will continue to pursue additional strategic alliances.
HISTORY OF BUILDING NETWORKS
Williams began building gas and petroleum pipeline networks more than 80
years ago and is currently one of the largest volume transporters of natural gas
in the U.S. Over the years, Williams has constructed, acquired and managed over
100,000 miles of energy pipelines. In 1985, Williams entered the communications
business by pioneering the placement of fiber optic cables in pipelines no
longer in use. Williams also pioneered the strategy of providing services solely
to other communications providers. By 1989, through a combination of
construction projects and acquisitions, Williams had completed the fourth
nationwide digital fiber optic network, consisting of approximately 9,700 route
miles. The first three networks were
64
<PAGE> 68
constructed by AT&T, MCI WorldCom and Sprint. By 1994, WilTel, Williams'
communications subsidiary, was one of the top four providers of high capacity
data services, one of the top five providers of long distance voice services and
the first provider to offer nationwide frame relay transmission capacity, a
high-speed form of packet switching, well-suited for connecting computers to
each other, which supports data units of variable lengths. In 1994, WilTel had
approximately $1.3 billion in revenues and approximately 5,000 employees.
In January 1995, Williams sold the majority of the WilTel network business
to LDDS (now MCI WorldCom) for approximately $2.5 billion. The sale included the
bulk of the nationwide fiber optic network and the associated consumer, business
and carrier customers. Williams retained an approximately 9,700 route-mile
single fiber strand on the nationwide network, WilTel's telecommunications
equipment distribution business and Vyvx. Under agreements with MCI WorldCom,
this fiber strand can only be used to transmit video and multimedia services,
including Internet services, until July 1, 2001. Multimedia services integrate
various forms of media, including audio, video, text, graphics, fax and
Internet. After July 1, 2001, this fiber strand can be used for any purpose,
including voice and data tariffed services.
As part of the sale to LDDS, Williams agreed not to reenter the
communications network business until January 1998. In January 1998, Williams
reentered the communications network business, announcing its plans to develop
the Williams Network.
INDUSTRY AND MARKET OPPORTUNITIES
We believe we are uniquely positioned to take advantage of changes and
developments in the communications industry. These anticipated changes and
developments include:
- Innovations in technology. Technological innovations are increasing both
the supply of and demand for telecommunications transmission capacity
while also driving increased integration in voice and data networks.
Innovations in optics technologies, consisting of both higher quality
fiber optic cable and improved transmission electronics, have increased
the capacity and speed of advanced fiber optic networks while decreasing
the unit cost of transmission. This increased capacity and speed,
combined with continuing advancements in the power of microprocessors,
have resulted in the development of bandwidth-intensive applications,
growth in Internet usage and increases in the number of network users. We
are developing our advanced fiber optic network to meet the increasing
demand for transmission capacity.
- Increasing demand for communications services. We believe that there is
and will continue to be a significant growth in demand for long distance
data, Internet, voice and video services. The increase in computing
power, number of computers networked over the Internet and connection
speeds of networked computers are driving tremendous increases in
communications use for Internet and data services. Prices for cellular
and long distance voice services have decreased, resulting in increased
demand for these services. We believe video conferencing, digital
television and other multimedia applications being developed will
continue to increase demand for transmission capacity. We believe the
Williams Network is well positioned to capture this growing demand.
- Deregulation within the communications industry. Around the world, the
communications industry is experiencing liberalization. In the U.S., the
long distance market became highly competitive in the 1980s following the
break up of AT&T, and the Telecommunications Act was designed to open
local markets to competition. Many new companies have formed to compete
for markets that have been traditionally dominated by a very small number
of providers. Our full-service platform enables both new entrants to
65
<PAGE> 69
compete in this market and existing service providers to expand into new
markets. The Williams Network will offer an attractive alternative to
network ownership for these carriers.
- Increasing specialization within the communications industry. We believe
industry specialization will continue to occur as communications
companies focus on their core competencies and outsource non-core
activities. In the long distance services market, we anticipate that many
new entrants will focus on branding and retail distribution while
outsourcing the development of network infrastructure and services.
Similarly, we believe that some communications providers, such as
Internet service providers, will focus on developing value-added services
and will outsource long distance transmission services. As a result, we
believe there will be significant demand for a provider of advanced,
high-quality, low-cost communications services to other communications
companies. The Williams Network is well positioned to benefit from this
market opportunity.
NETWORK
We own, operate and are extending a nationwide fiber optic network. We
offer services over the Williams Network to communications companies, including
RBOCs, long distance carriers, CLECs, Internet service providers, international
carriers and utilities.
STRATEGY
Our objective is to become the leading nationwide provider of voice, data,
Internet and video services to national and international communications
providers. To achieve this objective, we intend to:
- Become the leading provider to communications carriers. We focus on
providing high-quality communications services to other carriers as they
seek to benefit from the growth in communications demand. We also offer
our customers the flexibility to control their own service platforms so
that they choose to buy services from us rather than build these
capabilities themselves. Since our Network business targets the carrier
market, we do not compete with our customers for retail end-users. By not
competing with our customers, we believe we can become the provider of
choice to other carriers.
- Deploy a technologically advanced network. We are combining advanced
optical and electronic transmission equipment with our innovative network
design to offer highly flexible, efficient and reliable network services
to our customers. Our innovative network design provides high-quality
network services to support voice, data, Internet and video traffic at a
lower investment than other currently deployed network architectures due
to the elimination of several layers of costly equipment. The Williams
Network design also provides our customers with control over the quality
of service they receive and provides us with the flexibility to introduce
new services.
- Pursue strategic alliances. We pursue strategic alliances with
communications providers which offer the potential for long-term,
high-capacity commitments for traffic on the Williams Network, resulting
in increased revenues and decreased unit costs. To date, we have entered
into strategic alliances with SBC, Intel, Telmex, Metromedia Fiber
Network, WinStar, Intermedia and U S WEST and others to provide network
services. Our strategic alliances also allow us to combine our
capabilities with those of our alliance partners and thereby offer our
customers a more complete product set, including local and international
capacity and Internet access services.
66
<PAGE> 70
- Leverage network construction, operation and management experience. We
are utilizing Williams' long history of constructing, operating and
managing communications and energy networks to develop the Williams
Network. By the time Williams sold the WilTel network in 1995 for
approximately $2.5 billion, WilTel had approximately $1.3 billion in
revenues, approximately 5,000 employees and operated approximately 9,700
route miles. Many of our current employees worked with Williams in
various capacities during the WilTel network build until its subsequent
sale to LDDS. This experience translates into expertise in planning,
designing, constructing and managing a cross-country network.
- Utilizing pipeline rights of way. Where feasible, we construct the
Williams Network along the rights of way of Williams and other pipeline
companies. We believe that use of pipeline rights of way gives us
inherent advantages over other systems built over more public rights of
way, such as railroads, highways, telephone poles or overhead power
transmission lines. These advantages include greater physical protection
of the fiber system, lower construction costs and lower operational
costs.
- Establish international connectivity. We pursue strategic relationships
that allow us to exchange capacity on the Williams Network for
cost-effective access and capacity on international networks or that
allow us to use our network construction and management experience to
construct international networks. We intend to establish alliances with
international carriers that will expand our capabilities throughout
Europe and other key markets. Select domestic alliances will also allow
us to provide international capabilities such as cost-effective use of
SBC's capacity on China-U.S. and Japan-U.S. submarine fiber optic cable
systems.
- Establish low-cost position. Our carrier market focus, network design
and strategic alliances as well as dark fiber sales enable us to
establish and maintain a low-cost position. Our carrier services focus
enables us to maintain small, focused marketing and customer service
departments, reducing our operating costs. Our advanced network design
eliminates several unnecessary layers of costly equipment. Our strategic
alliances drive our unit costs lower due to the purchases of large
volumes of services on the Williams Network. Dark fiber sales allow us to
reduce the capital investment in the Williams Network and share future
operating and maintenance costs with those companies to which we have
sold capacity.
67
<PAGE> 71
NETWORK INFRASTRUCTURE
We anticipate that the Williams Network will total approximately 32,000
route miles connecting 125 cities when completed by the end of the year 2000. We
intend to invest approximately $4.7 billion through December 31, 2000 developing
the Williams Network. The following table describes our network infrastructure
(numbers are approximate):
<TABLE>
<CAPTION>
AVERAGE AVERAGE
MILES IN NUMBER NUMBER OF AVERAGE NUMBER
ROUTE MILES OPERATION OF FIBERS FIBERS RETAINED OF SPARE CONDUITS
----------- --------- --------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Retained WilTel Network(1)... 9,700 9,700 1 1 N/A
Acquired new fiber(2)........ 8,200 4,600 11 9 0.3
Completed fiber builds....... 4,600 4,300 102 21 1
Future fiber builds.......... 9,500 -- 100 24 2
------ ------
Total............. 32,000 18,600
====== ======
</TABLE>
- -------------------------
(1) We have the right to acquire from MCI WorldCom approximately 7,700
additional route miles of a single fiber optic strand which is restricted to
multimedia purposes until July 2001.
(2) This category consists of rights in dark fiber and conduits which we have
acquired or intend to acquire through purchases or exchanges. We have
already acquired approximately 6,600 route miles from IXC and other
carriers, of which 5,400 route miles has had fiber optic cable installed. We
intend to acquire an additional 2,000 route miles by the end of 2000.
We currently have approximately 20,550 route miles of fiber optic cable
primarily installed in the ground, with approximately 18,600 of those miles
currently in operation. Of the approximately 18,600 route miles currently in
operation, approximately 9,700 route miles consist of the Retained WilTel
Network. We are currently installing new transmission equipment on the Retained
WilTel Network to increase its transmission capacity and ensure its
compatibility with the newer portions of the Williams Network. Due to advances
in transmission electronics, it is now possible to carry as much traffic on this
single fiber optic strand as on 128 fiber optic strands four years ago. In
addition, the Retained WilTel Network will provide additional routes for the
Williams Network into select major markets.
We began building the newer portions of the Williams Network in January
1998 following the expiration of the non-compete agreement with MCI WorldCom. We
will expand the Williams Network through both new network construction and
acquisition of capacity on networks owned and to be constructed by others. We
have constructed and plan to construct approximately 73% of the Williams Network
and we have obtained and plan to obtain the remaining 27% through acquisitions
or exchanges. We manage the transmission equipment on the fiber optic strands we
obtain through acquisitions or exchanges. We typically pay maintenance fees to
other network providers to maintain the fiber optic strands and rights of way we
obtain through acquisitions or exchanges.
We lease capacity from both interexchange and local telecommunications
carriers, including our competitors, in order to meet the needs of our
customers. These leases are for areas where we do not have on-network portions,
or our on-network is not currently sufficient to meet the expected capacity.
This includes capacity to provide service from our facility to another
provider's facility. These leases of capacity may contain minimum commitments
that we will make in order to obtain better pricing. We attempt to balance our
off-network commitments with the expected requirements of our customers.
68
<PAGE> 72
Network design and infrastructure. The newer portions of the Williams
Network we are constructing have the following characteristics:
- Multi-service platform. A multi-service platform allows traditional
voice, data, Internet and video services to be provided on a single ATM
platform. Most other carriers use multiple platforms, which create
distinct networks and organizations for each service provided. Due to our
unified platform approach, we have greater efficiency and lower costs.
- ATM core switching. ATM core switching is a packet switching and
transmission technology based on sending various types of information,
including voice, data and video, in fixed-size cells. Packet-based
networks transport information compressed as "packets" over circuits
shared simultaneously by several users. Newly developed equipment based
on advanced communications standards enable packet-based networks to
carry voice and data more efficiently and at a lower cost than the
traditional telephone networks. We believe that utilizing ATM enables us
to provide higher-quality services than other packet technologies such as
Internet protocol, which do not currently send information in packets
with predictable characteristics.
- Advanced fiber optic cable. Fiber optic cable, including Corning's
LEAF(TM) fiber and Lucent TruWave(TM) fiber, which has a wider range of
spectrum than previously deployed fibers over which to send wavelengths
of light, enabling a greater number of wavelengths to be sent over long
distances.
- DWDM. Dense wave division multiplexing is a technology which allows
transmission of multiple waves of light over a single fiber optic strand,
thereby increasing network capacity. By using DWDM, we are able to derive
sixteen wavelengths, at OC-192 capacity per wavelength, over a single
fiber optic strand with current technology and plan to derive up to
thirty-two wavelengths over a single fiber optic strand by the end of
1999.
- Use of meshed SONET instead of SONET rings. Use of meshed SONET, which
allows every location on the Williams Network to be connected to multiple
other locations. Meshed SONET provides for more recovery options in the
case of a network failure, permits rapid provisioning of customer
services and allows for full utilization of capacity. Most other networks
use SONET rings, which automatically reverse signals at a specific point
along a network in the event of a network failure, providing for only one
recovery option. A SONET ring design also requires installation of up to
twice as much capacity for the same amount of traffic as compared to our
meshed SONET design.
- Closer spacing of transmission electronics. Spacing of transmission
electronics at 40-mile intervals. Most other fiber networks space their
electronics at 60-mile intervals. Our 40-mile spacing allows us to take
advantage of the latest advances in DWDM and other advances in optical
technology by reducing the distance over which light has to travel.
- Elimination of digital cross connect system. Exclusion of this system, a
high-cost, high-maintenance switching technology designed for
circuit-based systems. Circuit-based systems are the predecessor to the
ATM packet technologies we employ.
- Nortel DMS 250 switches. We will use the latest Nortel switching
technology to efficiently carry traditional voice services on our ATM
core network. At least seven Nortel DMS 250 voice switches will be
deployed on the Williams Network, enabling us to provide switched voice
services on the Williams Network. We will install the new
69
<PAGE> 73
switches in Anaheim, San Francisco, Kansas City, Houston, Chicago,
Atlanta and New York City.
The following is an example of how the Williams Network is designed
compared to traditional circuit-based networks.
The top portions of the diagram below reflect equipment which connects with
our customers. Each level of equipment interacts with the element below,
ultimately using the fiber for long distance transport. The contrast in the
number and width of each network element represented in the Traditional versus
the Williams Network diagram illustrates how the Williams Network collapses the
traditional dedicated network elements into shared, multi-service solutions
which simplify the network while increasing service flexibility. This unique
Williams Network design results in lower costs and faster development and
delivery of services versus traditional designs.
Network Design Flow Chart
Conduit and fiber optic cable. The newer portions of the Williams Network
that we are constructing are designed for expandability and flexibility and will
contain multiple conduits along approximately 70% of our routes. To construct
our fiber optic cable, fiber optic strands are placed inside small plastic tubes
and bundles of these tubes are wrapped with plastic and strengthened with metal.
We then place these bundles inside conduit, which is high-density polyethylene
hollow tubing 1 1/2 to 2 inches in diameter. Our conduit is generally pulled
through pipelines which are no longer used or it is buried approximately 42
inches underground along pipeline or other rights of way. We also use steel
casing in high-risk areas, including railroad crossings and high-population
areas, thereby providing for greater protection. The first conduit contains a
cable generally housing between 96 to 144 fibers, and the second conduit, or
third where constructed, serves as a spare. The spare conduit or conduits allows
for future technology upgrades, potential conduit sales and expansion of
capacity at costs significantly below the cost of new construction. After
existing and anticipated sales of dark fiber, we generally plan to retain
approximately 24 fibers for our own use on the Williams Network.
Points of presence. As of April 30, 1999, we had 38 points of presence or
POPs, which are environmentally-controlled, secure sites designed to house our
transmission, routing and switching equipment and local operational staff. We
plan to grow to 125 POPs by the end of 2000. A
70
<PAGE> 74
POP allows us to place customers' traffic onto the Williams Network. We are
designing our POPs with up to 50,000 square feet in order to provide colocation
services, which give our customers direct access to the Williams Network.
Colocation services provide our customers with access and space to install their
own equipment in our POPs. We intend to expand our network to include multiple
POPs within select major metropolitan areas in order to provide end-to-end
service offerings for our carrier customers.
Rights of way. The Williams Network is primarily constructed by digging
trenches along rights of way, rights to use the property of others which we
obtain throughout the U.S. from various landowners. Where feasible, we construct
along Williams' pipeline rights of way and the rights of way of other pipeline
companies. Approximately 27% of our rights of way are along Williams' pipeline
rights of way and the remainder are along the rights of way of third parties.
Rights of way from unaffiliated parties are generally for terms of at least 20
years and most cover distances of less than one mile. Where necessary or
economically preferable, we have other right of way agreements in place with
highway commissions, utilities, political subdivisions and others. As of May 21,
1999, we had agreements in place for approximately 89% of the rights-of-way
needed to complete the Williams Network. As of May 21, 1999, the remaining
rights of way needed for completion of the Williams Network consisted of
approximately 3,500 route miles located primarily in the Western U.S. Almost all
of our rights of way extend through at least 2018.
71
<PAGE> 75
The following table sets forth our current and future plans as of May 21,
1999 for the Williams Network build. This table does not include the routes of
the Retained WilTel Network.
<TABLE>
<CAPTION>
APPROXIMATE
ESTIMATED APPROXIMATE MILES IN
ROUTES COMPLETION DATE ROUTE MILES OPERATION
- ------ ----------------- ----------- -----------
<S> <C> <C> <C>
Atlanta -- Jacksonville Completed 370 370
Dallas -- Houston(1) Completed 250 250
Houston -- Atlanta -- Washington, D.C. Completed 1,830 1,830
Jacksonville -- Miami(2) Completed 330 330
Los Angeles -- New York City(1) Completed 4,370 4,370
Minneapolis -- Kansas City Completed 450 450
Portland -- Salt Lake City -- Los Angeles(3) Completed 1,320 1,320
Los Angeles -- San Diego(4) 2nd quarter 1999 150 --
Daytona -- Orlando -- Tampa 3rd quarter 1999 160 --
Detroit -- Cleveland(1) 3rd quarter 1999 200 --
Kansas City -- Denver 3rd quarter 1999 640 --
Los Angeles -- Sacramento -- Oakland -- San
Jose(5) 3rd quarter 1999 550 --
Portland -- Seattle(4) 3rd quarter 1999 180 --
Washington, D.C. -- New York City 3rd quarter 1999 350 --
Bakersfield -- San Luis Obispo -- Fresno 4th quarter 1999 310 --
Bandon, Oregon -- Eugene, Oregon 4th quarter 1999 270 --
Denver -- Salt Lake City 4th quarter 1999 570 --
Miami -- Tampa -- Tallahassee 4th quarter 1999 530 --
New Orleans -- Tallahassee 4th quarter 1999 480 --
Los Angeles -- Phoenix -- San Antonio --
Houston 1st quarter 2000 1,630 --
Sacramento -- Portland(5) 1st quarter 2000 530 --
New York -- Boston 2nd quarter 2000 250 --
Salt Lake City -- Sacramento -- San
Francisco 2nd quarter 2000 850 --
Albany -- Boston 4th quarter 2000 180 --
Atlanta -- Nashville -- Cincinnati -- Chicago 4th quarter 2000 850 --
Chicago -- Cleveland -- Pittsburgh -- Washington,
D.C. 4th quarter 2000 800 --
Chicago -- Detroit(1) 4th quarter 2000 280 --
Dallas -- Charlotte(1) 4th quarter 2000 1,250 --
Denver -- El Paso(1) 4th quarter 2000 750 --
Houston -- Kansas City -- St.
Louis -- Chicago 4th quarter 2000 1,300 --
Minneapolis -- Milwaukee -- Chicago(4) 4th quarter 2000 320 --
------ -----
TOTAL: 22,300 8,920
====== =====
</TABLE>
- -------------------------
(1) These routes were swapped or purchased by our company with no spare
conduits.
(2) We purchased this route along with one spare conduit.
(3) This route was jointly constructed by us, Enron Communications, Inc. and
Touch America, Inc. with no spare conduits.
(4) In addition to constructing one route with 2 spare conduits, we intend to
purchase 12 fibers along a diverse route between these cities.
(5) We purchased 12 fibers on these routes along with two spare conduits.
72
<PAGE> 76
Monitoring. We monitor the Williams Network 24 hours a day, seven days a
week from our network management centers in Tulsa, Oklahoma and St. Louis,
Missouri. Each network management center provides centralized network
surveillance, troubleshooting and customer service. The system currently allows
our technicians to detect a component malfunction in the Williams Network,
quickly reroute the customer's traffic to an available alternate path and effect
an expedited repair. Upon completion of the Williams Network, the rerouting
function will be fully automated and nearly instantaneous so that customers will
not experience any disruptions in service quality. We expect this will reduce
service costs and customer downtime. We have also implemented a program which
encourages people to phone a toll-free number prior to breaking ground, backed
up by Williams' "call before you dig" group to reduce the risk of damage to our
conduit or fiber system. Additionally, we place above-ground markers at frequent
intervals along the route of the Williams Network.
PRODUCTS AND SERVICES
Our network products and services fall into seven categories:
- packet-based data services
- private line services
- voice services
- local services
- dark fiber and conduit sales
- dim fiber leases
- network design and operational support
Packet-based data services. These services provide efficient connectivity
for data, Internet, voice and video networks at variable capacities across the
Williams Network to connect two or more points. Specific packet-based data
services include ATM, frame relay and Internet transport services. These
services primarily operate over the Williams Network and enable billing based on
quality of service and usage.
Private line services. We provide customers with fixed amounts of
point-to-point capacity across the Williams Network. We offer these services
both across the Williams Network and by purchasing capacity on other providers'
networks. As we complete the Williams Network, we will increase the percentage
of these services we provide on our network.
Voice services. We currently provide connectivity across the Williams
Network for our customers to complete long distance telephone calls using
capacity on other providers' networks. Our customers can use the Williams
Network to handle origination and termination of long distance phone calls. As
we complete deployment of our voice switches and obtain the necessary regulatory
approvals, we will provide these and other voice services on the Williams
Network and decrease our usage of other's networks. Other voice services will
include calling card, directory assistance, operator assistance, international
and toll-free services. As the traditional geographic boundaries for voice
services diminish, our voice platform will provide local, long distance and
international voice services.
Local services. We currently provide local connectivity for our carrier
customers through the resale of other providers' services. We have obtained
local capacity through our agreements with WinStar and can obtain local capacity
from SBC. We will develop specific products using this capacity to meet our
customers' local networking needs.
Dark fiber and conduit sales. We sell rights for dark fiber and related
services and may sell rights to a conduit in the future. Dark fiber consists of
fiber strands contained within a fiber optic cable which has been laid but does
not yet have its transmission electronics installed. A
73
<PAGE> 77
sale of dark fiber typically has a term which approximates the economic life of
a fiber optic strand (generally 20 to 30 years). Purchasers of dark fiber
typically install their own electrical and optical transmission equipment.
Substantially all of our current and planned builds include laying two spare
conduits, and we may sell rights to use at least one of them. A purchaser of
conduit typically lays its own cable inside the conduit. Related services for
both sales of rights for dark fiber and conduits include colocation of customer
equipment at our POPs and network equipment locations and maintenance of the
purchased fiber or conduit. In the past two years, we have entered into
approximately 15 agreements for sales of dark fiber with Frontier, IXC, WinStar
and others. Payment for dark fiber is generally made at the time of delivery and
acceptance of the fiber although other payment options may be available. In
addition, ongoing payments for maintenance services are required. These
transactions typically involve sales of contractual rights to use the fiber or
conduit, rather than sales of ownership interests.
Dim fiber leases. DWDM technology in the Williams Network will allow us to
sell a customer exclusive long-term use of a portion of the transmission
capacity of a fiber optic strand, rather than the entire fiber strand. This is
in addition to the capacity used by us to provide our other services. We are
able to derive sixteen wavelengths over a single fiber strand with current
technology and plan to derive up to thirty-two wavelengths over a single fiber
strand by the end of 1999. A purchaser of wavelength will install its own
electrical interface, switching and routing equipment and will share the fiber
and optical transmission equipment with other dim fiber users. We believe that
many potential customers will be interested in dim fiber because it allows a
customer to purchase capacity in smaller increments while retaining the added
control advantages of dark fiber.
Network design and operational support. We help our customers design and
operate their networks. We use our network management centers to monitor and
operate portions of their networks and use Solutions' resources to expand and
support our customers' networks. We are deploying new management tools,
including InSite(TM), our proprietary customer interface, which will give our
customers the ability to monitor network performance and reconfigure their
capacity from their own network management centers on an essentially real-time
basis and the ability to increase or reduce bandwidth rapidly to better match
their needs. InSite(TM) features equipment inventory management, bandwidth
inventory management, configuration management, fault isolation management and
alarm monitoring. In 1998, we provided network design and operational support
services primarily to Concentric and Savvis Communications Corporation, an
Internet service provider.
CUSTOMERS
We provide dedicated line and switched services to other communications
providers over our owned or leased fiber optic network facilities. Our customers
currently include RBOCs, Internet service providers, long distance carriers,
international carriers, utilities and other providers who desire high-speed
connectivity on a carrier services basis.
Sales to Intermedia accounted for approximately 31.2% of Network's revenues
from external customers in 1998. Sales to Qwest accounted for approximately
26.2% of Network's revenues from external customers in 1998. Sales to our next
three largest customers, Hyperion, Concentric and Frontier, together accounted
for approximately 29.0% of Network's revenues from external customers in 1998.
Our remaining customers each accounted for less than 3% of Network's revenues
from external customers in 1998.
74
<PAGE> 78
SALES AND MARKETING
We sell services and products to carriers through our sales organization.
Since we only sell to other communications carriers, our sales and marketing
department is small and focused, resulting in strong customer relationships and
lower operating costs. This organization consists of senior level management
personnel and experienced sales representatives with extensive knowledge of the
industry and our products and key contacts within the industry at various levels
in the carrier organizations. We position ourselves as the provider of choice
for communications carriers due to the quality of our service, the control we
provide customers over their service platforms, the reliability of our services
and our low cost position. We believe our cost advantages allow us to sell our
services on the Williams Network at prices which represent potentially
significant savings for our large-volume customers relative to their other
alternatives.
COMPETITION
The communications industry is highly competitive. Some competitors in the
markets of carrier services and fiber optic network providers may have
personnel, financial and other competitive advantages. New competitors may enter
the market because of increased consolidation and strategic alliances resulting
from the Telecommunications Act, as well as technological advances and further
deregulation. In the market for carrier services, we compete primarily with the
three traditional nationwide carriers, AT&T, MCI WorldCom and Sprint, and other
coast-to-coast and regional fiber optic network providers, such as Qwest, Level
3 and IXC. We compete primarily on the basis of pricing, transmission quality,
network reliability and customer service and support.
We believe that we have advantages over our competitors. AT&T, MCI WorldCom
and Sprint utilize systems that were constructed for the most part prior to
1990. We believe that the older systems operated by these carriers generally
face disadvantages when compared to the Williams Network, such as:
- lower transmission speeds
- lower overall capacity
- more costly maintenance requirements
- inefficiency due to design and competing traffic requirements
- greater susceptibility to systems interruption from physical damage to
the network infrastructure
Many older systems will face greater difficulty in upgrading to more
advanced fiber due to lack of a spare conduit. We are aware that other
competitors may employ advanced technology that is similar to that of the
Williams Network. Additional capacity that is expected to be available over the
next several years from competitors may cause significant decreases in prices
overall. For more information, see the section of this prospectus entitled "Risk
Factors -- Risks relating to our Network business."
We believe that our strategy of selling products and services to other
communications carriers gives us an advantage over other fiber optic network
providers who compete with their customers. We believe that communications
carriers prefer not to buy products and services from a competitor. We also do
not need a large sales, marketing and customer service staff in order to support
the retail markets that our competitors serve. We can effectively reach and
serve a relatively small group of large customers with our smaller, efficient
and focused team, resulting in reduced costs.
75
<PAGE> 79
RELATIONSHIP WITH MCI WORLDCOM
As part of our agreements with MCI WorldCom relating to the sale of the
majority of Williams' communications network business to LDDS, MCI WorldCom
granted us an option to purchase one fiber optic strand over approximately 7,700
miles of selected MCI WorldCom routes. In addition, we granted MCI WorldCom an
option to purchase one fiber optic strand over approximately 9,700 miles of
selected Williams Network routes on the portions of the Williams Network which
we began to develop in January 1998. The exercise price for each option is equal
to the capitalized cost attributable to the sold fiber plus a slight markup. Any
fiber optic strand we purchase pursuant to the option may only be used to
transmit video or multimedia services, including Internet services, until July
1, 2001. MCI WorldCom has agreed to provide private line, frame relay and
switched voice services for our and Williams' internal use through 2034. We have
agreed to pay MCI WorldCom its costs to unrelated third parties for these
services. Until July 1, 2003, we and MCI WorldCom have agreed not to solicit the
other's employees located in the Tulsa metropolitan area. Until August 1, 1999,
if either of us hires select key employees involved in network planning or in
management, the hiring company must pay to the other an amount equal to five
times the employee's annual compensation.
SOLUTIONS
We sell, install and maintain network services and the communications
equipment of leading vendors to address our customers' comprehensive voice and
data needs. Our expertise in communications and data networks permits us to
offer customers a wide range of professional services, including network
planning, design, implementation, management, maintenance and optimization. We
also distribute the products and services of select communications service
providers, including some of Network's customers. In April 1997, we purchased
Nortel's equipment distribution business, which we then combined with our
equipment distribution business to create Williams Communications Solutions,
LLC. We own 70% of Solutions LLC and Nortel owns the remaining 30%. Our
Solutions business unit consists primarily of Solutions LLC.
Our broad range of voice and data solutions allows us to serve as a
single-source provider for our customers' communications needs. We distribute
the products and services of a number of communications suppliers, primarily
Nortel, as well as Cisco, Octel (a division of Lucent), NEC, 3COM, Bell
Atlantic, SBC and U S WEST, and are therefore able to provide our customers with
multiple options. By offering equipment from a variety of vendors, we help
businesses optimize the productivity and reduce the cost of their communications
systems. We have expertise in the most complex network technologies to ensure
that products from various suppliers operate together effectively.
Selected statistics of our Solutions business as of March 31, 1999 include
(numbers are approximate):
<TABLE>
<S> <C>
Sales personnel........................ 1,200
Technicians............................ 2,400
Engineering personnel.................. 800
Operations support staff............... 1,400
Total customer sites................... 100,000
Sales and service locations............ 110
</TABLE>
76
<PAGE> 80
STRATEGY
Our objective is to be the premier provider of advanced, integrated
communications solutions to businesses. To achieve this objective, we intend to:
- Capitalize on converging voice, data, Internet and video needs. We
capitalize on the increased demand for new technologies as businesses
replace and upgrade existing communications infrastructure as a result of
an industry trend called convergence. Whereas in the past voice and data
equipment and networks were separate, convergence is the integration of
these separate technologies into a single communications environment. We
believe that our strong customer relationships, product portfolio and
technical experience provide us with an ideal platform to capitalize on
this trend.
- Leverage our engineering and technical resources. We have an experienced
staff of approximately 2,400 technicians and approximately 800
engineering personnel to design, install, manage and maintain our
customers' communications infrastructures. Our employees are trained to
address our customers' converged and complex communications needs, such
as Internet-connected call centers and voice over Internet protocol. As
technologies become more complex, the need for advanced communications
solutions such as these will continue to grow. Our engineering personnel
and technicians provide us with a competitive advantage in offering these
services.
- Provide advanced professional services. We provide comprehensive
services to assist customers in the design, engineering and operation of
their communications networks. Our services include advanced call center
applications, outsourcing, network engineering and network consulting. We
intend to continue to expand the professional services portion of our
business as customer demand for advanced communications and data network
solutions continues to grow.
- Utilize our nationwide presence and large, installed customer base. We
have approximately 110 sales and service locations throughout the U.S.
and Canada and approximately 100,000 customer sites. Our nationwide
presence allows us to better serve multi-location customers and makes us
a very attractive partner for leading communications equipment and
service providers. Our large, installed customer base provides us and
leading communications equipment and service providers with an existing
market to sell new products and services.
- Extend the reach of Network's carrier customers. We are able to
distribute the products and services of Network's customers to Solutions'
customer base. We are currently using Solutions' 1,200 sales personnel to
sell Concentric's Internet services and UniDial's long distance services.
In addition, we have agreed to offer SBC's network services as they are
made available to us. We believe that our ability to extend the reach of
Network's carrier customers provides Network with a valuable point of
differentiation.
PRODUCTS AND SERVICES
We provide a comprehensive array of communications products and services.
Our products and services fall into three categories:
- equipment sales and service
- professional services
- sale of carrier services
77
<PAGE> 81
Equipment sales and service. We sell and install voice and data
communications equipment and provide service, maintenance and support for our
customers' communications networks.
- Voice and video equipment. We offer our customers a variety of voice and
video equipment, which enables our customers to communicate more
effectively. We also install, configure and integrate all of the
equipment they purchase. The voice systems we sell range from systems for
small businesses to systems for large enterprise sites, requiring
anywhere between 15 and 50,000 internal telephone lines. This equipment
includes private branch exchange systems, key systems, building wiring,
call centers, voice mail systems and premise (as opposed to mobile)
wireless systems.
- Data equipment. We design, build and operate data networks as well as
integrated voice and data networks. To meet our customers' needs, we
evaluate technologies such as Internet protocol, frame relay and ATM and
then we select, integrate and deploy the appropriate routers, switches,
access devices and other required equipment. The networks we build range
from small local area networks supporting less than 50 users to wide area
networks supporting thousands of users and multiple technologies.
- Service and maintenance. We maintain and service our customers' networks
primarily through annual maintenance plans or through job-specific plans
based on time and materials. We remotely monitor and manage the voice and
data equipment and network connectivity of our customers 365 days a year,
24 hours a day through our advanced network management center. We are
able to resolve over 85% of all potential problems relating to data
equipment and over 25% relating to voice equipment without having to
dispatch a technician to the customer's site. When a skilled technician
is required, we have a staff of over 2,400 technicians available to meet
our customers' on-site service needs.
Professional services. We design, build and operate advanced voice, data
and integrated networks. Our professional services offerings include
outsourcing, advanced call center applications, network engineering and network
consulting. We will continue to expand these services as customer demand for
advanced communications solutions continues to grow.
- Outsourcing. We have over 400 engineers and on-site technicians to
support several large U.S. corporations which have elected to turn over
to us the management and operation of all or substantial portions of
their communications environments. Increasingly, these clients are
outsourcing their data networking requirements in addition to their
traditional voice communications requirements to expand network
capability, improve productivity and decrease costs.
- Advanced call center applications. Our call center applications team
consists of approximately 50 software applications developers and
engineers who design and implement customized call center solutions for
customers with complex requirements. We also maintain a computer
telephony integration lab with 30 specialists to test and develop custom
call center solutions.
- Network engineering. We have approximately 175 network engineers with
expertise in data as well as integrated voice and data networking. This
group designs networking solutions, implements those solutions and
provides ongoing operational support utilizing standard technologies. We
also provide engineers on a fee-for-service basis for customers who seek
to augment their own resources.
78
<PAGE> 82
- Network consulting. Our network consultants coordinate the operational
plans of our customers with their existing network capacity and
capability in order to determine the communications environment necessary
to meet their business needs. Our consultants provide a complete analysis
of existing network status and predict the impact of future changes on a
network and also develop sophisticated Internet applications.
Sale of carrier services. Our customers are increasingly demanding
"one-stop shopping" for communications services. We sell long distance, local
and Internet services offered by other carriers who are generally customers of
the Williams Network. This enables us to provide a complete communications
solution for our customers. We currently have agreements with SBC, Bell
Atlantic, U S WEST (in Arizona only), UniDial and Concentric to sell their
services.
ISSUES RELATING TO SOLUTIONS' BUSINESS PERFORMANCE
In 1997, we and Nortel combined our equipment distribution businesses to
create what is now Solutions LLC. The rationale for the combination was to
achieve the benefits of increasing the scale and national reach of our sales,
engineering and technical support staffs and our installed customer base and to
strengthen our relationship with our primary vendor. The combination was also
expected to provide the cost benefits of eliminating redundant operating and
overhead expenses. However, we have experienced difficulties in integrating
Nortel's equipment distribution business with ours and in managing the increased
complexity of our business. These difficulties have prevented us from fully
realizing the expected benefits of the combination and have adversely impacted
our financial results. For a detailed discussion of these issues, see the
section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- Solutions."
VENDOR RELATIONSHIPS
We have agreements with the suppliers of the products and providers of the
services we sell to our customers. These agreements provide for our
distribution, resale or integration of products or our acting as agents for the
provider of services. Normally, we receive volume discounts off the list price
of the product or service we purchase from our vendors. We estimate that sales
of Nortel's products, consisting of primarily voice equipment, accounted for
approximately 40% of Solutions' revenues in 1998. We estimate that product sales
from the next three largest vendors accounted for approximately 6% of Solutions'
revenues in 1998.
Nortel. We distribute Nortel's voice, data and video products. We are the
largest U.S. distributor of Nortel's end-user voice products. The discounts we
receive vary based on our volume of purchases of a particular product line up to
a maximum discount. We have a commitment from Nortel that we may remain a
distributor of Nortel's products through at least 2002. While we have no
commitment to purchase a minimum number of products from Nortel, if we do not
maintain a minimum percentage of Nortel's products in our product mix, each
party has the option to change the ownership structure of Solutions LLC. See the
section below entitled "-- LLC Agreement with Nortel" for more information.
Cisco. We are a large U.S. distributor of Cisco's full line of data
networking products. We also distribute Cisco's voice over Internet protocol
products.
Lucent. We are one of the largest U.S. distributors of the voicemail
products of Lucent's Octel messaging division. We also distribute Lucent's
advanced premises wiring products.
NEC. We are one of the largest non-affiliated U.S. distributors of NEC
voice equipment. We have an agreement with NEC that requires us to purchase from
April 1, 1999 through March 31, 2001 annual minimum amounts which aggregate to a
minimum of $44 million of
79
<PAGE> 83
their products. If we do not fulfill our commitment to NEC, we are required to
pay 30% of any amounts we do not purchase.
CUSTOMERS
We have approximately 100,000 customer sites across a broad range of
industries, including businesses as well as educational, governmental and
non-profit institutions. These customers consist of small businesses (ten or
more employees), small sites of larger companies and large enterprise campus
sites (e.g., AT&T and the University of Dayton). We are one of the largest
providers in the U.S. of installation and maintenance services of communications
systems to business sites of over 10,000 telephone lines. We believe that our
customer service will enable us to capture an increasing portion of each
customer's communications budget in the future. We are not dependent on any one
customer or group of customers to achieve our desired results. Our top 25
customers combined accounted for less than 10% of revenue during 1998, with no
one customer accounting for more than 1%. Our customers include: AT&T, Bankers
Trust Corporation, BP Amoco P.L.C., Countrywide Credit Industries, Inc., Hewlett
Packard Company, Johnson & Johnson, Kaiser Permanente, Lockheed Martin
Corporation, Merrill Lynch & Co., Pfizer, Inc., Prudential Individual Insurance
Group, Shell Exploration and Production Technology Company, Staples, Inc., T.
Rowe Price International Technologies, Inc. and Texaco Inc.
SALES
We operate approximately 110 sales and service offices in the U.S. and
Canada staffed with approximately 1,200 sales personnel. Approximately 100 of
our sales personnel focus on large, national and government accounts. In
addition, we have representatives dedicated to making regular telephone contact
with our existing customers, providing enhanced customer service and a channel
for merchandise sales.
COMPETITION
Our competition comes from communications equipment distributors, network
integrators and manufacturers of equipment (including in some instances those
manufacturers whose products we also sell). Our competitors include Norstan,
Inc., Anixter Inc., Integrated Network Services, Lucent, Siemens, Cisco Systems
and the equipment divisions of GTE, Sprint and the RBOCs. Most equipment
distributors tend to be regionally focused and do not have our capability to
service a nationwide customer base. We believe our expertise in voice
technologies and our ability to provide comprehensive solutions give us an
advantage over network integrators. We realize that we operate in a highly
competitive industry and face competition from companies that may have
significantly greater financial technical and marketing resources. Most
manufacturers of equipment are focused on selling their own equipment and do not
provide converged solutions. By having relationships with multiple vendors, we
believe we can provide the best solution for each customer's specific needs. We
realize that an interruption, or substantial modification, of our distribution
relationships could have a material adverse effect on our business. For more
information, see the section of this prospectus entitled "Risk Factors -- Risks
relating to our Solutions business."
LLC AGREEMENT WITH NORTEL
In April 1997, we purchased Nortel's equipment distribution business, which
we then combined with ours to create Solutions LLC. Nortel's equipment
distribution business included the combined net assets of Nortel's direct sales
subsidiaries, Nortel Communications Systems, Inc., which includes Bell Atlantic
Meridian Systems, and TTS Meridian Systems, Inc.
80
<PAGE> 84
We have a 70% interest and Nortel has a 30% interest in Solutions LLC. In
the event of a change of control of either us or Nortel, Nortel may require us
to buy, or we may require Nortel to sell, Nortel's entire interest in Solutions
LLC at market value. If for two consecutive years the percentage of Nortel
products purchased by Solutions LLC compared with all Nortel and similar
products purchased by Solutions LLC falls below approximately 78% and the rate
of growth of the purchase of Nortel products by Solutions LLC during the
two-year period is below that of other Nortel distributors, Nortel may require
us to buy, or we may require Nortel to sell, Nortel's entire interest in
Solutions LLC at market value.
After 1999, Nortel may require us to purchase up to one-third of its
interest in Solutions LLC. Nortel must retain a 20% interest in Solutions LLC
for a period of 5 years after the date on which Nortel's ownership interest is
reduced to 20%. As long as Nortel retains 20%, we must retain at least a 50%
interest in Solutions LLC. Each party has a right of first refusal to purchase
the other party's interest in the event of a sale to a third party of all or any
part of the party's interest. For more information about our relationship with
Nortel, see the section above entitled "-- Vendor relationships."
We and Nortel have representation in proportion to our respective ownership
interest on the management committee of Solutions LLC. We currently appoint
seven representatives and Nortel appoints three representatives to this
committee. As long as Nortel's interest in Solutions LLC is at least 20%, Nortel
must approve, among other things:
- any changes to the scope of Solutions LLC's business
- any non-budgeted capital expenditure over $5 million, non-budgeted
acquisition, divestiture or any other obligation over $20 million
- the incurrence of long-term debt in excess of equity
Until May 2000, we and Nortel will not engage in direct sales to end-users of
Nortel's voice products or any similar voice products in the U.S. and Canada
outside Solutions LLC.
STRATEGIC INVESTMENTS
We make investments in, or own and operate, domestic and international
businesses that create demand for capacity on the Williams Network, increase our
service capabilities, strengthen our customer relationships, develop our
expertise in advanced transmission electronics or extend our reach.
DOMESTIC
Vyvx. We own Vyvx, a leading provider of integrated fiber optic, satellite
and teleport video transmission services. Through Vyvx, we have gained
experience in multimedia networks and have established high-speed connectivity
to the major news and sports venues throughout the country. Vyvx's broadcast
customers include all major broadcast and cable television networks, news
services and professional and collegiate sports organizations. In 1998, Vyvx
delivered the video and audio signals from live events to television networks
for approximately 85% of all major league sports events.
Concentric. Concentric Network Corporation is a provider of Internet-based
virtual and private networking services to business customers. We currently own
4,633,716 shares, or 11.5%, of Concentric's common stock, which we acquired over
the past two years for an aggregate of approximately $41.5 million. We also own
warrants to purchase an additional 710,036 shares of Concentric's common stock
at an exercise price of $3 per share by June 2002. Concentric has agreed to
purchase at least $21 million of services and equipment from us prior to
December 1, 2002. Through 2007, we are Concentric's preferred provider of
communications equipment and
81
<PAGE> 85
long distance multimedia network services. As a preferred provider, we retain a
right of last refusal to provide these services so long as the equipment and
services are competitive to the market in technology and price. Through 2007,
Concentric must first try to buy all services and equipment it requires from us
if we provide the products Concentric requires. Solutions has also entered into
an agreement with Concentric which provides that we will market and resell
Concentric's telecommunications services in the U.S. Our investment in
Concentric allows us to better understand the requirements of Internet service
providers so that we can scale these service offerings to better serve our
customers.
UniDial. UniDial Communications, Inc. is a reseller of long distance and
other communications products, including frame relay, Internet and conferencing
services. In October 1998, we purchased shares of preferred stock of UniDial for
$27 million. Dividends accrue at the rate of 10% per annum beginning October 1,
1999. The shares are convertible into common stock under certain circumstances,
with our resulting percentage being subject to various formulas and timing
restrictions. We currently estimate that our preferred stock would convert into
approximately 12% of UniDial's common stock. We entered into an agreement with
UniDial which provides for UniDial to buy all of its required carrier services
from us until October 2002. We must price our services at competitive market
levels. UniDial may not terminate the carrier services agreement, which
automatically renews for successive two-year periods, as long as we continue to
own all of our UniDial preferred stock or own at least 5% of UniDial's common
stock. We also have an additional agreement with UniDial which provides for
Solutions to sell UniDial's products and services and for UniDial to handle the
billing and collection relating to Solutions' sales of UniDial's services. Our
investment in UniDial allows us to better understand the reseller market and
enables us to better serve our customers.
UtiliCom. UtiliCom Networks Inc. partners with utilities to create joint
ventures offering local exchange and other communications services. We currently
own 469,154 shares of UtiliCom's common stock, which represents a 14.5% interest
(9.7% on a fully-diluted basis), though we expect our interests to be reduced to
6.7% (5.9% on a fully-diluted basis) in 1999 upon UtiliCom's receipt of
additional financing. We have provided a $1 million loan to UtiliCom that
matures in May 2003, which we may convert to UtiliCom common stock in the event
of an initial public offering of UtiliCom's common stock. We also provided an
additional $4 million loan that matures in June 1999. We hold 200,000 warrants
that are exercisable to purchase UtiliCom common stock at $3 per share. In
exchange for our financing and investments, UtiliCom has agreed to use
reasonable best efforts to utilize our communications services and equipment and
to cause each of its joint ventures to designate us as its vendor as long as we
offer the equipment and services on competitive terms. In addition, we and
UtiliCom agreed to market each other's products and services to each other's
customers. UtiliCom's first joint venture partner is a subsidiary of SIGCORP,
Inc., a utility in Evansville, Indiana. The new venture is preparing to provide
telephony and data services, Internet services and cable television services to
business and residential customers.
Other. We also own Williams Conferencing, Global Access, Telemetry and
ChoiceSeat. Williams Conferencing offers worldwide audio and video services,
special events management and video conferencing networks to businesses. Global
Access offers closed-circuit video broadcasting services for businesses,
universities and other large institutions. Telemetry provides wireless remote
monitoring and meter reading equipment and related services to industrial and
commercial customers, including Williams. ChoiceSeat deploys touch-screen
display units installed on stadium seats which provide access to statistics,
different views of the field, player-and venue-related information and access to
current information from other sports events.
82
<PAGE> 86
INTERNATIONAL
We own interests in communications ventures in Brazil, Australia and Chile
which consist of ATL, PowerTel and MetroCom. Williams has granted us an option
to acquire its interest in Lightel. Williams International Company, a subsidiary
of Williams, will operate and manage our international investments under an
operations and management agreement.
ATL. ATL-Algar Telecom Leste S.A. was formed in March 1998 to acquire the
concession for B-band cellular licenses in the Brazilian states of Rio de
Janeiro and Espirito Santo. ATL is owned by Williams, SKTI-US LLC and Lightel
S.A. -- Tecnologia da Informacao. As of March 31, 1999, Williams owned a 55%
direct interest in ATL and indirect interest in ATL through its ownership in
SKTI-US LLC. SKTI-US LLC is owned by Williams and SK Telecom Co., Ltd., Korea's
largest wireless telecommunications provider. Lightel is a holding company whose
subsidiaries are communications service providers in Brazil.
Williams has an option to acquire SK Telecom's interest in SKTI-US LLC once
permitted under Brazilian regulations. In April 1998, Williams acquired a 20%
non-voting economic interest in ATL. Also in April 1998, SKTI-US LLC acquired a
10% economic interest, representing a 30% voting interest, in ATL. On March 25,
1999, Williams purchased from Lightel for $265 million an additional 35%
economic interest, representing a 19% voting interest, in ATL. This investment
reduces Lightel's investment to a 35% economic interest, representing a 51%
voting interest, in ATL. As of March 31, 1999, Williams' investment in ATL
totaled $415 million.
On March 25, 1999, Williams pledged 49% of its common and all of its
preferred stock as collateral for a U.S. dollar-denominated $521 million loan
from Ericsson Project Finance AB to ATL. In addition, Lightel pledged 83% of its
initial investment in ATL's common and preferred stock as collateral for the
loan. The loan matures on March 25, 2002.
ATL provides digital cellular services in the Brazilian states of Rio de
Janeiro and Espirito Santo, covering a population of approximately 16.1 million
inhabitants. ATL started commercial operations on January 15, 1999 and had
approximately 340,000 subscribers as of March 31, 1999. ATL's only cellular
competitor in these areas is Tele Sudeste Celular Participacoes S.A., a former
subsidiary of Telebras currently controlled by a consortium led by Telefonica de
Espana. We believe these areas to be particularly attractive because of the high
unsatisfied demand for cellular services, large population base and relatively
high level of income per capita when compared to other Brazilian regions. ATL's
strategy is based on rapidly deploying a high-quality, 100% digital cellular
network, offering a broad range of enhanced services and providing excellent
customer service.
Lightel. Williams currently owns a 20% equity interest in Lightel. Algar
S.A. Empreendimentos e Participacoes, a Brazilian conglomerate, owns 74% of
Lightel. The remaining 6% of Lightel is owned by the International Finance
Corporation.
We will have the right during the period from January 1, 2000 through
January 1, 2001 to purchase all of Williams' equity and debt investments in
Lightel at the net book value of Williams' investment in Lightel at the time of
the purchase. At December 31, 1998, this net book value was approximately $170
million. The purchase price is payable in shares of Class B common stock valued
at the average closing sale price per share of our common stock over the twenty
trading-day period prior to the purchase. In the event that we exercise this
option, we would be required to assume any capital or other commitments that
Williams may have to Lightel at the time of the purchase.
83
<PAGE> 87
Williams purchased the 20% economic interest in Lightel, representing a 5%
voting interest, in January 1997 for approximately $65 million. In April 1998,
Williams invested an additional $100 million in the form of a redeemable
convertible bond. The bond bears interest at an annual rate of 10% compounded
quarterly in U.S. dollars and is convertible at any point over the next three
years. After the conversion of the bond, Williams would own an approximately 33%
economic interest, representing a 21% voting interest in Lightel. Beginning in
January 2002 and until an initial public offering of Lightel, Williams has a
right to sell its entire interest in Lightel to Algar for at least the amount of
Williams' investment plus interest. Williams has the ability to maintain its
ownership level in Lightel in the event of capital increases.
Lightel's main communications subsidiaries and investments as of March 31,
1999 include:
- 35% of ATL
- 70.9% of Companhia de Telecomunicacoes do Brasil Central
- 39.7% of Tess S.A.
Other majority-owned subsidiaries of Lightel include companies involved in
cable television services, design, maintenance and construction of
communications networks and provision of long distance services.
Companhia de Telecomunicacoes do Brasil Central provides local telephone
and cellular services in parts of the states of Minas Gerais, Sao Paulo, Goias
and Mato Grosso do Sul, covering 90,000 square kilometers with a population of
approximately 2.5 million people. This area of Brazil has recently experienced
higher rates of economic development than other regions of Brazil. As of
December 31, 1998, Companhia de Telecomunicacoes do Brasil Central had
approximately 403,000 fixed telephone lines in service and approximately 127,000
cellular subscribers.
Tess provides digital cellular services in Sao Paulo state outside the city
of Sao Paulo, covering a population of approximately 16.3 million inhabitants,
under a concession purchased from Brazil's federal government in 1997. We
believe this to be an attractive area because of the low penetration of fixed
telephone lines and the steady demand for telephone service. Tess's other
stockholders are Telia AB, the largest telecommunications operator in Sweden,
and Eriline Celular, a subsidiary of the Brazilian Eriline group. Tess began to
provide cellular service in December 1998.
84
<PAGE> 88
OWNERSHIP STRUCTURE OF STRATEGIC INVESTMENTS IN BRAZIL AS OF MARCH 31, 1999
SUBSIDIARIES FLOW CHART
PowerTel. In August 1998, Williams and a joint venture owned by three
large Australian electric utilities purchased equity interests in PowerTel
Limited (previously known as Spectrum Network Systems Limited), a public company
in Australia.
PowerTel plans to build, own and operate communications networks serving
the three cities of Brisbane, Melbourne and Sydney and plans to provide local
services in the central business districts of these cities. The three Australian
utilities have entered into a ten-year agreement with PowerTel which allows
PowerTel to use the utilities' ducts and to lay fiber optic cable alongside
their rights-of-way between the cities. PowerTel's strategy is to provide
high-quality, low-cost local voice, data and Internet services to the commercial
and carrier markets commencing in the second half of 1999.
Williams currently owns 159,544,468 shares, or 35%, of the common stock of
PowerTel and 31,914,894 shares, or 100%, of convertible cumulative preferred
stock of PowerTel. Williams' total investment represents a 36% economic interest
in PowerTel, which Williams purchased for 90 million Australian dollars. The
convertible cumulative preferred stock is convertible into an equivalent number
of shares of common stock at Williams' option at any time until August 2003.
Williams currently holds a majority of PowerTel's board seats, is entitled to
elect the majority of the directors of PowerTel, to appoint the executive
officers of PowerTel and operate the company. Williams is required to invest an
additional 60 million Australian dollars in cash by February 2000 in PowerTel
for 127,659,574 shares of convertible cumulative preferred stock. Williams'
ownership in PowerTel will increase to 45% after it has made all of its 60
million Australian dollar cash contributions. Williams also has options to
purchase 44,680,851 shares of common stock, which would increase its interest by
3%, at an exercise price of 0.47 Australian dollars per share. These options are
exercisable at any time until August 2003. Williams also has a 2.4% ownership
interest in PowerTel through an earlier investment.
85
<PAGE> 89
MetroCom. On March 30, 1999, Williams acquired a 19.9% equity interest in
MetroCom S.A. MetroCom is a Chilean company formed to build, own and operate a
communications network providing local, Internet, data and voice services to
businesses and residences in the Santiago metropolitan area. The remaining 80.1%
of MetroCom is owned by MetroGas S.A., a company which is constructing a natural
gas distribution system throughout the Santiago metropolitan area. MetroGas'
stockholders are several large international and Chilean electric utilities and
energy companies. MetroGas has granted MetroCom the right to utilize its
rights-of-way throughout Santiago. MetroCom's strategy is to provide
high-quality, low-cost local, Internet, data and voice services and to focus on
the commercial and high-end residential markets. MetroCom plans to complete its
fiber optic network and plans to commence services in late 1999.
Williams also has warrants to purchase shares of MetroCom's common stock
which would increase its interest to 50%. Williams purchased the common stock
and the warrants for $24.5 million. Williams is entitled to appoint the
executive officers of MetroCom and operate the company.
STRATEGIC ALLIANCES
We enter into strategic alliances with communications companies in order to
secure long-term, high-capacity commitments for traffic on the Williams Network
and to enhance our service offerings. The most significant of these alliances
are described briefly below.
SBC
SBC is a communications providers in the U.S. with 1998 revenues of
approximately $28.8 billion. SBC currently provides local services in the south
central region of the U.S. and in California, Nevada and Connecticut. SBC has a
pending agreement to acquire Ameritech, a communications provider in the Midwest
with 1998 revenues of approximately $17.2 billion.
On February 8, 1999, we entered into agreements with SBC under which:
- SBC must first seek to obtain domestic voice and data long distance
services from us for 20 years
- we must first seek to obtain select international wholesale services and
various other services, including toll-free, operator, calling card and
directory assistance services, from SBC for 20 years
- we and SBC will sell each other's products to our respective customers
and provide installation and maintenance of communications equipment and
other services
For the services each must seek to obtain from the other, the prices
generally will be equal to the cost of the product or service plus a specified
rate of return. However, these prices cannot be higher than prices charged to
other customers and in some circumstances cannot be higher than specific rates.
If either party can secure lower prices for comparable services which the other
party will not match, then that party is free to utilize the lowest cost
provider.
Both we and SBC can provide services or products to other persons. Each
party may also sell or utilize the products or services purchased from the other
to provide products or services to other persons. However, if SBC establishes a
wholesale distribution channel to resell the network capacity purchased from us
to another provider of carrier services, we have the right to increase the price
we charge SBC for the services SBC resells in this manner. While the terms of
our agreements with SBC are intended to comply with restrictions on SBC's
provision of long distance services, various aspects of these arrangements have
not been tested under the Telecommunications Act.
86
<PAGE> 90
We and SBC have agreed on a mechanism for the development of projects which
would allow the interconnection of the SBC network with the Williams Network
based on the unanimous decision of committees composed of an equal number of
representatives from our company and SBC. If a committee does not approve a
project, both we and SBC have the right to require the other party to develop a
project in exchange for payment of the direct costs and cost of capital required
to complete the project or pursue it on its own. In addition, upon SBC receiving
authorization from the FCC to provide long distance services in any state in its
traditional telephone exchange service region, SBC has the option to purchase
from us at net book value certain voice or data switching assets which are
physically located in that state and of which SBC has been the primary user.
This purchase option would not permit SBC to acquire any rights-of-way we use
for the Williams Network or other transport facilities which we maintain.
Upon termination of the alliance agreements with SBC, SBC has the right in
certain circumstances to purchase voice or data switching assets (including
transport facilities) of which SBC's usage represents 75% or more of the total
usage of these assets.
SBC may terminate the provider agreements if any of the following occurs:
- SBC does not acquire Ameritech or if regulators impose conditions on the
acquisition that SBC refuses to accept
- we begin to offer retail long distance voice transport or local exchange
services on the Williams Network except in limited circumstances
- we materially breach our agreements with SBC causing a material adverse
effect on the commercial value of the relationship to SBC
- we have a change of control
- SBC acquires an entity which owns a nationwide fiber optic network in the
U.S. and determines not to sell us long distance transport assets
We may terminate the provider agreements if any of the following occurs:
- SBC has a change of control
- there is a material breach by SBC of the agreements
Either party may terminate a particular provider agreement if the action or
failure to act of any regulatory authority materially frustrates or hinders the
purpose of that agreement. There is no monetary remedy for such a termination.
In the event of termination due to our actions, we could be required to pay
SBC's transition costs of up to $200 million. Similarly, in the event of
termination due to SBC's actions, SBC could be required to pay our transition
costs of up to $200 million, even though our costs may be higher.
On March 23, 1999, the U.S. Department of Justice completed its antitrust
review of the proposed merger of SBC and Ameritech. The DoJ approved the merger
subject to a consent decree agreed to by the parties that the companies would
sell one of their overlapping wireless systems in St. Louis, Chicago and some
other portions of Illinois. On April 5, 1999, Ameritech announced its agreement
with GTE to sell GTE these overlapping wireless systems and thus satisfy the
consent decree's condition to completing the merger of SBC and Ameritech. On
April 8, 1999, the Public Utilities Commission of Ohio approved the merger,
subject to certain conditions agreed to by SBC and Ameritech. The merger must
still be approved by the FCC and the Illinois Commerce Commission, which
generally have statutory mandates to review competition issues as well as other
aspects of the public interest related to the merger. These regulatory agencies
may approve, approve subject to certain conditions imposed on the
87
<PAGE> 91
companies, or deny approval of the merger. On April 2, 1999, the chairman of the
FCC released a letter to Ameritech and SBC indicating that he has serious
concerns regarding whether the proposed merger is in the public interest and
requesting Ameritech and SBC to engage in discussions regarding possible
conditions to the merger that would address his concerns. SBC and Ameritech
recently stated that they plan to close the merger by mid-1999, and that the
DoJ's approval will help obtain approval from the regulatory agencies.
SBC has also entered into a securities purchase agreement with us and
Williams to purchase from us at the closing of the equity offering the number of
shares of our common stock equal to the lesser of:
(a) $500 million divided by the initial public offering price less the
underwriting discount or
(b) 10% of our outstanding common stock immediately following the
consummation of the equity offering and the SBC investment.
Furthermore, if the underwriters in the equity offering exercise their
over-allotment option, SBC will also purchase the number of additional shares of
common stock it would have been required to purchase if the closing of the
over-allotment option had occurred simultaneously with the closing of the equity
offering. The obligation to make the SBC investment is subject to certain
conditions at closing, including that the agreement under which we provide
network transport services to SBC is in full effect.
In connection with its purchase of common stock SBC has agreed to certain
restrictions and will receive certain privileges, including the following:
- SBC has agreed not to acquire more than 10% of our common stock
- SBC has agreed not to transfer to anyone except affiliates any of its
shares of common stock for a period of three and a half years, but this
transfer restriction provision will be terminated if we have a change of
control
- SBC has the right to nominate a member of our board of directors so long
as SBC retains more than a 5% equity interest in our common stock and has
obtained and continues to have relief in any state from Section 271 of
the Telecommunications Act
- SBC has a right to increase its interest to 10% of our outstanding common
equity if it does not achieve that limit immediately following the
consummation of the purchase of common stock described above
- SBC has a pre-emptive right to maintain its equity interest in our common
stock, which would be forfeited if it were not exercised more than once.
Following a second failure to exercise, SBC has a pre-emptive right to
maintain its newly diluted position so long as it maintains at least a 3%
interest in our common stock
- SBC also has registration rights in connection with its holdings
We have a call option to purchase all the shares of the common stock
acquired by SBC under the securities purchase agreement in the event of the
termination of certain agreements with SBC. Williams, so long as it has a 50%
interest in our common stock, has a right of first purchase with respect to any
shares of our common stock that SBC should decide to offer. We also have a right
of first purchase with respect to any shares of common stock not purchased by
Williams.
We are seeking to have SBC agree to reduce its investment from $500 million
to $425 million, in which event Telmex's investment would increase from $25
million to $100 million.
88
<PAGE> 92
INTEL
Intel Corporation is a leading manufacturer of chips and other computer,
networking and communications products. Intel recently announced the formation
of its new business, Intel Internet Data Services, to provide Internet
web-hosting services by building and managing data centers around the world.
On May 24, 1999, we and Intel, on behalf of Intel Internet Data Services,
entered into a long-term master alliance agreement. The alliance agreement
provides that we and Intel Internet Data Services will purchase services from
one another pursuant to a service agreement and create a co-marketing
arrangement, each of which will have shorter terms than that of the master
alliance agreement. The parties' obligations under the alliance agreement are
subject to, among other conditions, completion of the service agreement and
co-marketing agreement by June 15, 1999. The services we will provide include
domestic transport services and may also include Internet connectivity. Intel
will provide web hosting services pursuant to the co-marketing arrangement.
Subject to our meeting pricing, quality of service and other specifications,
Intel Internet Data Services will purchase a significant portion of its yearly
domestic transport requirements from us.
Intel also entered into a securities purchase agreement with us and
Williams to purchase the number of shares of our common stock equal to $200
million divided by the initial public offering price less the underwriting
discount. The parties' obligations under the securities purchase agreement are
subject to closing conditions, including that the alliance agreement is in full
effect, that at least $500 million is raised in the equity offering and that
necessary governmental approvals have been obtained.
In connection with its purchase of common stock, Intel has agreed not to
transfer any of its shares of common stock to anyone except affiliates for a
period of eighteen months, but this transfer restriction provision will be
terminated if we have a change of control. In addition, the transfer restriction
does not prohibit Intel from participating in future registered offerings
initiated by us or from engaging in hedging transactions commencing six months
from the date of the equity offering. Intel also has registration rights in
connection with its holdings.
TELMEX
Telefonos de Mexico, S.A. de C.V., known as Telmex, is the largest
communications provider in Mexico. Telmex currently provides long distance and
local services primarily in Mexico.
On May 25, 1999, we entered into agreements with Telmex under which,
subject to any necessary U.S. and Mexican regulatory requirements:
- Telmex must first seek to obtain select international wholesale services
and various other services from us for 20 years
- we must first seek to obtain select international wholesale services and
various other services from Telmex for 20 years
- we and Telmex will sell each other's products to our respective customers
and will negotiate the terms under which both parties will provide
installation and maintenance of communications equipment and other
services for the other
For the services each must seek to obtain from the other, the prices
generally will be established to reflect the strategic relationship and
commitments made to each other, subject to any applicable law or regulations
establishing the prices. If either party can secure lower prices for comparable
services which the other party will not match, then that party is free to
utilize
89
<PAGE> 93
the lowest cost provider. Both we and Telmex can provide services or products to
other persons. Each party may also sell or utilize the products or services
purchased from the other to provide products or services to other persons.
We and Telmex have agreed on a mechanism for the development of mutually
beneficial projects intended to interconnect the Williams Network with the
Telmex network to provide seamless voice and data on both a nationwide and
international basis. Project decisions will be based on the unanimous decision
of committees composed of an equal number of representatives from our company
and Telmex.
Either party may terminate the alliance agreement if any of the following
occurs:
- the parties cannot execute implementing agreements within a specified
amount of time
- specified agreements to which Telmex is a party are not terminated prior
to the equity offering
- the action, or failure to act, of any regulatory authority or the passage
of a law or regulation materially frustrates or hinders the purpose of
any of our agreements
- either party experiences a change of control
One party may terminate the agreements if the other party materially
breaches them or is no longer able to deliver the products and services for a
period of 30 days.
We and Telmex recognize that certain provisions of the alliance agreement
may require further relaxation of existing regulatory requirements by either
U.S. or Mexican regulatory authorities before they may be implemented.
Telmex has also entered into a securities purchase agreement with us and
Williams to purchase from us the number of shares of our common stock equal to
$25 million divided by the initial public offering price less the underwriting
discount. If SBC agrees to reduce its investment to $425 million, Telmex's
investment would increase to $100 million.
The obligation to make the Telmex investment is subject to conditions at
closing, including that the alliance agreement with Telmex be in full effect.
In connection with its purchase of our common stock Telmex has agreed to
certain restrictions and will receive certain privileges, including the
following:
- Telmex has agreed not to acquire more than 10% of our common stock for a
period of 10 years
- Telmex has agreed not to transfer to anyone, except affiliates, any of
its shares of common stock for a period of 3 1/2 years, but this transfer
restriction provision will be terminated if we have a change of control
- Telmex has agreed that we have the right, for a period of 3 1/2 years, to
repurchase our stock at market value less the underwriter's discount if
the alliance agreement is terminated for any reason other than a breach
by us
Telmex also has registration rights in connection with its holdings.
METROMEDIA FIBER NETWORK
Metromedia Fiber Network is currently constructing local fiber optic
networks in 11 U.S. cities including New York, Boston, Philadelphia, Chicago,
Washington, D.C., Dallas, Houston, Atlanta, Seattle, Los Angeles and San
Francisco. Metromedia has indicated that it may announce additional cities for
its network during the next year. On May 21, 1999, we
90
<PAGE> 94
entered into two memoranda of understanding with Metromedia under which we each
agree to enter into 20-year agreements with the other, providing for the
following:
- Metromedia will lease to us up to 3,200 miles of dark fiber on its
local networks, six to 96 fibers per segment, and will provide us with
maintenance services and dark fiber connectivity to approximately 250
points of presence and data centers in exchange for approximately $317
million payable by us over the duration of the agreement
- we will lease to Metromedia six dark fibers over substantially all of
the fiber optic cable on the Williams Network and provide colocation
and maintenance services in exchange for approximately $317 million
payable by Metromedia over the duration of the agreement
Lease and maintenance payments will be based on the number of fiber miles
leased. We will lease fiber from Metromedia in all 11 of its current
metropolitan areas. In addition, we will have the right to select future
Metromedia market areas where we will lease fiber, when and if such cities are
announced. We will begin leasing fiber on constructed segments of the Metromedia
network upon acceptance by us in accordance with acceptance procedures as
provided in the agreement. Leases of fiber on additional segments will begin
following construction and acceptance. We anticipate that we will begin to lease
fiber from Metromedia during 1999.
Metromedia will begin leasing fiber on constructed segments of the Williams
Network upon acceptance by it pursuant to the acceptance procedures. Leases of
fiber on additional segments will begin following construction and acceptance.
We anticipate that Metromedia will begin to lease fiber from us during 1999.
WINSTAR
WinStar Communications, Inc. uses wireless technology to provide
high-capacity local exchange and Internet access services to companies located
generally in buildings not served by fiber optic cable. On December 17, 1998, we
entered into two agreements with WinStar under which:
- we have a 25-year right to use approximately 2% of WinStar's wireless
local capacity, which is planned to cover the top 50 U.S. markets, in
exchange for payments equal to $400 million over the next four years
- WinStar has a 25-year right to use four strands of our fiber optic cable
over 15,000 route miles on the Williams Network, a transmission capacity
agreement with an obligation to lease specified circuits from us for at
least 20-year terms and an agreement for colocation and maintenance
services in exchange for monthly payments equal to an aggregate of
approximately $644 million over the next seven years
WinStar has licenses from the FCC to operate in various frequencies in the
top 50 metropolitan markets in the U.S. WinStar has constructed approximately 60
hubs, or antenna sites, which are currently available to us. WinStar intends to
construct 270 hubs by the end of 2001 and we will have the ability to use all of
these hubs. We will pay WinStar the $400 million over the next four years as
WinStar completes construction of the hubs. As of March 31, 1999, we had paid
WinStar approximately $84 million.
We anticipate that the network fiber to be used by WinStar will be
completed in 2000. We will also be WinStar's preferred provider of domestic
communications requirements for 25 years. WinStar will pay us the $644 million
in equal monthly installments over the next seven years.
91
<PAGE> 95
As of March 31, 1999, we had received approximately $15.3 million. In addition,
we and WinStar are prohibited from directly competing with each other for a
period of three years.
U S WEST
U S WEST, Inc. is a communications provider with operations currently in
the western region of the U.S. We entered into an agreement with U S WEST,
effective January 1998, which provides that our two companies will work together
to provide data networking services to a variety of customers. We are marketing
out-of-region data networking services developed by U S WEST on a carrier
services basis. U S WEST has agreed to first seek to obtain services from us
through 2002 and is required to purchase at least $36.6 million of services and
equipment from us prior to June 30, 2003.
INTERMEDIA
Intermedia Communications Inc. provides a wide range of local, long
distance and Internet services. In April 1998, Intermedia executed an agreement
providing for a 20-year right to use our nationwide transmission capacity for
approximately $450 million payable over 20 years. This amount represents the
present value of the minimum amount Intermedia will pay over the life of the
agreement. To date, we have received approximately $57 million from Intermedia.
We will provide Intermedia with transmission capacity at rates up to 9.95
billion bits per second.
PROPERTIES
The Williams Network and its component assets are the principal properties
which we currently operate. We lease portions of the network and related
equipment pursuant to our operating lease with a financial institution, which
supplies funds to construct the Williams Network and purchase equipment. The
lease term is for five years with possible renewal for two additional one-year
terms. We have the rights to purchase, exchange and sell the leased property
during the lease term as well as to purchase the property at the end of the
lease term. The price at which we may purchase the property approximates its
original cost. In the event we do not purchase the property at the end of the
lease term, we are obligated to pay 89.9% of the original purchase cost of the
property.
Our installed fiber optic cable is laid under various rights of way. We
have agreements in place for approximately 87% of the rights of way needed to
complete the Williams Network. Almost all of our rights of way extend through at
least 2018. A significant portion of our rights of way are along Williams
pipeline easements.
We own or lease sites in approximately 100 U.S. cities on which we locate
or plan to locate transmission, routing and switching equipment. These sites
range in size from 2,000 square feet to 50,000 square feet and total
approximately 1,700,000 square feet. We also lease office space in various
locations including from Williams. We lease from Williams approximately
1,200,000 square feet of office space in Tulsa, Oklahoma and have entered into a
lease with Williams for an additional 350,000 square feet of office space to be
constructed. Solutions occupies approximately 192,000 square feet of office
space in Houston, Texas which it subleases from Williams.
92
<PAGE> 96
EMPLOYEES
As of March 31, 1999, excluding our unconsolidated strategic investments,
we had a total of 8,563 employees, 1,125 of whom were served by collective
bargaining agreements. The following shows the number of our employees broken
down by segment:
<TABLE>
<S> <C>
Network 854
Solutions 6,192
Strategic Investments 813
Corporate 704
-----
Total 8,563
=====
</TABLE>
LEGAL PROCEEDINGS
We are not a party to any material litigation and are not aware of any
pending or threatened litigation that would have a material adverse effect on us
or our business taken as a whole. However, class actions have been filed against
other communications carriers which challenge the carriers' rights to install
and operate fiber optic systems along easements that are similar to the
non-pipeline easements that we use. Some of the carriers which have granted us
rights in fiber optic strands are subject to these suits. It is possible we
could be involved in similar litigation in the future. See the section of this
prospectus entitled "Risk Factors -- Risks relating to our Network
business -- We need to obtain and maintain the necessary rights-of-way for the
Williams Network" for more information.
REPORTS TO HOLDERS OF NOTES
We intend to furnish holders of our notes annual reports containing audited
financial statements examined by our independent auditors and quarterly reports
containing unaudited financial statements for each of the first three quarters
of each fiscal year.
93
<PAGE> 97
REGULATION
GENERAL REGULATORY ENVIRONMENT
We are subject to federal, state and local regulations that affect our
product offerings, competition, demand, costs and other aspects of our
operations. Federal laws and regulations generally apply to interstate
telecommunications, including international telecommunications that originate or
terminate in the United States, while state laws and regulations apply to
telecommunications terminating within the state of origination. The regulation
of the telecommunications industry is changing rapidly, and varies from state to
state. Our operations are also subject to a variety of environmental, safety,
health and other governmental regulations. We cannot guarantee that future
regulatory, judicial or legislative activities will not have a material adverse
effect on us, or that domestic or international regulators or third parties will
not raise material issues with regard to our compliance or noncompliance with
applicable regulations.
The Telecommunications Act seeks to promote competition in local and long
distance telecommunications services, including by allowing entities affiliated
with power utilities entry into providing telecommunications services and by
allowing GTE and, subject to certain limitations and conditions, the RBOCs'
entry into providing long distance services. We believe that the RBOCs' and
other companies' entry into providing long distance services will provide
opportunities for us to sell fiber or lease high-volume long distance capacity.
The Telecommunications Act allows an RBOC to provide long distance services
originating outside its traditional exchange service area or from mobile
services, and to own 10% or less of the equity of a long distance carrier
operating in its traditional service area. In addition, Section 271 of the
Telecommunications Act allows an RBOC to provide long distance services
originating in a state in its traditional exchange service area if it satisfies
several procedural and substantive requirements. These include obtaining FCC
approval upon a showing that the RBOC has entered into, or under some
circumstances has offered to enter into, interconnection agreements which
satisfy a 14-point "checklist" of competitive requirements. On February 22,
1999, the United States Supreme Court issued an order confirming the FCC's
authority to adopt requirements for compliance with the checklist. This order
reversed an earlier decision by the U.S. Court of Appeals for the Eighth Circuit
that required the FCC to defer to state determinations as to certain elements of
the checklist. To date, the FCC has not granted any petitions by RBOCs for entry
and has denied several of these petitions. We expect that additional petitions
for entry will be filed, and that the RBOCs will obtain approval to provide long
distance services in some states within the next two years.
Common carrier services to end-users and enhanced services providers are
subject to assessment for the FCC's Universal Service Fund, which assists in
ensuring the universal availability of basic telecommunications services at
affordable prices. The FCC has proposed assessments for the second quarter of
1999 of approximately 3.6% of gross interstate and 0.6% of gross intrastate
end-user revenues, which are slightly lower than previous assessments. These
assessments may be higher in subsequent years. Appeals of the FCC's universal
service order are pending in the U.S. Court of Appeals for the Fifth Circuit.
Reversal of the FCC's order or changes in the rules, especially changes that
affect the revenues on which universal service assessments are based, could have
an adverse impact on interstate carriers, including us. Certain of our services
may be subject to those assessments, which would increase our costs, and we may
also be liable for assessments by state commissions for state universal service
programs.
94
<PAGE> 98
FEDERAL REGULATION
Under the FCC's rules, we are a non-dominant carrier. Generally, the FCC
has chosen not to closely regulate the charges or practices of non-dominant
carriers. Although the FCC has the power to impose more stringent regulatory
requirements on us, we believe that the FCC is unlikely to do so. We are subject
to the regulatory requirements applicable to all common carriers, such as
providing services without unreasonable discrimination and charging reasonable
rates.
Federal regulation affects the cost and thus the demand for long distance
services through regulation of interstate access charges, which are the ILECs'
charges for use of their exchange facilities in originating or terminating
interstate transmissions. The FCC ordered a multi-year transition in the
structure of interstate access charges, leading to lower per-minute charges. The
FCC may adopt further changes in the structure of interstate access charges in
the future. The FCC also regulates the levels of interstate access charges
through price caps for larger ILECs and other rate regulation for smaller ILECs.
The FCC may adopt rules allowing ILECs further flexibility in setting interstate
access charges in the future, especially for high-speed data lines. On May 21,
1999, the U.S. Court of Appeals for the District of Columbia Circuit reversed
and remanded for reconsideration by the FCC the 6.5% inflation offset in the
current price cap rules.
The FCC has adopted rules for pricing the ILECs' unbundled network elements
and services to CLECs, which use these network elements and services to
interconnect with long distance carriers. These regulations affect the growth
opportunities for some of our customers and thus demand for our services. In
January 1999, the United States Supreme Court upheld the FCC's authority to
adopt pricing rules for unbundled network elements and resale by CLECs. However,
the Supreme Court instructed the FCC to reconsider an earlier determination
regarding the extent to which ILECs are required to unbundle elements of their
networks and provide those unbundled networks to CLECs. In addition, certain
ILECs have indicated in papers filed with the U.S. Court of Appeals for the
Eighth Circuit that they will seek additional judicial review of the FCC's
pricing rules on substantive grounds.
The FCC has to date treated Internet service providers as enhanced service
providers rather than common carriers. As such, Internet service providers have
been exempt from various federal and state regulations, including the obligation
to pay access charges and contribute to universal service funds. On February 25,
1999, the FCC adopted an order in which it determined that calls to Internet
service providers are interstate in nature and proposed rules to govern
compensation to carriers for transmitting these calls. Although the FCC does not
intend to require Internet service providers to pay access charges or to
contribute to universal service funds, the FCC's order could affect the costs
incurred by Internet service providers and the demand for the offerings of some
of our customers. Several appeals of the order have been filed in the U.S. Court
of Appeals for the District of Columbia Circuit.
The FCC has adopted rules for a multi-year transition to lower
international settlements payments by U.S. common carriers. We believe that
these rules are likely to lead to lower rates for certain international services
and increased demand for these services provided by certain of our customers.
The result is likely to be increased demand for capacity on the U.S. facilities,
including the Williams Network, which provide these services.
Rules adopted by the FCC in 1996 and 1997, which are subject to pending
appeals and a stay, could impose significant limits on the ability of carriers
to maintain tariffs for interstate long distance services and to rely on tariffs
to state the prices, terms and conditions under which they offer interstate
services. Additional rules, adopted by the FCC on March 18, 1999, will require
long distance carriers to make specified public disclosures of their rates,
terms and conditions for
95
<PAGE> 99
domestic interstate services, with the effective date for these rules delayed
until a court decision on the appeal of the FCC's 1996 detariffing order. These
regulations could affect how some of our customers provide services and the
demand for their offerings.
STATE REGULATION
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any person from providing any interstate or intrastate
telecommunications service. However, states retain jurisdiction to adopt
regulations necessary to preserve universal service, protect public safety and
welfare, ensure the continued quality of communications services and safeguard
the rights of consumers.
Generally, we must obtain and maintain certificates of authority from
regulatory bodies in states in which we offer intrastate services. In most
states, we must also file and obtain prior regulatory approval of tariffs for
our intrastate services. Certificates of authority can generally be conditioned,
modified or revoked by state regulatory authorities for failure to comply with
state law or regulations. Fines and other penalties also may be imposed for such
violations. We are currently authorized to provide intrastate services in 37
states. We believe that most states do not regulate our provision of dark fiber.
If a state did regulate our provision of dark fiber, we could be required to
provide dark fiber in that state pursuant to tariffs, and at regulated rates.
State regulatory commissions generally regulate the rates ILECs charge for
intrastate services, including intrastate access services paid by providers of
intrastate long distance services. Intrastate access rates affect the costs of
carriers providing intrastate long distance services and demand for the services
we and other carriers provide. Under the Telecommunications Act, state
commissions have jurisdiction to arbitrate and review negotiations between ILECs
and CLECs regarding the prices ILECs charge for interconnection of network
elements with, and resale of, services by CLECs; however, the U.S. Supreme Court
has upheld the FCC's authority to adopt rules which the states must apply when
setting these prices. A state may also impose telecommunications taxes, and fees
related to the support for universal service, on providers of services within
that state.
LOCAL REGULATION
We are occasionally required to obtain street use and construction permits
and licenses and/or franchises to install and expand our fiber optic network
using municipal rights of way. Termination or failure to renew our existing
franchise or license agreements could have a material adverse effect on us. In
some municipalities where we have installed or anticipate constructing networks,
we are required to pay license or franchise fees based on a percentage of gross
revenue or on a per linear foot basis. We cannot guarantee that fees will remain
at their current levels following the expiration of existing franchises. In
addition, we could be at a competitive disadvantage if our competitors do not
pay the same level of fees as we do. However, the Telecommunications Act
requires municipalities to manage public rights of way in a competitively
neutral and non-discriminatory manner.
OTHER
Our operations are subject to a variety of federal, state, local and
foreign environmental, safety and health laws and governmental regulations.
These laws and regulations govern matters such as the generation, storage,
handling, use and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites and
endangered species and the health and safety of our employees.
96
<PAGE> 100
Although we monitor compliance with environmental, safety and health laws
and regulations, we cannot assure you that we have been or will be in complete
compliance with these laws and regulations. We may be subject to fines or other
sanctions imposed by governmental authorities if we fail to obtain certain
permits or violate the laws and regulations. We do not expect any capital or
other expenditures for compliance with laws, regulations or permits relating to
the environment, safety and health to be material in 1999 or 2000.
In addition, we may be subject to environmental laws requiring the
investigation and cleanup of contamination at sites we own or operate or at
third party waste disposal sites. These laws often impose liability even if the
owner or operator did not know of, or was not responsible for, the
contamination. Although we own or operate numerous sites in connection with our
operations, we are not aware of any liability relating to contamination at these
sites or third party waste disposal sites that could have a material adverse
effect on our company.
FOREIGN REGULATION
BRAZIL
Communications service in Brazil has until recently been primarily provided
by operating subsidiaries of Telebras, a state-owned holding company. In 1997,
the General Telecommunications Act provided for the restructuring and
privatization of the communications industry in Brazil. In 1998, Telebras was
split into 12 different holding companies -- one long distance carrier, three
local landline companies, and eight cellular companies. A governmental
regulatory agency, Agencia Nacional de Telecomunicacoes, known as Anatel, was
created to regulate the newly privatized industry and to facilitate competition.
One aspect of the restructuring and privatization process is the issuance
of licenses, through a bid process, to competing privately-owned carriers.
Licenses for "B-Band" cellular companies, including ATL and Tess, were issued in
1997 and 1998. Each cellular concession is a specific grant of authority to
supply cellular services within a defined region. In the case of ATL, this
region consists of the states of Rio de Janeiro and Espirito Santo. In the case
of Tess, this region consists of the state of Sao Paulo outside the city of Sao
Paulo.
A cellular concession has been granted to each of ATL and Tess for an
initial term of 15 years which may be renewed for equal periods at the
discretion of Anatel. Currently within each area only one cellular company may
operate in Band A and one in Band B; there are no personal communications
service carriers. The cellular concessions and other regulations impose a range
of restrictions on the companies' operations, corporate governance and
shareholders, with penalties for noncompliance, including loss of license and
monetary fines.
Long distance service is regulated pursuant to the General
Telecommunications Act. In April 1998, the government issued a general granting
plan for licenses, which split the country into four telecommunications areas.
Areas I and II include most of the states of the country. Area III corresponds
to the state of Sao Paulo. Area IV covers international calls and long distance
calls throughout the whole country. The operators in Areas I and II are also
able to provide long distance calls but only within the boundaries of the states
inside each area.
During 1999, the government of Brazil awarded through bid processes
licenses for other companies that will compete against the former Telebras
subsidiaries. Each company will be able to provide service in one of the four
areas. In 2000, the government may sell additional licenses in each wireless
market for personal communications service.
Each concession agreement establishes the service obligations for the
operator, based on the applicable legislation determined by Anatel. Anatel
defines maximum rates, but an operator can charge users lower rates. The rates
can be readjusted periodically but not less often than every
97
<PAGE> 101
12 months. ATL and Tess are subject to the rate parameters set out in their
concession agreements, based upon the bids they submitted to obtain the
concessions. Cellular service in Brazil is offered on a "calling party pays"
basis, where the cellular subscriber pays usage charges only for outgoing calls.
Roaming agreements between cellular carriers apply to services for subscribers
outside of their home regions.
Anatel also regulates cable television in Brazil. Each license is granted
for 15 years and renewable for equal periods. The service must be rendered
without discrimination, at reasonable prices and conditions and on a
non-exclusive basis. There is no specific regulation of rates for cable
services. There is a basic group of channels that must be provided to customers.
Competition for cable comes from microwave multichannel systems and satellite
television. Recently, bidding procedures took place for new licenses for both
cable and the microwave multichannel systems.
AUSTRALIA
On July 1, 1997, the Australian government opened all sectors of the
Australian communications industry to competition. Central elements of the new
regulatory regime include an unrestricted number of carrier licenses, increased
reliance on certain elements of the Australian Trade Practices Act and industry
self-regulation and retention of some carrier land access rights and statutory
immunities in relation to the construction of network facilities.
The Australian Competition and Consumer Commission (ACCC) is charged with
most competition-related regulatory functions and price control arrangements.
The Australian Communications Authority (ACA) is responsible for regulating the
non-competition aspects of the telecommunications industry, including carrier
licensing, technical regulation, preselection, and enforcing industry standards,
universal service, spectrum management and numbering. There also are
self-regulatory authorities that recommend telecommunications services for
regulation to the ACCC and that develop industry consumer, technical and
operational codes.
A carrier license is required for the ownership of most transmission
infrastructure used to provide telecommunications services to the public.
PowerTel holds a carrier license and is subject to regulation by the ACCC and
the ACA. PowerTel does not have any service coverage obligations. PowerTel does
not require any further regulatory approval for new services, except when new
services require new spectrum or equipment licenses for operating radio
communication facilities such as mobile services or microwave links. Each
licensed carrier pays an annual fee to cover the costs of industry regulation
based on a portion of the carrier's revenues.
Under the regulations, access to particular regulated carriage services and
other services which facilitate the supply of those regulated services must be
provided between operators on non-discriminatory technical and operational terms
and, in some circumstances, at cost-based prices. The ACCC determines which
services are regulated. Other services may be supplied on commercially
negotiated terms subject to the Australian Trade Practices Act. Any transmission
capacity of 2 or more megabits per second is regulated on all routes except
between Sydney, Canberra and Melbourne.
The ACCC is currently considering regulating local call resale and local
network unbundling. Regulation of switched interconnection at the local exchange
level would allow PowerTel and other competitors to reduce their access costs by
interconnecting with the Telstra Corporation Limited network closer to the
customer. The ACCC has issued a draft report in favor of regulating
noncompetitive access services with pricing based on total service long-run
incremental cost.
98
<PAGE> 102
Prior to July 1, 1997, carriers had extensive rights to install facilities
on land without the consent of the owner and with immunity from state and
territory environmental and planning laws. Under the new regulatory regime,
carriers, including PowerTel, must now generally comply with state and territory
environmental planning and property laws.
Telstra, the current national universal service provider, is required to
ensure that the standard telephone services, pay phones and any other regulated
services are reasonably accessible to all Australians on an equitable basis. All
carriers are required to contribute to the costs of providing universal service.
The ACA has required all carriers and carriage service providers to guarantee
timely service to customers. The Australian government has proposed amendments
to the communications legislation to strengthen competitive and consumer
safeguards. The proposals include enabling the ACCC to make binding legal
directions to parties to facilitate access negotiations, to publicly disclose or
require the disclosure of cost information and to specify the terms on which
carriers must disclose network planning information to each other. There are
also proposals to streamline the ACCC's ability to act when it believes that
anti-competitive conduct is taking place. There can be no assurance that the
proposed amendments will be enacted in their current form or at all.
PowerTel currently has entered into a facilities access agreement with
Telstra for access to Telstra's ducts, underground facilities and equipment
buildings. PowerTel also obtains services from Telstra through wholesale/resale
products, and is in the process of negotiating an agreement covering Telstra's
wireline and mobile originating and terminating access services.
Although the regulatory regime is structured to encourage new entrants,
PowerTel as well as other industry participants and the ACCC have expressed the
view that Telstra's interconnect and wholesale pricing is to high. The ACCC does
not currently have power to set interconnect prices generally. The ACCC is only
empowered to settle disputes between specific parties in relation to a limited
number of services. Even where the ACCC is able to arbitrate, in practice to
date it has been a lengthy process. The consequence of the current pricing
structure is to encourage new entrants such as PowerTel to construct alternative
infrastructures. The current pricing also adversely impacts the ability of new
entrants without significant infrastructure to substantially discount prices
below those of incumbent network owners.
PowerTel has entered into an asset use agreement with three electric
utilities which are indirect stockholders of PowerTel. Each agreement provides
PowerTel with access to each utility's facilities (ducts, poles, fiber optic
cable, towers, etc.) for the installation of telecommunications equipment.
PowerTel also has entered into a reseller agreement with each of these utilities
under which each utility is appointed a non-exclusive reseller of PowerTel's
telecommunications services to certain customers. The agreement provides for the
utility to be able to resell the full range of PowerTel's services, including
new services which become available from time to time, subject to any
prohibitions on resale in third-party agreements.
There are two marketing database agreements between each of the utilities
and PowerTel. The first provides PowerTel with access to each utility's database
of electricity customers to market telecommunications services. The second
provides each utility access to PowerTel's customer database to market
electricity. These agreements are subject to any applicable privacy laws.
CHILE
The process of privatization and opening up of monopoly telecommunications
markets in Chile began in 1982 with the General Telecommunications Law, which
allowed companies to
99
<PAGE> 103
provide service and develop telecommunications infrastructure without geographic
restriction or exclusive rights to serve.
Chile currently has a competitive, multi-carrier system for long distance
and local services. There is no regulatory limit on the number of concessions
that could be granted to companies that would compete against MetroCom.
Currently, there are five local service providers in Santiago. The largest
providers of local telecommunications services in Santiago are Compania de
Telecomunicaciones de Chile, Telefonica Manquehue and CMET.
MetroCom holds an intermediate service concession for the installation,
operation, and exploitation of a high-capacity fiber optic cable network in
Santiago and the towns surrounding it. Intermediate services are provided via
networks to satisfy the transmission or exchange service requirements of other
telecommunications providers. The concession is for a renewable 30-year term.
MetroCom's concession provides for network construction to end on December 23,
1998 and service to begin on January 23, 1999. The company requested an
extension of these terms, which was granted by the telecommunications authority
but is pending before the Republic Comptrollership's Office for formal amendment
of the concession.
The telecommunications law states that prices should be determined by
market forces in competitive markets; in markets with one dominant firm, maximum
rates are determined by the regulatory authorities. The regulatory authority has
declared that the conditions prevailing in the local (including Santiago) and
long distance markets, as well as in the market for intermediate services,
require rates to be determined by the regulatory authority. The maximum rate
structure is determined every five years.
Local service providers with concessions are obligated to provide service
to any customer who requests service within their service area, or to any
customer outside the service area of all concessionaires who is willing to pay
for an extension to get service. Local providers must also give long distance
service providers equal access to their network connections.
100
<PAGE> 104
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of May 26, 1999
concerning our directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Keith E. Bailey........................ 56 Director
John C. Bumgarner, Jr. ................ 56 Director and Senior Vice President, Strategic
Investments
James R. Herbster...................... 57 Director
Howard E. Janzen....................... 45 President, Chief Executive Officer and Director
Michael P. Johnson, Sr................. 51 Director
Steven J. Malcolm...................... 50 Director
Jack D. McCarthy....................... 56 Director
Brian E. O'Neill....................... 63 Director
Roy A. Wilkens......................... 56 Director (upon completion of the equity
offering)
David P. Batow......................... 46 General Counsel
Mark A. Bender......................... 34 Vice President and Chief Information Officer
Delwin L. Bothof....................... 54 Senior Vice President, Domestic Strategic
Investments
Matthew W. Bross....................... 38 Senior Vice President and Chief Technology
Officer
Gerald L. Carson....................... 59 Senior Vice President, Human Resources
Kenneth R. Epps........................ 42 Senior Vice President, Strategic Marketing
Lawrence C. Littlefield, Jr. .......... 61 Senior Vice President and Chief Financial
Officer (until June 6, 1999); Senior Vice
President and Group Executive (effective June
7, 1999)
Garry K. McGuire....................... 52 Senior Vice President, Solutions
Patti L. Schmigle...................... 40 Senior Vice President and Chief Operations
Officer, Solutions
Scott E. Schubert...................... 46 Senior Vice President and Chief Financial
Officer (effective June 7, 1999)
Frank M. Semple........................ 47 Senior Vice President, Network
William G. von Glahn................... 55 Senior Vice President, Law
S. Miller Williams..................... 47 Senior Vice President and Senior Managing
Director of International Strategic Investments
</TABLE>
OUR DIRECTORS
Our restated certificate of incorporation provides that the number of
directors may be altered from time to time by a resolution adopted by our board
of directors. However, the number of directors may not be less than three.
Currently, we have eight directors on our board. Concurrently with completion of
the offerings, we intend to add two independent directors to our board of
directors so that our board will consist of ten members. SBC will be entitled to
designate a director for our board after the closing of the SBC investment so
long as SBC retains more than a 5% equity interest in our common stock and has
obtained and continues to provide long distance services in states within its
traditional exchange service area.
Our restated certificate of incorporation provides for a classified board
of directors, consisting of three classes as nearly equal in size as
practicable. Each class holds office until the third annual stockholders'
meeting for election of directors following the most recent election of that
class, except that the initial terms of the three classes expire in 2000, 2001
and 2002.
101
<PAGE> 105
The following individuals are our directors. Each director holds office
until his successor is duly elected and qualified or until his resignation or
removal, if earlier.
Keith E. Bailey is the Chairman of the Board, President and Chief Executive
Officer of Williams. Mr. Bailey has held various officer level positions with
Williams and its subsidiaries since 1975 and has served as a director of
Williams since 1988. Mr. Bailey has been a director of our company since 1994.
Mr. Bailey's term as a director expires at the annual stockholders' meeting in
2002.
John C. Bumgarner, Jr. is the Senior Vice President of Corporate
Development and Planning of Williams and President of Williams International
Company, a subsidiary of Williams. Mr. Bumgarner has held various officer level
positions with Williams since 1977. Mr. Bumgarner has been a director of our
company since 1997 and was named Senior Vice President, Strategic Investments of
our company in May 1999. Mr. Bumgarner's term as a director expires at the
annual stockholders' meeting in 2001.
James R. Herbster is the Senior Vice President of Administration of
Williams. Mr. Herbster has held various officer level positions with Williams
since 1981. Mr. Herbster has been a director of our company since 1997. Mr.
Herbster's term as a director expires at the annual stockholders' meeting in
2000.
Howard E. Janzen has been a director and the President and Chief Executive
Officer of our company since 1994. From April 1993 to December 1994, Mr. Janzen
served as Senior Vice President and General Manager of Williams Gas Pipelines
Central, Inc., an affiliate of Williams. Mr. Janzen has also held various other
management and officer level positions with Williams since 1979. Mr. Janzen also
serves on the board of directors of BOK Financial Corporation. Mr. Janzen's term
as a director expires at the annual stockholders' meeting in 2002.
Michael P. Johnson, Sr. is the Senior Vice President of Human Resources of
Williams and has been since May 1, 1999. Prior to joining Williams in December
1998 as Vice President of Human Resources, Mr. Johnson was a vice president of
human resources with Amoco Corporation, where he held various officer level
positions since 1991. Mr. Johnson has been a director of our company since May
1, 1999. Mr. Johnson's term as a director expires at the annual shareholders'
meeting in 2000.
Steven J. Malcolm is the President and Chief Executive Officer of Williams
Energy Services, a subsidiary of Williams. Mr. Malcolm has held various
management and officer level positions with subsidiaries of Williams since 1984.
Mr. Malcolm has been a director of our company since 1998. Mr. Malcolm's term as
a director expires at the annual stockholders' meeting in 2001.
Jack D. McCarthy is the Senior Vice President and Chief Financial Officer
of Williams. Mr. McCarthy has held various officer level positions with Williams
since 1986. Mr. McCarthy has been a director of our company since 1997. Mr.
McCarthy's term as a director expires at the annual stockholders' meeting in
2001.
Brian E. O'Neill is the President and Chief Executive Officer of each of
the interstate natural gas pipeline companies owned by Williams. Mr. O'Neill has
held various officer level positions with subsidiaries of Williams since 1988.
Mr. O'Neill also serves on the board of directors of Daniel Industries, Inc. Mr.
O'Neill has been a director of our company since 1997. Mr. O'Neill's term as a
director expires at the annual stockholders' meeting in 2000.
Roy A. Wilkens will be appointed as an independent director and
non-executive chairman of the board of our company concurrently with completion
of the offerings. Mr. Wilkens is a member of the board of directors of UniDial
Inc., Invensys Corporation Inc., and Splitrock
102
<PAGE> 106
Services, Inc. He is a former director of Qwest Communications and Paging
Network Inc. He was President of Williams Pipeline Company, a subsidiary of
Williams, when he founded WilTel, Inc., then a subsidiary of Williams, in 1985.
He served as Chief Executive Officer of WilTel from 1985 to 1997. In 1995, LDDS
Communications, which now operates under the name MCI WorldCom, acquired WilTel
from Williams. In 1997, Mr. Wilkens retired from WorldCom as Vice Chairman. In
1992, President George Bush appointed Mr. Wilkens to the National Security
Telecommunications Advisory Council. He has also served as chairman of both the
Competitive Telecommunications Association and the National Telecommunications
Network. Mr. Wilkens' term as a director of our company will expire at the
annual stockholders' meeting in 2002.
BOARD COMPENSATION AND BENEFITS
Messrs. Janzen and Bumgarner will not receive additional compensation for
serving on our board of directors or committees of the board. Directors who are
not our employees but who are employees of Williams will receive one time grants
of ten-year, fully exercisable options to purchase 50,000 shares of our common
stock, or in the case of Mr. Bailey, 100,000 shares of our common stock, at an
exercise price equal to the initial public offering of our common stock in the
equity offering. These individuals will not receive additional compensation for
serving on our board of directors or our committees.
Independent directors elected who are in office at the time of completion
of the equity offering will receive a one-time grant of options to purchase
10,000 shares of our common stock. Independent directors will also receive an
annual retainer of $12,000, ______ shares of our common stock and an annual
grant of ten-year, fully exercisable options to purchase ______ shares of our
common stock for so long as they are directors of our company. The exercise
price per share for these options will be set at the market price of our common
stock on the date of grant, which in the case of the independent directors
elected at the time of completion of the offerings will be deemed to be the
initial public offering price. Non-employee directors will also receive a
committee retainer of $4,000 for each committee assignment held and an
additional fee for attending board and committee meetings of $1,000 and $500,
respectively. Chairpersons of the audit/affiliated transactions and compensation
committees will be paid an additional annual fee of $2,500.
We expect that directors may elect to receive all or part of their cash
fees in the form of common stock or deferred stock. Individuals may defer stock
to any subsequent year or until that individual ceases to be a director. We will
pay dividend equivalents on deferred shares to the extent that dividends are
declared and paid on our common stock, and directors may elect to receive the
dividend equivalents in cash or in additional deferred shares.
We will reimburse all directors for reasonable out-of-pocket expenses
incurred in attending meetings of the board or any committee or otherwise
because of service as a director.
COMMITTEES OF THE BOARD
To date, our board has not had either an audit/affiliated transactions
committee or a compensation committee. The Williams compensation committee
determines the compensation for senior Williams officers and the presidents of
Williams' operating subsidiaries. Messrs. Janzen, Bumgarner and von Glahn are
the only named executive officers that fall into this category. The compensation
of the other named executive officers for 1998 was determined by Mr. Janzen and
Gerald Carson, our Senior Vice President for Human Resources, with input from
our human resources department and was based upon compensation survey
information relevant to companies of similar sizes in the communications
industry.
103
<PAGE> 107
Prior to the completion of the offerings, our board will establish an
audit/affiliated transactions committee and a compensation committee. Each
committee will be comprised solely of independent directors.
AUDIT/AFFILIATED TRANSACTIONS COMMITTEE RESPONSIBILITIES
Our audit/affiliated transactions committee will:
- - recommend to the board the selection, retention or termination of our
independent auditors
- - approve the level of non-audit services provided by the independent auditors
- - review the scope and results of the work of our internal auditors
- - review the scope and approve the estimated cost of the annual audit
- - review the annual financial statements and the results of the audit with
management and the independent auditors
- - review with management and the independent auditors the adequacy of our
internal accounting controls
- - review with management and the independent auditors the significant
recommendations made by the auditors with respect to changes in accounting
procedures and internal accounting controls
- - review and approve any transaction between us and Williams, or any entity in
which Williams has a 20% or greater ownership interest, where the transaction
is other than in the ordinary course of business and has a value of more than
$10 million
- - report to the board on its review and make such recommendations as it deems
appropriate
COMPENSATION COMMITTEE RESPONSIBILITIES
Our compensation committee will:
- - administer our stock plans and related programs
- - approve, or refer to the board of directors for approval, changes in these
plans and the compensation programs to which they relate
- - review and approve the compensation and development of our senior executives
OUR EXECUTIVE OFFICERS
In addition to Mr. Janzen and Mr. Bumgarner, the following persons are our
executive officers:
David P. Batow has been the general counsel of our company since 1996.
Prior to that time, he served as general counsel to Williams Gas Pipelines
Central, Inc., an affiliate of Williams, from 1993 to 1996. Mr. Batow joined
Williams in 1987.
Mark A. Bender has been Vice President and Chief Information Officer of our
company since March 1999. He has held various positions with other affiliates of
Williams since November 1993.
Delwin L. Bothof has been Senior Vice President, Domestic Strategic
Investments since May 1999 and was Senior Vice President, Applications of our
company since 1997. Mr. Bothof served as President of Vyvx, Inc., now known as
Williams Communications, Inc., from 1989 to 1997.
Matthew W. Bross has been Senior Vice President and Chief Technology
Officer of our company since May 1999 and was Vice President and Chief
Technology Officer of our company from 1998 to 1999. He joined our company in
1997 when our company acquired Critical Technologies, Inc., a company he founded
in 1991, that focused on large-scale, global
104
<PAGE> 108
telecommunications infrastructures with an emphasis on the Internet. Mr. Bross
served as Chief Executive Officer of Critical Technologies from 1991 until its
acquisition by our company and has more than 20 years of experience in the
telecommunications industry.
Gerald L. Carson has been Senior Vice President, Human Resources of our
company since May 1999 and Vice President Human Resources of our company from
1997 to 1999. Prior to that time, Mr. Carson held various management and human
resources positions with Williams since 1985.
Kenneth R. Epps has been Senior Vice President, Strategic Marketing of our
company since February 1999. Before joining Williams in February 1999, Mr. Epps
served as a vice president of Emerald Solutions, Inc., a start-up information
technology firm, from 1998 to 1999. Prior to that he was with AT&T for 13 years.
Lawrence C. Littlefield, Jr. has been Senior Vice President and Chief
Financial Officer of our company since 1997. Prior to that, Mr. Littlefield
served as Senior Vice President, Marketing, Strategic Sales and Operations and
as Vice President, Finance and Administration for a predecessor of Solutions.
From 1990 to 1995, he served as Vice President, Finance and Administration and
Chief Financial Officer of Williams Telecommunications Group, Inc., which was
then an affiliate of Williams. Effective June 7, 1999, Mr. Littlefield will
become Senior Vice President and Group Executive.
Garry K. McGuire has been Senior Vice President, Solutions of our company
since May 1997. Prior to joining our company, Mr. McGuire worked at Nortel for
14 years where he held various officer level positions.
Patti L. Schmigle has been Senior Vice President of our company since 1997
and has been Chief Operations Officer, Solutions since March 1999. Ms. Schmigle
has held various management and officer level positions with Williams since
1980, including Vice President of Performance Management of Williams from June
1996 to November 1997, Vice President of Operations and Engineering of Williams
Gas Pipeline Central, Inc., an affiliate of Williams, from 1995 to June 1996,
and Director of Engineering of Williams Pipe Line Company, also an affiliate of
Williams, from 1994 to 1995.
Scott E. Schubert will become Senior Vice President and Chief Financial
Officer of our company on June 7, 1999. Before joining our company, Mr. Schubert
was vice president of global accounting services and finance of BP Amoco. He has
23 years of experience with Amoco, including the past six years as an officer of
Amoco prior to its merger with British Petroleum.
Frank M. Semple has been Senior Vice President, Network of our company
since 1997. From 1995 to 1997, Mr. Semple served as Senior Vice President and
General Manager of Williams Gas Pipelines Central, Inc., an affiliate of
Williams. From 1994 to 1995, Mr. Semple served as Vice President of Operations
and Marketing for Northwest Pipeline Corporation, also an affiliate of Williams.
Mr. Semple has held various management and officer level positions with Williams
since 1979.
William G. von Glahn has been Senior Vice President, Law of our company
since March 1999. Mr. von Glahn is the general counsel of Williams and has been
since 1996. Mr. von Glahn joined Williams in 1984 as associate general counsel.
S. Miller Williams has been Senior Vice President and Senior Managing
Director of International Strategic Investments since May 1999 and was Senior
Vice President, Corporate Development of our company since 1996. From 1992
through 1996, Mr. Williams held various officer level positions with
predecessors of our company and WilTel, Inc.
105
<PAGE> 109
STOCK OWNERSHIP OF OUR DIRECTORS AND EXECUTIVE OFFICERS
All of our capital stock is currently owned by Williams and therefore none
of our executive officers or directors own any of our capital stock. All of our
executive officers and directors will be granted options to purchase shares of
our common stock at the time of completion of the equity offering. In addition,
those individuals who were granted deferred shares or options under the Williams
Communications stock plan will have the right to receive deferred shares or
options to purchase our common stock in cancellation of deferred Williams shares
or options to purchase Williams common stock held by them. Mr. Janzen will have
the right to receive deferred shares in exchange for deferred shares of Williams
common stock held by him. Messrs. Littlefield and Schubert will receive grants
of deferred shares at the time of completion of the equity offering. In
addition, some or all of our executive officers and directors may purchase
shares of our common stock in the equity offering from the shares reserved for
employees and directors of our company and Williams. For more information, see
"New stock-based and incentive plans of our company" below and "Principal
Stockholders -- Ownership of our common stock and Class B common stock." At the
time of completion of the equity offering, no director or executive officer will
own or have options to purchase in excess of 1% of our common stock.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by our company to our
chief executive officer and four other most highly compensated executive
officers during our fiscal year ending December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS AWARDS(1)(2) OPTIONS COMPENSATION(3)
- --------------------------- -------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Howard E. Janzen.......... $400,000 $126,000 $2,574,000(4) 30,000 $12,050
President, Chief Executive
Officer and Director
Delwin L. Bothof.......... $210,000 $ 46,857 $ 650,082 15,000 $12,800
Senior Vice President,
Applications
Lawrence C. Littlefield,
Jr...................... $190,000 $ 42,394 $ 207,169 15,000 $12,800
Senior Vice President and
Chief Financial Officer
Garry K. McGuire.......... $290,000 $ 30,441 $ 643,046 15,000 $ 9,600
Senior Vice President,
Solutions
Frank M. Semple........... $240,000 $ 91,350 $ 669,150 15,000 $12,800
Senior Vice President,
Network
</TABLE>
- -------------------------
(1) Amounts reported in this column include the dollar value as of the date of
grant of Williams deferred stock awards under the terms of The Williams
Companies, Inc. 1996 stock plan and The Williams Companies, Inc. stock plan
for nonofficer employees. Amounts represent the value of awards granted in
fiscal year 1998 pursuant to the executive incentive compensation program.
Valuation of the awards is based on the 52-week average stock price for the
award year as follows: Mr. Janzen, 1,769 shares valued at $54,000; Mr.
Bothof, 658 shares valued at
106
<PAGE> 110
$20,081; Mr. Littlefield, 596 shares valued at $18,169; Mr. McGuire, 428
shares valued at $13,046; and Mr. Semple, 1,283 shares valued at $39,150.
Receipt of deferred stock under the executive incentive compensation program
is approximately three years after the date of grant. Dividend equivalents
are paid on deferred stock at the same time and at the same rate as
dividends paid to stockholders generally.
(2) Amounts reported in this column include the dollar value as of the date of
grant of Williams deferred stock under the terms of the Williams
Communications stock plan. Amounts represent the value of stock awards
granted on May 21, 1998 as follows: Mr. Bothof, 20,000 shares valued at
$630,000, Mr. Littlefield, 6,000 shares valued at $189,000, Mr. McGuire,
20,000 shares valued at $630,000, and Mr. Semple, 20,000 shares valued at
$630,000. Receipt of deferred stock under the Williams Communications Stock
Plan is approximately five years after the date of grant. Dividend
equivalents are paid on deferred stock at the same time and at the same rate
as dividends paid to stockholders generally. Each individual will have the
right to receive deferred shares of our common stock in exchange for
deferred shares of Williams common stock as described in "-- New stock-based
and incentive plans of our company -- Treatment of specified Williams stock
awards" below.
(3) Amounts reported in this column represent the value of contributions made by
Williams to defined contribution pension plans, on behalf of each of our
executive officers named in the table.
(4) This amount includes a Williams deferred stock award of 80,000 shares
granted for retention purposes on May 21, 1998 under The Williams Companies,
Inc. 1996 stock plan. One-half of the shares vest five years after the date
of grant and one-half of the shares vest ten years after the date of grant.
The value of the award at the time of grant was $2,520,000. Dividend
equivalents are paid on deferred stock at the same time and at the same rate
as dividends paid to stockholders generally. Mr. Janzen will have the right
to receive deferred shares of our common stock in exchange for deferred
shares of Williams common stock as described in "-- New stock-based and
incentive plans of our company -- Treatment of specified Williams stock
awards" below.
107
<PAGE> 111
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding grants of stock options
made to the named executive officers during the 1998 fiscal year. All grants
relate to Williams common stock.
WILLIAMS OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE PRICE EXPIRATION GRANT DATE
NAME OPTIONS GRANTED IN FISCAL YEAR (PER SHARE) DATE PRESENT VALUE(2)
- ---- --------------- --------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Howard E. Janzen...... 10,000 0.20% $31.5625 03/30/08 $107,600
10,000 0.20 $34.3750 07/25/08 117,300
10,000 0.20 $30.0000 11/19/08 103,900
------ ---- --------
30,000 0.60% $328,800
Delwin L. Bothof...... 5,000 0.10% $31.5625 03/30/08 $ 53,800
5,000 0.10 $34.3750 07/25/08 58,650
5,000 0.10 $30.0000 11/19/08 51,950
------ ---- --------
15,000 0.30% $164,400
Lawrence C.
Littlefield, Jr..... 5,000 0.10% $31.5625 03/30/08 $ 53,800
5,000 0.10 $34.3750 07/25/08 58,650
5,000 0.10 $30.0000 11/19/08 51,950
------ ---- --------
15,000 0.30% $164,400
Garry K. McGuire...... 5,000 0.10% $31.5625 03/30/08 $ 53,800
5,000 0.10 $34.3750 07/25/08 58,650
5,000 0.10 $30.0000 11/19/08 51,950
------ ---- --------
15,000 0.30% $164,400
Frank M. Semple....... 5,000 0.10% $31.5625 03/30/08 $ 53,800
5,000 0.10 $34.3750 07/25/08 58,650
5,000 0.10 $30.0000 11/19/08 51,950
------ ---- --------
15,000 0.30% $164,400
</TABLE>
- -------------------------
(1) Options granted in 1998 vested pursuant to an accelerated vesting provision
that accelerates vesting if the average price of Williams common stock
reaches and maintains a specified target price for five out of ten
consecutive business days. Williams granted these options under The Williams
Companies, Inc. 1996 stock plan and The Williams Companies, Inc. stock plan
for nonofficer employees.
(2) The grant date present value is determined using the Black-Scholes option
pricing model and is based on assumptions about future stock price
volatility and dividend yield. The model does not take into account that the
stock options are subject to vesting restrictions and that executives cannot
sell their options. The calculations assume an expected volatility of 25%
"weighted-average," a risk-free rate of return of 5.3% "weighted-average," a
dividend yield of 2% and an exercise date at the end of the contractual term
in 2008. The actual value, if any, that may be realized by an executive will
depend on the market price of Williams common stock on the date of exercise.
The dollar amounts shown are not intended to forecast possible future
appreciation in Williams stock price.
108
<PAGE> 112
WILLIAMS OPTION EXERCISES IN 1998
The following table provides certain information on stock option exercises
with respect to Williams common stock by our executive officers named in the
table above during our fiscal year ended December 31, 1998.
AGGREGATED WILLIAMS OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Howard E. Janzen...... 52,194 $1,160,176 214,812 30,000 $3,214,637 $11,875
Delwin L. Bothof...... 76,000 $ 789,563 30,000 15,000 $ 205,000 $ 5,938
Lawrence C.
Littlefield, Jr..... 25,000 $ 415,625 86,000 15,000 $1,019,500 $ 5,938
Garry K. McGuire...... -- $ -- 50,000 15,000 $ 390,625 $ 5,938
Frank M. Semple....... 92,810 $1,278,281 140,000 15,000 $1,904,375 $ 5,938
</TABLE>
- -------------------------
(1) Based on the closing price of $31.1875 per share of Williams common stock at
December 31, 1998, less the exercise price. The values shown reflect the
value of options accumulated over periods of up to ten years. The values
reflected in the table had not been realized at that date and may not be
realized. In the event the options are exercised, their value will depend
upon the value of Williams common stock on the date of exercise.
Williams has extended to each of our directors and to some of our executive
officers loans in order to enable them to exercise stock options to purchase
Williams common stock. As of March 26, 1999, loans aggregating approximately
$29.9 million were outstanding to these directors and executive officers.
PENSION PLANS
At the time of the offerings, we will make available the same pension plans
in which eligible employees were participating immediately prior to the
offerings. Mr. Janzen, Mr. Bothof, Mr. Littlefield and Mr. Semple will continue
to participate in the Williams pension plan. Mr. McGuire will continue to
participate in the Solutions LLC pension plan.
WILLIAMS PENSION PLAN
The Williams pension plan is a non-contributory, tax-qualified cash balance
pension plan subject to the Employee Retirement Income Security Act of 1974. The
plan generally includes all of our salaried employees who are employed outside
of Solutions LLC and who have completed one year of service. Except as noted
below, our executive officers participate in the plan on the same terms as other
full-time employees.
Effective April 1, 1998, Williams converted the plan from a final average
pay plan to a cash balance pension plan. Each participant's accrued benefit as
of that date was converted to a beginning account balance. Account balances are
credited with an annual employer contribution and quarterly interest
allocations. Each year an employer contribution equal to a percentage of
109
<PAGE> 113
eligible compensation is allocated to each employee's pension account. This
percentage is based upon each employee's age according to the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF ELIGIBLE PAY
PERCENTAGE OF ALL GREATER THAN THE SOCIAL
AGE ELIGIBLE PAY SECURITY WAGE BASE
- --- ----------------- --------------------------
<S> <C> <C>
30 4.5% 1%
30-39 6% 2%
40-49 8% 3%
50+ 10% 5%
</TABLE>
For employees, including the executive officers who participate in the
plan, who were active employees and plan participants on March 31, 1998 and
April 1, 1998, the percentage of all eligible pay is increased by an amount
equal to the product of 0.3% multiplied by the participant's total years of
service prior to March 31, 1998. Interest is credited to account balances
quarterly at a rate determined annually in accordance with the terms of the
plan. The normal retirement benefit is a monthly annuity based on an
individual's account balance as of benefit commencement. The plan defines
eligible compensation to include salary and bonuses. Normal retirement age is
65. Early retirement may begin as early as age 55. At retirement, employees are
entitled to receive a single-life annuity or one of several optional forms of
payment having an equivalent actuarial value to the single-life annuity.
Participants who were age 50 or older as of March 31, 1998, were
grandfathered under a transitional provision that gives them the greater of the
benefit payable under the cash balance formula or the final average pay formula
based on all years of service and compensation. Mr. Bothof and Mr. Littlefield
are covered under this grandfather provision.
The Internal Revenue Code of 1986, as amended, currently limits the pension
benefits that can be paid from a tax-qualified pension plan to highly
compensated individuals. These limits prevent such individuals from receiving
the full pension benefit based on the same formula as is applicable to other
employees. As a result, Williams has adopted an unfunded supplemental retirement
plan to provide a supplemental retirement benefit equal to the amount of such
reduction to every employee whose benefit payable under the plan is reduced
because of these limitations, including the executive officers who participate
in this plan.
Total estimated annual benefits payable at normal retirement age under the
cash balance formula from both the tax qualified and the supplemental retirement
plans are as follows:
<TABLE>
<S> <C>
Howard E. Janzen............................................ $504,840
Delwin L. Bothof............................................ 92,319
Lawrence C. Littlefield, Jr................................. 44,394
Frank M. Semple............................................. 259,410
</TABLE>
The following table illustrates projected annual retirement benefits for
employees grandfathered under the final average pay formula, payable as a single
life annuity amount from both the tax-qualified and the supplemental retirement
plans based on various levels of final
110
<PAGE> 114
average annual compensation and years of service. The benefits are not subject
to deduction for any offset amounts.
WILLIAMS PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
- ------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 125,000 $ 20,966 $ 31,448 $ 41,931 $ 52,414 $ 62,897 $ 73,379
$ 175,000 $ 30,216 $ 45,323 $ 60,431 $ 75,539 $ 90,647 $105,754
$ 200,000 $ 34,840 $ 52,260 $ 69,680 $ 87,100 $104,520 $121,940
$ 250,000 $ 44,090 $ 66,135 $ 88,180 $110,225 $132,270 $154,315
$ 300,000 $ 53,340 $ 80,010 $106,681 $133,351 $160,022 $186,692
$ 400,000 $ 72,681 $109,022 $145,363 $181,703 $218,044 $254,385
$ 450,000 $ 81,090 $121,636 $162,181 $202,726 $243,272 $289,244
$ 500,000 $ 90,340 $135,510 $180,680 $225,850 $271,020 $316,190
</TABLE>
The estimated annual benefits payable at normal retirement age from both
the tax-qualified and the supplemental retirement plans as of December 31, 1998
would be based on average compensation of $267,705 for Mr. Bothof with 8 years
of credited service and $218,657 for Mr. Littlefield with 9 years of credited
service.
SOLUTIONS LLC PENSION PLAN
The Solutions LLC pension plan is a non-contributory, tax-qualified defined
benefit plan subject to ERISA. The plan generally includes all of our salaried
employees who work for Solutions LLC and who have completed one year of service.
Except as noted below, executive officers participate in the plan on the same
terms as other full-time employees.
The normal retirement benefit is a monthly annuity determined by averaging
compensation during the four calendar years of employment with the highest
compensation within the ten calendar years preceding retirement. Compensation
includes salary and bonuses. Normal retirement age is 65. Early retirement may
be taken with reduced benefits beginning as early as age 55. At retirement,
employees are entitled to receive a single-life annuity or one of several
optional forms of settlement having an equivalent actuarial value to the
single-life annuity.
The Internal Revenue Code currently limits the pension benefits that can be
paid from a tax-qualified defined benefit plan to highly compensated
individuals. These limits prevent such individuals from receiving the full
pension benefit based on the same formula as is applicable to other employees.
As a result, we have adopted an unfunded supplemental retirement plan to provide
a supplemental retirement benefit equal to the amount of such reduction to every
employee whose benefit payable under the plan is reduced by these limitations,
including the executive officers who participate in the plan.
The following table illustrates projected annual retirement benefits
payable as a single life annuity amount under both the tax-qualified and the
supplemental retirement plans based on
111
<PAGE> 115
various levels of final average annual compensation and years of service. The
benefits are not subject to deduction for any offset amounts.
SOLUTIONS LLC PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000 $17,340 $23,120 $ 28,900 $ 34,680 $ 40,460
$ 175,000 $25,012 $33,350 $ 41,687 $ 50,025 $ 58,362
$ 200,000 $28,849 $38,465 $ 48,081 $ 57,697 $ 67,313
$ 250,000 $36,521 $48,695 $ 60,869 $ 73,042 $ 85,216
$ 300,000 $44,194 $58,925 $ 73,042 $ 88,387 $103,118
$ 400,000 $59,539 $79,385 $ 99,231 $119,077 $138,923
$ 450,000 $67,211 $89,615 $112,019 $134,422 $156,826
$ 500,000 $74,884 $99,845 $124,806 $149,767 $174,728
</TABLE>
The estimated annual benefits payable from both the tax-qualified and the
supplemental retirement plans as of December 31, 1998 would be based on average
compensation of $267,239 for Mr. McGuire with 16 years of credited service.
WILLIAMS' PLANS
Prior to the offerings, stock options and deferred stock awards relating to
Williams common stock were made to our employees under The Williams Companies,
Inc. 1996 stock plan, The Williams Companies, Inc. stock plan for nonofficer
employees and the Williams Communications stock plan. These plans permit the
compensation committee of Williams' board of directors to grant different types
of stock-based awards, including deferred stock awards. They also provide for
stock option awards giving employees the right to purchase common stock over a
ten-year period at the market value per share of Williams common stock, as
defined by the plan, as of the date the option is granted. Stock options granted
under The Williams Companies, Inc. 1996 stock plan and The Williams Companies,
Inc. stock plan for nonofficer employees are subject to three-year vesting from
January 20 of the year the options are granted. Both plans provide for
accelerated vesting if the average price of Williams common stock reaches and
maintains a specified target price for five out of ten consecutive business
days. Options granted under the Williams Communications stock plan are generally
subject to five-year vesting, but provide for accelerated vesting based on the
attainment of various performance targets.
The compensation committee's objective with respect to stock option awards
is to provide a long-term component to overall compensation which aligns the
interests of executives with the interests of stockholders through stock
ownership. Compensation opportunities in the form of stock options serve this
purpose. The compensation committee has established stock option award targets
for each level of management participating in the stock option program. The
target levels for annual stock option grants have been established based on
competitive market practices and range from 50,000 shares for the chairman,
president and chief executive officer of Williams to 1,500 shares for
manager-level employees. In making decisions on stock option awards, the
compensation committee has available to it information on previous stock option
awards granted under the plans. Stock option awards are not tied to
preestablished performance targets.
The Williams stock plans also provide for awards of deferred stock which
the employee cannot otherwise dispose of prior to vesting. Williams' annual
incentive program requires that 30% of an executive's award be deferred in
Williams common stock. Deferred stock is normally forfeited if the executive
terminates employment for any reason other than retirement, disability
112
<PAGE> 116
or death prior to the end of the deferral period. Executive officers also have
the option to defer all or a portion of the cash award. Participants who elect
to defer all or a portion of the cash award may elect to defer for up to five
years from the award date. Deferred stock cannot be sold or otherwise disposed
of until the applicable deferral period lapses. Dividend equivalents are paid on
deferred stock. The value of the deferred award is at risk during the deferral
period since the value is tied to the stock price. The compensation committee
also uses deferred stock awards to provide, on a selective basis, a vehicle for
tying an element of compensation to the employee's willingness to remain with
Williams in a way that aligns the employee's interests with those of the other
stockholders.
NEW CHANGE IN CONTROL SEVERANCE PLAN OF OUR COMPANY
We have established a change in control severance plan which covers our
executives, including the executive officers named in the summary compensation
table. The plan provides severance benefits if, within two years following a
change in control of Williams or our company, a participant's employment is
terminated either involuntarily, other than for cause, death, disability or the
sale of a business, or voluntarily for good reason. The severance benefit is a
lump sum payment equal to 100% of the participant's annual base salary, plus
100% of the participant's monthly base salary for each completed year of
service, subject to a maximum severance benefit equal to 200% of the
participant's annual base salary.
If necessary, a participant is entitled to receive a corresponding gross-up
payment sufficient to compensate for the amount of any excise tax imposed by
Section 4999 of the Internal Revenue Code and for any taxes imposed on the
additional payment. Amounts payable under the plan are in lieu of any payments
which may otherwise be payable under any other severance plan or program.
NEW STOCK-BASED AND INCENTIVE PLANS OF OUR COMPANY
Prior to the completion of the equity offering, we expect to adopt stock
plans which will authorize the grant of different types of stock-based awards to
our employees. The total number of shares of our common stock to be authorized
for issuance under these plans is expected to be approximately 36,000,000.
The terms of the plans will be substantially similar to those of the
Williams stock plans described above, except that stock option grants will
generally be subject to a three-year graded (one-third per year) vesting
requirement, and will not provide for performance-based accelerated vesting. The
plans will be administered by our compensation committee. Award agreements with
respect to awards granted under the plans to our employees are expected to
provide that in the event of certain terminations of a participant's employment
following a change in control of Williams, or of our company, awards will become
fully vested and exercisable and generally remain exercisable for a period of 18
months. Award agreements with respect to awards granted under the plan to
Williams' independent directors, Williams' executive officers and certain other
Williams employees are expected to provide that in the event of a change in
control of our company awards will become fully vested and exercisable and
generally remain exercisable for a period of 18 months.
STOCK OPTION AND DEFERRED SHARE GRANTS
As of the completion of the equity offering, we intend to make stock option
grants under a new stock plan to employees. These awards and subsequent awards
under the plan will be made to selected employees and will be targeted to be
competitive with equity-based awards of similar companies in our industry. The
initial options will have an exercise price equal to the initial
113
<PAGE> 117
public offering price, the other options will have an exercise price equal to
the market price of the common stock on the date of grant and all of these
options will be subject to three-year graded vesting, which means that these
options will vest in three equal installments over three years. The total number
of shares covered by the initial awards is expected to be approximately
2,800,000.
We intend to make one-time stock option grants to our independent
directors, executive officers and other key employees as of the completion of
the equity offering. These options will have an exercise price equal to the
initial public offering price and, except for grants to independent directors
that will vest upon grant, be subject to five-year cliff vesting, which means
that all of these options will vest after five years. The total number of shares
covered by these one-time grants is expected to be approximately 2,380,000.
We also intend to make one-time stock option grants to Williams'
independent directors, Williams' executive officers and certain other Williams
employees. These options will have an exercise price equal to the initial public
offering price and, except for grants to independent directors that will vest
upon grant, be subject to five-year cliff vesting. The total number of shares
covered by these grants is expected to be approximately 974,000.
We also intend to make a one-time option grant to purchase shares of our
common stock to each of our regular employees who are not eligible to receive
annual grants under our stock plans. These options will have an exercise price
equal to the initial public offering price and be subject to three-year cliff
vesting. The total number of shares covered by these grants is expected to be
approximately 800,000.
Effective as of the completion of the equity offering, Mr. Littlefield will
receive an additional grant of 9,200 deferred shares and Mr. Schubert will
receive a grant of deferred shares with a value of $500,000 based on the initial
public offering price.
TREATMENT OF SPECIFIED WILLIAMS STOCK AWARDS
Prior to the closing of the equity offering, individuals who are actively
employed by us or Williams and who hold deferred shares of Williams common stock
or options to purchase shares of Williams common stock granted under the
Williams Communications stock plan will have the right to surrender for
cancellation each deferred Williams share or Williams option, whether or not
vested or exercisable, and, upon cancellation, we will issue or grant to these
individuals a deferred share or stock option in our company. Mr. Janzen will
also have the right to receive deferred shares in exchange for Williams deferred
shares held by him under The Williams Companies, Inc. 1996 stock plan. All of
these deferred shares or options will have the same deferral, vesting and
exercisability features as the deferred Williams share or Williams option
cancelled. The number of deferred shares that we issue or the number of shares
subject to each of the stock options that we grant and the exercise price per
share of our stock options will be determined in a manner that will reflect the
relative value between the Williams common stock and our common stock giving the
participant approximately equal value before and after the exchange.
As of the date of this prospectus, there are outstanding under the Williams
Communications stock plan approximately 175,000 deferred Williams shares and
approximately 510,000 Williams shares issuable under existing options which are
eligible to be exchanged for deferred shares or options to purchase our common
stock. Mr. Janzen holds 80,000 deferred shares under The Williams Companies,
Inc. 1996 stock plan. If all of the eligible employees were to exercise their
rights to exchange existing Williams awards for deferred shares or options to
purchase our
114
<PAGE> 118
common stock, we would issue approximately ______ deferred shares and we would
grant options to purchase approximately ______ shares of our common stock.
DIRECTED STOCK PROGRAM
We intend to provide all regular domestic Williams employees, all of our
regular domestic employees, the independent directors of both companies and
selected suppliers and customers of our company with the opportunity to purchase
shares of our common stock in the equity offering. Employees who participate in
certain 401(k) plans will have the option to execute this purchase through the
401(k) plan. Up to 7.0% of the common stock constituting the equity offering
will be available for purchase under this program, with no more than 0.7% of the
common stock constituting the equity offering to be available for purchase under
this program by the independent directors or our suppliers and customers.
115
<PAGE> 119
PRINCIPAL STOCKHOLDERS
OWNERSHIP OF OUR COMMON STOCK AND CLASS B COMMON STOCK
Prior to the equity offering, Williams owned 100% of our capital stock. In
the equity offering, we will be selling ____ shares, or ____%, of common stock
and in the concurrent investments we will be selling ____ shares, or %, of
common stock. Following the equity offering and the concurrent investments,
Williams will own 100% of our outstanding Class B common stock.
In connection with the offerings, we will grant directors and executive
officers options to purchase common stock and will grant some of the executive
officers deferred shares of our common stock. See the section of this prospectus
entitled "Management" for more information.
The following table first sets forth the expected ownership of class B
common stock by Williams, which is expected to be the only beneficial owner of
at least 5% of our common stock upon completion of the equity offering and the
concurrent investments. The table also sets forth the expected ownership by our
directors and executive officers of our common stock, or of options to purchase
our common stock as of the completion of the equity offering, based on the
assumption that all directors and executive officers elect to fully exchange
current Williams deferred share and option awards for our deferred share and
option awards to the extent that they are eligible to do so, but excluding
shares that executive officers and directors may purchase under the directed
stock program. For those individuals who hold deferred shares or options to
purchase Williams common stock that are eligible to be exchanged for deferred
shares or options to purchase our common stock, the number of shares indicated
below have been determined based on an assumed initial public offering price of
$____ per share and trading prices of Williams common stock on the last trading
day prior to the date of this prospectus. Other than for Mr. Wilkens, a
significant percentage of the options to purchase common stock indicated for
each individual will not be exercisible at the time of, or within 60 days
following, the completion of the equity offering. Subject to applicable
community property laws, these persons have sole voting and investment power
with respect to all shares of our common stock shown as beneficially owned by
them. The address for Williams is The Williams Companies, Inc., One Williams
Center, Tulsa, Oklahoma 74172 and for the other stockholders is c/o Williams
Communications Group, Inc., One Williams Center, Tulsa, Oklahoma 74172. The
percent of class after the equity offering has been calculated with our common
stock and Class B common stock treated as the share class and without giving
effect to the issuance of any shares of our common stock upon exercise of the
overallotment option granted to the underwriters of the equity offering.
<TABLE>
<CAPTION>
PERCENT OF CLASS
SHARES OF SHARES ---------------------------------
COMMON UNDERLYING PRIOR TO THE AFTER THE
STOCKHOLDER STOCK OWNED OPTIONS TOTAL EQUITY OFFERING EQUITY OFFERING
- ----------- ----------- ---------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
The Williams Companies, Inc. ....... 100%
Keith E. Bailey..................... -- 100,000 100,000 * *
John C. Bumgarner, Jr. ............. 50,000 * *
James R. Herbster................... 50,000 50,000 * *
Howard E. Janzen.................... 300,000 * *
Michael P. Johnson, Sr. ............ -- 50,000 50,000 * *
Steven J. Malcolm................... -- 50,000 50,000 * *
Jack D. McCarthy.................... -- 50,000 50,000 * *
Brian E. O'Neill.................... -- 50,000 50,000 * *
Roy A. Wilkens...................... -- 10,000 10,000 * *
Delwin L. Bothof.................... 70,000 * *
Lawrence C. Littlefield, Jr. ....... 70,000 * *
Garry K. McGuire.................... 70,000 * *
</TABLE>
116
<PAGE> 120
<TABLE>
<CAPTION>
PERCENT OF CLASS
SHARES OF SHARES ---------------------------------
COMMON UNDERLYING PRIOR TO THE AFTER THE
STOCKHOLDER STOCK OWNED OPTIONS TOTAL EQUITY OFFERING EQUITY OFFERING
- ----------- ----------- ---------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Frank M. Semple..................... 100,000 * *
All directors and executive officers
as a group (22 persons)........... * *
</TABLE>
- ---------------
* Less than 1%.
OWNERSHIP OF WILLIAMS COMMON STOCK
The following table sets forth, as of the date of this prospectus, the
beneficial ownership of Williams common stock, par value $0.01 per share, by
each of our executive officers named in the summary compensation table, each of
our directors and all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules and regulations
of the Commission. Shares of Williams common stock subject to options that are
currently exercisable or exercisable within 60 days of March 31, 1999 are deemed
to be outstanding and beneficially owned by the person holding the options for
the purpose of computing the number of shares beneficially owned and the
percentage ownership of that person, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Except as
indicated in the text below this table, and subject to applicable community
property laws, these persons have sole voting and investment power with respect
to all shares of the Williams common stock shown as beneficially owned by them.
The address for the following stockholders is c/o Williams Communications Group,
Inc., One Williams Center, Tulsa, Oklahoma 74172.
Directors and executive officers as a group own less than 2% of outstanding
Williams common stock.
OWNERSHIP OF WILLIAMS COMMON STOCK BY OUR EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
SHARES
SHARES OF UNDERLYING
COMMON OPTIONS
STOCK OWNED EXERCISABLE
DIRECTLY OR WITHIN 60 PERCENT
NAME INDIRECTLY(1) DAYS(3) TOTAL OF CLASS
---- ------------- ----------- --------- --------
<S> <C> <C> <C> <C>
Keith E. Bailey............................ 1,886,001 325,002 2,211,003 *
John C. Bumgarner, Jr. .................... 977,891 70,000 1,047,891 *
James R. Herbster.......................... 166,085(2) 203,904 369,989 *
Howard E. Janzen........................... 242,717 200,006 442,723 *
Michael P. Johnson, Sr..................... 20,346 5,250 25,596 *
Steven J. Malcolm.......................... 55,114 138,938 194,052 *
Jack D. McCarthy........................... 211,044 30,000 241,044 *
Brian E. O'Neill........................... 123,526 324,404 447,930 *
Delwin L. Bothof........................... 132,981 52,500 185,481 *
Lawrence C. Littlefield, Jr. .............. 121,840 108,500 230,340 *
Garry K. McGuire........................... 35,592 73,500 109,092 *
Frank M. Semple............................ 61,685 162,500 224,185 *
All directors and executive officers as a
group (22 persons)....................... 4,644,023 2,232,119 6,876,142
</TABLE>
- ---------------
* Less than 1%.
117
<PAGE> 121
(1) Includes shares held under the terms of incentive and investment plans as
follows: Mr. Bailey, 621,287, including 175,873 over which he has sole
voting and investment power; Mr. Bumgarner, 382,824, including 221,863 over
which he has sole voting and investment power; Mr. Herbster, 89,816,
including 44,005 over which he has sole voting and investment power; Mr.
Janzen, 144,802, including 58,294 over which he has sole voting and
investment power; Mr. Johnson, 20,346, including 304 shares over which he
has sole investment and voting power; Mr. Malcolm, 36,138, including 31,662
over which he has sole voting and investment power; Mr. McCarthy, 94,975,
including 42,975 over which he has sole voting and investment power; Mr.
O'Neill, 62,760, including 12,928 over which he has sole voting and
investment power; Mr. Littlefield, 83,340, including 10,137 over which he
has sole voting and investment power; Mr. Semple, 85,034, including 53,334
over which he has sole voting and investment power; Mr. Bothof, 33,372,
including 10,115 over which he has sole voting and investment power; Mr.
McGuire, 35,592, including 1,194 over which he has sole voting and
investment power; and all executive officers as a group, 1,885,768,
including 749,971, over which each has sole voting and investment power as
to his or her shares.
(2) Includes 29,996 shares held in trust, over which Mr. Herbster has voting and
investment power.
(3) The Commission deems a person to have beneficial ownership of all shares
that the person has the right to acquire within 60 days. The shares
indicated represent stock options granted under the stock plans of The
Williams Companies, Inc. Shares subject to option cannot be voted.
118
<PAGE> 122
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Included in our revenues are charges to Williams and its subsidiaries and
affiliates for managing their internal telephone operations of $7,710,000,
$5,217,000 and $4,918,000 for 1998, 1997 and 1996, respectively. In addition,
our revenues include charges to Williams' gas pipelines for managing microwave
frequencies of $4,254,000, $3,754,000 and $1,381,000 for 1998, 1997 and 1996,
respectively.
Williams grants our directors and officers loans in order to enable them to
exercise stock options to purchase Williams common stock. These loans use stock
certificates as collateral and may be for either a three- or five-year term.
Interest payments are due annually during the term of the loan and are based on
the minimum applicable federal rates required to avoid imputed income. The
principal amount is due at the end of the loan term, provided, however, that a
participant may request, prior to the end of a loan term, a new loan which may
be granted at the discretion of Williams. Participants who leave Williams during
the loan period are required to pay the loan balance and any accrued interest
within 30 days of termination. John C. Bumgarner, one of our directors and our
senior vice president of strategic investments, owns real estate and leases a
portion of it to subsidiaries of our company for use as office space. In 1998,
payments under these leases approximated $136,782. These leases remain in place,
and we expect the company's subsidiaries to make similar payments approximating
$60,000 per month for the term of the leases.
The following table describes details regarding these loans which have been
made to our directors or officers.
<TABLE>
<CAPTION>
TOTAL LARGEST
INTEREST AMOUNT AMOUNT
INTEREST OVER TERM DUE DURING OUTSTANDING
NAME RATE OF LOAN 1998 5/10/99
- ---- -------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Keith E. Bailey............. 6.28% $ 50,641.92 $ 171,408.39 $ 164,887.37
Keith E. Bailey............. 6.58% $ 71,656.20 $ 232,131.21 $ 222,904.28
Keith E. Bailey............. 6.42% $ 64,200.00 $ 266,050.00 $ 255,716.44
Keith E. Bailey............. 6.80% $ 144,190.19 $ 601,327.51 $ 576,677.18
Keith E. Bailey............. 5.68% $ 406,609.84 $ 1,472,720.00 $ 1,460,688.79
Keith E. Bailey............. 5.57% $1,026,811.18 $ 3,770,204.37 $ 3,760,076.92
Keith E. Bailey............. 5.54% $1,670,829.99 $ 6,143,571.06 $ 6,150,895.25
Total............ $3,434,939.32 $12,657,412.54 $12,591,846.23
John C. Bumgarner, Jr. ..... 5.91% $ 203,927.62 $ 1,218,159.86 $ 1,174,394.59
John C. Bumgarner, Jr. ..... 5.42% $ 559,102.89 $ 3,500,299.27 $ 3,504,894.64
Total............ $ 763,030.51 $ 4,718,459.13 $ 4,679,289.23
James R. Herbster........... 6.74% $ 17,864.37 $ 56,582.87 $ 54,282.53
James R. Herbster........... 6.49% $ 119,416.00 $ 391,883.22 $ 376,506.35
James R. Herbster........... 5.93% $ 77,115.43 $ 274,452.51 $ 265,578.93
Total............ $ 214,395.80 $ 722,918.60 $ 696,367.81
Howard E. Janzen............ 5.70% $ 80,997.64 $ 500,521.63 $ 483,286.56
Howard E. Janzen............ 5.69% $ 87,092.51 $ 320,823.16 $ 312,328.65
Howard E. Janzen............ 5.77% $ 38,864.87 $ 139,207.01 $ 137,482.06
Howard E. Janzen............ 4.71% $ 106,851.10 $ 0 $ 459,340.85
Howard E. Janzen............ 4.83% $ 114,621.70 $ 0 $ 477,261.87
Total............ $ 428,427.87 $ 960,551.80 $ 1,869,699.99
</TABLE>
119
<PAGE> 123
<TABLE>
<CAPTION>
TOTAL LARGEST
INTEREST AMOUNT AMOUNT
INTEREST OVER TERM DUE DURING OUTSTANDING
NAME RATE OF LOAN 1998 5/10/99
- ---- -------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Jack D. McCarthy............ 6.23% $ 321,312.50 $ 1,095,763.30 $ 1,054,388.80
Jack D. McCarthy............ 6.42% $ 265,031.98 $ 878,651.17 $ 844,523.79
Jack D. McCarthy............ 5.59% $ 158,676.74 $ 696,532.02 $ 677,989.90
Jack D. McCarthy............ 4.83% $ 301,392.00 $ 0 $ 1,256,752.75
Total............ $1,046,413.21 $ 2,670,946.49 $ 3,833,655.24
William G. von Glahn........ 5.83% $ 73,234.13 $ 443,131.32 $ 427,414.47
William G. von Glahn........ 5.91% $ 6,240.96 $ 37,280.31 $ 35,940.94
William G. von Glahn........ 6.23% $ 23,624.16 $ 134,274.72 $ 129,204.70
William G. von Glahn........ 5.54% $ 56,063.91 $ 353,746.50 $ 343,983.99
William G. von Glahn........ 5.59% $ 39,174.72 $ 182.954.39 $ 178,688.16
William G. von Glahn........ 5.39% $ 11,670.00 $ 102,499.38 $ 100,191.16
William G. von Glahn........ 5.48% $ 76,281.60 $ 474,170.89 $ 473,056.26
William G. von Glahn........ 5.57% $ 55,700.00 $ 203,845.60 $ 203,967.67
William G. von Glahn........ 5.54% $ 113,547.84 $ 417,448.38 $ 418,008.34
William G. von Glahn........ 5.28% $ 36,960.00 $ 0 $ 175,886.03
Total............ $ 492,497.32 $ 2,349,351.47 $ 2,486,341.72
Delwin L. Bothof............ 5.42% $ 241,045.04 $ 1,507,316.76 $ 1,511,059.01
Delwin L. Bothof............ 4.67% $ 70,050.00 $ -- $ 604,298.96
Total............ $ 311,095.04 $ 1,507,316.76 $ 2,115,357.97
Gerald L. Carson............ 5.59% $ 183,874.33 $ 686,281.13 $ 670,966.70
Total............ $ 183,874.33 $ 686,281.13 $ 670,966.70
Lawrence C. Littlefield,
Jr........................ 5.54% $ 109,692.00 $ 691,254.73 $ 673,022.79
Total............ $ 109,692.00 $ 691,254.73 $ 673,022.79
Frank M. Semple............. 5.42% $ 180,664.33 $ 1,131,060.57 $ 1,132,545.46
Total............ $ 180,664.33 $ 1,131,060.57 $ 1,132,545.46
Grand Total................. $6,118,616.42 $25,424,606.73 $26,915,437.91
</TABLE>
Garry McGuire, our Senior Vice President, Solutions, has an interest-free
loan outstanding from Solutions LLC in the amount of $350,000. This loan was
made to enable Mr. McGuire to purchase a new principal residence upon his
relocation to Houston.
RELATIONSHIP BETWEEN OUR COMPANY AND WILLIAMS
Williams is currently the beneficial owner of all of our capital stock.
Following the completion of the equity offering and concurrent investments,
Williams will continue to be our controlling stockholder and will beneficially
own 100% of the outstanding Class B common stock, which will represent
approximately ____% of the combined voting power of all of our outstanding
capital stock and approximately ____% of the economic interest in our company,
or ____% and ____% if the underwriters of the equity offering exercise the
over-allotment option in full.
For so long as Williams continues to beneficially own shares of capital
stock representing more than 50% of the combined voting power of our outstanding
capital stock, it will be able to approve any matter submitted to a vote of our
stockholders without the consent of our other stockholders, including, among
other things, the amendment of our restated certificate of incorporation and
by-laws and the election of all members of the board of directors. Williams has,
however, agreed to elect a director designated by SBC so long as SBC retains
more than a
120
<PAGE> 124
5% equity interest in our capital stock and satisfies the procedural and
substantive requirements to provide long distance services originating in a
state in its traditional exchange service area. In addition, through its
controlling beneficial ownership of us, as well as certain provisions of
intercompany agreements discussed below, Williams will be able to exercise a
controlling influence over our company, including determinations with respect to
mergers or other business combinations involving us, the acquisition or
disposition of assets by us, our access to the capital markets, the payment of
dividends and any change of control of our company. In these and other
situations, various conflicts of interest between us and Williams could arise.
Furthermore, ownership interests of our directors and officers in Williams'
common stock or service as a director or officer of both us and Williams could
create, or appear to create, potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for us
and Williams. We cannot assure you that conflicts of interest will not arise or
will be resolved in a manner favorable to us.
Williams has advised us that its current intent is to continue to hold all
the Class B common stock beneficially owned by it following the equity offering.
However, Williams has no contractual obligation to retain its shares of Class B
common stock. Williams has agreed, subject to specified exceptions, not to sell
or otherwise dispose of any shares of our Class B common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Salomon Smith Barney Inc. and Lehman Brothers Inc. on behalf of the
underwriters. As a result, there can be no assurance concerning the period of
time during which Williams will maintain its beneficial ownership of our Class B
common stock owned by it following the equity offering. In addition, we have
agreed that we will, upon the request of Williams, use our reasonable best
efforts to effect the registration under applicable federal and state securities
laws of any shares of common stock or Class B common stock held by Williams or
any of its affiliates.
The following are summaries of material provisions of the agreements to be
entered into by our company with Williams by the completion of the offerings,
forms of which we have filed as exhibits to the registration statement.
SEPARATION AGREEMENT
We have entered into a separation agreement with Williams relating to
various aspects of our companies' operations that will govern our relationship
with each other after the equity offering. Under the separation agreement, we
have agreed not to compete with Williams for five years in any area of the
energy industry in which Williams currently has operations and Williams has
agreed not to compete with us for five years in any area of the
telecommunications industry in which we currently have operations, subject to
specified exceptions. Under the separation agreement, if a party decides not to
pursue a business opportunity that it has the right to pursue to the exclusion
of the other party, it must promptly inform the other party of this decision.
The other party would then be free to pursue the opportunity.
Our restated certificate of incorporation provides that we may not bring
any claim against Williams or any of its officers, directors or other
affiliates, for breach of any duty, including, but not limited to, the duty of
loyalty or fair dealing on account of a diversion of a corporate business
opportunity to Williams, unless that opportunity relates solely to a business
that we have the right to elect to pursue to the exclusion of Williams pursuant
to the separation agreement. Notwithstanding the above, no claim may be made in
any event if our directors who are not employees of Williams disclaim the
opportunity by a unanimous vote.
121
<PAGE> 125
Other components of the separation agreement provide for the following:
- exchange of participation, service and compensation records of employees
who transfer between Williams and us
- filing of annual reports and compliance with other legal requirements
applicable to the parties' employee benefit plans
- allocation of assets and liabilities under various nonqualified pension
and deferred compensation plans maintained by Williams for the benefit of
employees and non-employee directors
- disposition of outstanding stock options, stock appreciation rights and
long-term incentive awards
- allocation of assets and liabilities pertaining to post-retirement life
insurance and health care benefits
- allocation of liabilities for accrued vacation, paid leave and certain
other benefits
- maintenance of insurance coverage consistent with past practices
- establishment of a separation committee to resolve disputes between us
and Williams and arbitration provisions
Our employees, other than those who work for Solutions, LLC, are jointly
employed by other subsidiaries of Williams which provide administrative services
related to their employment. We have entered into personnel services agreements
providing for reimbursement by us of the actual costs incurred by the services
companies related to our employees. Williams also pays the services companies a
fee for administration. Under the separation agreement, we have agreed to
reimburse Williams for our portion of the fee. A Williams subsidiary also
performs risk management services for us and other Williams subsidiaries.
Williams compensates the risk management subsidiary for its actual costs
incurred, a portion of which is related to our business. Under the separation
agreement, we have agreed to reimburse the risk management subsidiary for our
portion of the costs.
LIGHTEL CALL OPTION
We have entered into an agreement with Williams granting us the option to
acquire Williams' equity and debt interests in Lightel. For more information,
see the section of this prospectus entitled "Business -- Strategic
Investments -- International -- Lightel."
TAX SHARING AGREEMENT
In the past, we have been included in Williams' federal consolidated income
tax group. After the offerings and the closing of the SBC investment, it is
expected that we will continue to be included in the Williams federal
consolidated income tax group. In this case, our federal income tax liability
would be included in the consolidated federal income tax liability of Williams
and its subsidiaries. We also expect to be included with Williams and/or certain
of its subsidiaries in combined, consolidated or unitary income tax groups for
state income tax purposes. We have entered into a tax sharing agreement with
Williams under which we and Williams will make payments such that, for any
period, the amount of federal income taxes we will pay will, subject to certain
adjustments, generally be determined as though we were filing separate federal
income tax returns (including amounts determined to be due under such agreement
as a result of an audit or otherwise). Under the tax sharing agreement, our
losses or other similar tax attributes realized for periods prior to the equity
offering will be utilized or retained by the Williams group and thus will not be
available to us in order to reduce our hypothetical separate tax liability. We
will be responsible for any increases in federal income tax liabilities
resulting to Williams and its subsidiaries if these losses or attributes are
reduced by
122
<PAGE> 126
audit or otherwise. If, for any period after consummation of the equity
offering, we have a current realized operating loss determined on such a
hypothetical separate tax return basis, we will not owe any payments under the
tax sharing agreement for that tax year, and, in general, we will be allowed to
carry over the loss to other tax years in which we are a member of the Williams
federal consolidated income tax group in order to offset our income determined
on this hypothetical separate tax return basis for other tax years. However, if
we are unable to utilize any loss on a hypothetical separate tax return basis,
Williams will be entitled to utilize the loss without paying us for it. If we
cease to be included in the Williams federal consolidated income tax group, we
will not be entitled to receive the benefit of any carryforward of any loss to
offset our income for any tax years thereafter where such loss has been utilized
by the Williams group. We will also be required to pay Williams for any tax
attribute that we are entitled to use after leaving the Williams federal
consolidated income tax group if we have already received the benefit of this
tax attribute under the tax sharing agreement. Therefore, we generally will
receive the benefit of a loss only if we are able to offset the loss against our
income while we are a member of the Williams federal consolidated income tax
group. We cannot guarantee that we will earn any income against which we can
offset any loss while we are a member of the Williams federal consolidated
income tax group and, thus, that we will obtain any benefit from losses
generated while we are a member of the Williams group.
Since we expect to continue to be included in the Williams federal
consolidated income tax group, Williams will continue to have all the rights of
a parent of a consolidated group. Williams will have sole and absolute
responsibility for, and sole and absolute discretion with respect to, the
following:
- preparing any of our income and other tax returns, including, without
limitation, amended returns or claims for refunds
- representing us with respect to any tax audit or tax contest, including,
without limitation, settling or compromising any tax controversy
- engaging outside counsel and accountants with respect to tax matters
regarding us
- performing other acts and duties with respect to our tax returns as
Williams determines to be appropriate
- interpreting and applying the tax sharing agreement and determining any
disputes that arise under it
The general principles of the tax sharing agreement will also apply to
state income taxes (and, in the sole and absolute discretion of Williams, may
also apply to foreign, local, other state and other federal taxes) with respect
to which we are included with Williams and/or certain of its subsidiaries in
consolidated, combined or unitary groups. Thus, we will be responsible for any
foreign tax liability arising from our business activities.
To the extent permitted by applicable state laws, Williams will continue to
have all the rights of a parent of a combined, consolidated or unitary income
tax group. The tax sharing agreement will remain in effect so long as and to the
extent that we are included with Williams and/or any of its subsidiaries in any
combined, consolidated or unitary income tax group in any taxing jurisdiction
and the statute of limitations for these returns remains open.
Under the administrative services agreement, the amounts that we will pay
Williams will encompass reimbursement to Williams for all direct and indirect
costs and expenses incurred with respect to our share of the overall costs and
expenses incurred by Williams with respect to tax-related services.
In general, we will be included in Williams' consolidated group for federal
income tax purposes for so long as Williams beneficially owns at least 80% of
the total voting power and
123
<PAGE> 127
value of our outstanding common stock. Each member of a consolidated group is
jointly and severally liable for the federal income tax liability of the
consolidated group for the period during which it was a member of this
consolidated group. Accordingly, although the tax sharing agreement allocates
tax liabilities between us and Williams during the period in which we are
included in Williams' federal consolidated income tax group and provides that
Williams will indemnify us for any tax liabilities not allocated to us, we could
be liable for any federal income tax liabilities incurred, but not discharged,
by any other member of Williams' federal consolidated income tax group. Similar
principles may apply for combined, consolidated, or unitary state income tax
purposes.
INDEMNIFICATION AGREEMENT
We and Williams have entered into an indemnification agreement which
provides that each party to the agreement will indemnify the other party and its
directors, officers, employees, agents and representatives for liabilities under
federal or state securities laws as a result of the offerings, including
liabilities arising out of or based upon alleged misrepresentations in or
omissions from the registration statements. Each party will indemnify the other
party for liabilities, which also include taxes, that may be incurred by the
other party relating to, resulting from or arising out of the business and
operations conducted or formerly conducted, or assets formerly owned, by the
indemnifying party and its subsidiaries. However, where Williams is the
indemnifying party, it will not indemnify us for any liabilities relating to,
resulting from or arising out of our business and operations and assets. Each
party will indemnify the other party for liabilities, which also include taxes,
that may be incurred by that other party relating to, resulting from or arising
out of the failure by each party to comply with other agreements executed in
connection with the offerings, except to the extent caused by the other party.
The indemnification agreement also provides that we indemnify Williams for
any liabilities incurred by Williams under the guarantees of Williams'
obligations with respect to us or any other of our liabilities that are imposed
on Williams and that we will pay Williams for the direct cost, if any, of
maintaining these guarantees or for the costs of defending a claim asserting any
potentially covered liability.
Williams currently guarantees our obligations under the revolving credit
agreement, the bridge loan and the asset defeasance program, each of which we
describe in the section of this prospectus entitled "Description of Indebtedness
and Other Financing Arrangements." Williams' guarantee of our obligations under
the asset defeasance program will continue following the offerings. Williams'
guarantee of the revolving credit agreement and bridge loans will continue
following the offerings until these agreements are terminated and replaced by a
new permanent credit facility. Williams also has guaranteed and entered into
other contingent obligations in connection with financings by ATL in total
amount of approximately $100 million.
REGISTRATION RIGHTS AGREEMENT
We and Williams have entered into a registration rights agreement which
provides that, upon the request of Williams, we will use our reasonable efforts
to effect the registration under the applicable federal and state securities
laws of any shares of common stock, and any other securities issued in
connection in respect of or exchange for the common stock, held by Williams and
will take any other action necessary to permit the sale of these securities in
other jurisdictions, subject to certain specified limitations. However, Williams
has advised us that it has no current plan or intention to dispose of its shares
of our Class B common stock. For the foreseeable future, Williams will also have
the right, which it may exercise at any time and from time to time, to include
shares of common stock held by it in certain other registrations of our
124
<PAGE> 128
common equity securities we initiate on our own behalf or on behalf of other
stockholders. Williams will pay the out-of-pocket costs and expenses of
registration for registrations which it initiates. We have agreed to pay all
out-of-pocket costs and expenses, other than underwriting discounts and
commissions, in connection with the registrations we initiate in which Williams
participates. Our restated certificate of incorporation provides that any shares
of Class B common stock sold or otherwise transferred to any person other than a
Williams affiliate are automatically converted into common stock.
ADMINISTRATIVE SERVICES AGREEMENT
The administrative services agreement provides for Williams to continue to
provide similar financial management services, information services, legal and
contract services, risk management, human resources services, corporate planning
and other management support services to us as it has in the past. Under the
terms of the administrative services agreement, all of the services will be
rendered by Williams or subsidiaries of Williams subject to our oversight,
supervision and approval through our board of directors.
The administrative costs we will pay to Williams and its subsidiaries
pursuant to the administrative services agreement are allocated pursuant to an
established formula based on actual costs and is believed to be equal to or less
than the fees that would be paid if these services were to be provided by an
independent third party.
The administrative services agreement will become effective upon the
completion of the equity offering and shall terminate on December 31, 2005
unless earlier terminated by Williams or us. The administrative services
agreement would be automatically renewed for additional terms of two years
unless either party gives at least six months' written notice prior to a
scheduled termination date. The administrative services agreement can be
terminated upon a material breach by either party and will be terminated upon a
change of control of our company. A change of control shall be deemed to have
occurred if:
(a) Williams or the companies controlled by Williams should own shares
representing less than the majority of the voting power of our then-outstanding
common stock;
(b) the majority of the seats of our board of directors shall be occupied
by persons who are neither nominated by Williams or by our board of directors,
nor appointed by our directors so nominated; or
(c) any person or group other than Williams and the companies controlled by
Williams shall directly or indirectly have the power to exercise a controlling
influence over us.
Upon a change of control, we will enter into good faith negotiations with
Williams concerning an acceptable form of transition agreement providing for
Williams to make available, at cost, necessary services to us until a time when
we can provide these services for ourselves or obtain them from some other
source.
Williams and its affiliates incur certain costs on our behalf, primarily
insurance coverage and related risk management services provided by
non-affiliates, benefits provided to our employees under Williams' benefit
plans, payroll administration, bank fees, certain utility costs, employee
relocation and other costs. Williams and its affiliates either directly charge
these costs to us or, for a shared service or cost, allocate a portion of these
costs to us based for insurance coverage on various risk exposure factors and
otherwise primarily on actual usage.
The amount paid by us during the year ended December 31, 1998 for all of
the services provided during that year that in the future will be provided under
the administrative services agreement was approximately $25 million.
125
<PAGE> 129
SERVICE AGREEMENT
We have entered into a service agreement with Williams Information Services
Corporation, a wholly-owned subsidiary of Williams. Under this agreement, WISC
will provide data processing computer-related services to us. These services
include mainframe operations, help desk support, network services, mid-range
operations, general data center operations, disaster recovery, technical
support, development services and hardware and software procurement assistance.
Services are generally charged at cost on a usage basis plus a 15% management
fee. Any procured items are transferred at actual cost. The amount paid by us
during the year ended December 31, 1998 for all of the services provided during
that year that in the future will be provided under the service agreement was
$4,786,000.
LEASE AGREEMENT
We have leases with various Williams affiliates providing for the leasing
of office and other space. The total charges for leased space during the year
ended December 31, 1998 for leases provided during that year that in the future
will be provided under lease agreements was $3,971,000. The lease charges are
based on occupied square footage and terms approximate market. In addition, we
reimburse Williams affiliates for the cost of leased space utilized by our
employees at these affiliates' locations.
CROSS-LICENSE AGREEMENT
The cross-license agreement addresses Williams' and our respective rights
and obligations after the equity offering with respect to intellectual property,
inventions and trademarks and trade names as well as the use of proprietary
information by employees of Williams and us. Williams and WISC license at no
cost to us certain intellectual property to us, effective as of the equity
offering. Similarly we will cross license at no cost to Williams certain
intellectual property to Williams on the same terms as their license to us.
Among other things, for so long as Williams shall beneficially own at least 50%
of the voting power of our outstanding common stock, we are permitted to
continue our use of the Williams trademark and brand names.
TECHNICAL, MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
The technical, management and administrative services agreement provides
for Williams to continue to provide to us the same management services relating
to our international operations and investments after the offerings as it has in
the past. Under the terms of the management agreement, all of the services will
be rendered by Williams or subsidiaries of Williams subject to our oversight,
supervision and approval through our board of directors.
The management costs we will pay to Williams and its subsidiaries pursuant
to the management agreement are allocated pursuant to an established formula
based on actual costs and is believed to be equal to or less than the fees that
would be paid if these services were to be provided by an independent third
party.
CONFLICTS OF INTEREST
Conflicts of interest may arise between us and Williams in a number of
areas relating to our past and ongoing relationships with Williams, including
potential acquisitions of businesses or properties or other corporate
opportunities, potential competitive business activities, the election of new or
additional directors, payment of dividends, incurrence or repayment of
indebtedness, tax matters, financial commitments, marketing functions, indemnity
arrangements, registration rights, administration of benefits plans, service
arrangements, issuances of our capital stock, sales or distributions by Williams
of its shares of our Class B common stock, the exercise of the right
126
<PAGE> 130
to purchase Williams' investment in Lightel and the exercise by Williams of its
ability to control our management and affairs. Although the separation agreement
contains certain non-compete provisions, in many circumstances we and Williams
are free to compete with one another.
We and Williams may enter into material transactions and agreements in the
future in addition to those described above. Our board of directors will utilize
procedures in evaluating the terms and provisions of any material transactions
between us and Williams or its affiliates as our board of directors may deem
appropriate in light of its fiduciary duties under state law. In any evaluation,
our board of directors may rely on management's statements and opinions and may
or may not utilize outside experts or consultants or obtain independent
appraisals or opinions. One of our directors is both a senior officer and
director, and six of our directors are also senior officers, of Williams. These
directors and officers may have conflicts of interest with respect to matters
potentially or actually involving or affecting us or Williams, such as
acquisitions, financing and other corporate opportunities that may be suitable
both for us and for Williams. To the extent that opportunities arise, these
directors may consult with their legal advisors and make a determination after
considering a number of factors, including whether such an opportunity is within
our line of business or consistent with our strategic objectives and whether we
will be able to undertake or benefit from a particular opportunity. In addition,
determinations may be made by our board of directors, and when appropriate, by
the vote of the disinterested directors only. Despite the foregoing, there can
be no assurance that conflicts will be resolved in our favor.
For so long as Williams controls at least 50% of the voting power of our
outstanding capital stock, our directors and officers will, subject to certain
limitations, be indemnified by Williams and insured under insurance policies
maintained by Williams against liability for actions taken, or omitted to be
taken, in their capacities as our directors and officers, including actions or
omissions that may be alleged to constitute breaches of the fiduciary duties
owed by our directors and officers to us and our stockholders. This insurance
may not be applicable to certain of the claims which Williams may have against
us under the indemnification agreement or otherwise.
127
<PAGE> 131
DESCRIPTION OF THE NOTES
GENERAL
The notes will be issued under an indenture between WCG and ____, as
trustee. We have filed a copy of the indenture as an exhibit to the registration
statement which includes this prospectus. In this description, the term "WCG"
refers to Williams Communications Group, Inc. and does not include its
subsidiaries, except for purposes of financial data determined on a consolidated
basis. You can find the definitions of capitalized terms used in this section in
the section below entitled "-- Certain definitions."
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the notes. The terms of the notes also include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act.
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are senior unsecured obligations of WCG;
- rank equally with all existing and future senior unsecured indebtedness
of WCG;
- rank senior to all existing and future indebtedness of WCG expressly
subordinated in right of payment to the notes;
- are subordinated to all existing and future indebtedness and other
liabilities, including trade payables, of WCG's subsidiaries as described
below under "-- Ranking";
- accrue interest from the date they are issued at a rate of %, which is
payable semi-annually;
- mature on , 2009.
WCG has covenanted that it will offer to repurchase the notes under the
circumstances described in the indenture upon:
- a Change of Control Triggering Event; or
- Asset Dispositions by WCG or any of its Restricted Subsidiaries.
The indenture also contains the following covenants:
- limitation on consolidated Debt;
- limitation on Debt of Restricted Subsidiaries;
- limitation on Restricted Payments;
- limitation on dividend and other payment restrictions affecting
Restricted Subsidiaries;
- limitation on Liens;
- limitation on Sale and Leaseback Transactions;
- limitation on Asset Dispositions;
- limitation on issuance and sales of Capital Stock of Restricted
Subsidiaries;
- transactions with Affiliates;
128
<PAGE> 132
- reports;
- limitation on designations of Unrestricted Subsidiaries; and
- mergers, consolidations and certain sales of assets.
RANKING
Substantially all the operations of WCG are conducted through its
subsidiaries and, therefore, WCG is dependent upon cash flow from those entities
to meet its obligations. The payment of dividends and the making of loans and
advances to WCG by its subsidiaries are subject to various restrictions. Future
debt of certain of the subsidiaries may prohibit the payment of dividends or the
making of loans or advances to WCG. In addition, the ability of subsidiaries of
WCG to make such payments, loans or advances to WCG is limited by the laws of
the relevant jurisdictions in which such subsidiaries are organized or located.
In some cases, the prior or subsequent approval of such payments, loans or
advances by such subsidiaries to WCG may be required from applicable regulatory
bodies or other governmental entities.
WCG's subsidiaries will have no direct obligation to pay amounts due on the
notes unless they become Guarantors. The notes effectively will be subordinated
to all existing and future indebtedness and other liabilities, including trade
payables, of WCG's subsidiaries that are not Guarantors. As of ,
1999, none of WCG's subsidiaries will be Guarantors. As of March 31, 1999, after
giving pro forma effect to the offerings, the concurrent investments, the
financings described in this prospectus and the application of the net proceeds
from the offerings and the concurrent investments, WCG's subsidiaries would have
had $3.3 billion of liabilities outstanding, including $1.3 billion under the
Williams Note. The indenture permits WCG and its subsidiaries to incur
substantial amounts of additional indebtedness and other liabilities. Any rights
of WCG and its creditors, including the holders of notes, to participate in the
assets of any of WCG's subsidiaries upon any liquidation or reorganization of
any such subsidiary will be subject to the prior claims of that subsidiary's
creditors, including trade creditors. See the section of this prospectus
entitled "Risk Factors -- Risks relating to our notes -- Your right to receive
payment on the notes is junior to our existing debt and possibly all future
borrowings" for more information.
PRINCIPAL, MATURITY AND INTEREST
WCG will issue notes in this offering with a maximum aggregate principal
amount of $____ million. The notes will mature on ____, 2009. The notes will
bear interest at the rate of ____% per annum from ____ or from the most recent
date to which interest has been paid. Interest will be payable in cash
semiannually in arrears on ____ and ____, commencing ____. WCG will make each
interest payment to the persons who are registered holders of the notes at the
close of business on the preceding ____ or ____. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency of WCG,
which, unless otherwise provided by WCG, will be the offices of the trustee. At
the option of WCG, interest may be paid by check mailed to the registered
holders at their registered addresses. The notes will be issued without coupons
and in fully registered form only, in minimum denominations of $1,000 and
integral multiples thereof. The notes will be issued only against payment in
immediately available funds. No service charge will be made for any registration
of transfer or exchange of the notes, but WCG may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection with the registration of, transfer or exchange of the
notes.
129
<PAGE> 133
BOOK-ENTRY SYSTEM
The notes will initially be issued in the form of global securities held in
book-entry form. The notes will be deposited with the trustee as custodian for
The Depository Trust Company (DTC), and DTC or its nominee will initially be the
sole registered holder of the notes for all purposes under the indenture. Except
as set forth below, a global security may not be transferred except as a whole
by DTC to a nominee of DTC or by a nominee of DTC to DTC.
Upon the issuance of a global security, DTC or its nominee will credit, on
its internal system, the accounts of persons holding through it with the
respective principal amounts of the individual beneficial interest represented
by such global security purchased by such persons in this offering. Ownership of
beneficial interests in a global security will be limited to participants, who
are persons that have accounts with DTC, or persons that may hold interests
through participants. Ownership of beneficial interests by participants in a
global security will be shown on, and the transfer of that ownership interest
will be effected only through, records maintained by DTC or its nominee for such
global security. Ownership of beneficial interests in such global security by
persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a global security.
Payment of principal, premium, if any, and interest on notes represented by
any such global security will be made to DTC or its nominee, as the case may be,
as the sole registered owner and the sole holder of the notes represented
thereby for all purposes under the indenture. None of WCG, the trustee or any
agent of WCG will have any responsibility or liability for any aspect of DTC's
reports relating to or payments made on account of beneficial ownership
interests in a global security representing any notes or for maintaining,
supervising or reviewing any of DTC's records relating to such beneficial
ownership interests.
WCG has been advised by DTC that, upon receipt of any payment of principal
of, premium, if any, or interest on any global security, DTC will immediately
credit, on its book-entry registration and transfer system, the accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the principal or face amount of such global security, as
shown on the records of DTC. WCG expects that payments by participants to owners
of beneficial interests in a global security held through such participants will
be governed by standing instructions and customary practices as is now the case
with securities held for customer accounts registered in "street name" and will
be the sole responsibility of such participants.
So long as DTC or its nominee is the registered owner or holder of such
global security, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by such global security for the
purposes of receiving payment on the notes, receiving notices and for all other
purposes under the indenture and the notes. Beneficial interests in the notes
will be evidenced only by, and transfers thereof will be effected only through,
records maintained by DTC and its participants. Except as provided above, owners
of beneficial interests in a global security will not be entitled to receive
physical delivery of certificated notes in definitive form and will not be
considered the holders of such global security for any purposes under the
indenture. Accordingly, each person owning a beneficial interest in a global
security must rely on the procedures of DTC and, if such person is not a
participant, on the procedures of the participant through which such person owns
its interest, to exercise any rights of a holder under the indenture. WCG
understands that under existing industry practices, if WCG requests any action
of holders or that an owner of a beneficial interest in a global
130
<PAGE> 134
security desires to give or take any action that a holder is entitled to give or
take under the indenture, DTC would authorize the participants holding the
relevant beneficial interest to give or take such action, and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
DTC has advised WCG that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account with DTC interests in the global security are credited and only in
respect of such portion of the aggregate principal amount of the notes as to
which such participant or participants has or have given such direction.
Although DTC has agreed to these procedures in order to facilitate
transfers of interests in global securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of WCG, the trustee or any
agent of WCG will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
DTC has advised WCG that DTC is a limited-purpose trust company organized
under the Banking Law of the State of New York, a "banking organization" within
the meaning of New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered under the Exchange Act. DTC was created
to hold the securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thus
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
CERTIFICATED NOTES
Notes represented by a global security are exchangeable for certificated
notes only if:
- DTC notifies WCG that it is unwilling or unable to continue as a
depository for such global security or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act, and a successor
depository is not appointed by WCG within 90 days; or
- there shall have occurred and be continuing an Event of Default or an
event which, with the giving of notice or lapse of time, or both, would
constitute an Event of Default with respect to the notes represented by
such global security.
Any global security that is exchangeable for certificated notes pursuant to
the preceding sentence will be transferred to, and registered and exchanged for,
certificated notes in authorized denominations and registered in such names as
DTC or its nominee holding such global security may direct. Subject to the
above, a global security is not exchangeable, except for a global security of
like denomination to be registered in the name of DTC or its nominee. If a
global security becomes exchangeable for certificated notes:
- certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
131
<PAGE> 135
- payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will be
registrable, at the office or agency of WCG maintained for such purposes;
and
- no service charge will be made for any issuance of the certificated
notes, although WCG may require payment of a sum sufficient to cover any
tax or governmental charge imposed in connection with the issuance of the
certificated notes.
OPTIONAL REDEMPTION
After ____, 2004, WCG may redeem all or part of the notes upon not less
than 30 nor more than 60 days' prior notice, at the redemption prices set forth
below, plus accrued and unpaid interest on the notes, if any, to the redemption
date, subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date, if redeemed during
the twelve months beginning ____, of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2004.......................................... __%
2005.......................................... __%
2006.......................................... __%
2007 and thereafter........................... 100%
</TABLE>
In addition, at any time or from time to time prior to ____, 2002, WCG may
redeem up to 35% of the original aggregate principal amount of the notes at a
redemption price equal to ____% of the principal amount of the notes so
redeemed, plus accrued and unpaid interest on the notes, if any, to the
redemption date, subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date, with
the net cash proceeds of one or more private placements to Persons other than
Affiliates of WCG or public offerings of common stock of WCG, in each case
resulting in gross proceeds to WCG of at least $____ million in the aggregate;
provided that
- at least 65% of the original aggregate principal amount of the notes
would remain outstanding immediately after giving effect to such
redemption;
- any such redemption shall be made within 90 days of such private
placement or public offering upon not less than 30 nor more than 60 days'
prior notice; and
- any such redemption may not occur with or after a Change of Control.
In the case of any partial redemption, the trustee will make the selection
of notes on a pro rata basis, by lot or by such other method as the trustee in
its sole discretion shall deem to be fair and appropriate, but no note of $1,000
in principal amount or less shall be redeemed in part. If any note is to be
redeemed in part, the notice of redemption relating to such note shall state the
portion of the principal amount to be redeemed. A new note in principal amount
equal to the unredeemed portion will be issued in the name of the holder upon
cancellation of the original note.
MANDATORY REDEMPTION
Except as set forth below under the sections entitled "-- Certain
covenants -- Change of control triggering event" and "-- Limitation on asset
dispositions," WCG is not required to make mandatory redemption payments or
sinking fund payments with respect to the notes.
132
<PAGE> 136
CERTAIN COVENANTS
Set forth below are the material covenants contained in the indenture.
Limitation on consolidated debt. (a) WCG may not, and may not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Debt, unless, after
giving pro forma effect to such Incurrence and the receipt and application of
the net proceeds of such Incurrence, no Default or Event of Default would occur
as a consequence of such Incurrence or be continuing following such Incurrence
and either:
(1) the ratio of (A) the aggregate consolidated principal amount (or,
in the case of Debt issued at a discount, the then Accreted Value) of Debt
of WCG outstanding as of the most recent available quarterly or annual
balance sheet, after giving pro forma effect to (x) the Incurrence of such
Debt and any other Debt Incurred and that remains outstanding on the date
as of which the Debt to be Incurred is to be Incurred (the "incurrence
date") since such balance sheet date and the receipt and application of the
net proceeds thereof, in each case as if such Incurrence, receipt and
application had occurred on such balance sheet date, and (y) the repayment,
repurchase, retirement or extinguishment of any Debt since such balance
sheet date, as if such repayment, repurchase, retirement or extinguishment
had occurred on such balance sheet date, to (B) Consolidated Cash Flow
Available for Fixed Charges for the four full fiscal quarters next
preceding the Incurrence of such Debt for which consolidated financial
statements are available, determined on a pro forma basis as if any such
Debt had been Incurred and the proceeds of such Debt had been applied, and
any material Investment in, or acquisition or disposition of, any material
asset outside the ordinary course of business consummated during, or since
the end of, such period of four fiscal quarters had occurred at the
beginning of such four fiscal quarters, would be less than ____ to 1.0; or
(2) WCG's Consolidated Capital Ratio as of the most recent available
quarterly or annual balance sheet, after giving pro forma effect to (w) the
Incurrence of such Debt and any other Debt Incurred and that remains
outstanding on the incurrence date since such balance sheet date as if such
Incurrence had occurred on such balance sheet date, (x) the repayment,
repurchase, retirement or extinguishment of any Debt since such balance
sheet date, as if such repayment, repurchase or extinguishment had occurred
on such balance sheet date, (y) the issuance of any Capital Stock (other
than Disqualified Stock) of WCG since such balance sheet date, including
the issuance of any Capital Stock to be issued concurrently with the
Incurrence of such Debt, as of such Incurrence had occurred on such balance
sheet date, and (z) the receipt and application of the net proceeds of such
Debt or Capital Stock, as the case may be, as if such receipt and
application of the proceeds therefrom had occurred on the balance sheet
date is less than ____ to 1.0.
(b) The restrictions in paragraph (a) do not prevent WCG or any Restricted
Subsidiary from Incurring any and all of the following, each of which shall be
given independent effect:
(1) Debt under the notes, the indenture or any Domestic Restricted
Subsidiary Guarantee;
(2) Debt under Credit Facilities in an aggregate principal amount
outstanding or available (together with all refinancing Debt outstanding or
available pursuant to clause (8) below in respect of Debt previously
Incurred pursuant to this clause (2)) at any one time not to exceed the
greater of (x) $____ million, less (A) the amount of all mandatory
principal payments actually made by WCG or any Restricted Subsidiary in
respect of term loans thereunder (excluding any such payments to the extent
refinanced at the time of
133
<PAGE> 137
payment under a new Credit Facility) and (B) in the case of a revolving
facility, reduced by any required permanent repayments actually made (which
are accompanied by a corresponding permanent commitment reduction) under
the revolving facility (excluding any such repayments and commitment
reductions to the extent refinanced and replaced at the time under a new
Credit Facility), and (y) ____% of the Eligible Receivables;
(3) Purchase Money Debt; provided that the amount of such Purchase
Money Debt does not exceed 100% of the cost of the construction,
installation, acquisition, lease, development or improvement of the
applicable Telecommunications Assets;
(4) Subordinated Debt of WCG; provided, however, that the aggregate
principal amount of such Debt, together with any other outstanding Debt
Incurred pursuant to this clause (4), shall not exceed $____ million at any
one time (which amount shall be permanently reduced by the amount of Net
Available Proceeds used to repay Subordinated Debt of WCG, and not
reinvested in Telecommunications Assets or used to purchase notes or repay
other Debt, pursuant to the covenant described in the section below
entitled "-- Limitation on asset dispositions"), except to the extent such
Debt in excess of $____ million (A) is subordinated to all other Debt of
WCG other than Debt Incurred pursuant to this clause (4) in excess of such
$____ million limitation, (B) does not provide for the payment of cash
interest on such Debt prior to the Stated Maturity of the notes and (C) (1)
does not provide for payments of principal of such Debt at stated maturity
or by way of a sinking fund applicable to the payment of such Debt or by
way of any mandatory redemption, defeasance, retirement or repurchase
thereof by WCG (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of the acceleration of any payment with respect to such
Debt upon any event of default under such Debt), in each case on or prior
to the Stated Maturity of the notes, and (2) does not permit redemption or
other retirement (including pursuant to an offer to purchase made by WCG)
of such Debt at the option of the holder of such Debt on or prior to the
Stated Maturity of the notes, other than, in the case of each of (1) and
(2) a redemption or retirement at the option of the holder of such Debt
(including pursuant to an offer to purchase made by WCG) which is
conditioned upon a change of control or asset disposition pursuant to
provisions substantially similar to those described in the sections below
entitled "-- Change of control triggering event" and "-- Limitation on
asset dispositions;"
(5) Debt outstanding on , 1999;
(6) Debt owed by WCG to any Restricted Subsidiary of WCG or Debt owed
by a Restricted Subsidiary of WCG to WCG or a Restricted Subsidiary of WCG;
provided, however, that (x) upon any subsequent transfer, conveyance or
other disposition by any such Restricted Subsidiary or WCG of any Debt so
permitted to a Person other than WCG or another Restricted Subsidiary of
WCG or (y) if for any reason such Restricted Subsidiary ceases to be a
Restricted Subsidiary, the provisions of this clause (6) shall no longer be
applicable to such Debt and such Debt shall be deemed to have been Incurred
by the issuer thereof at the time of such transfer, conveyance or other
disposition or when such Restricted Subsidiary ceases to be a Restricted
Subsidiary;
(7) Debt Incurred by a Person prior to the time (A) such Person became
a Restricted Subsidiary, (B) such Person merges into or consolidates with a
Restricted Subsidiary or (C) another Restricted Subsidiary merges into or
consolidates with such Person (in a transaction in which such Person
becomes a Restricted Subsidiary), which Debt was not Incurred with, or in
anticipation of, such transaction or such Person becoming a Restricted
Subsidiary.
134
<PAGE> 138
(8) Debt Incurred to renew, extend, refinance, defease, repay,
replace, prepay, repurchase, redeem, retire, exchange or refund (each, a
"refinancing") Debt Incurred pursuant to clause (1), (2), (3), (5), (7),
(12) or (13) of this paragraph (b) or this clause (8), in an aggregate
principal amount (or if issued at a discount, the then Accreted Value) not
to exceed the aggregate principal amount (or if issued at a discount, the
then Accreted Value) of and accrued interest on the Debt so refinanced plus
the amount of any premium, accrued interest, prepayment penalties, fees and
expenses required to be paid with such refinancing pursuant to the terms of
the Debt so refinanced or the amount of any premium or accrued interest
reasonably determined by the Board of Directors of WCG as necessary to
accomplish such refinancing by means of a redemption, tender offer or
privately negotiated repurchase plus the amount of fees and expenses
incurred with such redemption, tender offer or privately negotiated
repurchase; provided, however, that (A) the refinancing Debt shall not be
senior in right of payment to the Debt that is being refinanced and (B) in
the case of any refinancing of Debt Incurred pursuant to clause (1), (5),
(7) or (12) or, if such Debt previously refinanced Debt Incurred pursuant
to any such clause, this clause (8), the refinancing Debt by its terms, or
by the terms of any agreement or instrument pursuant to which such Debt is
issued, (x) does not provide for payments of principal of such Debt at
stated maturity or by way of a sinking fund applicable to the payment of
such Debt or by way of any mandatory redemption, defeasance, retirement or
repurchase thereof by WCG (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding
any retirement required by virtue of the acceleration of any payment with
respect to such Debt upon any event of default under such Debt), in each
case prior to the time the same are required by the terms of the Debt being
refinanced and (y) does not permit redemption or other retirement
(including pursuant to an offer to purchase made by WCG) of such Debt at
the option of the holder of such Debt prior to the time the same are
required by the terms of the Debt being refinanced, other than, in the case
of clause (x) or (y), any such payment, redemption or other retirement
(including pursuant to an offer to purchase made by WCG) which is
conditioned upon a change of control or asset sale pursuant to provisions
substantially similar to those described in the sections below entitled
"-- Change of control triggering event" and "-- Limitation on asset
dispositions;" provided further that the above clauses (x) and (y) and the
limitation on the aggregate principal amount referred to above in this
clause (8) shall not apply to any refinancing of all of the notes then
outstanding;
(9) Debt (A) in respect of performance, surety or appeal bonds,
Guarantees, letters of credit or reimbursement obligations Incurred or
provided in the ordinary course of business securing the performance of
contractual, franchise, lease, self-insurance or license obligations and
not in connection with the Incurrence of Debt or (B) in respect of
customary agreements providing for indemnification, adjustment of purchase
price after closing, or similar obligations, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any such obligations
of WCG or any of its Restricted Subsidiaries pursuant to such agreements,
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary of WCG (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business,
assets or Restricted Subsidiary of WCG for the purpose of financing such
acquisition) and in an aggregate principal amount not to exceed the gross
proceeds actually received by WCG or any Restricted Subsidiary in
connection with such disposition;
(10) Debt consisting of Permitted Interest Rate or Currency Protection
Agreements;
(11) Debt secured by Receivables originated by WCG or any Restricted
Subsidiary and related assets; provided that such Debt is nonrecourse to
WCG and any of its other
135
<PAGE> 139
Restricted Subsidiaries; provided further, that Receivables shall not be
available at any time to secure Debt under this clause (11) to the extent
that they are used as the basis for the Incurrence of Debt pursuant to
clause (2)(y) of this paragraph (b);
(12) Debt Incurred after , 1999 pursuant to the Williams
Note, including Debt Incurred in lieu of payments under the Williams
Intercompany Arrangements and any accrual of interest that is capitalized
under, or added to the principal amount of, the Williams Note; provided
that the aggregate amount of such Debt Incurred in lieu of payments under
the Williams Intercompany Arrangements (other than in respect of any such
accrual of interest) in reliance on this clause (12) does not exceed $____
in any 12-month period;
(13) Debt Incurred pursuant to the lease, dated as of September 2,
1998, between 1998 WCI Trust, as lessor, and Williams Communications, Inc.,
as lessee, in an aggregate principal amount not to exceed $750 million at
any one time outstanding; and
(14) Debt not otherwise permitted to be Incurred pursuant to clauses
(1) through (13) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (14), has an aggregate principal amount
not in excess of $____ million at any time outstanding.
Notwithstanding any other provision of this "-- Limitation on consolidated
debt" covenant, the maximum amount of Debt that WCG or a Restricted Subsidiary
may Incur pursuant to this "-- Limitation on consolidated debt" covenant shall
not be deemed to be exceeded due solely to the result of fluctuations in the
exchange rates of currencies.
For purposes of determining any particular amount of Debt under this
"-- Limitation on consolidated debt" covenant:
- Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of such
particular amount shall not be included; and
- any Liens granted for the benefit of the notes pursuant to the equal and
ratable provisions referred to in the covenant described in the section
below entitled "-- Limitation on liens" shall not be treated as Debt.
For purposes of determining compliance with this "-- Limitation on
consolidated debt" covenant, if an item of Debt meets the criteria of more than
one of the types of Debt described in the above clauses, WCG, in its sole
discretion, may classify such item of Debt and only be required to include the
amount and type of such Debt in one of such clauses, but also may classify a
portion of such item of Debt in more than one of such clauses and in any order
WCG so chooses.
Limitation on Debt of Restricted Subsidiaries. WCG may not permit any
Restricted Subsidiary that is not a Guarantor to Incur any Debt except any and
all of the following, each of which shall be given independent effect:
(1) Domestic Restricted Subsidiary Guarantees;
(2) Debt outstanding on , 1999;
(3) Debt of Restricted Subsidiaries under Credit Facilities permitted
to be Incurred pursuant to clause (2) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt;"
136
<PAGE> 140
(4) Purchase Money Debt of Restricted Subsidiaries permitted to be
Incurred pursuant to clause (3) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt;"
(5) Debt owed by a Restricted Subsidiary to WCG or a Restricted
Subsidiary of WCG permitted to be Incurred pursuant to clause (6) of
paragraph (b) of the section above entitled "-- Limitation on consolidated
debt;"
(6) Debt of Restricted Subsidiaries consisting of Permitted Interest
Rate or Currency Protection Agreements permitted to be Incurred pursuant to
clause (10) of paragraph (b) of the section above entitled "-- Limitation
on consolidated debt;"
(7) Debt of Restricted Subsidiaries permitted to be Incurred under
clause (7) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt;"
(8) Debt of Restricted Subsidiaries permitted to be Incurred under
clause (9) or (14) of paragraph (b) of the section above entitled
"-- Limitation on consolidated debt;"
(9) Debt of Restricted Subsidiaries secured by Receivables originated
by WCG or any Restricted Subsidiary and related assets permitted to be
Incurred under clause (11) of paragraph (b) of the section above entitled
"-- Limitation on consolidated debt;"
(10) Debt permitted to be Incurred pursuant to clause (12) of
paragraph (b) of the section above entitled "-- Limitation on consolidated
debt;"
(11) Debt Incurred pursuant to the lease, dated as of September 2,
1998, between 1998 WCI Trust, as lessor, and Williams Communications, Inc.,
as lessee, in an aggregate principal amount not to exceed $750 million at
any one time outstanding; and
(12) Debt which is Incurred to refinance any Debt of a Restricted
Subsidiary permitted to be Incurred pursuant to clauses (1), (2), (3), (4),
(7), (10) or (11) of this paragraph or this clause (12), in an aggregate
principal amount (or if issued at a discount, the then Accreted Value) not
to exceed the aggregate principal amount (or if issued at a discount, the
then Accreted Value) of the Debt so refinanced, plus the amount of any
premium, prepayment penalties, accrued interest, fees and expenses required
to be paid for such refinancing pursuant to the terms of the Debt so
refinanced or the amount of any premium or accrued interest reasonably
determined by the Board of Directors of WCG as necessary to accomplish such
refinancing by means of a redemption, tender offer or privately negotiated
repurchase, plus the amount of fees and expenses of WCG and the applicable
Restricted Subsidiary Incurred with such refinancing; provided, however,
that, in the case of any refinancing of Debt Incurred pursuant to clause
(1), (2) or (7) or, if such Debt previously refinanced Debt Incurred
pursuant to any such clause, this clause (12), the refinancing Debt by its
terms, or by the terms of any agreement or instrument pursuant to which
such Debt is Incurred, (x) does not provide for payments of principal at
the stated maturity of such Debt or by way of a sinking fund applicable to
such Debt or by way of any mandatory redemption, defeasance, retirement or
repurchase of such Debt by WCG or any Restricted Subsidiary (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each
case prior to the time the same are required by the terms of the Debt being
refinanced and (y) does not permit redemption or other retirement
(including pursuant to an offer to purchase made by WCG or a Restricted
Subsidiary) of such Debt at the option of the holder of such Debt prior to
the stated maturity of the Debt being refinanced, other than, in the case
of clause (x) or (y), any such payment, redemption or other retirement
(including pursuant to
137
<PAGE> 141
an offer to purchase made by WCG or a Restricted Subsidiary) which is
conditioned upon the change of control or asset sale of WCG pursuant to
provisions substantially similar to those contained in the indenture which
are described in the sections below entitled "-- Change of control
triggering event" and "-- Limitation on asset dispositions;" provided
further that the above clauses (x) and (y) and the limitation on the
aggregate principal amount referred to above in this clause (8) shall not
apply to any refinancing of all of the notes then outstanding.
Notwithstanding any other provision of this "-- Limitation on debt of
restricted subsidiaries" covenant, the maximum amount of Debt that a Restricted
Subsidiary may Incur pursuant to this "-- Limitation on debt of restricted
subsidiaries" covenant shall not be deemed to be exceeded due solely as the
result of fluctuations in the exchange rates of currencies.
For purposes of determining any particular amount of Debt under this
"-- Limitation on debt of restricted subsidiaries" covenant, Guarantees, Liens
or obligations with respect to letters of credit supporting Debt otherwise
included in the determination of such particular amount shall not be included.
For purposes of determining compliance with this "-- Limitation on debt of
restricted subsidiaries" covenant, in the event that an item of Debt meets the
criteria of more than one of the types of Debt described in the above clauses,
WCG, in its sole discretion, may classify such item of Debt and only be required
to include the amount and type of such Debt in one of such clauses, but also may
classify a portion of such item of Debt in more than one of such clauses and in
any order WCG so chooses.
Limitation on issuances of guarantees by, and debt securities of, domestic
restricted subsidiaries. WCG will not permit any of its Domestic Restricted
Subsidiaries, directly or indirectly, to issue or Guarantee any Debt Securities,
unless such Domestic Restricted Subsidiary simultaneously executes and delivers
a supplemental indenture to the indenture providing for the Guarantee of the
payment of the notes by such Domestic Restricted Subsidiary, which Guarantee
shall be senior to or rank equally with such Debt Securities.
Notwithstanding the foregoing, any such Guarantee by a Domestic Restricted
Subsidiary of the notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon a sale or other
disposition, by way of merger or otherwise, to any Person not an Affiliate of
WCG, of WCG's equity interest in, or the assets of, such Domestic Restricted
Subsidiary, which sale or other disposition results in such Domestic Restricted
Subsidiary ceasing to be a Domestic Restricted Subsidiary and such sale or other
disposition is made in compliance with, and the Net Available Proceeds therefrom
are applied in accordance with, the applicable provisions of the indenture.
The form of such supplemental indenture is attached as an exhibit to the
indenture. The foregoing provisions will not be applicable to:
- Guarantees of Debt Securities of a Person by its subsidiaries in effect
prior to the time such Person is merged with or into or became a Domestic
Restricted Subsidiary; provided that such Guarantees do not extend to any
other Debt Securities of such Person or any other Person; and
- any one or more Guarantees of up to $____ million in aggregate principal
amount of Debt Securities of WCG or any Domestic Restricted Subsidiary at
any time outstanding.
Limitation on restricted payments. (a) WCG:
(1) may not, and may not permit any Restricted Subsidiary to, directly
or indirectly, declare or pay any dividend, or make any distribution, in
respect of its Capital Stock or to the holders of its Capital Stock,
excluding any dividends or distributions which are made
138
<PAGE> 142
solely to WCG or a Restricted Subsidiary (and, if such Restricted
Subsidiary declaring, paying or making any such dividend or distribution is
not a Wholly Owned Subsidiary, to the other stockholders or equity owners
of such Restricted Subsidiary on a pro rata basis or on a basis that
results in the receipt by WCG or a Restricted Subsidiary of dividends or
distributions of greater value than it would receive on a pro rata basis)
or any dividends or distributions payable solely in shares of Capital Stock
of WCG (other than Disqualified Stock) or in options, warrants or other
rights to acquire Capital Stock of WCG (other than Disqualified Stock);
(2) may not, and may not permit any Restricted Subsidiary to,
purchase, redeem, or otherwise retire or acquire for value (x) any Capital
Stock of WCG or any Restricted Subsidiary of WCG or (y) any options,
warrants or rights to purchase or acquire shares of Capital Stock of WCG or
any Restricted Subsidiary or any securities convertible or exchangeable
into shares of Capital Stock of WCG or any Restricted Subsidiary, except,
in any such case, any such purchase, redemption or retirement or
acquisition for value (A) paid to WCG or a Restricted Subsidiary (or, in
the case of any such purchase, redemption or other retirement or
acquisition for value with respect to a Restricted Subsidiary that is not a
Wholly Owned Subsidiary, to the other stockholders or equity owners of such
Restricted Subsidiary on a pro rata basis or on a basis that results in the
receipt by WCG or a Restricted Subsidiary of payments of greater value than
it would receive on a pro rata basis) or (B) paid solely in shares of
Capital Stock (other than Disqualified Stock) of WCG;
(3) may not make, or permit any Restricted Subsidiary to make, any
Investment (other than an Investment in WCG or a Restricted Subsidiary or a
Permitted Investment) in any other Person, including the Designation of any
Restricted Subsidiary as an Unrestricted Subsidiary, or the Revocation of
any such Designation, according to the covenant described in the section
below entitled "-- Limitation on designations of unrestricted
subsidiaries;"
(4) may not, and may not permit any Restricted Subsidiary to, redeem,
defease, repurchase, retire or otherwise acquire or retire for value, prior
to any scheduled maturity, repayment or sinking fund payment, Debt of WCG
which is subordinate in right of payment to the notes (other than any
redemption, defeasance, repurchase, retirement or other acquisition or
retirement for value made in anticipation of satisfying a scheduled
maturity, repayment or sinking fund obligation due within one year
thereof); and
(5) may not, and may not permit any Restricted Subsidiary to, issue,
transfer, convey, sell or otherwise dispose of Capital Stock of any
Restricted Subsidiary to a Person other than WCG or another Restricted
Subsidiary if the result thereof is that such Restricted Subsidiary shall
cease to be a Restricted Subsidiary, in which event the amount of such
"Restricted Payment" shall be the Fair Market Value of the remaining
interest, if any, in such former Restricted Subsidiary held by WCG and the
other Restricted Subsidiaries;
each of clauses (1) through (5) being a "Restricted Payment," if:
(A) an Event of Default, or an event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default,
shall have occurred and be continuing; or
(B) upon giving effect to such Restricted Payment, WCG could not
Incur at least $1.00 of additional Debt pursuant to the terms of the
indenture described in paragraph (a) of the section above entitled
"-- Limitation on consolidated debt;" or
139
<PAGE> 143
(C) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments made on or after , 1999, plus
Permitted Investments made on or after , 1999 pursuant
to clause (i) or (n) of the definition thereof, other than any such
Permitted Investments that are Permitted Investments in WCG or any
Restricted Subsidiary (the amount of any such Restricted Payment or
Permitted Investment, if made other than in cash, to be based upon Fair
Market Value), exceeds the sum of:
(1) 50% of cumulative Consolidated Net Income (or, in the case
that Consolidated Net Income shall be negative, 100% of such
negative amount) since June 30, 1999 through the last day of the
last full fiscal quarter for which consolidated financial statements
are available;
(2) in the case of any Revocation made after ____, 1999, an
amount equal to the lesser of the portion (proportionate to WCG's
direct or indirect equity interest in the Subsidiary to which such
Revocation relates) of the Fair Market Value of the net assets of
such Subsidiary at the time of Revocation and the amount of
Investments previously made (and treated as a Restricted Payment) by
WCG or any Restricted Subsidiary in such Subsidiary; and
(3) the aggregate amount of Returned Investments since ____,
1999 and on or prior to the date of such Restricted Payment;
provided, however, that WCG or a Restricted Subsidiary of WCG may,
without regard to the limitations in clause (C) but subject to clauses
(A) and (B), make Restricted Payments in an aggregate amount not to
exceed the sum of $____ million and the aggregate net cash proceeds
received after ____, 1999 (1) as capital contributions to WCG, or
proceeds from the issuance (other than to a Subsidiary) of Capital Stock
(other than Disqualified Stock) of WCG and options, warrants or rights
to purchase or acquire shares of Capital Stock (other than Disqualified
Stock) of WCG, and (2) from the issuance or sale of Debt of WCG or any
Restricted Subsidiary (other than to a Subsidiary, WCG or a Plan) that
after ____, 1999 has been converted into or exchanged for Capital Stock
(other than Disqualified Stock) of WCG; provided, further, that in the
case of the issuance of Capital Stock of WCG to any Plan, if such Plan
Incurs any Debt for the purpose of purchasing such Capital Stock, the
aggregate net cash proceeds from such issuance shall be included for
purposes of the above proviso only to the extent of any increase in the
Consolidated Net Worth of WCG resulting from principal repayments made
with respect to the Debt Incurred to finance the purchase of such
Capital Stock. The aggregate net cash proceeds referred to in the
immediately preceding clauses (1) and (2) shall not be utilized to make
Restricted Payments pursuant to such clauses to the extent such proceeds
have been utilized to make Permitted Investments under clause (i) of the
definition of "Permitted Investments."
(b) The restrictions in paragraph (a) do not prevent the following:
(1) WCG or any Restricted Subsidiary may pay any dividend on Capital
Stock of any class of WCG within 60 days after the declaration of such
dividend if, on the date when the dividend was declared, WCG or such
Restricted Subsidiary, as the case may be, could have paid such dividend in
accordance with the above provisions; provided, however, that at the time
of such payment of such dividend, no other Event of Default shall have
occurred and be continuing, or result from, the payment of such dividend;
140
<PAGE> 144
(2) WCG or any Restricted Subsidiary may repurchase, redeem, acquire,
cancel or otherwise retire for value any shares of its Common Stock or
options to acquire its Common Stock from Persons who are currently or were
formerly directors, officers or employees of WCG or any of its Subsidiaries
or other Affiliates (or their estates or beneficiaries under their estates)
or from any Plan, upon death, disability, retirement or termination of
employment in an amount not to exceed $____ million in any 12-month period;
(3) WCG and any Restricted Subsidiary may refinance any Debt otherwise
permitted by clause (8) of paragraph (b) in the section above entitled
"-- Limitation on consolidated debt" or clause (12) in the section above
entitled "-- Limitation on debt of restricted subsidiaries;"
(4) WCG and any Restricted Subsidiary may retire or repurchase any
Capital Stock of WCG or of any Restricted Subsidiary or any Subordinated
Debt of WCG in exchange for, or out of the proceeds of the substantially
concurrent sale (other than to a Subsidiary of WCG or any Plan) of, Capital
Stock (other than Disqualified Stock) of WCG; provided that the proceeds
from any such exchange or sale of Capital Stock shall be excluded from any
calculation pursuant to clause (b) of the definition of "Invested Capital;"
(5) WCG may pay cash dividends in an amount not to exceed $____
million in any 12-month period in respect of Preferred Stock of WCG (other
than Disqualified Stock);
(6) WCG or any Restricted Subsidiary may purchase shares of Capital
Stock of WCG or any Restricted Subsidiary of WCG for the purpose of
contributing such shares to any Plan; provided that all such purchases
referred to in this clause (6) may not exceed $____ million in any 12-month
period;
(7) WCG or any Restricted Subsidiary may purchase all (but not less
than all), excluding directors' qualifying shares, of the Capital Stock or
other ownership interests in a Subsidiary of WCG which Capital Stock or
other ownership interests were not until that time owned by WCG or a
Subsidiary of WCG such that after giving effect to such purchase such
Subsidiary becomes a Wholly Owned Subsidiary of WCG;
(8) WCG or any Restricted Subsidiary may redeem, defease, repurchase,
retire or acquire for value any Subordinated Debt upon a Change of Control
or Asset Disposition to the extent required by the indenture or other
agreement pursuant to which such Subordinated Debt was issued, but only if
WCG has first complied with its obligations under the sections below
entitled "-- Change of control triggering event" and "-- Limitation on
asset dispositions;"
(9) WCG or any Restricted Subsidiary may make loans to any officer,
director or employee of WCG or any Restricted Subsidiary to be used to
exercise options granted to such officer, director or employee under any
Plan, in an amount not to exceed $____ million at any one time outstanding;
and
(10) WCG or any Restricted Subsidiary may make distributions to the
stockholders or equity owners of Restricted Subsidiaries that are
partnerships, limited liability companies that are treated as partnerships
for U.S. tax purposes or other similar pass-through entities in order to
reimburse or compensate such other stockholders or equity owners for income
taxes attributable to the operations of such Restricted Subsidiaries as
required by the formation agreement, operating agreement or partnership
agreement or similar governing document of the Restricted Subsidiary.
The Restricted Payments described in the foregoing clauses (1), (2), (5),
(6), (7), (8) and (9) shall be included in the calculation of Restricted
Payments; the Restricted
141
<PAGE> 145
Payments described in clauses (3), (4) and (10) shall be excluded in the
calculation of Restricted Payments.
Limitation on dividend and other payment restrictions affecting restricted
subsidiaries. (a) WCG may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction (other than pursuant to law
or regulation) on the ability of any Restricted Subsidiary:
(1) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by WCG or any other
Restricted Subsidiary or pay any Debt or other obligation owed to WCG or
any other Restricted Subsidiary;
(2) to make loans or advances to WCG or any other Restricted
Subsidiary; or
(3) to transfer any of its Property to WCG or any other Restricted
Subsidiary.
(b) Notwithstanding the foregoing limitation, WCG may, and may permit any
Restricted Subsidiary to, create or otherwise cause or suffer to exist:
(1) any encumbrance or restriction pursuant to any agreement in effect
on ____________, 1999;
(2) any customary (as conclusively determined in good faith by the
Chief Financial Officer of WCG) encumbrance or restriction applicable to a
Restricted Subsidiary that is contained in an agreement or instrument
governing or relating to Debt contained in any Credit Facilities or
Purchase Money Debt; provided that such encumbrances and restrictions do
not prohibit the distribution of funds to WCG in an amount sufficient for
WCG to make the timely payment of interest, premium (if any) and principal
(whether at stated maturity, by way of a sinking fund applicable thereto,
by way of any mandatory redemption, defeasance, retirement or repurchase
thereof, including upon the occurrence of designated events or
circumstances or by virtue of acceleration upon an event of default, or by
way of redemption or retirement at the option of the holder of the Debt,
including pursuant to offers to purchase) according to the terms of the
indenture and the notes and other Debt that is solely an obligation of WCG,
but provided further that such agreement may nevertheless contain customary
(as so determined) net worth, restricted payment, leverage, interest
coverage invested capital and other financial covenants, customary (as so
determined) covenants regarding the merger of or sale of all or any
substantial part of the assets of WCG or any Restricted Subsidiary,
customary (as so determined) restrictions on transactions with affiliates
and customary (as so determined) subordination provisions governing Debt
owed to WCG or any Restricted Subsidiary;
(3) any encumbrance or restriction pursuant to an agreement relating
to any Acquired Debt, which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the
Person so acquired;
(4) any encumbrance or restriction pursuant to an agreement effecting
a refinancing of Debt Incurred pursuant to an agreement referred to in
clause (1), (2) or (3) of this paragraph (b); provided, however, that the
provisions contained in such agreement relating to such encumbrance or
restriction are no more restrictive (as so determined) in any material
respect than the provisions contained in the agreement governing the Debt
being refinanced;
(5) in the case of clause (3) of paragraph (a) above, any encumbrance
or restriction contained in any security agreement (including a Capital
Lease Obligation) securing Debt of WCG or a Restricted Subsidiary otherwise
permitted under the indenture, but only to the
142
<PAGE> 146
extent such restrictions restrict the transfer of the Property subject to
such security agreement;
(6) in the case of clause (3) of paragraph (a) above, customary
provisions (A) that restrict the subletting, assignment or transfer of any
Property that is a lease, license, conveyance or similar contract, (B)
contained in asset sale or other asset disposition agreements limiting the
transfer of the Property being sold or disposed of pending the closing of
such sale or disposition or (C) arising or agreed to in the ordinary course
of business, not relating to any Debt, and that do not, individually or in
the aggregate, detract from the value of Property of WCG or any Restricted
Subsidiary in any manner material to WCG or any Restricted Subsidiary;
(7) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
Property of such Restricted Subsidiary; provided that the consummation of
such transaction would not result in a Default or an Event of Default, that
such restriction terminates if such transaction is abandoned and that the
consummation or abandonment of such transaction occurs within one year of
the date such agreement was entered into;
(8) any encumbrance or restriction pursuant to the indenture and the
notes (or encumbrances or restrictions that are substantially similar taken
as a whole) and any encumbrance or restriction pursuant to any Credit
Facility in effect on ____________, 1999 (or encumbrances or restrictions
that are substantially similar taken as a whole); and
(9) Permitted Liens.
Limitation on liens. WCG may not, and may not permit any Restricted
Subsidiary to, directly or indirectly, Incur or suffer to exist any Lien on or
with respect to any Property now owned or acquired after ____________, 1999 to
secure any Debt without making, or causing such Restricted Subsidiary to make,
effective provision for securing the notes
- equally and ratably with such Debt as to such Property for so long as
such Debt will be so secured or
- in the event such Debt is Debt of WCG or a Guarantor which is subordinate
in right of payment to the notes or the applicable Domestic Restricted
Subsidiary Guarantee, prior to such Debt as to such Property for so long
as such Debt will be so secured.
These restrictions shall not apply to:
(1) Liens existing on ____________, 1999;
(2) Liens Incurred on or after ____________, 1999 pursuant to any
Credit Facility to secure Debt permitted to be Incurred pursuant to clause
(2) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt;"
(3) Liens securing Debt in an amount which, together with the
aggregate amount of Debt then outstanding or available under all Credit
Facilities (together with all refinancing Debt then outstanding or
available pursuant to clause (8) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt" in respect of Debt previously
Incurred under Credit Facilities), does not exceed ____ times WCG's
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters preceding the Incurrence of such Lien for which WCG's consolidated
financial statements are available, determined on a pro forma basis as if
such Debt had been Incurred and the proceeds thereof had been applied at
the beginning of such four fiscal quarters;
143
<PAGE> 147
(4) Liens in favor of WCG or any Restricted Subsidiary; provided,
however, that any subsequent issue or transfer of Capital Stock or other
event that results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of the Debt secured by any
such Lien (except to WCG or a Restricted Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Lien by the issuer thereof;
(5) Liens to secure Purchase Money Debt permitted to be Incurred
pursuant to clause (3) of paragraph (b) of the section above entitled
"-- Limitation on consolidated debt;" provided that any such Lien may not
extend to any Property other than the Telecommunications Assets installed,
constructed, acquired, leased, developed or improved with the proceeds of
such Purchase Money Debt and any improvements or accessions thereto (it
being understood that all Debt to any single lender or group of related
lenders or outstanding under any single credit facility, and in any case
relating to the same group or collection of Telecommunications Assets
financed thereby, shall be considered a single Purchase Money Debt, whether
drawn at one time or from time to time);
(6) Liens to secure Acquired Debt; provided that (a) such Lien
attaches to the acquired Property prior to the time of the acquisition of
such Property and (b) such Lien does not extend to or cover any other
Property;
(7) Liens to secure Debt permitted to be Incurred pursuant to clause
(13) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt;"
(8) Liens to secure Debt Incurred to refinance, in whole or in part,
Debt secured by any Lien referred to in the foregoing clauses (1), (2),
(5), (6) and (7) or this clause (8) so long as such Lien does not extend to
any other Property (other than improvements and accessions to the original
Property) and the principal amount of Debt so secured is not increased
except as otherwise permitted under clause (8) of paragraph (b) of the
section above entitled "-- Limitation on consolidated debt" or clause (12)
of the section above entitled "-- Limitation on debt of restricted
subsidiaries;"
(9) Liens to secure Debt consisting of Permitted Interest Rate and
Currency Protection Agreements permitted to be Incurred pursuant to clause
(10) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt;"
(10) Liens to secure Debt secured by Receivables permitted to be
Incurred pursuant to clause (11) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt;"
(11) Liens granted after ____________, 1999 to secure the notes;
(12) Permitted Liens; and
(13) Liens not otherwise permitted by the foregoing clauses (1)
through (12) that, at the time of Incurrence thereof, taken together with
all other Liens Incurred after ____________, 1999 in reliance on this
clause (13) and which remain in existence, secure Debt in an aggregate
principal amount not to exceed 5% of WCG's Consolidated Tangible Assets as
of the most recent balance sheet date as of which WCG's consolidated
balance sheet is available;
Limitation on sale and leaseback transactions. WCG may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, enter into, assume,
Guarantee or otherwise become liable with respect to any Sale and Leaseback
Transaction, unless:
(1) WCG or such Restricted Subsidiary would be entitled to Incur (a)
Debt in an amount equal to the Attributable Value of the Sale and Leaseback
Transaction pursuant to
144
<PAGE> 148
the covenant described in the section above entitled "-- Limitation on
consolidated debt" and (b) a Lien pursuant to the covenant described in the
section above entitled "-- Limitation on liens," equal in amount to the
Attributable Value of the Sale and Leaseback Transaction, without also
securing the notes; and
(2) the Sale and Leaseback Transaction is treated as an Asset
Disposition and all of the conditions of the indenture described in the
section below entitled "-- Limitation on asset dispositions" (including the
provisions concerning the application of Net Available Proceeds) are
satisfied with respect to such Sale and Leaseback Transaction, treating all
of the consideration received in such Sale and Leaseback Transaction as Net
Available Proceeds for purposes of such covenant.
Limitation on asset dispositions. WCG may not, and may not permit any
Restricted Subsidiary to, make any Asset Disposition unless:
(1) WCG or the Restricted Subsidiary, as the case may be, receives
consideration for such disposition at least equal to the Fair Market Value
for the Property sold or disposed of; and
(2) at least 75% of the consideration for such disposition consists of
cash or Cash Equivalents or the assumption of Debt of WCG or any Restricted
Subsidiary (other than Debt that is subordinated to the notes or any
Domestic Restricted Subsidiary Guarantee) and release of WCG and all
Restricted Subsidiaries from all liability on the Debt assumed (or if less
than 75%, the remainder of such consideration consists of
Telecommunications Assets).
The Net Available Proceeds (or any portion thereof) from Asset Dispositions
may be applied by WCG or a Restricted Subsidiary, to the extent WCG or such
Restricted Subsidiary elects (or is required by the terms of any Debt):
- to the permanent repayment or reduction of Debt then outstanding under
any Credit Facility, to the extent such Credit Facility would require
such application or prohibit payments pursuant to the offer to purchase
the notes in accordance with the indenture described in the following
paragraph (other than Debt owed to WCG or any Affiliate of WCG); or
- to reinvest in Telecommunications Assets (including by means of an
Investment in Telecommunications Assets by a Restricted Subsidiary with
Net Available Proceeds received by WCG or another Restricted Subsidiary).
Any Net Available Proceeds from an Asset Disposition not applied in
accordance with the preceding paragraph within 360 days from the date of the
receipt of such Net Available Proceeds shall constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $____ million, WCG will be
required to make an offer to purchase the notes in accordance with the indenture
with such Excess Proceeds on a pro rata basis according to principal amount, or,
in the case of Debt issued at a discount, the then Accreted Value, for (x)
outstanding notes at a price in cash equal to 100% of the principal amount of
the notes on the purchase date plus accrued and unpaid interest, if any, on the
notes, subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date, and (y) any other
Debt of WCG or any Guarantor that ranks equally with the notes, or any Debt of a
Restricted Subsidiary that is not a Guarantor, at a price no greater than 100%
of the principal amount of such Debt plus accrued and unpaid interest, if any,
to the purchase date, or 100% of the then Accreted Value plus accrued and unpaid
interest, if any, to the purchase date in the case of original issue discount
Debt, to the extent, in the case of this clause (y), required under
145
<PAGE> 149
the terms of such Debt (other than Debt owed to WCG or any Affiliate of WCG). To
the extent there are any remaining Excess Proceeds following the completion of
the offer to purchase the notes in accordance with the indenture, WCG shall
apply such Excess Proceeds to the repayment of other Debt of WCG or any
Restricted Subsidiary, to the extent permitted or required under the terms of
such other Debt. Any other remaining Excess Proceeds may be applied to any use
as determined by WCG which is not otherwise prohibited by the indenture, and the
amount of Excess Proceeds shall be reset to zero.
Limitation on issuance and sales of capital stock of restricted
subsidiaries. WCG may not, and may not permit any Restricted Subsidiary to,
issue, transfer, convey, sell or otherwise dispose of any shares of Capital
Stock of a Restricted Subsidiary or securities convertible or exchangeable into,
or options, warrants, rights or any other interest with respect to, Capital
Stock of a Restricted Subsidiary to any Person other than WCG or a Restricted
Subsidiary except:
(1) a sale of all of the Capital Stock of such Restricted Subsidiary
owned by WCG and any Restricted Subsidiary that complies with the
provisions described in the section above entitled "-- Limitation on asset
dispositions" to the extent such provisions apply;
(2) in a transaction that results in such Restricted Subsidiary
becoming a Joint Venture; provided (x) such transaction complies with the
provisions described in the section above entitled "-- Limitation on asset
dispositions" to the extent such provisions apply and (y) the remaining
interest of WCG or any other Restricted Subsidiary in such Joint Venture
would have been permitted as a new Restricted Payment or Permitted
Investment under the provisions of the section above entitled
"-- Limitation on restricted payments;"
(3) the issuance, transfer, conveyance, sale or other disposition of
shares of such Restricted Subsidiary so long as after giving effect to such
transaction such Restricted Subsidiary remains a Restricted Subsidiary and
such transaction complies with the provisions described in the section
above entitled "-- Limitation on asset dispositions" to the extent such
provisions apply;
(4) the transfer, conveyance, sale or other disposition of shares
required by applicable law or regulation;
(5) if required, the issuance, transfer, conveyance, sale or other
disposition of directors' qualifying shares;
(6) Disqualified Stock issued in exchange for, or upon conversion of,
or the proceeds of the issuance of which are used to redeem, replace,
refund or refinance, shares of Disqualified Stock of such Restricted
Subsidiary; provided that the amounts of the redemption obligations of such
Disqualified Stock shall not exceed the amounts of the redemption
obligations of, and such Disqualified Stock shall have redemption
obligations no earlier than those required by, the Disqualified Stock being
exchanged, converted, redeemed, replaced, refunded or refinanced;
(7) in a transaction where WCG or a Restricted Subsidiary acquires at
the same time not less than its Proportionate Interest in such issuance of
Capital Stock;
(8) Capital Stock issued and outstanding on ____________, 1999;
(9) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by WCG; and
146
<PAGE> 150
(10) an issuance of Preferred Stock of a Restricted Subsidiary (other
than Preferred Stock convertible or exchangeable into Common Stock of any
Restricted Subsidiary) otherwise permitted by the indenture.
Transactions with affiliates. WCG will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, sell, lease, transfer, or
otherwise dispose of any of its Property to, or purchase any Property from, or
enter into any contract, agreement, understanding, loan, advance, Guarantee or
transaction, including the rendering of services, with or for the benefit of,
any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions is
in the best interest of WCG or such Restricted Subsidiary and on terms that
are fair and reasonable to, and in the best interests of, WCG or the
Restricted Subsidiary, as the case may be, as determined in good faith by
WCG's Board of Directors; and
(b) WCG delivers to the trustee (1) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
payments in excess of $____ million but less than $____ million, a
certificate of the chief executive, operating or financial officer of WCG
evidencing such officer's determination that such Affiliate Transaction or
series of Affiliate Transactions complies with clause (a) above and (2)
with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate payments equal to or in excess of $____
million, a board resolution certifying that such Affiliate Transaction or
series of Affiliate Transactions complies with clause (a) above and that
such Affiliate Transaction or series of Affiliate Transactions has been
approved by the Board of Directors of WCG, including a majority of the
disinterested members of the Board of Directors of WCG, provided that, if
there shall not be at least two disinterested members of the Board of
Directors of WCG with respect to the Affiliate Transaction, WCG shall, in
addition to such board resolution, file with the trustee a written opinion
from an investment banking firm of national standing in the United States
which, in the good faith judgment of the Board of Directors of WCG, is
independent with respect to WCG and its Affiliates and qualified to perform
such task, which opinion shall be to the effect that the consideration to
be paid or received in connection with such Affiliate Transaction is fair,
from a financial point of view, to WCG or such Restricted Subsidiary.
Despite (a) and (b) above, the following shall not be deemed Affiliate
Transactions:
(1) any employment agreement entered into by WCG or any of its
Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice;
(2) any agreement or arrangement with respect to the compensation of a
director or officer of WCG or any Restricted Subsidiary approved by a
majority of the Board of Directors of WCG and consistent with industry
practice;
(3) transactions between or among WCG and its Restricted Subsidiaries;
provided that no more than ____% of the Voting Stock (on a fully diluted
basis) of any such Restricted Subsidiary is owned by an Affiliate of WCG
(other than a Restricted Subsidiary);
(4) Restricted Payments and Permitted Investments permitted by the
covenant described in the section above entitled "-- Limitation on
restricted payments" (other than Investments in Affiliates that are not WCG
or Restricted Subsidiaries);
(5) transactions pursuant to the terms of or performance of any
agreement or arrangement as in effect on ____________, 1999;
147
<PAGE> 151
(6) transactions pursuant to and any payments under, compliance with,
or performance of obligations under, the Williams Intercompany
Arrangements;
(7) transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiber optic lines,
equipment, rights-of-way or other access rights, between WCG (or any
Restricted Subsidiary) and any other Person; provided that, in the case of
this clause (7), such transaction complies with clause (a) in the
immediately preceding paragraph;
(8) loans or advances to employees, officers and directors of WCG or
any Restricted Subsidiary in the ordinary course of business and consistent
with past practice not to exceed $____ million at any one time outstanding;
(9) the granting or performance of registration rights under any
written registration rights agreement approved by the Board of Directors of
WCG;
(10) transactions with Persons solely in their capacity as holders of
Debt or Capital Stock of WCG or any of its Subsidiaries, where such Persons
are treated no more favorably than holders of Debt or Capital Stock of WCG
generally;
(11) loans to any officer, director or employee of WCG or any
Restricted Subsidiary to be used to exercise options granted to the
officer, director or employee under any Plan, in an amount not exceed $____
million at any one time outstanding;
(12) sales or issuances of Capital Stock (other than Disqualified
Stock) in exchange for cash, securities or Property; provided that such
transactions comply with clause (a) in the immediately preceding paragraph;
and
(13) any agreement to do any of the foregoing.
Change of control triggering event. Within 30 days of both a Change of
Control and a Rating Decline with respect to the notes (a "Change of Control
Triggering Event"), WCG will be required to make an offer to purchase all
outstanding notes in accordance with the indenture at a price in cash equal to
101% of the principal amount of the notes on the purchase date plus any accrued
and unpaid interest, if any, to such purchase date, subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date.
A "Change of Control" means the occurrence of any of the following events:
(A) if any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act or any successor provisions to either
of the foregoing), including any group acting for the purpose of acquiring,
holding, voting or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, other than any one or more of the
Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, except that a person will be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of 35% or more of the total
voting power of the Voting Stock of WCG at a time when the Permitted
Holders are the "beneficial owners" (as defined in Rule 13d-3 under the
Exchange Act, except that a person will be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, in the aggregate of a lesser percentage of
the total voting power of the Voting Stock of WCG than such other person or
group (for purposes of this clause (A), such person or group shall be
deemed to beneficially own any Voting Stock of a corporation held by any
other corporation so long as such person or group beneficially owns,
148
<PAGE> 152
directly or indirectly, in the aggregate a majority of the total voting
power of the Voting Stock of such other corporation); or
(B) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all the assets
of WCG and the Restricted Subsidiaries, considered as a whole (other than a
disposition of such assets as an entirety or virtually as an entirety to
one or more Permitted Holders) shall have occurred; or
(C) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of WCG
(together with any new directors whose election or appointment by such
board or whose nomination for election by the shareholders of WCG was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of WCG then in office; or
(D) the shareholders of WCG shall have approved any plan of
liquidation or dissolution of WCG.
In the event that WCG makes an offer to purchase the notes in accordance
with the indenture, WCG intends to comply with any applicable securities laws
and regulations, including any applicable requirements of Section 14(e) of, and
Rule 14e-1 under, the Exchange Act. To the extent that the provisions of any
applicable securities laws or regulations conflict with the provisions relating
to the offer to purchase, WCG will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations
described above by virtue thereof.
The existence of the holders' right to require, subject to certain
conditions, WCG to repurchase notes upon a Change of Control Triggering Event
may deter a third party from acquiring WCG in a transaction that constitutes a
Change of Control. If an offer to purchase the notes in accordance with the
indenture is made, there can be no assurance that WCG will have sufficient funds
to pay the purchase price for all notes tendered by holders seeking to accept
the offer to purchase. In addition, instruments governing other Debt of WCG may
prohibit WCG from purchasing any notes prior to their Stated Maturity, including
pursuant to an offer to purchase the notes in accordance with the indenture, or
require that such Debt be repurchased upon a Change of Control.
In the event that an offer to purchase the notes in accordance with the
indenture occurs at a time when WCG does not have sufficient available funds to
pay the purchase price for all notes tendered pursuant to such offer to purchase
or a time when WCG is prohibited from purchasing the notes (and WCG is unable
either to obtain the consent of the holders of the relevant Debt or to repay
such Debt), an Event of Default would occur under the indenture. In addition,
one of the events that constitutes a Change of Control under the indenture is a
sale, transfer, assignment, lease, conveyance or other disposition of all or
substantially all of the assets of WCG. The indenture will be governed by New
York law, and there is no established definition under New York law of
"substantially all" of the assets of a corporation. Accordingly, if WCG were to
engage in a transaction in which it disposed of less than all of its assets, a
question of interpretation could arise as to whether such disposition was of
"substantially all" of its assets and whether WCG was required to make an offer
to purchase the notes in accordance with the indenture.
149
<PAGE> 153
Except as described herein with respect to a Change of Control, the
indenture does not contain any other provisions that permit holders of notes to
require that WCG repurchase or redeem notes in the event of a takeover,
recapitalization or similar restructuring.
Reports. Whether or not WCG is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, WCG shall file with the
Commission, unless the Commission will not accept such filing, the annual
reports, quarterly reports and other documents which WCG would have been
required to file with the Commission pursuant to such Section 13(a) or 15(d) or
any successor provision thereto if WCG were subject to such successor provision,
such documents to be filed with the Commission on or prior to the respective
dates (the "required filing dates") by which WCG would have been required to
file them.
WCG shall also in any event:
(a) within 15 days of each required filing date:
- transmit by mail to all holders, as their names and addresses appear in
the security register, without cost to such holders; and
- file with the trustee copies of the annual reports, quarterly reports and
other documents, without exhibits, which WCG would have been required to
file with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act or any successor provisions thereto if WCG were subject to
such successor provisions and
(b) if filing such documents by WCG with the Commission is not permitted
under the Exchange Act, promptly upon written request, supply copies of such
documents, without exhibits, to any prospective holder.
Limitation on designations of unrestricted subsidiaries. The indenture
will provide that WCG will not designate any Subsidiary of WCG (other than a
newly created Subsidiary in which no Investment has previously been made) as an
"Unrestricted Subsidiary" under the indenture (a "Designation") unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(b) immediately after giving effect to such Designation, WCG would be
able to Incur $1.00 of Debt under paragraph (a) of the section above
entitled "-- Limitation on consolidated debt;" and
(c) WCG would not be prohibited under the indenture from making an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the portion
(proportionate to WCG's equity interest in such Restricted Subsidiary) of
the Fair Market Value of the net assets of such Restricted Subsidiary on
such date.
In the event of any such Designation, WCG shall be deemed to have made an
Investment constituting a Restricted Payment pursuant to the covenant
"-- Limitation on restricted payments" for all purposes of the indenture in the
Designation Amount; provided, however, that, upon a Revocation of any such
Designation of a Subsidiary, WCG shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary of an amount (if positive) equal to
(1) WCG's "Investment" in such Subsidiary at the time of such Revocation less
(2) the portion (proportionate to WCG's equity interest in such Subsidiary) of
the Fair Market Value of the net assets of such Subsidiary at the time of such
Revocation less (3) any Returned Investment. At the time of any Designation of
any Subsidiary as an Unrestricted Subsidiary, such Subsidiary shall not own any
Capital Stock of WCG or any Restricted Subsidiary.
150
<PAGE> 154
The indenture will further provide that neither WCG nor any Restricted
Subsidiary shall at any time (x) provide credit support for, or a Guarantee of,
any Debt of any Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Debt); provided that WCG or a Restricted Subsidiary
may pledge Capital Stock or Debt of any Unrestricted Subsidiary on a nonrecourse
basis such that the pledgee has no claim whatsoever against WCG other than to
obtain such pledged Capital Stock or Debt, (y) be directly or indirectly liable
for any Debt of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any Debt which provides that the holder of such Debt may (upon
notice, lapse of time or both) declare a default thereon or cause the payment
thereof to be accelerated or payable prior to its final scheduled maturity upon
the occurrence of a default with respect to any Debt, Lien or other obligation
of any Unrestricted Subsidiary (including any right to take enforcement action
against such Unrestricted Subsidiary), except in the case of clause (x) or (y)
to the extent permitted under the sections above entitled "-- Limitation on
restricted payments" and "-- Transactions with affiliates."
Unless Designated as an Unrestricted Subsidiary, any Person that becomes a
Subsidiary of WCG will be classified as a Restricted Subsidiary; provided,
however, that such Subsidiary shall not be designated as a Restricted Subsidiary
and shall be automatically classified as an Unrestricted Subsidiary if either of
the requirements set forth in clauses (a) and (b) of the immediately following
paragraph will not be satisfied immediately following such classification.
Except as provided in the first sentence of this "-- Limitation on designations
of unrestricted subsidiaries," no Restricted Subsidiary may be redesignated as
an Unrestricted Subsidiary.
The indenture will further provide that a Designation may be revoked (a
"Revocation") by a resolution of the Board of Directors of WCG; provided that
WCG will not make any Revocation unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation; and
(b) all Liens and Debt of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time, have
been permitted to be Incurred at such time for all purposes of the
indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of WCG delivered to the trustee
- certifying compliance with the foregoing provisions and
- giving the effective date of such Designation or Revocation, such
delivery to the trustee to occur within 45 days after the end of the
fiscal quarter of WCG in which such Designation or Revocation is made
(or, in the case of a Designation or Revocation made during the last
fiscal quarter of WCG's fiscal year, within 90 days after the end of such
fiscal year).
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
WCG may not, in a single transaction or a series of related transactions,
(1) consolidate with or merge into any other Person or Persons or permit any
other Person to consolidate with or merge into WCG or (2) directly or
indirectly, transfer, sell, lease, convey or otherwise dispose of all or
substantially all its assets to any other Person or Persons unless:
(a) in a transaction in which WCG is not the resulting, surviving or
transferee Person or in which WCG transfers, sells, leases, conveys or
otherwise disposes of all or substantially all of its assets to any other
Person, the resulting, surviving or transferee Person is organized
151
<PAGE> 155
under the laws of the United States of America or any State thereof or the
District of Columbia and shall expressly assume, by a supplemental
indenture executed and delivered to the trustee in form satisfactory to the
trustee, all of WCG's obligations under the indenture;
(b) immediately before and after giving effect to such transaction and
treating any Debt which becomes an obligation of WCG or a Restricted
Subsidiary as a result of such transaction as having been Incurred by WCG
or such Restricted Subsidiary at the time of the transaction, no Default or
Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction and treating
any Debt which becomes an obligation of WCG or a Restricted Subsidiary as a
result of such transaction as having been Incurred by WCG, or the successor
entity to WCG, or such Restricted Subsidiary at the time of the
transaction, WCG, or the successor entity to WCG, could Incur at least
$1.00 of additional Debt pursuant to the provisions of the indenture
described in paragraph (a) of the section above entitled "Certain
covenants -- Limitation on consolidated debt;"
(d) if, as a result of any such transaction, Property of WCG or any
Restricted Subsidiary would become subject to a Lien prohibited by the
provisions of the indenture described in the section above entitled
"Certain covenants -- Limitation on liens," WCG or the successor entity to
WCG shall have secured the notes as required by said covenant; and
(e) in the case of a transfer, sale, lease, conveyance or other
disposition of all or substantially all of the assets of WCG, such assets
shall have been transferred as an entirety or virtually as an entirety to
one Person and such Person shall have complied with all the provisions of
this paragraph.
The resulting, surviving or transferee Person shall succeed to, and be
substituted for, and may exercise every right and power of WCG under the
indenture, and the predecessor company, except in the case of a lease, shall be
released from all its obligations under the indenture.
These restrictions will not apply to (1) a consolidation or merger by WCG
with or into or (2) the sale, assignment, transfer, lease, conveyance or other
disposition by WCG or all or substantially all of its property or assets to, one
or more of its Subsidiaries shall not relieve WCG from its obligations under the
indenture or the notes. In addition, WCG may merge or consolidate with or into
any Restricted Subsidiary so long as the merger or consolidation complies with
clauses (a) and (b) above.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture.
"Accreted Value" of any Debt issued at a price less than the principal
amount at stated maturity, means, as of any date of determination, an amount
equal to the sum of (a) the issue price of such Debt as determined in accordance
with Section 1273 of the Code or any successor provisions plus (b) the aggregate
of the portions of the original issue discount (the excess of the amounts
considered as part of the "stated redemption price at maturity" of such Debt
within the meaning of Section 1273(a)(2) of the Code or any successor
provisions, whether denominated as principal or interest, over the issue price
of such Debt) that shall until that time have accrued pursuant to Section 1272
of the Code (without regard to Section 1272(a)(7) of the Code) from the date of
issue of such Debt to the date of determination, minus all amounts until that
time paid in respect of such Debt, which amounts are considered as part of the
"stated redemption
152
<PAGE> 156
price at maturity" of such Debt within the meaning of Section 1273(a)(2) of the
Code or any successor provisions (whether such amounts paid were denominated
principal or interest).
"Acquired Debt" means, with respect to any specified Person, (1) Debt of
any other Person existing at the time such Person merges with or into or
consolidates with or becomes a Subsidiary of such specified Person and (2) Debt
secured by a Lien encumbering any Property acquired by such specified Person,
which Debt was not incurred in connection with, or in anticipation of, such
merger, consolidation or acquisition or such Person becoming a Subsidiary of
such specified Person.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
covenants described in the sections above entitled "-- Certain
covenants -- Transactions with affiliates" and "-- Limitation on asset
dispositions" and the definition of "Telecommunications Assets" only,
"Affiliate" shall also mean any beneficial owner of shares representing more
than 10% or more of the total voting power of the Voting Stock (on a fully
diluted basis) of WCG or of rights or warrants to purchase such Voting Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any transfer, conveyance, sale, lease, issuance
or other disposition by WCG or any Restricted Subsidiary in one or more related
transactions (including a consolidation or merger or other sale of any such
Restricted Subsidiary with, into or to another Person in a transaction in which
such Restricted Subsidiary ceases to be a Restricted Subsidiary of WCG, but
excluding a disposition by a Restricted Subsidiary to WCG or a Restricted
Subsidiary or by WCG to a Restricted Subsidiary) of:
(1) shares of Capital Stock or other ownership interests of a
Restricted Subsidiary (other than as permitted by clause (5), (6), (7) or
(9) of the covenant described in the section above entitled "-- Certain
covenants -- Limitation on issuance and sales of capital stock of
restricted subsidiaries" and other than any transaction in which WCG or
such Restricted Subsidiary receives therefor one or more properties with a
Fair Market Value equal to the Fair Market Value of the Capital Stock
issued, sold or disposed of by WCG or the Restricted Subsidiary);
(2) real property;
(3) all or substantially all of the assets of WCG or any Restricted
Subsidiary representing a division or line of business; or
(4) other Property of WCG or any Restricted Subsidiary outside of the
ordinary course of business (excluding (A) any transfer, conveyance, sale,
lease or the disposition of Property by WCG or any Restricted Subsidiary
for which WCG or any Restricted Subsidiary receives capacity and (B) any
transfer, conveyance, sale, lease or other disposition of equipment that is
obsolete, damaged, worn out or no longer used by or useful to WCG; provided
that, in the case of clause (B), WCG has delivered to the trustee an
officers' certificate stating that such criteria are satisfied);
provided, in each case, that the aggregate consideration for such
transfer, conveyance, sale, lease or other disposition is equal to $____
million or more in any 12-month period.
153
<PAGE> 157
The following shall not be Asset Dispositions:
(1) Permitted Telecommunications Asset Dispositions that comply with
clause (1) of the first paragraph in the section above entitled "-- Certain
covenants -- Limitation on asset dispositions;"
(2) when used with respect to WCG, any Asset Disposition permitted
pursuant to "-- Mergers, consolidations and certain sales of assets" which
constitutes a disposition of all or substantially all of the assets of WCG
and the Restricted Subsidiaries taken as a whole;
(3) Receivables sales constituting Debt under Qualified Receivable
Facilities permitted to be Incurred pursuant to the section above entitled
"-- Certain covenants -- Limitation on consolidated debt;"
(4) sales, leases, conveyances, transfers or other dispositions to WCG
or to a Restricted Subsidiary or to any other person if, after giving
effect to such sale, lease, conveyance, transfer or other disposition, such
other Person becomes a Restricted Subsidiary; and
(5) any disposition that results in a Permitted Investment (other than
pursuant to clause (f) or (i) of the definition of "Permitted Investment")
or a Restricted Payment permitted by the covenant described in the section
above entitled "-- Certain covenants -- Limitation on restricted payments."
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount owed under such lease is to be determined, the total
net amount of rent required to be paid by such Person under such lease during
the remaining term of such lease (including any period for which such lease has
been extended) as determined in accordance with generally accepted accounting
principles, discounted from the last date of such remaining term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of a penalty, such net amount shall
also include the lesser of the amount of such penalty (in which case no rent
shall be considered as required to be paid under such lease subsequent to the
first date upon which it may be so terminated) or the rent which would otherwise
be required to be paid if such lease is not so terminated. "Attributable Value"
means, as to a Capital Lease Obligation, the principal amount of such Capital
Lease Obligation.
"Board of Directors" means, with respect to any Person, the Board of
Directors (or similar governing body) of such person or any committee of the
Board of Directors (or similar governing body) of such Person authorized, with
respect to any particular matter, to exercise the power of the Board of
Directors (or similar governing body) of such Person.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) Property of such Person which is required to be classified and
accounted for as a capital lease or a liability on the face of a balance sheet
of such Person in accordance with generally accepted accounting principles (a
"Capital Lease"). The stated maturity of such obligation shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without payment
of a penalty. The principal amount
154
<PAGE> 158
of such obligation shall be the capitalized amount thereof that would appear on
the face of a balance sheet of such Person in accordance with generally accepted
accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person and any rights (other than debt securities convertible
or exchangeable into an equity interest), warrants or options to acquire an
equity interest in such Person.
"Cash Equivalents" means:
(1) Government Securities maturing, or subject to tender at the option
of the holder thereof, within two years after the date of acquisition
thereof;
(2) time deposits and certificates of deposit of any commercial bank
organized in the United States having capital and surplus in excess of $500
million or a commercial bank organized under the law of any other country
that is a member of the Organization for Economic Cooperation and
Development having total assets in excess of $500 million (or its foreign
currency equivalent at the time) with a maturity date not more than one
year from the date of acquisition;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with (x) any bank meeting the qualifications specified in clause (2)
above or (y) any primary government securities dealer reporting to the
Market Reports Division of the Federal Reserve Bank of New York;
(4) direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder of such obligation, within one year after the date of acquisition
thereof; provided that, at the time of acquisition, the long-term debt of
such state, political subdivision or public instrumentality has a rating of
A or higher from S&P or A-2 or higher from Moody's, or, if at any time
neither S&P nor Moody's shall be rating such obligations, then an
equivalent rating from such other nationally recognized rating service
acceptable to the trustee;
(5) commercial paper issued by the parent corporation of any
commercial bank organized in the United States having capital and surplus
in excess of $500 million or a commercial bank organized under the laws of
any other country that is a member of the Organization for Economic
Cooperation and Development having total assets in excess of $500 million
or its foreign currency equivalent at the time, and money market
instruments and commercial paper issued by others having one of the three
highest ratings obtainable from either S&P or Moody's, or, if at any time
neither S&P nor Moody's shall be rating such obligations, then from such
other nationally recognized rating service acceptable to the trustee, and
in each case maturing within one year after the date of acquisition;
(6) overnight bank deposits and bankers' acceptances at any commercial
bank organized in the United States having capital and surplus in excess of
$500 million or a commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Cooperation and
Development having total assets in excess of $500 million or its foreign
currency equivalent at the time;
(7) deposits available for withdrawal on demand with a commercial bank
organized in the United States having capital and surplus in excess of $500
million or a commercial bank organized under the laws of any other country
that is a member of the Organization for
155
<PAGE> 159
Economic Cooperation and Development having total assets in excess of $500
million or its foreign currency equivalent at the time; and
(8) investments in money market funds substantially all of whose
assets comprise securities of the types described in clauses (1) through
(7).
"Change of Control" has the meaning set forth in the section above entitled
"-- Certain covenants -- Change of control triggering event."
"Change of Control Triggering Event" has the meaning set forth in the
section above entitled "-- Certain covenants -- Change of control triggering
event."
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Capital Ratio" means as of the date of determination the
ratio of (1) the aggregate amount of Debt of WCG and its Restricted Subsidiaries
on a consolidated basis as at the date of determination to (2) the sum of:
(a) $________;
(b) the aggregate Net Proceeds to WCG from the issuance or sale of any
Capital Stock (including Preferred Stock) of WCG other than Disqualified
Stock subsequent to ____________, 1999; and
(c) the aggregate Net Proceeds from the issuance or sale of Debt of
WCG or any Restricted Subsidiary subsequent to ____________, 1999
convertible or exchangeable into Capital Stock of WCG other than
Disqualified Stock, in each case upon conversion or exchange thereof into
Capital Stock of WCG subsequent to ____________, 1999;
provided, however, that, for purposes of calculation of the
Consolidated Capital Ratio, the Net Proceeds from the issuance or sale of
Capital Stock or Debt described in clause (b) or (c) above shall not be
included to the extent (x) such proceeds have been utilized to make a
Permitted Investment under clause (1) of the definition thereof or a
Restricted Payment or (y) such Capital Stock or Debt shall have been issued
or sold to WCG, a Subsidiary of WCG or a Plan.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of WCG and its Restricted Subsidiaries for such
period increased by the sum of, to the extent reducing Consolidated Net Income
for such period;
(1) Consolidated Interest Expense of WCG and its Restricted
Subsidiaries for such period; plus
(2) Consolidated Income Tax Expense of WCG and its Restricted
Subsidiaries for such period; plus
(3) consolidated depreciation and amortization expense and any other
non-cash items (other than any such non-cash item to the extent that it
represents an accrual of or reserve for cash expenditures in any future
period); plus
(4) any penalty paid in connection with redeeming or retiring any Debt
prior to its stated maturity;
156
<PAGE> 160
provided, however, that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Restricted Subsidiary (calculated separately for such Restricted Subsidiary
in the same manner as provided above for WCG) that is subject to a
restriction which prevents the payment of dividends or the making of
distributions to WCG or another Restricted Subsidiary to the extent of such
restrictions.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of WCG and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with generally accepted accounting principles.
"Consolidated Interest Expense" for any period means the interest expense
included in a consolidated income statement (excluding interest income) of WCG
and its Restricted Subsidiaries for such period in accordance with generally
accepted accounting principles, including without limitation or duplication (or,
to the extent not so included, with the addition of (but in no event adding any
amount that would be eliminated in consolidation in accordance with generally
accepted accounting principles)):
(1) the amortization of Debt discounts and issuance costs, including
commitment fees;
(2) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities;
(3) net costs with respect to interest rate swap or similar agreements
or foreign currency hedge, exchange or similar agreements, including fees;
(4) Preferred Stock Dividends (other than dividends paid in shares of
Preferred Stock that is not Disqualified Stock) declared and paid or
payable;
(5) accrued Disqualified Stock Dividends, whether or not declared or
paid;
(6) interest on Debt guaranteed by WCG and its Restricted
Subsidiaries;
(7) the portion of any Capital Lease Obligation or Sale and Leaseback
Transaction paid during such period that is allocable to interest expense
in accordance with generally accepted accounting principles;
(8) interest Incurred in connection with investments in discontinued
operations; and
(9) the cash contributions to any Plan to the extent such
contributions are used by such Plan to pay interest or fees to any Person
(other than WCG or a Restricted Subsidiary) in connection with Debt
Incurred by such Plan.
"Consolidated Net Income" for any period means the net income (or loss) of
WCG and its Restricted Subsidiaries for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided that
there shall be excluded from such net income (or loss):
(a) for purposes of the covenant described in the section above
entitled "-- Certain covenants -- Limitation on restricted payments" only,
the net income (or loss) of any Person acquired by WCG or a Restricted
Subsidiary in a pooling-of-interests transaction for any period prior to
the date of such transaction;
(b) the net income (or loss) of any Person that is not a Restricted
Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to WCG or a Restricted Subsidiary by such
Person during such period (except, for purposes of the covenant described
under "-- Certain covenants -- Limitation on restricted payments" only,
157
<PAGE> 161
to the extent such dividends or distributions have been subtracted from the
calculation of the amount of Investments to support the actual making of
Investments);
(c) gains or losses realized upon the sale or other disposition of any
Property of WCG or its Restricted Subsidiaries that is not sold or disposed
of in the ordinary course of business (it being understood that Permitted
Telecommunications Capital Asset Dispositions shall be considered to be in
the ordinary course of business);
(d) all extraordinary gains and extraordinary losses, determined in
accordance with generally accepted accounting principles;
(e) the cumulative effect of changes in accounting principles;
(f) non-cash gains or losses resulting from fluctuations in currency
exchange rates;
(g) any non-cash expense related to the issuance to employees or
directors of WCG or any Restricted Subsidiary of (1) options to purchase
Capital Stock of WCG or such Restricted Subsidiary or (2) other
compensatory rights; and
(h) with respect to a Restricted Subsidiary that is not a Wholly Owned
Subsidiary any aggregate net income (or loss) in excess of WCG's or any
Restricted Subsidiary's pro rata share of the net income (or loss) of such
Restricted Subsidiary that is not a Wholly Owned Subsidiary, but such
excess shall be excluded only to the extent that such minority interest in
net income (or loss) is not otherwise excluded in determining consolidated
net income in accordance with generally accepted accounting principles;
provided further that there shall further be excluded therefrom the net
income (but not net loss) of any Restricted Subsidiary that is subject to a
restriction which prevents the payment of dividends or the making of
distributions to WCG or another Restricted Subsidiary to the extent of such
restriction; provided further, that at the time any restriction referred to
in the immediately preceding proviso ceases to be effective, all of such
net income previously excluded from Consolidated Net Income by reason of
such proviso shall be included cumulatively in Consolidated Net Income in
the accounting period during which such restriction ceases to be effective.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person, determined on a consolidated basis in accordance with generally
accepted accounting principles, less (to the extent not otherwise accounted for
as a liability) amounts attributable to Disqualified Stock of such Person.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Subsidiaries after deducting
from such total amount of assets all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, which in each
case under generally accepted accounting principles would be included on such
consolidated balance sheet.
"Credit Facilities" means one or more credit agreements, loan agreements,
fiscal agency agreements (other than fiscal agency agreements relating to Debt
Securities) or similar facilities, secured or unsecured, providing for working
capital advances, revolving credit loans, term loans and/or letters of credit,
including any Qualified Receivable Facility, entered into from time to time by
WCG and its Restricted Subsidiaries, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed with such
credit facilities, as the same may be amended, supplemented, modified, restated
or replaced from time to time.
158
<PAGE> 162
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent:
(1) every obligation of such Person for money borrowed;
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of Property;
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person or for which such Person is otherwise obligated
to make payment;
(4) every obligation of such Person issued or assumed as the deferred
purchase price of Property or services (including securities repurchase
agreements);
(5) every Capital Lease Obligation of such Person;
(6) all obligations to redeem or repurchase Disqualified Stock issued
by such Person and all Attributable Value in respect of Sale and Leaseback
Transactions entered into by such Person;
(7) the liquidation preference of any Preferred Stock, other than
Disqualified Stock, which is covered by the preceding clause (6), issued by
any Restricted Subsidiary of such Person;
(8) every obligation under Interest Rate or Currency Protection
Agreements of such Person; and
(9) every obligation of the type referred to in clauses (1) through
(8) of another Person and all dividends of another Person the payment of
which, in either case, such Person has Guaranteed.
The "amount" or "principal amount" of Debt at any time of determination as
used here represented by (a) any Debt issued at a price that is less than the
principal amount at maturity thereof, shall be, except as otherwise set forth
here, the Accreted Value of such Debt at such time or (b) in the case of any
Receivables sale constituting Debt, the amount of the unrecovered purchase price
paid (that is, the amount paid for Receivables that has not been actually
recovered from the collection of such Receivables) by the purchaser (other than
WCG or a Wholly Owned Restricted Subsidiary of WCG) thereof. The amount of Debt
represented by an obligation under an Interest Rate or Currency Protection
Agreement shall be equal to (x) zero if such obligation has been Incurred
pursuant to clause (10) of paragraph (b) of the covenant described in the
section above entitled "-- Certain covenants -- Limitation on consolidated debt"
or (y) the notional amount of such obligation if not Incurred pursuant to such
clause. Notwithstanding the foregoing, "Debt" does not include trade accounts
payable or accrued liabilities arising in the ordinary course of business.
"Debt Securities" means any debt securities (including any Guarantee of
such securities) issued by WCG or any Domestic Restricted Subsidiary in
connection with an underwritten public offering or an underwritten private
placement for resale in accordance with Rule 144A and/or Regulation S, in each
case, not rated or rated below Baa3 by Moody's or BBB- by S&P, or an equivalent
below investment grade rating by any successor Rating Agency.
"Default" means any event, act or condition the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
159
<PAGE> 163
"Designation" has the meaning set forth in the section above entitled
"-- Certain covenants -- Limitations on designations of unrestricted
subsidiaries."
"Designation Amount" has the meaning set forth in the section above
entitled "-- Certain covenants -- Limitations on designations of unrestricted
subsidiaries."
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final Stated Maturity of the notes;
provided, however, that any Preferred Stock which would not constitute
Disqualified Stock but for provisions of such Preferred Stock giving holders
thereof the right to require WCG to repurchase or redeem such Preferred Stock
upon the occurrence of a change of control or asset disposition occurring prior
to the final Stated Maturity of the notes shall not constitute Disqualified
Stock if the change of control or asset disposition provisions applicable to
such Preferred Stock are no more favorable to the holders of such Preferred
Stock than the provisions applicable to the notes contained in the covenant
described in the sections above entitled "-- Certain covenants -- Change of
control triggering event" and "-- Limitations on asset dispositions" and such
Preferred Stock specifically provides that WCG will not repurchase or redeem any
such stock pursuant to such provisions prior to WCG's repurchase of such notes
as are required to be repurchased pursuant to the covenant described in the
sections above entitled "-- Certain covenants -- Change of control triggering
event" and "-- Limitations on asset dispositions;" provided further, that such
Preferred Stock will not be deemed Disqualified Stock if it is redeemable by
exchange for or through the issuance of Capital Stock (other than Disqualified
Stock).
"Disqualified Stock Dividends" means all dividends with respect to
Disqualified Stock of WCG held by Persons other than a Wholly Owned Restricted
Subsidiary. The amount of any such dividend shall be equal to the quotient of
such dividend divided by the difference between one and the maximum statutory
federal income tax rate (expressed as a decimal number between 1 and 0)
applicable to WCG for the period during which such dividends were paid.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of WCG (x)
that was formed under the laws of the United States of America or any state,
district or territory thereof or the District of Columbia or (y) 50% or more of
the assets of which are located in the United States or any territory thereof.
"Domestic Restricted Subsidiary Guarantee" means a supplemental indenture
to the indenture in form satisfactory to the trustee, providing for an
unconditional Guarantee by a Domestic Restricted Subsidiary of payment in full
of the principal of, premium, if any, and interest on the notes. Any such
Domestic Restricted Subsidiary Guarantee shall not be subordinate to any Debt of
the Domestic Restricted Subsidiary providing the Domestic Restricted Subsidiary
Guarantee.
"Eligible Receivables" means, at any time, Receivables of WCG and its
Restricted Subsidiaries, as evidenced on the most recent quarterly consolidated
balance sheet of WCG as at a date at least 45 days prior to such time, arising
in the ordinary course of business of WCG or any Restricted Subsidiary.
"Event of Default" has the meaning set forth in the section below entitled
"-- Events of default."
160
<PAGE> 164
"Excess Proceeds" has the meaning set forth in the section above entitled
"-- Certain covenants -- Limitation on asset dispositions."
"Existing International Joint Ventures" means [to come.]
"Fair Market Value" means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
indenture, and except in the case of Permitted Telecommunications Capital Asset
Dispositions in the ordinary course of business and individual transactions
involving a price of less than $____, Fair Market Value shall be determined by
the Board of Directors of WCG acting in good faith and shall be evidenced by a
resolution of the Board of Directors of WCG.
"Government Securities" means direct obligations of, or obligations fully
and unconditionally guaranteed or insured by, the United States of America or
any agency or instrumentality thereof for the payment of which obligations or
guarantee the full faith and credit of the United States is pledged and which
are not callable or redeemable at the issuer's option (unless, for purposes of
the definition of "Cash Equivalents" only, the obligations are redeemable or
callable at a price less than the purchase price paid by WCG or the applicable
Restricted Subsidiary, together with all accrued and unpaid interest (if any) on
such Government Securities).
"Guarantee" by any Person means any obligation, direct or indirect,
contingent or otherwise, of such Person guaranteeing, or having the economic
effect of guaranteeing, any Debt of any other Person in any manner, whether
directly or indirectly.
"Guarantor" means a Domestic Restricted Subsidiary of WCG that has executed
a Domestic Restricted Subsidiary Guarantee.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred," "Incurrable" and "Incurring"
shall have meanings correlative to the foregoing); provided, however, that (a) a
change in generally accepted accounting principles that results in an obligation
of such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt and (b) neither the accrual of interest nor the
amortization or accretion of original issue discount shall be deemed an
Incurrence of Debt. Debt otherwise incurred by a Person before it becomes a
Subsidiary of WCG shall be deemed to have been Incurred at the time at which it
becomes a Restricted Subsidiary.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Invested Capital" means the sum of:
(a) $____ million;
(b) the aggregate Net Proceeds received by WCG from the issuance or
sale of any Capital Stock, including Preferred Stock, of WCG but excluding
Disqualified Stock, subsequent to ________, 1999 and from the
Over-allotment Option; and
161
<PAGE> 165
(c) the aggregate Net Proceeds from the issuance or sale of Debt of
WCG or any Restricted Subsidiary subsequent to ________, 1999 convertible
or exchangeable into Capital Stock of WCG other than Disqualified Stock, in
each case upon conversion or exchange thereof into Capital Stock of WCG
subsequent to ________, 1999;
provided, however, that the Net Proceeds from the issuance or sale of
Capital Stock or Debt described in clause (b) or (c) shall be excluded from
any computation of Invested Capital to the extent (1) utilized to make a
Restricted Payment or (2) such Capital Stock or Debt shall have been issued
or sold to WCG, a Subsidiary of WCG or a Plan.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other Property to others or payments for Property or services for the account
or use of others, or otherwise) to, purchase, redemption, retirement or
acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidence of Debt issued by, or Incurrence of, or payment on, a Guarantee of any
obligation of, any other Person; provided that Investments shall exclude (v)
commercially reasonable extensions of trade credit, (w) trade receivables
arising in the ordinary course of business; provided, that such receivables
would be recorded as assets of such Person in accordance with generally accepted
accounting principals, (x) Investments received in connection with the
bankruptcy or reorganization of suppliers and customers or in good faith bona
fide settlement of delinquent ordinary course of business trade receivables of
customers, (y) endorsements for collection or deposit in the ordinary course of
business by such Person of bank drafts and similar negotiable instruments of
such other Person received as payment for ordinary course of business trade
receivables; and (z) any Investment that is less than $100,000. The amount, as
of any date of determination, of any Investment shall be the original cost of
such Investment, plus the cost of all additions, as of such date, thereto and
minus the amount, as of such date, of any portion of such Investment repaid to
such Person in cash as a repayment of principal or a return of capital, as the
case may be (except to the extent such repaid amount has been included in
Consolidated Net Income to support the actual making of Restricted Payments),
but without any other adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment. In
determining the amount of any Investment involving a transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"Joint Venture" means a Person in which WCG or a Restricted Subsidiary
holds, directly or indirectly, not more than 50% of the shares of Voting Stock.
"Lien" means, with respect to any Property, any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest, lien,
charge, easement (other than any easement not materially impairing usefulness),
encumbrance, preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect to such Property
(including any Capital Lease Obligation, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing and any Sale and Leaseback Transaction). For purposes of this
definition the sale, lease, conveyance or other transfer by WCG or any of its
Subsidiaries of, including the grant of indefeasible rights of use or equivalent
arrangements with respect to, dark or lit communications fiber capacity or
communications conduit shall not constitute a Lien.
"Moody's" means Moody's Investors Service, Inc. or, if Moody's Investors
Service, Inc. shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if there is no successor Person, then "Moody's" shall mean any other
162
<PAGE> 166
national recognized rating agency (other than S&P) that rates debt securities
having a maturity at original issuance of at least one year and that shall have
been designated by the trustee with the consent of WCG.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or cash equivalents received (including amounts received by way of sale or
discounting of any note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Debt or other obligations relating to such Property) therefrom by
such Person, net of:
(1) all legal, title and recording taxes, expenses and commissions and
other fees and expenses (including appraisals, brokerage commissions and
investment banking fees) Incurred and all federal, state, provincial,
foreign and local taxes required to be accrued as a liability as a
consequence of such Asset Disposition;
(2) all payments made by such Person or its Subsidiaries on any Debt
which is secured by such Property in accordance with the terms of any Lien
upon or with respect to such Property or which must by the terms of such
Lien, or in order to obtain a necessary consent to such Asset Disposition
or by applicable law, be repaid out of the proceeds from such Asset
Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or Joint Ventures of such Person
as a result of such Asset Disposition; and
(4) appropriate amounts to be provided by such Person or any
Subsidiary of such Person, as the case may be, as a reserve in accordance
with generally accepted accounting principles against any liabilities
associated with such Property and retained by such Person or any Subsidiary
of such Person, as the case may be, after such Asset Disposition, including
liabilities under any indemnification obligations and severance and other
employee termination costs associated with such Asset Disposition, in each
case as determined by the Board of Directors of such Person, in its
reasonable good faith judgment evidenced by a resolution of the Board of
Directors filed with the trustee; provided, however, that any reduction in
such reserve within twelve months following the consummation of such Asset
Disposition will be, for all purposes of the indenture and the notes,
treated as a new Asset Disposition at the time of such reduction with Net
Available Proceeds equal to the amount of such reduction; provided further,
however, that, in the event that any consideration for a transaction (which
would otherwise constitute Net Available Proceeds) is required to be held
in escrow pending determination of whether a purchase price adjustment will
be made, at such time as such portion of the consideration is released to
such Person or its Restricted Subsidiary from escrow, such portion shall be
treated for all purposes of the indenture and the notes as a new Asset
Disposition at the time of, but not before, such release from escrow with
Net Available Proceeds equal to the amount of such portion of consideration
released from escrow.
"Net Proceeds" means the aggregate net proceeds (including the Fair Market
Value of non-cash proceeds constituting Capital Stock in or of a person engaged
in a Telecommunications Business or assets of a type generally used in a
Telecommunications Business) received by a Person from the sale of Capital Stock
or Debt after payment of out-of-pocket expenses, commissions and discounts
incurred and net of taxes paid or payable in connection with the sale of such
Capital Stock or Debt.
"Over-allotment Option" means the over-allotment option granted to the
underwriters of the equity offering by WCG consummated on ____________, 1999.
163
<PAGE> 167
"Permitted Holders" means (1) The Williams Companies, Inc. and any of its
Subsidiaries, (2) any corporation the outstanding voting power of the Capital
Stock of which is beneficially owned, directly or indirectly, by the
stockholders of WCG in substantially the same proportions as their ownership of
the voting power of the Capital Stock of WCG, (3) any underwriter during the
period engaged in a firm commitment underwriting on behalf of WCG with respect
to the shares of Capital Stock being underwritten or (4) WCG or any Subsidiary
of WCG.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and not for purposes of
speculation and which, in the case of an interest rate agreement, shall have a
notional amount no greater than the principal amount at maturity due with
respect to the Debt being hedged thereby.
"Permitted Investments" means:
(a) Cash Equivalents;
(b) investments in prepaid expenses;
(c) negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits;
(d) loans, advances or extensions of credit to employees and directors
of WCG and its Subsidiaries made in the ordinary course of business and
consistent with past practice;
(e) obligations under Permitted Interest Rate or Currency Protection
Agreements;
(f) Investments received as consideration for, or customary
indemnities given in connection with, Asset Dispositions pursuant to and in
compliance with the covenant described above under "-- Certain
covenants -- Limitation on asset dispositions," and for Permitted
Telecommunication Asset Dispositions;
(g) Investments in WCG or any Restricted Subsidiary, or in any Person
as a result of which such Person becomes a Restricted Subsidiary;
(h) Investments made prior to ____________, 1999;
(i) Investments made after ____________, 1999 in Persons engaged in
the Telecommunications Business in an aggregate amount as of the date of
determination not to exceed Invested Capital as of the date of
determination;
(j) Investments deemed to have been made as a result of the
acquisition of a Person that at the time of such acquisition held
instruments constituting Investments that were not acquired in
contemplation of the acquisition of such Person;
(k) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers or in good faith bona fide
settlement of delinquent ordinary course of business trade receivables of
customers;
(l) Investments where all or a portion of the consideration provided
is Capital Stock of WCG, other than Disqualified Stock, but the same shall
constitute a Permitted Investment only to the extent of such consideration
provided in the form of such Capital Stock;
(m) Investments in Existing International Joint Ventures; provided
that the aggregate amount of such Investments made after ____________, 1999
does not exceed $____ million as of the date of determination; and
164
<PAGE> 168
(n) additional Investments in an aggregate amount not to exceed $____
million.
"Permitted Liens" means:
(a) Liens for taxes, assessments, governmental charges, levies or
claims which are not yet delinquent or which are being contested in good
faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with generally
accepted accounting principles shall have been made for such Liens;
(b) other Liens incidental to the conduct of WCG's and its Restricted
Subsidiaries' businesses or the ownership of its Property not securing any
Debt, and which do not in the aggregate materially detract from the value
of WCG's and its Restricted Subsidiaries' Property when taken as a whole,
or materially impair the use thereof in the operation of its business;
(c) Liens, pledges and deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of statutory obligations;
(d) Liens, pledges or deposits made to secure the performance of
tenders, bids, leases, public or statutory obligations, sureties, stays,
appeals, indemnities, performance or other similar bonds and other
obligations of like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money, the obtaining
of advances or credit or the payment of the deferred purchase price of
Property and which do not in the aggregate materially impair the use of
Property in the operation of the business of WCG and the Restricted
Subsidiaries taken as a whole);
(e) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially
detract from the value of the Property subject thereto or materially
interfere with the ordinary conduct of the business of WCG or its
Restricted Subsidiaries;
(f) any interest or title of a lessor in the Property subject to any
lease other than a Capital Lease;
(g) Liens with respect to assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to WCG to secure Debt owing to WCG;
(h) Liens arising out of judgments or awards against WCG or any
Restricted Subsidiary of WCG with respect to which WCG or such Restricted
Subsidiary is prosecuting an appeal or proceeding for review and WCG or
such Restricted Subsidiary is maintaining adequate reserves in accordance
with generally accepted accounting principles;
(i) Liens arising by operation of law in connection with judgments,
only to the extent, for an amount and for a period not resulting in an
Event of Default with respect thereto;
(j) Liens securing Permitted Interest Rate or Currency Protection
Agreement; and
(k) Liens in favor of the trustee arising under the indenture.
"Permitted Telecommunications Asset Disposition" means the transfer,
conveyance, sale, lease or other disposition of an interest in or capacity on
optical fiber and/or conduit and any related equipment used in a Segment of
WCG's communications network, whether or not in the ordinary course of business;
provided that after giving effect to such disposition, WCG would retain at least
either (A) ____ optical fibers per route mile on such Segment as deployed at the
165
<PAGE> 169
time of such disposition or (B) ____ optical fibers and one empty conduit per
route mile on such Segment as deployed at such time.
"Person" means any individual, corporation, company, partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"Plan" means any employee benefit plan, retirement plan, deferred
compensation plan, restricted stock plan, health, life, disability or other
insurance plan or program, employee stock purchase plan, employee stock
ownership plan, pension plan, stock option plan or similar plan or arrangement
of WCG or any Restricted Subsidiary of WCG, or any successor plan thereof, and
"Plans" shall have a correlative meaning.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding-up of such Person, to shares of Capital
Stock of any other class of such Person.
"Preferred Stock Dividends" means all dividends with respect to Preferred
Stock of Restricted Subsidiaries held by Persons other than WCG or a Wholly
Owned Restricted Subsidiary. The amount of any such dividend shall be equal to
the quotient of such dividend divided by the difference between one and the
maximum statutory federal income rate (expressed as a decimal number between 1
and 0 and determined in accordance with generally accepted accounting
principles) applicable to the issuer of such Preferred Stock for the period
during which such dividends were paid.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the indenture, the
value of any Property shall be its Fair Market Value.
"Proportionate Interest" in any issuance of Capital Stock of a Restricted
Subsidiary means a ratio (1) the numerator of which is the aggregate amount of
Capital Stock of such Restricted Subsidiary beneficially owned by WCG and the
Restricted Subsidiaries and (2) the denominator of which is the aggregate amount
of Capital Stock of such Restricted Subsidiary beneficially owned by all Persons
(excluding, in the case of this clause (2), any Investment made in connection
with such issuance).
"Purchase Amount" means the aggregate principal amount of the outstanding
notes offered to be purchased by WCG pursuant to an offer to purchase the notes
in accordance with the indenture (including, if less than 100%, the manner by
which such has been determined pursuant to the section of the indenture
requiring the offer to purchase the notes in accordance with the indenture).
"Purchase Date" is an expiration date of an offer to purchase the notes in
accordance with the indenture which shall be, subject to any contrary
requirements of applicable law, not less than 30 days or more than 60 days after
the date of such offer and a settlement date.
"Purchase Price" is the purchase price to be paid by WCG for $1,000
aggregate principal amount of notes accepted for payment (as specified pursuant
to the indenture).
"Purchase Money Debt" means Debt (including Acquired Debt and Capital Lease
Obligations, mortgage financings and purchase money obligations) incurred for
the purpose of financing all or any part of the cost of construction,
installation, acquisition, lease, development or improvement by WCG or any
Restricted Subsidiary of any Telecommunications Assets of WCG or any Restricted
Subsidiary and including any related notes, Guarantees, collateral
166
<PAGE> 170
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Qualified Receivable Facility" means Debt of WCG or any Subsidiary
Incurred from time to time pursuant to either (x) credit facilities secured by
Receivables or (y) Receivables purchase facilities, and including any related
notes, Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Rating Agencies" mean Moody's and S&P.
"Rating Date" means the earlier of the date of public notice of the
occurrence of a Change of Control or of the intention of WCG to effect a Change
of Control.
"Rating Decline" shall be deemed to have occurred if, no later than 90 days
after the Rating Date (which period shall be extended so long as the rating of
the notes is under publicly announced consideration for possible downgrade by
any of the Rating Agencies), either of the Rating Agencies assigns or reaffirms
a rating to the notes that is lower than the applicable rating of the notes on
____________, 1999 (or the equivalent thereof). If, prior to the Rating Date,
either of the ratings assigned to the notes by the Rating Agencies is lower than
the applicable rating of the notes on ____________, 1999, then a Rating Decline
will be deemed to have occurred if such rating is not changed by the 90th day
following the Rating Date. A downgrade within rating categories, as well as
between rating categories, will be considered a Rating Decline.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money and proceeds
and products thereof in each case generated in the ordinary course of business.
"Restricted Subsidiary" means (a) a Subsidiary of WCG or of a Restricted
Subsidiary that has not been designated or classified as an Unrestricted
Subsidiary pursuant to and in compliance with the section above entitled
"-- Certain covenants -- Limitation on designations of unrestricted
subsidiaries" and (b) an Unrestricted Subsidiary that is redesignated as a
Restricted Subsidiary pursuant to such covenant.
"Returned Investments" mean, with respect to all Investments made in
Unrestricted Subsidiaries, the aggregate amount of all payments made in respect
of such Investments, other than interest, dividends or other distributions not
in the nature of a return or repurchase of capital or a repayment of principal,
that have been paid or returned, without restriction, to WCG or any Restricted
Subsidiary.
"Revocation" has the meaning set forth in the section above entitled
"-- Certain covenants -- limitations on designations of unrestricted
subsidiaries."
"S&P" means Standard & Poor's Ratings Service or, if Standard & Poor's
Ratings Service shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if there is no successor Person, then "S&P" shall mean any other national
recognized rating agency (other than Moody's) that rates debt securities having
a maturity at original issuance of at least one year and that shall have been
designated by the trustee with the consent of WCG.
"Sale and Leaseback Transaction" of any Person means any direct or indirect
arrangement pursuant to which any Property is sold or transferred by such Person
or a Restricted Subsidiary of such person and is thereafter leased back from the
purchaser or transferee thereof by such Person or one of its Restricted
Subsidiaries. The stated maturity of such arrangement shall be
167
<PAGE> 171
the date of the last payment of rent or any other amount due under such
arrangement prior to the first date on which such arrangement may be terminated
by the lessee without payment of a penalty.
"Segment" means (x) with respect to WCG's intercity network, the
through-portion of such network between two local networks and (y) with respect
to a local network of WCG, the entire through-portion of such network, excluding
the spurs which branch off the through-portion.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of WCG within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
"Stated Maturity" when used with respect to a note or any installment of
interest on such note, means the date specified in such note as the fixed date
on which the principal of such note or such installment of interest is due and
payable, including pursuant to any mandatory redemption provision, but excluding
any provision providing for the repurchase of such note at the option of the
holder of such note upon the happening of any contingency beyond the control of
WCG unless such contingency has occurred.
"Subordinated Debt" means Debt of WCG (a) that is not secured by any Lien
on or with respect to any Property now owned or acquired after ________, 1999
and (b) as to which the payment of principal of, and premium, if any, and
interest and other payment obligations in respect of such Debt shall be
subordinate to the prior payment in full in cash of the notes to at least the
following extent:
(1) no payments of principal of, or premium, if any, or interest on or
otherwise due, including by acceleration or for additional amounts, in
respect of, or repurchases, redemptions or other retirements of, such Debt
may be permitted for so long as any default, after giving effect to any
applicable grace periods, in the payment of principal, or premium, if any,
or interest on the notes exists, including as a result of acceleration;
(2) in the event that any other Default exists with respect to the
notes, upon notice by holders of 25% or more in aggregate principal amount
of the notes to the trustee, the trustee shall have the right to give
notice to WCG and the holders of such Debt, or trustees or agents therefor,
of a payment blockage, and thereafter no payments of such Debt may be made
for a period of 179 days from the date of such notice; provided that not
more than one such payment blockage notice may be given in any consecutive
360-day period, irrespective of the number of defaults with respect to the
notes during such period;
(3) if payment of such Debt is accelerated when any notes are
outstanding, no payments of such Debt may be made until three Business Days
after the trustee receives notice of such acceleration and, thereafter,
such payments may only be made to the extent the terms of such Debt permit
payment at that time; and
(4) such Debt may not (x) provide for payments of principal of such
Debt at the stated maturity of such Debt or by way of a sinking fund
applicable to such Debt or by way of any mandatory redemption, defeasance,
retirement or repurchase of such Debt by WCG, including any redemption,
retirement or repurchase which is contingent upon events or circumstances
but excluding any retirement required by virtue of acceleration of such
Debt upon an event of default thereunder, in each case prior to the final
Stated Maturity of the notes or (y) permit redemption or other retirement,
including pursuant to an offer to purchase made by WCG, of such Debt at the
option of the holder of such Debt prior to the final Stated Maturity of the
notes, other than, in the case of clause (x) or (y), any such payment,
redemption or other retirement, including pursuant to an offer to purchase
made by WCG, which is conditioned upon (A) a change of control of WCG
pursuant to
168
<PAGE> 172
provisions substantially similar to those described in the section above
entitled "-- Certain covenants -- Change of control triggering event" (and
which shall provide that such Debt will not be repurchased pursuant to such
provisions prior to WCG's repurchase of the notes required to be
repurchased by WCG pursuant to the provisions described in the section
above entitled "-- Certain covenants -- Change of control triggering
event") or (B) a sale or other disposition of assets pursuant to provisions
substantially similar to those described in the section above entitled
"-- Certain covenants -- Limitation on asset dispositions" (and which shall
provide that such Debt will not be repurchased pursuant to such provisions
prior to WCG's repurchase of the notes required to be repurchased by WCG
pursuant to the provision described in the section above entitled
"-- Certain covenants -- Limitation on asset dispositions").
"Subsidiary" of any Person means:
- a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly,
by such Person or by one or more other Subsidiaries of such Person
or by such Person and one or more Subsidiaries of such Person; or
- any other Person, other than a corporation, in which such Person, or
one or more other Subsidiaries of such Person or such Person and one
or more other Subsidiaries of such Person, directly or indirectly,
has at least a majority ownership and power to direct the policies,
management and affairs thereof.
"Telecommunications Assets" means:
(a) any Property (other than cash, cash equivalents and securities) to
be owned or used by WCG or any Restricted Subsidiary and used in the
Telecommunications Business;
(b) for purposes of the covenants described in the sections above
entitled "-- Certain covenants -- Limitation on consolidated debt" and
"-- Limitation on liens" only, Capital Stock of any Person; or
(c) for all other purposes of the indenture, Capital Stock of a Person
that becomes a Restricted Subsidiary as a result of the acquisition of such
Capital Stock by WCG or another Restricted Subsidiary from any Person other
than an Affiliate of WCG;
provided, however, that, in the case of clause (b) or (c), such Person
is primarily engaged in the Telecommunications Business.
"Telecommunications Business" means the business of:
(1) transmitting, or providing services relating to the transmission
of, voice, video, data through owned or leased transmission facilities or
the right to use such facilities;
(2) constructing, creating, developing, operating, managing or
marketing communications networks, related network transmission equipment,
software and other devices for use in a communications business;
(3) computer outsourcing, data center management, computer systems
integration, reengineering of computer software for any purpose, including,
without limitation, for the purposes of porting computer software from one
operating environment or computer platform to another or to address issues
commonly referred to as "Year 2000 issues;"
(4) constructing, managing or operating fiber optic telecommunications
networks and leasing capacity on those networks to third parties;
169
<PAGE> 173
(5) the sale, resale, installation or maintenance of communications
systems and equipment; or
(6) evaluating, participating or pursuing any other activity or
opportunity that is primarily related to those identified in (1), (2), (3),
(4) or (5) above;
provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors of WCG.
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of WCG designated as such pursuant to and in
compliance with the section above entitled "-- Certain covenants -- Limitation
on designations of unrestricted subsidiaries" and not thereafter redesignated as
a Restricted Subsidiary as permitted pursuant to such section.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only for so long as
no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person,
all of the outstanding Voting Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such Person
or by one or more Wholly Owned Subsidiaries of such Person or by such Person and
one or more Wholly Owned Subsidiaries of such Person.
"Williams Intercompany Arrangements" means (1) the Williams Note and (2)
any other documents, instruments, agreements and arrangements between WCG and
any Restricted Subsidiaries, between any Restricted Subsidiaries or between WCG
or any Restricted Subsidiary, on the one hand, and The Williams Companies, Inc.
or any of its Subsidiaries, on the other hand, in effect on __________, 1999, as
such documents, instruments, agreements and arrangements may be amended,
modified or supplemented, but only to the extent any such amendments,
modifications or supplements are approved by a majority of the members of the
Board of Directors of WCG who are disinterested with respect to such amendment,
modification or supplement.
EVENTS OF DEFAULT
The following will be Events of Default under the indenture:
(a) failure to pay principal of, or premium, if any, on, any note when
due;
(b) failure to pay any interest on any note when due, continued for 30
days;
(c) default in the payment of principal and interest on notes required
to be purchased pursuant to an offer to purchase the notes in accordance
with the indenture as described in the section above entitled "-- Certain
covenants -- Change of control triggering event" when due and payable;
(d) failure to perform or comply with the provisions described in the
section above entitled "-- Mergers, consolidations and certain sales of
assets;"
(e) failure to perform any other covenant or agreement of WCG under
the indenture or the notes continued for 60 days after written notice to
WCG by the trustee or holders of at least 25% in aggregate principal amount
of the outstanding notes;
(f) default under the terms of any instrument evidencing or securing
Debt of WCG or any Restricted Subsidiary having an outstanding principal
amount of $____ million or its foreign currency equivalent at the time
individually or in the aggregate which default results
170
<PAGE> 174
in the acceleration of the payment of such indebtedness or constitutes the
failure to pay such indebtedness when due (after expiration of any
applicable grace period);
(g) the rendering of a final judgment or judgments, not subject to
appeal or covered by insurance, against WCG or any Restricted Subsidiary in
an aggregate amount in excess of $____ million or its foreign currency
equivalent at the time and shall not be waived, satisfied or discharged for
any period of 45 consecutive days after the date on which the right to
appeal has expired;
(h) any Domestic Restricted Subsidiary Guarantee ceases to be in full
force and effect, other than in accordance with the terms of such Domestic
Restricted Subsidiary Guaranty, or any Guarantor denies or disaffirms its
obligations under its Domestic Restricted Subsidiary Guarantee; and
(i) certain events of bankruptcy, insolvency or reorganization
affecting WCG or any Significant Subsidiary.
If an Event of Default has occurred (which has not been cured or waived)
the trustee will exercise its rights and powers under the indenture, and use the
same degree of care and skill in its exercise, as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs. At
all other times, the trustee will not be under any obligation to exercise any of
its rights or powers under the indenture at the request or direction of any of
the holders of notes, unless such holders shall have offered to the trustee
reasonable indemnity. Subject to this indemnification, the holders of a majority
in aggregate principal amount of the outstanding notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee.
If any Event of Default (other than an Event of Default described in clause
(i) above) shall occur and be continuing, either the trustee or the holders of
at least 25% in aggregate principal amount of the outstanding notes may
accelerate the maturity of all notes. After such acceleration, but before a
judgment or decree based on acceleration, the holders of a majority in aggregate
principal amount of the outstanding notes may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal, have been cured or waived. If an Event of
Default specified in clause (i) above occurs, the outstanding notes will
automatically become immediately due and payable without any declaration or
other act on the part of the trustee or any holder. For information as to waiver
of defaults, see the section below entitled "-- Amendment, supplement and
waiver."
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy under the indenture, unless such
holder shall have previously given to the trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding notes shall have made written request and
offered reasonable indemnity to the trustee to institute such proceeding as
trustee, and the trustee shall not have received from the holders of a majority
in aggregate principal amount of the outstanding notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a holder of
a note for enforcement of payment of the principal of and premium, if any, or
interest on such note on or after the respective due dates expressed in such
note.
WCG shall deliver to the trustee, within 30 days after the occurrence of an
Event of Default, written notice in the form of an officers' certificate of any
event which with the giving of notice and the lapse of time would become an
Event of Default, its status and what action WCG is taking or proposes to take
with respect to such Event of Default. WCG also will be required
171
<PAGE> 175
to deliver to the trustee annually a statement as to the performance by WCG of
certain of its obligations under the indenture and as to any default in such
performance.
AMENDMENT, SUPPLEMENT AND WAIVER
WCG and the trustee may, at any time and from time to time, without notice
to or consent of any holders of notes, enter into one or more indentures
supplemental to the indenture:
(1) to evidence the succession of another Person to WCG and the
assumption by such successor of the covenants of WCG in the indenture and
the notes;
(2) to add to the covenants of WCG, for the benefit of the holders, or
to surrender any right or power conferred upon WCG by the indenture;
(3) to add any additional Events of Defaults;
(4) to provide for uncertificated notes in addition to or in place of
certificated notes;
(5) to evidence and provide for the acceptance of appointment under
the indenture of a successor trustee;
(6) to secure the notes;
(7) to comply with the Trust Indenture Act;
(8) to add additional Guarantees with respect to the notes or to
release Guarantors from Domestic Restricted Subsidiary Guarantees as
provided by the terms of the indenture; or
(9) to cure any ambiguity in the indenture, to correct or supplement
any provision in the indenture which may be inconsistent with any other
provision therein or to add any other provision with respect to matters or
questions arising under the indenture;
provided such actions shall not adversely affect the interests of the
holders in any material respect.
With the consent of the holders of not less than a majority in principal
amount of the outstanding notes, WCG and the trustee may enter into one or more
supplemental indentures for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the indenture or modifying
in any manner the rights of the holders; except that no such supplemental
indenture shall, without the consent of the holder of each outstanding note:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any note, or reduce the principal amount of any note or the
interest on any note that would be due and payable upon the Stated Maturity
of any note, or change the place of payment where, or the coin or currency
in which, any note or any premium or interest on any note is payable, or
impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity of any note;
(2) reduce the percentage in principal amount of the outstanding
notes, the consent of whose holders is necessary for any such supplemental
indenture or required for any waiver of compliance with certain provisions
of the indenture or certain Defaults thereunder;
(3) subordinate in right of payment, or otherwise subordinate, the
notes to any other Debt;
(4) except as otherwise required by the indenture, release any
security interest that may have been granted in favor of the holders of the
notes;
172
<PAGE> 176
(5) reduce the premium payable upon the redemption of any note nor
change the time at which any note may be redeemed, as described in the
section above entitled "-- Optional redemption;"
(6) reduce the premium payable upon a Change of Control Triggering
Event;
(7) make any change in any Domestic Restricted Subsidiary Guarantee
that would adversely affect the holders of the notes; or
(8) modify any provision of this paragraph, except to increase any
percentage set forth herein.
The holders of not less than a majority in principal amount of the
outstanding notes may, on behalf of the holders of all the notes, waive any past
Default under the indenture and its consequences, except Default (1) in the
payment of the principal of, or premium, if any, or interest on any note, or (2)
in respect of a covenant or provision hereof which under the proviso to the
prior paragraph cannot be modified or amended without the consent of the holder
of each outstanding note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
WCG, at its election, shall:
(a) be deemed to have paid and discharged its debt on the notes and the
indenture shall cease to be of further effect as to all outstanding notes
(except as to (1) rights of registration of transfer, substitution and exchange
of notes and WCG's right of optional redemption, (2) rights of holders to
receive payment of principal of, premium, if any, and interest on such notes
(but not the Purchase Price referred to in the section above entitled
"-- Certain covenants -- Change of control triggering event" or in the section
above entitled "-- Limitation on asset dispositions") and any rights of the
holders with respect to such amount, (3) the rights, obligations and immunities
of the trustee under the indenture and (4) certain other specified provisions in
the indenture) or
(b) cease to be under any obligation to comply with certain restrictive
covenants, including those described in the section above entitled "-- Certain
covenants," and terminate the operation of certain Events of Default, after the
irrevocable deposit by WCG with the trustee, in trust for the benefit of the
holders of notes, at any time prior to the maturity of the notes, of (1) money
in an amount, (2) Government Securities which through the payment of interest
and principal will provide, not later than one day before the due date of
payment in respect of the notes, money in an amount, or (3) a combination
thereof, sufficient to pay and discharge the principal of, premium, if any, on,
and interest on, the notes then outstanding on the dates on which any such
payments are due in accordance with the terms of the indenture and of the notes.
Such defeasance or covenant defeasance shall be deemed to occur only if
certain conditions are satisfied, including among other things, delivery by WCG
to the trustee of an opinion of counsel acceptable to the trustee to the effect
that (1) such deposit, defeasance and discharge will not be deemed, or result
in, a taxable event for federal income tax purposes with respect to the holders;
and (2) WCG's deposit will not result in the trust relating thereto or the
trustee being subject to regulation under the Investment Company Act of 1940, as
amended.
GOVERNING LAW
The indenture and the notes are governed by the laws of the State of New
York, without reference to principles of conflicts of law.
173
<PAGE> 177
THE TRUSTEE
____ is the trustee under the indenture. The address of the trustee is
____.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of WCG, as
such, shall have any liability for any obligations of WCG under the notes or the
indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its status as director,
officer, employee, incorporator or stockholder of WCG. By accepting a note each
holder waives and releases all such liability, but only such liability. The
waiver and release are part of the consideration for issuance of the notes.
Nevertheless, such waiver may not be effective to waive liabilities under the
federal securities laws and it has been the view of the Commission that such a
waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
WCG, the registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and WCG may require a
holder to pay any taxes and fees required by law or permitted by the indenture.
174
<PAGE> 178
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS
The following are summaries of the material provisions of our debt
agreements, copies of which we have filed as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable law. See the section of this prospectus entitled "Where You Can Find
Additional Information" for more information.
REVOLVING CREDIT FACILITIES
We currently borrow under an unsecured revolving credit facility with
various banks which includes as borrowers Williams and some of its other
subsidiaries. This credit facility terminates in July 2002. Solutions may borrow
up to $300 million and we may borrow up to $400 million under this credit
facility. Our $400 million commitment is guaranteed by Williams. We have agreed
that our combined borrowings under this commitment will not exceed $400 million.
Borrowings under this credit facility are generally for 30 to 90 day terms and
bear interest at LIBOR plus 75 to 85 basis points. We currently have no
outstanding borrowings under this credit facility.
INTERIM CREDIT FACILITY
In April 1999, we entered into a $1.4 billion unsecured revolving interim
loan facility with two banks which terminates on September 30, 1999. Our interim
loan obligations are guaranteed by Williams. Borrowings under this interim loan
facility are generally for 30-day terms and bear interest at LIBOR plus 75 basis
points. We currently have $400 million in outstanding borrowings under this
credit facility. We intend to repay all of the then-outstanding borrowings under
this facility with the proceeds from the offerings and the concurrent
investments. The balance of any new borrowings will be repaid and the commitment
terminated upon implementation of our new permanent credit facility described
below.
PERMANENT CREDIT FACILITY
At the time of completion of the offerings, we expect to have a commitment
for a new $1.0 billion, six-year unsecured revolving credit facility which we
plan to put in place after the completion of the offerings but on or before
September 30, 1999. We expect to borrow the amount necessary under this
permanent credit facility to repay the bridge loan facility on or before that
date. Additional borrowings will be made under the permanent credit facility as
and when needed for our capital investment plan and for working capital and
general corporate purposes. We expect that the new permanent credit facility
will contain various restrictive covenants, including those described above for
the indenture governing the notes, and will provide that any outstanding
borrowings will become due upon a change of control of our company.
WILLIAMS NOTE
To fund our operations, we historically have received capital contributions
from Williams and interest-bearing advances from Williams and an affiliate of
Williams at floating rates of interest established at specified margins above
benchmark rates. As of December 31, 1998, Williams' total capital contributions
to us were approximately $1.3 billion and our borrowings provided by Williams
were $614.3 million at an annual interest rate of LIBOR plus 75 basis points,
the rate paid on our current credit facility. At the time of completion of the
offerings, we estimate that we will have approximately $1.3 billion in
borrowings from Williams including the $500 million recharacterization of
paid-in capital to amounts due to affiliates -- Williams. At
175
<PAGE> 179
that time, these borrowings will be converted into a 6-year amortizing note that
will bear interest at an annual rate based on our credit rating, expected
initially to be LIBOR plus ____ basis points. This note will rank senior to the
notes and will be made on market terms and conditions. Principal will be due and
payable quarterly beginning no earlier than June 30, 2000 based on an earnings
formula, but we will pay not less than $12.5 million in 2000 and $25 million in
principal annually after 2000. The Williams Note will be due and payable in full
upon a change of control of our company. We plan to amend the Williams Note to
more closely resemble the terms and conditions of the permanent credit facility
after the offerings.
ASSET DEFEASANCE PROGRAM
During 1998, we entered into an asset defeasance program in the form of an
operating lease agreement covering a portion of the Williams Network with a
group of financial institutions. The total estimated cost of the network assets
to be covered by this lease agreement is $750 million. The lease term will
include an interim term, during which the covered network assets will be
constructed, which is anticipated to end no later than December 31, 1999, and a
base term. The interim and base terms are expected to total five years and, if
renewed, could total seven years.
We have an option to purchase the covered network assets during the lease
term at an amount approximating the lessor's cost. Williams provides a residual
value guarantee equal to a maximum of 89.9% of the transaction. The residual
value guarantee is reduced by the present value of the actual lease payments. In
the event that we do not exercise the purchase option, we expect the fair market
value of the covered network assets to substantially reduce or eliminate
Williams' payment under the residual value guarantee. At March 31, 1999, $368.1
million of construction costs for the Williams Network had been incurred.
176
<PAGE> 180
IMPORTANT UNITED STATES FEDERAL TAX CONSIDERATIONS
OF THE NOTES TO NON-U.S. HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our notes by a
holder that, for U.S. federal income tax purposes, is not a U.S. person as we
define that term below. A holder of our notes who is not a U.S. person is a
non-U.S. holder. We assume in this discussion that you will hold our notes
issued pursuant to the offering as a capital asset (generally, property held for
investment). We do not discuss all aspects of U.S. federal taxation that may be
important to you in light of your individual investment circumstances, such as
special tax rules that would apply to you, for example, if you are a dealer in
securities, financial institution, bank, insurance company, tax-exempt
organization or partnership. Our discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended, Treasury Regulations, judicial
opinions, published positions of the U.S. Internal Revenue Service and other
applicable authorities, all as in effect on the date of this prospectus and all
of which are subject to differing interpretations or change, possibly with
retroactive effect. We have not sought, and will not seek, any ruling from the
IRS with respect to the tax consequences discussed in this prospectus, and there
can be no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained. We urge you to consult your tax advisor about the U.S. federal tax
consequences of acquiring, holding, and disposing of our notes, as well as any
tax consequences that may arise under the laws of any foreign, state, local, or
other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
- a citizen or resident of the U.S.
- a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source
- a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust
INTEREST
Interest paid to a non-U.S. holder will generally not be subject to
withholding of U.S. federal income tax provided that all of the following are
true:
- the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all our classes of stock entitled
to vote
- the non-U.S. holder is not a controlled foreign corporation to which we
are a related person for U.S. federal income tax purposes
- the non-U.S. holder certifies, under penalties of perjury, that it is a
non-U.S. holder and provides its name and address
Interest paid to a non-U.S. holder that does not qualify for the above
exception from withholding tax would generally be subject to withholding of U.S.
federal income tax at the rate of 30% unless the non-U.S. holder of the note
provides us or our paying agent, as the case may be, with a properly executed
(1) IRS Form 1001 (or successor form) claiming an exemption from (or reduction
in) withholding under the benefit of an applicable tax treaty or (2) IRS Form
4224 (or successor form) stating that the interest paid on the note is not
subject to withholding tax because it is effectively connected with the non-U.S.
holder's conduct of a trade
177
<PAGE> 181
or business in the U.S. If, however, the interest is effectively connected with
the conduct of a trade or business in the U.S. by the non-U.S. holder, the
interest will be subject to U.S. federal income tax imposed on net income on the
same basis that applies to U.S. persons generally, and, for corporate holders
and under certain circumstances, the branch profits tax. Non-U.S. holders should
consult any applicable income tax treaties that may provide for a reduction of,
or exemption from, withholding taxes.
GAIN ON DISPOSITION
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our notes unless any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder
- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain United States expatriates
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders and under certain circumstances, the
branch profits tax, but will generally not be subject to withholding. Non-U.S.
holders should consult any applicable income tax treaties that may provide for
different rules.
UNITED STATES FEDERAL ESTATE TAXES
A note that is owned or treated as owned by an individual who is not a
citizen or resident of the U.S., as specially defined for U.S. federal estate
tax purposes, on the date of that person's death will not be included in his or
her estate for U.S. federal estate tax purposes, provided that both of the
following are true:
- the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all of our classes of stock
entitled to vote on the date of that person's death
- the interest on the note would not have been effectively connected with
the conduct of trade or business in the U.S. if it had been received by
that person on the date of that person's death
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of interest that we paid to that holder, and the amount of tax that
we withheld on the interest. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides.
Under current U.S. Treasury regulations, U.S. information reporting
requirements and backup withholding tax at a rate of 31% will generally apply to
interest and gross proceeds received with respect to a note. Backup withholding
tax will generally not apply to interest and gross proceeds received by a
non-U.S. holder who furnishes a certificate of foreign status and makes any
other required certification, or who is otherwise exempt from backup
withholding. Generally, a non-U.S. holder will provide this certification on IRS
Form W-8 (Certificate of Foreign Status). Payments to or through a U.S. office
of a broker of the proceeds of a sale,
178
<PAGE> 182
exchange or other disposition of a note are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its non-U.S. holder status under penalties of perjury or otherwise establishes
an exemption. Information reporting requirements, but not backup withholding
tax, will also apply to payments of the proceeds of a sale of a note by foreign
offices of U.S. brokers, or foreign brokers with certain types of relationships
to the U.S., unless the broker has documentary evidence in its records that the
holder is a non-U.S. holder and certain other conditions are met, or the holder
otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholdings and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
179
<PAGE> 183
UNDERWRITING
GENERAL
We intend to offer our notes through a number of underwriters. Subject to
the terms and conditions set forth in a purchase agreement among our company and
each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.
and Salomon Smith Barney Inc., we have agreed to sell to the underwriters, and
each of the underwriters severally and not jointly has agreed to purchase from
us, the aggregate principal amount of the notes set forth opposite its name
below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................. $
Lehman Brothers Inc. .......................................
Salomon Smith Barney Inc. ..................................
--------
Total......................................... $
========
</TABLE>
The several underwriters have agreed, subject to the terms and conditions
included in the purchase agreement, to purchase all of the notes being sold
pursuant to such agreement if any of the notes being sold pursuant to such
agreement are purchased.
In the event of a default by an underwriter, the purchase agreement
provides that, in some circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The notes are being offered by the several underwriters, subject to prior
sale, when, as if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the underwriters and certain other conditions,
including the closing of the equity offering and the SBC investment. The
underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part.
CONCESSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price set forth on the cover page of
this prospectus, and to certain dealers at such price less a concession not in
excess of ____% of the principal amount of the notes. The underwriters may
allow, and such dealers may reallow, a discount not in excess of ____% of the
principal amount of the notes to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $________ and are payable by us.
NO SALES OF SIMILAR SECURITIES
We have agreed, subject to exceptions, not to directly or indirectly offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, lend or otherwise dispose of or transfer any
180
<PAGE> 184
debt securities, or any securities convertible into or exercisable or
exchangeable for debt securities, or file a registration statement under the
Securities Act with respect to the foregoing, without the prior written consent
of Merrill Lynch on behalf of the underwriters for a period of ____ days after
the date of this prospectus.
NEW ISSUE OF NOTES
The notes are a new issue of securities with no established trading market.
We do not intend to apply for listing of the notes on any national securities
exchange or for quotation of the notes on any automated dealer quotation system.
We have been advised by the underwriters that they presently intend to make a
market in the notes after the consummation of the notes offering, although they
are under no obligation to do so and may discontinue any market-making
activities at any time without any notice. No assurance can be given as to the
liquidity of the trading market for the notes or that an active public market
for the notes will develop. If an active public trading market for the notes
does not develop, the market price and liquidity of the notes may be adversely
affected.
PRICE STABILIZATION AND SHORT POSITIONS
In connection with the notes offering, the underwriters are permitted to
engage in transactions that stabilize the market price of the notes. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the notes. If the underwriters create a short position
in the notes in connection with the notes offering, i.e., if they sell more
notes than are set forth on the cover page of this prospectus, the underwriters
may reduce that short position by purchasing notes in the open market. In
general, purchases of a security for the purpose of stabilization or to reduce a
short position could cause the price of the security to be higher than it might
in the absence of such purchases.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the notes. In addition, neither we nor
any of the underwriters make any representation that the underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
OTHER RELATIONSHIPS
Certain of the underwriters of the notes offering and their affiliates
engage in transactions with, and perform services for, our company in the
ordinary course of business and have engaged and may in the future engage in
commercial banking and investment banking transactions with us and with
Williams, for which they receive customary compensation. In addition, some of
the underwriters of the notes offering will act as underwriters for the equity
offering.
181
<PAGE> 185
LEGAL MATTERS
The validity of the notes offered in this prospectus and certain legal
matters in connection with the offerings will be passed upon for us by our
Senior Vice President, Law, William von Glahn, and our special counsel, Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York. Skadden, Arps, Slate,
Meagher & Flom LLP has from time to time represented, and may continue to
represent, Williams and its affiliates in certain legal matters, and is one of
several firms that have provided advice on taxation matters in connection with
the formation of WCG. Certain legal matters in connection with the offerings
will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New
York. Davis Polk & Wardwell has from time to time represented, and may continue
to represent, Williams and its affiliates in certain legal matters. As of the
date of this prospectus, Mr. von Glahn owns, directly or indirectly, 177,527
shares of common stock of Williams and has the right to exercise options to
receive an additional 93,838 shares. At the time of completion of the offerings,
our company will grant to Mr. von Glahn options to purchase 50,000 shares of our
common stock at an exercise price equal to the initial public offering price.
EXPERTS
The consolidated financial statements and schedule of Williams
Communications Group, Inc. at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, appearing in this prospectus
and registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein
which, as to the year 1998, are based in part on the report of Arthur Andersen
S/C, independent public accountants. The financial statements and schedule
referred to above are included in reliance upon such reports given on the
authority of such firms as experts in accounting and auditing.
The combined financial statements of the Direct Sales Subsidiary, NCS
(including BA Meridian) and TTS of the Enterprise Network's division of Nortel
Networks Corporation, formerly Northern Telecom Limited, for the year ended
December 31, 1996 and the four-month period ended April 30, 1997 appearing in
this prospectus and registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as set forth thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
182
<PAGE> 186
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the notes
offered in this prospectus. This prospectus does not contain all the information
which is in the registration statement. Certain parts of the registration
statement are omitted as allowed by the rules and regulations of the Commission.
We refer you to the registration statement for further information about our
company and the securities offered in this prospectus. Statements contained in
this prospectus concerning the provisions of documents are not necessarily
summaries of the material provisions of those documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. You can inspect and copy the registration statement
and the reports and other information we file with the Commission under the
Exchange Act at the public reference room maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain information on the operation of the public reference room by calling the
Commission at 1-800-SEC-0330. The same information will be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of this material from the public reference room of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a Web site which provides online access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. In addition, Williams is subject to the information requirements of
the Exchange Act and files reports and other information under the Exchange Act
with the Commission. You can inspect and copy these reports and other
information of our company and Williams at the locations set forth above or
download these reports from the Commission's web site.
183
<PAGE> 187
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
WILLIAMS COMMUNICATIONS GROUP, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-2
Report of Arthur Andersen S/C, Independent Public
Accountants............................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 and the three months
ended March 31, 1999 and 1998 (unaudited).............. F-4
Consolidated Balance Sheets as of December 31, 1998 and
1997 and March 31, 1999 (unaudited).................... F-5
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 1998, 1997 and 1996 and the
three months ended March 31, 1999 and 1998
(unaudited)............................................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 and the three months
ended March 31, 1999 and 1998 (unaudited).............. F-7
Notes to Consolidated Financial Statements (Information as
of March 31, 1999 and for the three months ended March
31, 1999 and 1998 is unaudited)........................ F-8
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
Report of Deloitte & Touche LLP, Independent Auditors..... F-39
Combined Statements of Income and Changes in Net Assets
for the four months ended April 30, 1997 and year ended
December 31, 1996...................................... F-40
Combined Statements of Cash Flows for the four months
ended April 30, 1997 and year ended December 31,
1996................................................... F-41
Notes to the Financial Statements......................... F-42
</TABLE>
F-1
<PAGE> 188
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Williams Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Williams
Communications Group, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity, 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. The financial statements of ATL -- Algar Telecom Leste S.A. (an
entity in which the Company has a 30% interest at December 31, 1998) have been
audited by other auditors whose report has been furnished to us; insofar as our
opinion on the consolidated financial statements relates to data included for
ATL -- Algar Telecom Leste S.A., it is based solely on their report. In the
consolidated statement of operations for the year ended December 31, 1998, the
Company's equity in the net loss of ATL -- Algar Telecom Leste S.A. is
$12,683,000.
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 other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Williams
Communications Group, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
April 7, 1999,
except for the matters described in the third
paragraph of Note 10 and Note 17, as to which the
date is May 27, 1999
F-2
<PAGE> 189
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management and Shareholders of
ATL -- Algar Telecom Leste S.A.:
We have audited the balance sheet of ATL -- ALGAR TELECOM LESTE S.A. (a
Brazilian corporation in the pre-operating stage) as of December 31, 1998, and
the related statements of income, changes in shareholders' investment and cash
flows for the period from inception (March 26, 1998) to December 31, 1998 (not
presented separately herein), all expressed in US dollars. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. 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 audit provides 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 ATL -- ALGAR TELECOM LESTE
S.A. (a pre-operating Company) as of December 31, 1998, and the results of its
operations and its cash flows for the period from inception (March 26, 1998) to
December 31, 1998, in conformity with generally accepted accounting principles
in the United States of America.
ARTHUR ANDERSEN S/C
Belo Horizonte, Brazil, January 29, 1999.
(except with respect to the matter
discussed in Note 8, as to which the
date is February 5, 1999)
F-3
<PAGE> 190
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, (UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues (Note 3).............. $ 492,002 $ 386,293 $ 1,717,106 $ 1,426,130 $ 703,586
Operating expenses:
Cost of sales................ 389,747 288,553 1,294,583 1,043,932 517,222
Selling, general and
administrative............ 122,919 103,673 487,073 323,513 152,484
Provision for doubtful
accounts.................. 8,437 1,483 21,591 7,837 2,694
Depreciation and
amortization.............. 27,578 18,995 84,381 70,663 32,378
Other (Note 4)............... 300 (342) 34,245 45,269 500
----------- ----------- ----------- ----------- -----------
Total operating
expenses.......... 548,981 412,362 1,921,873 1,491,214 705,278
----------- ----------- ----------- ----------- -----------
Loss from operations (Note
3)........................... (56,979) (26,069) (204,767) (65,084) (1,692)
Interest accrued............... (10,536) (1,739) (18,650) (8,714) (17,367)
Interest capitalized........... 4,135 1,739 15,575 7,781 --
Investing income............... 1,025 369 1,931 670 296
Minority interest in (income)
loss of subsidiaries......... 5,836 (1,460) 15,645 (13,506) --
Gain on sale of interest in
subsidiary (Note 2).......... -- -- -- 44,540 --
Gain on sale of assets (Note
4)........................... -- -- -- -- 15,725
Other income (loss), net....... (174) (104) 178 508 (108)
----------- ----------- ----------- ----------- -----------
Loss before income taxes....... (56,693) (27,264) (190,088) (33,805) (3,146)
(Provision) benefit for income
taxes (Note 5)............... (17,448) 766 5,097 (2,038) (368)
----------- ----------- ----------- ----------- -----------
Net loss....................... $ (74,141) $ (26,498) $ (184,991) $ (35,843) $ (3,514)
=========== =========== =========== =========== ===========
Basic earnings per share:
Net loss..................... $ (74,141) $ (26,498) $ (184,991) $ (35,843) $ (3,514)
Weighted average shares
outstanding............... 1,000 1,000 1,000 1,000 1,000
Pro-forma earnings per share
(unaudited):
Net loss..................... $ (.16) $ (.06) $ (.41) $ (.08) $ (.01)
Weighted average shares
outstanding............... 450,000,000 450,000,000 450,000,000 450,000,000 450,000,000
</TABLE>
See accompanying notes.
F-4
<PAGE> 191
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, ---------------------------
1999 (UNAUDITED) 1998 1997
---------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 96,847 $ 42,004 $ 11,290
Receivables less allowance of $33,241,000 (unaudited)
($23,576,000 in 1998 and $12,787,000 in 1997)..... 512,985 491,871 291,100
Due from affiliates (Note 14)........................ -- 3,881 --
Costs and estimated earnings in excess of billings... 176,728 185,922 144,575
Inventories.......................................... 73,609 67,699 63,484
Dark fiber held for sale............................. 41,079 46,175 --
Deferred income taxes (Note 5)....................... 40,132 23,829 20,090
Other................................................ 18,119 26,198 29,640
---------- ---------- ----------
Total current assets................................... 959,499 887,579 560,179
Investments (Note 7)................................... 635,004 261,155 28,170
Property, plant and equipment -- net (Note 8).......... 781,324 695,725 407,652
Goodwill and other intangibles, net of accumulated
amortization of $90,668,000 (unaudited) ($81,882,000
in 1998 and $55,136,000 in 1997)..................... 419,871 430,557 403,319
Due from affiliate (Note 14)........................... -- -- 97,097
Other assets and deferred charges...................... 73,161 58,468 9,617
---------- ---------- ----------
Total assets........................................... $2,868,859 $2,333,484 $1,506,034
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable (Note 9)............................ $ 140,723 $ 269,736 $ 59,402
Due to affiliates (Note 14).......................... 64,150 38,510 123,584
Accrued liabilities (Note 9)......................... 207,507 198,676 176,979
Billings in excess of costs and estimated earnings... 45,050 49,434 48,054
Long-term debt due within one year (Note 10)......... 622 690 1,195
---------- ---------- ----------
Total current liabilities.............................. 458,052 557,046 409,214
Long-term debt:
Affiliates (Note 14)................................. 825,044 620,710 --
Other (Note 10)...................................... 318,390 3,020 125,746
Deferred income taxes (Note 5)......................... 108,176 29,417 20,090
Other liabilities...................................... 11,995 10,595 5,126
Minority interest in subsidiaries...................... 117,190 110,076 83,156
Stockholder's equity:
Common stock, $1 per share par value, 1,000 shares
issued and authorized............................. 1 1 1
Capital in excess of par value....................... 1,356,891 1,299,871 1,000,348
Accumulated deficit.................................. (396,153) (321,958) (134,168)
Accumulated other comprehensive income (loss) (Note
11)............................................... 69,273 24,706 (3,479)
---------- ---------- ----------
Total stockholder's equity............................. 1,030,012 1,002,620 862,702
---------- ---------- ----------
Total liabilities and stockholder's equity............. $2,868,859 $2,333,484 $1,506,034
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 192
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CAPITAL ACCUMULATED
IN OTHER
COMMON EXCESS OF ACCUMULATED COMPREHENSIVE
STOCK PAR VALUE DEFICIT INCOME(LOSS) TOTAL
------ ---------- ----------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995................ $1 $ 179,712 $ (85,492) $ -- $ 94,221
Net loss................................ -- -- (3,514) -- (3,514)
Capital contributions from parent....... -- 439,000 -- -- 439,000
Dividends to parent..................... -- -- (2,760) -- (2,760)
Other................................... -- 306 -- -- 306
-- ---------- --------- -------- ----------
Balance, December 31, 1996................ 1 619,018 (91,766) -- 527,253
Net loss................................ -- -- (35,843) -- (35,843)
Other comprehensive loss (Note 11):
Unrealized depreciation on marketable
equity securities................. -- -- -- (2,348) (2,348)
Foreign currency translation
adjustments....................... -- -- -- (1,131) (1,131)
----------
Comprehensive loss...................... (39,322)
Capital contributions from parent....... -- 366,130 -- -- 366,130
Acquisition of subsidiary with parent
stock................................ -- 15,200 -- -- 15,200
Dividends to parent..................... -- -- (6,559) -- (6,559)
-- ---------- --------- -------- ----------
Balance, December 31, 1997................ 1 1,000,348 (134,168) (3,479) 862,702
Net loss................................ -- -- (184,991) -- (184,991)
Other comprehensive income (loss) (Note
11):
Unrealized appreciation on marketable
equity securities................. -- -- -- 29,977 29,977
Foreign currency translation
adjustments....................... -- -- -- (1,792) (1,792)
----------
Comprehensive loss...................... (156,806)
Capital contributions from parent....... -- 299,493 -- -- 299,493
Noncash dividends to parent............. -- -- (2,799) -- (2,799)
Other................................... -- 30 -- -- 30
-- ---------- --------- -------- ----------
Balance, December 31, 1998................ 1 1,299,871 (321,958) 24,706 1,002,620
Net loss*............................... -- -- (74,141) -- (74,141)
Other comprehensive income (loss) (Note
11):
Unrealized appreciation on marketable
equity securities*................ -- -- -- 67,761 67,761
Foreign currency translation
adjustments*...................... -- -- -- (23,194) (23,194)
----------
Comprehensive loss*..................... (29,574)
Capital contributions from parent*...... -- 57,020 -- -- 57,020
Other*.................................. -- -- (54) -- (54)
-- ---------- --------- -------- ----------
Balance, March 31, 1999*.................. $1 $1,356,891 $(396,153) $ 69,273 $1,030,012
== ========== ========= ======== ==========
</TABLE>
- ---------------
* Amounts for the three months ended March 31, 1999 are unaudited.
See accompanying notes.
F-6
<PAGE> 193
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, (UNAUDITED) YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (74,141) $ (26,498) $(184,991) $ (35,843) $ (3,514)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accounting principle.................. 301 -- -- -- --
Depreciation.................................... 19,146 12,251 56,224 47,066 22,453
Amortization of goodwill and other
intangibles.................................. 8,432 6,744 28,157 23,597 9,925
Provision (benefit) for deferred income taxes... 16,486 (1,151) (7,781) (1,777) (1,600)
Provision for loss on property.................. -- -- -- 44,043 --
Provision for loss on investment................ -- -- 23,150 2,500 --
Provision for doubtful accounts................. 8,437 1,483 21,591 7,837 2,694
Equity losses................................... 10,159 1,479 16,363 2,383 1,601
Gain on disposition of interest in subsidiary... -- -- -- (44,540) --
Gain on sale of assets.......................... -- -- -- -- (15,725)
Minority interest in income (loss) of
subsidiaries................................. (5,836) 1,460 (15,645) 13,506 --
Cash provided (used) by changes in:
Receivables sold............................. (33,767) -- 8,103 25,664 --
Receivables.................................. 3,589 (18,316) (213,148) (34,127) (15,420)
Costs and estimated earnings in excess of
billings................................... 9,194 1,048 (41,298) (66,454) (8,753)
Inventories.................................. (5,910) 2,783 (2,347) (6,613) (1,896)
Dark fiber held for sale..................... 5,096 -- (46,175) -- --
Other current assets......................... 7,897 (8,328) (10,640) (1,790) (17,484)
Accounts payable............................. (79,844) 44,762 108,770 (24,349) 13,851
Accrued liabilities.......................... 5,831 (1,763) 18,226 42,480 11,715
Billings in excess of costs and estimated
earnings................................... (4,384) (14,675) 1,380 38,239 5,214
Due to/from affiliates....................... 29,521 (103,245) (89,870) 127,378 7,320
Other........................................ (10,432) (7,911) (33,902) (11,342) (12,156)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities...................................... (90,225) (109,877) (363,833) 147,858 (1,775)
FINANCING ACTIVITIES
Proceeds from long-term debt...................... 315,477 -- -- 150,890 126
Payments on long-term debt........................ (175) (125,653) (126,677) (187,534) (1,353)
Capital contributions from parent................. 57,020 224,717 299,493 366,130 439,000
Contribution to subsidiary from minority interest
shareholders.................................... 11,000 -- -- -- --
Changes due to/from affiliates.................... 204,334 123,627 717,807 (96,974) (209,004)
Dividends to parent............................... -- -- -- (6,559) (2,760)
--------- --------- --------- --------- ---------
Net cash provided by financing activities......... 587,656 222,691 890,623 225,953 226,009
INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures............................ (151,238) (110,117) (299,481) (276,249) (66,900)
Proceeds from sales............................. -- 506 1,512 15,292 23,010
Purchase of investments........................... (291,350) (11,800) (226,489) (25,345) (15,415)
Acquisition of businesses, net of cash acquired... -- -- 9,067 (81,192) (164,881)
Proceeds from sale of business.................... -- -- 10,000 -- --
Other............................................. -- 8,920 9,315 4,000 --
--------- --------- --------- --------- ---------
Net cash used in investing activities............. (442,588) (112,491) (496,076) (363,494) (224,186)
--------- --------- --------- --------- ---------
Increase in cash and cash equivalents............. 54,843 323 30,714 10,317 48
Cash and cash equivalents at beginning of year.... 42,004 11,290 11,290 973 925
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year.......... $ 96,847 $ 11,613 $ 42,004 $ 11,290 $ 973
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE> 194
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (INFORMATION AS OF MARCH 31, 1999 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED.)
1. NATURE OF THE BUSINESS -- HISTORY AND FORMATION OF THE COMPANY -- BASIS OF
PRESENTATION -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
Williams Communications Group, Inc. ("WCG" as described below) owns,
operates and is extending a nationwide fiber optic network focused on providing
voice, data, Internet and video services to communications service providers.
WCG also sells, installs and maintains equipment and network services that
address the comprehensive voice and data needs of organizations of all sizes.
WCG's primary business units are Williams Network ("Network") and Williams
Communications Solutions ("Solutions"). WCG also owns and operates businesses
that create demand for capacity on the Williams Network, create demand for
Solutions services or develop expertise in advanced transmission applications.
In addition, WCG has a number of investments in domestic and foreign businesses
that drive bandwidth usage on the Williams Network, increase service
capabilities, strengthen customer relationships or extend WCG's reach. These
businesses and investments are referred to as "Strategic Investments."
HISTORY AND FORMATION OF THE COMPANY
WCG is owned by The Williams Companies, Inc. ("Williams"). In 1985,
Williams entered the communications business by pioneering the placement of
fiber optic cables in decommissioned pipelines. By 1989, through a combination
of construction projects and acquisitions, Williams had completed the fourth
nationwide digital fiber optic network. The network consisted of approximately
9,700 route miles. By 1994, Williams, through its WilTel subsidiary, was one of
the top providers of broadband data services and long distance voice services as
well as the first provider to offer nationwide frame relay transmission
capacity.
In January 1995, Williams completed the sale of the majority of the WilTel
network business to LDDS Communications, Inc. (now MCI WorldCom, Inc.) for
approximately $2.5 billion. The sale included the bulk of the nationwide fiber
optic network and the associated consumer, business and carrier customers.
Williams retained an approximate 9,700 route mile single fiber strand on the
nationwide network (the "Retained WilTel Network"), WilTel's communications
equipment distribution business, and Vyvx, Inc. ("Vyvx"), a leading provider of
integrated fiber optic, satellite and teleport video transmission services. The
Retained WilTel Network, along with Vyvx, Solutions and a number of acquired
companies formed the initial basis for what is today WCG. See Note 2 for a
description of acquisitions in 1996 through 1998.
Under agreements with MCI WorldCom, Inc., the Retained WilTel Network can
only be used to transmit video and multimedia services, including Internet
services, until July 1, 2001. After July 1, 2001, the Retained WilTel Network
can be used for any purpose, including voice and data tariffed services. In
addition, as part of the sale to MCI WorldCom, Inc., Williams agreed not to
reenter the communications network business until January 1998.
In October 1997, management and ownership of the Retained WilTel Network
was transferred from Strategic Investments to Network and intercompany transfer
pricing was established prospectively. In addition, consulting, outsourcing and
the management of Williams' internal telephone operations, activities previously
performed within Strategic Investments, were transferred to Network. For
comparative purposes, the 1996 and 1997 consulting, outsourcing
F-8
<PAGE> 195
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and internal telephone management activities previously performed in Strategic
Investments that were transferred to Network have been reflected in Network's
segment results. See Note 3 for segment disclosures.
In January 1998, Williams reentered the communications network business,
announcing its plans to develop a fiber optic network consisting of 32,000 route
miles.
In November 1998, Williams announced its intention to sell a minority
interest in WCG through an initial public offering. Prior to the initial public
offering, Williams contributed certain international communications investments
held in Williams International Company to WCG for inclusion in the initial
public offering (see Note 17).
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been retroactively
restated to reflect the historical consolidated financial position as of March
31, 1999 (unaudited) and December 31, 1998 and 1997 and the consolidated results
of operations and cash flows for the three months ended March 31, 1999 and 1998
(unaudited) and each of the three years in the period ended December 31, 1998 as
if the contribution of the international investments held in Williams
International Company to WCG described above had occurred and operated as a
stand alone business throughout the periods presented. The March 31, 1999 and
1998 financial statements have not been audited by independent auditors, but
include all normal recurring adjustments which, in the opinion of WCG's
management, are necessary to present fairly its financial position as of March
31, 1999 and results of operations and cash flows for the three months ended
March 31, 1999 and 1998. Williams Communications Group, Inc. and Williams
International Company are both wholly owned subsidiaries of Williams Holdings of
Delaware, Inc. ("Holdings"), which is a wholly owned subsidiary of Williams.
When the consolidated financial statements refer to WCG, references include both
Williams Communications Group, Inc. together with its subsidiaries and the
international assets contributed to the company from Williams. In addition, when
the consolidated financial statements refer to Williams, Holdings or parent, the
reference includes Williams, either alone or together with its consolidated
subsidiaries as the context requires, except for WCG.
The consolidated financial statements include the accounts of WCG and its
majority owned subsidiaries and subsidiaries that WCG controls but owns less
than 50% of the voting common stock. Companies in which WCG owns 20% to 50% of
the voting common stock, or otherwise has the ability to exercise significant
influence over the operating and financial policies of the company, are
accounted for under the equity method of accounting.
The specific international investments referred to above include the
interests in ATL-Algar Telecom Leste S.A. ("ATL") located in Brazil (see Note
7), and a 36% interest at March 31, 1999 (22% at December 31, 1998) in PowerTel
Limited ("PowerTel") located in Australia, accounted for under the principles of
consolidation inasmuch as WCG has control over the operations despite its less
than 50% ownership.
WCG is organized into three operating segments as follows: (1) Network,
which includes fiber optic construction, transmission and management services,
(2) Solutions, which includes distribution and integration of communications
equipment for voice and data networks, and (3) Strategic Investments, which
includes Vyvx services (video, advertising distribution and other multimedia
transmission services via terrestrial and satellite links for the broadcast
F-9
<PAGE> 196
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
industry), closed circuit video broadcasting services for businesses and audio
and video conferencing services, investments in domestic communications
companies and investments in foreign communications companies located in
Australia, Brazil and Chile.
WCG's operations do not currently provide positive cash flow. Accordingly,
Williams has historically funded WCG's capital expenditures and acquisitions
through a combination of advances and capital contributions. Williams will
continue to provide cash to WCG or assist in the attainment of bridge financing
up to the effective date of the public offering. Subsequent to that date, WCG
intends to finance future cash outlays through internally generated and external
funds without relying on cash advances or contributions from Williams.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Transmission and management services revenues are recognized monthly as the
services are provided. Amounts billed in advance of the service month are
recorded as deferred revenue.
Sales of constructed but unlit fiber, or dark fiber, are recognized at the
time of acceptance of the fiber by the customer.
New systems sales and upgrades revenues are recognized under the percentage
of completion method. The equipment portion of new systems sales and upgrades
revenues, when separately stated in the sales contract, is recognized when the
equipment is received by, and title passes to, the customer. The services
portion of new systems sales and upgrades revenues, and equipment when not
separately stated in the sales contract, is recognized based on the relationship
of the accumulated service costs incurred to the estimated total service costs
upon completion. Estimated losses on all contracts in progress are accrued when
the loss becomes known. Costs incurred and estimated earnings on contracts in
excess of billings are recorded and reflected as current assets in the balance
sheet. The billings associated with these contracts occur incrementally over the
term of the contract or upon completion of the contract, as provided in the
applicable contract. Billings to customers in excess of costs incurred and
estimated earnings are recorded and reflected as current liabilities.
Customer service order revenues are recognized under the completed contract
method. Customer service orders represent moves, adds or changes to existing
customer systems.
Revenues on contracts for maintenance of installed systems are deferred and
amortized on a straight-line basis over the lives of the related contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits, certificates of
deposit and other marketable securities with maturities of three months or less
when acquired.
F-10
<PAGE> 197
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories consist primarily of purchased new and refurbished data, voice
and video equipment, and are stated at the lower of average cost or market.
DARK FIBER HELD FOR SALE
Dark fiber held for sale represents fibers constructed by WCG on the
network for sale to third parties. Dark fiber held for sale is in excess of
fiber to be retained, lit and utilized by WCG for the provisioning of services
to its customers. The carrying amount of dark fiber held for sale reflects an
allocation of the total costs of cable, cable installation and rights-of-way
based on fiber-miles of each network segment. Dark fiber held for sale included
in current assets represents amounts to be sold within one year. Amounts
expected to be sold beyond one year of $24,822,000 and $18,948,000 as of March
31, 1999 (unaudited) and December 31, 1998, respectively, are included in other
assets and deferred charges.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed
primarily on the straight-line method over estimated useful lives.
GOODWILL AND OTHER INTANGIBLES
Goodwill is amortized on a straight-line basis over the estimated period of
benefit ranging from ten to twenty-five years. Other intangibles are amortized
on a straight-line basis over the estimated period of benefit ranging from five
to twenty years.
IMPAIRMENT OF LONG-LIVED ASSETS
WCG evaluates its long-lived assets, including related intangibles, of
identifiable business activities for impairment when events or changes in
circumstances indicate, in management's judgment, that the carrying value of
such assets may not be recoverable. The determination of whether an impairment
has occurred is based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets. If
an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a provision
for loss if the carrying value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
INCOME TAXES
WCG's operations are included in the Williams' consolidated federal income
tax return. A tax sharing agreement exists between WCG and Williams to allocate
and settle among themselves the consolidated federal income tax liability (see
Note 5). Deferred income taxes are computed using the liability method and are
provided on all temporary differences between the financial basis and tax basis
of WCG's assets and liabilities. Valuation allowances are established to reduce
deferred tax assets to an amount that will more likely than not be realized.
F-11
<PAGE> 198
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share are based on the 1,000 shares outstanding for all
periods presented. Diluted earnings per share are not presented as there are no
dilutive securities related to the WCG stock for the periods presented. The
pro-forma earnings per share was based on an assumed average shares outstanding
of 450,000,000. Stock options and awards have not been considered in calculating
the pro-forma net loss per share as their effect would be anti-dilutive.
FOREIGN CURRENCY TRANSLATION
The functional currency of WCG is the U.S. dollar. The functional currency
of WCG's foreign operations is the applicable local currency for each foreign
subsidiary and equity method investee, including the Australian dollar,
Brazilian real and Canadian dollar. Assets and liabilities of foreign
subsidiaries and equity investees are translated at the spot rate in effect at
the applicable reporting date, and the combined statements of operations and
WCG's share of the results of operations of its equity affiliates are translated
at the average exchange rates in effect during the applicable period. The
resulting cumulative translation adjustment is recorded as a separate component
of other comprehensive income.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transactions gains and losses
which are reflected in the statement of operations.
RECENT ACCOUNTING STANDARDS
On January 21, 1999, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus regarding EITF Issue
98-13, "Accounting by an Equity Method Investor for Investee Losses When the
Investor Has Loans to and Investments in Other Securities of the Investee." EITF
98-13 was applied prospectively beginning January 1, 1999 and impacted WCG by
reducing the equity method interest used to record WCG's losses from ATL (see
Note 7).
WCG adopted the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," on January 1, 1999. The SOP requires that all start-up costs be
expensed as incurred and the expense related to the initial application of this
SOP was immaterial.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1999
presentation. Effective January 1, 1999, the segments previously known as
Applications and Strategic Investments were combined as they are now
collectively managed and reported under the name of Strategic Investments.
2. ACQUISITIONS
NORTEL
On April 30, 1997, WCG purchased Northern Telecom Limited's ("Nortel")
North American customer-premise equipment distribution business which was then
combined with WCG's equipment distribution business to create Williams
Communications Solutions, LLC.
F-12
<PAGE> 199
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Solutions LLC"). WCG owns 70% of Solutions LLC and Nortel owns the remaining
30%. WCG paid approximately $68 million to Nortel. WCG has accounted for its 70%
interest in the operations as a purchase business combination, and beginning May
1, 1997, has included the results of operations of the acquired company in WCG's
consolidated statement of operations. Accordingly, the acquired assets and
liabilities, including $168 million in accounts receivable, $68 million in
accounts payable and accrued liabilities and $161 million in debt obligations,
were recorded based on an allocation of the purchase price, with substantially
all of the cost in excess of historical carrying values allocated to
identifiable intangible assets and goodwill.
WCG recorded the 30% ownership reduction in its operations contributed to
Solutions LLC as a sale to Nortel. WCG recognized a gain of $44.5 million based
on the excess of the fair value over the net book value (approximately $71
million) of its operations conveyed to Nortel's minority interest. Income taxes
were not provided on the gain, because the transaction did not affect the
difference between the financial and tax bases of identifiable assets and
liabilities.
OTHER
During the three years ended December 31, 1998, WCG acquired 11 companies
in addition to the business combination involving Nortel. Each acquisition was
accounted for as a purchase business combination. The acquired assets and
liabilities have been recorded based on an allocation of the purchase price,
including identifiable intangibles with any remaining cost in excess of fair
value allocated to goodwill. WCG has included the results of operations of the
acquired entities in WCG's consolidated results of operations generally from the
date of acquisition. A summary of the acquisitions by segment is as follows:
NETWORK
On March 7, 1997, WCG acquired Critical Technologies, Inc., a company which
designs and manages outsourced communications networks, by utilizing a
$15,200,000 contribution of Williams common stock.
SOLUTIONS
In January 1996, WCG acquired Comlink, Inc., a voice and network systems
integration company, for approximately $13 million in cash.
On August 30, 1996, WCG acquired SoftIRON Systems, Inc., a network systems
integration company, for approximately $9 million in cash.
On October 13, 1998, WCG acquired Computer Networking Group, Inc., a
Canadian company which provides customers with comprehensive multimedia network
consulting and remote network management services, for approximately $13 million
to be paid over four years. Approximately $11 million of the acquisition price
was recorded at the acquisition date as the remaining $2 million is contingent
upon certain performance measures. Approximately $3 million of the acquisition
price was paid at the acquisition date with the remaining $7,700,000 payable on
the October 13 anniversary date as follows: 1999 -- $1,323,000,
2000 -- $1,667,000, 2001 -- $2,296,000 and 2002 -- $2,404,000.
F-13
<PAGE> 200
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STRATEGIC INVESTMENTS
On May 1, 1996, WCG acquired Global Access Telecommunications Services,
Inc., a reseller of worldwide satellite video transmission services, for
approximately $22 million in cash.
On August 1, 1996, WCG acquired ITC Media Conferencing, a provider of audio
and video conferencing services, for approximately $48 million in cash.
On November 19, 1996, WCG acquired Cycle-Sat, Inc., a distributor of
television and radio commercials using satellite, fiber-optic and digital
technologies, for approximately $57 million in cash.
On December 31, 1996, WCG acquired Viacom MGS, an advertising distribution
services company, for approximately $15 million in cash.
On March 3, 1997, WCG acquired Satellite Management International, Inc., a
full service provider of closed-circuit video broadcasting services for
businesses, for approximately $6 million in cash.
On August 14, 1998, Williams International Company acquired 22% (based on
25% of the common shares and no preferred shares) of PowerTel, a publicly owned
telecommunications company in Australia, for approximately $25 million in cash
and subscribed to purchase additional common and preferred shares for
approximately $67 million to increase its combined ownership to approximately
45% by February 2000. WCG also received 44,680,851 options to purchase
additional common shares of PowerTel at 0.47 Australian dollars per share. The
options, which expire in 2003, are not publicly traded and do not have a readily
determinable fair value. On February 9, 1999, in accordance with the
subscription agreement, additional preferred and common shares were purchased at
a total cost of $31,845,000, increasing WCG's ownership to 35% of the common
shares. WCG consolidates its interest in PowerTel as WCG currently holds a
majority of PowerTel's board seats and exercises control over PowerTel's
operations. After WCG's initial investment, PowerTel had approximately $38
million in cash, which resulted in net cash acquired of approximately $13
million when consolidated by WCG.
On October 23, 1998, WCG acquired Intersys, a data systems integration, ATM
frame relay and professional development company based in Mexico, for
approximately $1 million in cash and conversion of the investment WCG had in
Intersys' parent.
Costs of acquisitions, net of cash acquired, for all acquisitions discussed
above are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Working capital............................. $ (3,048) $ 121,830 $ 16,862
Property and equipment...................... 4,567 21,211 17,790
Goodwill and other intangibles.............. 52,506 215,821 142,287
Long-term debt.............................. (3,446) (160,873) (1,234)
Minority interest........................... (49,137) (69,650) --
Other....................................... (10,509) (31,947) (10,824)
-------- --------- --------
Cost of acquisitions, net of cash
acquired.................................. $ (9,067) $ 96,392 $164,881
======== ========= ========
</TABLE>
F-14
<PAGE> 201
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized unaudited pro forma financial information for the
years ended December 31 assumes each acquisition had occurred on January 1 of
the year immediately preceding the year of the acquisition:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................ $1,759,986 $1,753,870 $1,531,539
Net loss................................ $ (193,769) $ (37,615) $ (11,162)
</TABLE>
The pro forma results include operating results prior to the acquisitions
and adjustments to interest expense, goodwill amortization and income taxes. The
pro forma consolidated results do not purport to be indicative of results that
would have occurred had the acquisitions been in effect for the period
presented, nor do they purport to be indicative of the results that will be
obtained in the future.
3. SEGMENT DISCLOSURES
WCG adopted Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," during
the fourth quarter of 1998. SFAS No. 131 establishes standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers.
WCG evaluates performance based upon segment profit or loss from operations
which includes revenues from external and internal customers, equity earnings or
losses, operating costs and expenses, and depreciation and amortization and
excludes allocated charges from parent. The accounting policies of the segments
are the same as those described in Note 1. Intercompany sales are generally
accounted for as if the sales were to unaffiliated third parties, that is, at
current market prices.
F-15
<PAGE> 202
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents certain financial information concerning WCG's
reportable segments.
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MARCH 31, 1999 (UNAUDITED)
Revenues:
External customers:
Sales of dark fiber................................. $ 51,321 $ -- $ -- $ -- $ 51,321
Capacity and other.................................. 42,129 -- 68,010 -- 110,139
New systems sales and upgrades...................... -- 193,610 -- -- 193,610
Maintenance and customer service orders............. -- 137,721 -- -- 137,721
Other............................................... -- 4,717 -- -- 4,717
-------- ---------- ----------- ---------- ----------
Total external customers............................... 93,450 336,048 68,010 -- 497,508
Affiliates............................................. 3,409 1,244 -- -- 4,653
Intercompany........................................... 11,633 -- 134 (11,767) --
Equity losses.......................................... -- -- (10,159) -- (10,159)
-------- ---------- ----------- ---------- ----------
Total segment revenues................................... $108,492 $ 337,292 $ 57,985 $ (11,767) $ 492,002
======== ========== =========== ========== ==========
Costs of sales:
Sales of dark fiber.................................... $ 40,804 $ -- $ -- $ -- $ 40,804
Capacity and other..................................... 61,838 -- 42,808 -- 104,646
New systems sales and upgrades......................... -- 141,491 -- -- 141,491
Maintenance and customer service orders................ -- 73,566 -- -- 73,566
Indirect operating and maintenance..................... -- 29,240 -- 29,240
Intercompany........................................... -- 2,472 9,295 (11,767) --
-------- ---------- ----------- ---------- ----------
Total cost of sales...................................... $102,642 $ 246,769 $ 52,103 $ (11,767) $ 389,747
======== ========== =========== ========== ==========
Segment loss:
Loss from operations................................... $(17,956) $ (10,941) $ (28,082) $ -- $ (56,979)
Add back -- allocated charges from parent.............. 764 2,109 477 -- 3,350
-------- ---------- ----------- ---------- ----------
Total segment loss....................................... $(17,192) $ (8,832) $ (27,605) $ -- $ (53,629)
======== ========== =========== ========== ==========
Total assets............................................. $814,858 $ 951,883 $ 1,102,118 $ -- $2,868,859
Depreciation and amortization............................ $ 5,800 $ 10,571 $ 11,207 $ -- $ 27,578
</TABLE>
F-16
<PAGE> 203
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MARCH 31, 1998 (UNAUDITED)
Revenues:
External customers:
Capacity and other................................... $ 7,218 $ -- $ 50,177 $ -- $ 57,395
New systems sales and upgrades....................... -- 179,587 -- -- 179,587
Maintenance and customer service orders.............. -- 145,254 -- -- 145,254
Other................................................ -- 1,835 -- -- 1,835
-------- ---------- ----------- ---------- ----------
Total external customers................................ 7,218 326,676 50,177 -- 384,071
Affiliates.............................................. 1,878 770 1,053 -- 3,701
Intercompany............................................ 12,070 -- 117 (12,187) --
Equity losses........................................... -- -- (1,479) -- (1,479)
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $ 21,166 $ 327,446 $ 49,868 $ (12,187) $ 386,293
======== ========== =========== ========== ==========
Costs of sales:
Capacity and other...................................... $ 16,414 $ -- $ 32,759 $ -- $ 49,173
New systems sales and upgrades.......................... -- 128,608 -- -- 128,608
Maintenance and customer service orders................. -- 80,054 -- -- 80,054
Indirect operating and maintenance...................... -- 30,718 -- -- 30,718
Intercompany............................................ 50 1,985 10,152 (12,187) --
-------- ---------- ----------- ---------- ----------
Total cost of sales....................................... $ 16,464 $ 241,365 $ 42,911 $ (12,187) $ 288,553
======== ========== =========== ========== ==========
Segment loss:
Loss from operations.................................... $ (8,347) $ (214) $ (17,508) $ -- $ (26,069)
Add back -- allocated charges from parent............... 434 3,512 544 -- 4,490
-------- ---------- ----------- ---------- ----------
Total segment loss........................................ $ (7,913) $ 3,298 $ (16,964) $ -- $ (21,579)
======== ========== =========== ========== ==========
Depreciation and amortization............................. $ 2,235 $ 9,018 $ 7,742 $ -- $ 18,995
</TABLE>
F-17
<PAGE> 204
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Revenues:
External customers:
Sales of dark fiber.................................. $ 64,100 $ -- $ -- $ -- $ 64,100
Capacity and other................................... 73,367 -- 216,634 -- 290,001
New systems sales and upgrades....................... -- 791,518 -- -- 791,518
Maintenance and customer service orders.............. -- 556,392 -- -- 556,392
Other................................................ -- 16,029 -- -- 16,029
-------- ---------- ----------- ---------- ----------
Total external customers................................ 137,467 1,363,939 216,634 -- 1,718,040
Affiliates.............................................. 7,710 3,465 4,254 -- 15,429
Intercompany............................................ 49,759 -- 522 (50,281) --
Equity losses........................................... -- -- (16,363) -- (16,363)
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $194,936 $1,367,404 $ 205,047 $ (50,281) $1,717,106
======== ========== =========== ========== ==========
Costs of sales:
Sales of dark fiber..................................... $ 38,500 $ -- $ -- $ -- $ 38,500
Capacity and other...................................... 118,627 -- 137,255 -- 255,882
New systems sales and upgrades.......................... -- 554,726 -- -- 554,726
Maintenance and customer service orders................. -- 311,258 -- -- 311,258
Indirect operating and maintenance...................... -- 134,217 -- -- 134,217
Intercompany............................................ 252 9,274 40,755 (50,281) --
-------- ---------- ----------- ---------- ----------
Total cost of sales....................................... $157,379 $1,009,475 $ 178,010 $ (50,281) $1,294,583
======== ========== =========== ========== ==========
Segment loss:
Loss from operations.................................... $(27,716) $ (58,966) $ (118,085) $ -- $ (204,767)
Add back -- allocated charges from parent............... 1,409 8,435 1,810 -- 11,654
-------- ---------- ----------- ---------- ----------
Total segment loss........................................ $(26,307) $ (50,531) $ (116,275) $ -- $ (193,113)
======== ========== =========== ========== ==========
Total assets.............................................. $727,119 $ 967,948 $ 638,417 $ -- $2,333,484
Equity method investments................................. $ -- $ -- $ 145,221 $ -- $ 145,221
Additions to long-lived assets............................ $246,626 $ 57,504 $ 97,824 $ -- $ 401,954
Depreciation and amortization............................. $ 13,230 $ 36,637 $ 34,514 $ -- $ 84,381
</TABLE>
F-18
<PAGE> 205
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Revenues:
External customers:
Capacity and other................................... $ 16,637 $ -- $ 213,098 $ -- $ 229,735
New systems sales and upgrades....................... -- 674,604 -- -- 674,604
Maintenance and customer service orders.............. -- 508,319 -- -- 508,319
Other................................................ -- 5,363 -- -- 5,363
-------- ---------- ----------- ---------- ----------
Total external customers................................ 16,637 1,188,286 213,098 -- 1,418,021
Affiliates.............................................. 5,217 1,512 3,763 -- 10,492
Intercompany............................................ 21,159 -- 1,105 (22,264) --
Equity earnings (losses)................................ -- -- (2,383) -- (2,383)
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $ 43,013 $1,189,798 $ 215,583 $ (22,264) $1,426,130
======== ========== =========== ========== ==========
Cost of sales:
Capacity and other...................................... $ 28,657 $ -- $ 139,609 $ -- $ 168,266
New systems sales and upgrades.......................... -- 505,284 -- -- 505,284
Maintenance and customer service orders................. -- 267,775 -- -- 267,775
Indirect operating and maintenance...................... -- 102,607 -- -- 102,607
Intercompany............................................ 554 5,446 16,264 (22,264) --
-------- ---------- ----------- ---------- ----------
Total cost of sales....................................... $ 29,211 $ 881,112 $ 155,873 $ (22,264) $1,043,932
======== ========== =========== ========== ==========
Segment profit (loss):
Income (loss) from operations........................... $ 3,278 $ 37,052 $ (105,414) $ -- $ (65,084)
Add back -- allocated charges from parent............... -- 6,690 2,540 -- 9,230
-------- ---------- ----------- ---------- ----------
Total segment profit (loss)............................... $ 3,278 $ 43,742 $ (102,874) $ -- $ (55,854)
======== ========== =========== ========== ==========
Total assets.............................................. $246,317 $ 922,823 $ 336,894 $ -- $1,506,034
Equity method investments................................. $ 2,317 $ -- $ 3,815 $ -- $ 6,132
Additions to long-lived assets............................ $175,861 $ 236,000 $ 101,487 $ -- $ 513,348
Depreciation and amortization............................. $ 4,012 $ 30,142 $ 36,509 $ -- $ 70,663
</TABLE>
F-19
<PAGE> 206
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Revenues:
External customers:
Capacity and other................................... $ -- $ -- $ 130,816 $ -- $ 130,816
New systems sales and upgrades....................... -- 306,110 -- -- 306,110
Maintenance and customer service orders.............. -- 251,221 -- -- 251,221
Other................................................ -- 9,379 -- -- 9,379
-------- ---------- ----------- ---------- ----------
Total external customers................................ -- 566,710 130,816 -- 697,526
Affiliates.............................................. 4,918 1,362 1,381 -- 7,661
Intercompany............................................ 6,145 -- 280 (6,425) --
Equity losses........................................... -- -- (1,601) -- (1,601)
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $ 11,063 $ 568,072 $ 130,876 $ (6,425) $ 703,586
======== ========== =========== ========== ==========
Cost of sales:
Capacity and other...................................... $ 4,681 $ -- $ 81,535 $ -- $ 86,216
New systems sales and upgrades.......................... -- 223,519 -- -- 223,519
Maintenance and customer service orders................. -- 155,130 -- -- 155,130
Indirect operating and maintenance...................... -- 52,357 -- -- 52,357
Intercompany............................................ -- 4,484 1,941 (6,425) --
-------- ---------- ----------- ---------- ----------
Total cost of sales....................................... $ 4,681 $ 435,490 $ 83,476 $ (6,425) $ 517,222
======== ========== =========== ========== ==========
Segment profit (loss):
Income (loss) from operations........................... $ 5,750 $ 8,887 $ (16,329) $ -- $ (1,692)
Add back -- allocated charges from parent............... -- 5,439 $ 1,204 -- 6,643
-------- ---------- ----------- ---------- ----------
Total segment profit (loss)............................... $ 5,750 $ 14,326 $ (15,125) $ -- $ 4,951
======== ========== =========== ========== ==========
Total assets.............................................. $228,455 $ 344,606 $ 148,626 $ -- $ 721,687
Equity method investments................................. $ -- $ -- $ 6,550 $ -- $ 6,550
Additions to long-lived assets............................ $ -- $ 34,906 $ 192,071 $ -- $ 226,977
Depreciation and amortization............................. $ -- $ 16,023 $ 16,355 $ -- $ 32,378
</TABLE>
F-20
<PAGE> 207
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following geographic area data includes revenues from external
customers based on product shipment origin for the years ended December 31 and
long-lived assets based upon physical location as of December 31.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from external customers:
United States........................... $1,591,779 $1,336,743 $693,943
Other................................... 126,261 81,278 3,583
---------- ---------- --------
Total..................................... $1,718,040 $1,418,021 $697,526
========== ========== ========
Long-lived assets:
United States........................... $1,070,772 $ 805,830 $374,439
Other................................... 55,510 5,141 1,244
---------- ---------- --------
Total..................................... $1,126,282 $ 810,971 $375,683
========== ========== ========
</TABLE>
Long-lived assets are comprised of property, plant and equipment and
goodwill and other intangible assets.
4. ASSET SALES AND WRITE-OFFS
Included in 1998 other operating expenses and Strategic Investments'
segment loss is a $23,150,000 loss related to abandoning an investment in a
venture involved in the technology and transmission of business information for
news and educational purposes. The loss occurred as a result of WCG's
re-evaluation and decision to exit the venture as WCG decided against making
further investments in the venture. WCG abandoned its entire ownership interest
in the venture in 1998. The loss primarily consists of $17 million from writing
off the entire carrying amount of the investment and $5 million from recognition
of contractual obligations that will continue after the abandonment. During
1998, $2 million of the contractual obligations were paid. WCG's share of losses
from the venture accounted for under the equity method were $3,670,000,
$2,269,000 and none in 1998, 1997 and 1996, respectively.
Included in 1997 other operating expenses and Strategic Investments'
segment loss are impairments and other charges totaling $42,043,000. In the
fourth quarter of 1997, WCG made the decision and committed to a plan to sell
the learning content business, which resulted in a loss of $22.7 million in
1997. The loss consisted of a $21 million impairment of the assets to fair value
less cost to sell and recognition of $1.7 million in costs associated with the
decision to sell the business. Fair value was based on management's estimate of
the expected net proceeds to be received. During 1998, a significant portion of
the learning content business was sold with a resulting $2 million reduction in
1998 expenses. The carrying amount of the learning content business at December
31, 1998 and 1997 is not significant to WCG's consolidated balance sheet. The
results of operations and effect of suspending amortization for the learning
content business included in the consolidated net loss are not significant for
any of the periods presented. Costs of $1.7 million recorded in 1997 primarily
consist of contractual obligations and employee termination costs. Additional
employee termination costs of $1 million were incurred in 1998. In 1997, WCG
also impaired a continuing Strategic Investments project resulting in a loss of
$13 million. Fair value for this project was based upon management's estimate as
to the ultimate recovery of the project. Additionally, WCG made the decision and
committed to a plan
F-21
<PAGE> 208
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to sell the enhanced fax business, resulting in an impairment loss of $4 million
in 1997. Fair value was based on management's estimate of the expected proceeds
to be received. The fax business was sold in 1998 resulting in a $.5 million
reduction in 1998 expenses. In 1997, WCG also recorded $2 million of expenses
from cancellation payments for leases that are no longer being utilized in our
operations.
In 1996, WCG recognized a pre-tax gain of $15,725,000 from the sale of
certain communication rights (obtained from affiliates in 1995) for
approximately $38 million.
5. PROVISION (BENEFIT) FOR INCOME TAXES
WCG's operations are included in Williams' consolidated federal income tax
return. WCG has a tax sharing agreement with Williams under which the amount of
federal income taxes allocated to WCG is generally determined as though WCG were
filing a separate federal consolidated income tax return. Under the terms of the
tax sharing agreement, any loss or other similar tax attribute realized for
periods prior to the initial public offering will be allocated solely to
Williams. WCG will be responsible for any taxes resulting to Williams if the
loss or similar tax attribute is reduced by audit or otherwise. For any loss or
other similar tax attribute realized after the initial public offering, WCG will
receive the benefit of the loss or other similar tax attribute only if WCG is
able to carry forward the loss or other similar tax attribute against its
hypothetical separate return tax calculation for a period in which WCG remains a
member of Williams' consolidated federal income tax group. If WCG ceases to be a
member of Williams' consolidated federal income tax return, WCG will retain only
its allocable share under applicable law of any consolidated loss or other
similar tax attribute realized after the initial public offering to the extent
that it has not been treated as utilizing such loss or attribute on a
hypothetical separate tax return basis under the tax sharing agreement. Similar
concepts apply to allocate the state unitary, combined or consolidated, income
tax liability.
The provision (benefit) for income taxes for the three months ended March
31, 1999 and 1998 (unaudited) and the years ended December 31, 1998, 1997 and
1996 includes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, (UNAUDITED) YEARS ENDED DECEMBER 31,
---------------------- ---------------------------
1999 1998 1998 1997 1996
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current:
Federal................. $ -- $ -- $ -- $ -- $ 1,810
State................... -- 23 162 2,081 158
Foreign................. 962 362 2,522 1,734 --
------- ------- ------- ------- -------
962 385 2,684 3,815 1,968
Deferred:
Federal................. 11,202 (846) (5,652) (2,761) (1,761)
State................... 5,284 (305) (2,129) 984 161
------- ------- ------- ------- -------
16,486 (1,151) (7,781) (1,777) (1,600)
------- ------- ------- ------- -------
Total provision
(benefit)............... $17,448 $ (766) $(5,097) $ 2,038 $ 368
======= ======= ======= ======= =======
</TABLE>
F-22
<PAGE> 209
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the U.S. and foreign components of loss before
income taxes for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
--------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States................................ $(183,074) $(33,930) $(2,184)
Foreign...................................... (7,014) 125 (962)
--------- -------- -------
Total loss before taxes...................... $(190,088) $(33,805) $(3,146)
========= ======== =======
</TABLE>
Reconciliations from the benefit for income taxes at the federal statutory
rate to the provision (benefit) for income taxes for the three months ended
March 31, 1999 and 1998 (unaudited) and the years ended December 31, 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, (UNAUDITED) YEARS ENDED DECEMBER 31,
--------------------- -----------------------------
1999 1998 1998 1997 1996
-------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Benefit at statutory
rate................. $(19,737) $(9,541) $(66,531) $(11,832) $(1,101)
Increases (reductions)
in taxes resulting
from:
State income taxes... 3,435 (184) (1,279) 1,992 207
Goodwill
amortization...... 812 762 5,286 2,675 1,469
Non-taxable gain from
the sale of
interest in
subsidiary........ -- -- -- (15,605) --
Change in valuation
allowance......... -- (1,256) (7,639) 10,827 --
Tax benefits
allocated to
Williams.......... 29,566 8,633 60,261 12,761 --
Other -- net......... 3,372 820 4,805 1,220 (207)
-------- ------- -------- -------- -------
Provision (benefit) for
income taxes......... $ 17,448 $ (766) $ (5,097) $ 2,038 $ 368
======== ======= ======== ======== =======
</TABLE>
F-23
<PAGE> 210
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of deferred tax assets and liabilities as of
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenues..................................... $14,321 $ 15,424
Impairment and other charges.......................... 3,880 17,441
Other................................................. 12,789 3,392
------- --------
30,990 36,257
Valuation allowance..................................... (3,188) (10,827)
------- --------
Total deferred tax assets............................... 27,802 25,430
Deferred tax liabilities:
Property, plant and equipment......................... 14,783 21,759
Securities available for sale......................... 13,763 (1,565)
Other................................................. 4,844 5,236
------- --------
Total deferred tax liabilities.......................... 33,390 25,430
------- --------
Net deferred tax liability.............................. $ 5,588 $ --
======= ========
</TABLE>
Valuation allowances have been established that reduce deferred tax assets
to an amount that will more likely than not be realized. Uncertainties that may
affect the realization of these assets include application of the tax sharing
agreement with Williams, tax law changes and expiration of carryforward periods.
The valuation allowance decreased during 1998 and increased during 1997,
primarily due to application of the tax sharing agreement with Williams.
If WCG had filed a separate federal income tax return for all periods
presented, the provision (benefit) for income taxes for 1998 and 1997 would
reflect additional benefit from the carryback or carryforward of federal net
operating losses that would have been recognized by WCG on a separate return
basis. The deferred federal income tax benefit for 1998 would have increased by
$5,588,000, to reflect the benefit of a deferred tax asset for the federal net
operating loss carryforward generated in 1998, to the extent of the existing net
deferred tax liability. A current federal income tax benefit for 1997 of
$12,761,000 would have been recognized to reflect the refund of tax from
carryback of the federal net operating loss generated in 1997. The provision
(benefit) for income taxes for 1996 would not change since a federal net
operating loss was not generated in 1996.
Cash payments for income taxes (net of refunds) were $2,067,000, $1,148,000
and $2,444,000 in 1998, 1997 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
Substantially all of WCG's employees are covered by noncontributory defined
benefit pension plans. Effective August 1, 1997, separate plans were established
for the Solutions LLC union employees and Solutions LLC salaried employees.
Substantially all of the remaining WCG employees are covered by Williams'
noncontributory defined benefit pension plans in which WCG is included. WCG is
also included in Williams' health care plan that provides postretirement medical
benefits to certain retired employees.
F-24
<PAGE> 211
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contributions for pension and postretirement medical benefits related to
WCG's participation in the Williams plans were $1,742,000, $357,000 and
$12,463,000 in 1998, 1997 and 1996, respectively. The change in contributions
from year to year is due to a change in the rate of pension contributions during
the periods. Contributions in excess of the minimum funding requirements were
made in 1996 and the resulting credit balances from 1996 were used to reduce the
required pension contributions in 1997.
The following table presents the changes in benefit obligations and plan
assets for pension benefits for the Solutions LLC plans for the years indicated.
It also presents a reconciliation of the funded status of these benefits to the
amount recognized in the accompanying consolidated balance sheet as of December
31 of each year indicated.
<TABLE>
<CAPTION>
PENSION BENEFITS
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................ $41,987 $ --
Service cost........................................... 4,604 1,770
Interest cost.......................................... 2,972 1,130
Actuarial loss......................................... 2,566 497
Acquisition............................................ -- 38,663
Benefits paid.......................................... (234) (73)
------- -------
Benefit obligation at end of year........................ 51,895 41,987
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year......... 42,971 --
Actual return on plan assets........................... 5,247 (956)
Acquisition............................................ 73 44,000
Employer contributions................................. 502 --
Benefits paid.......................................... (234) (73)
------- -------
Fair value of plan assets at end of year................. 48,559 42,971
------- -------
Funded status............................................ (3,336) 984
Unrecognized net actuarial loss.......................... 4,550 2,855
Unrecognized prior service credit........................ (1,230) (1,510)
------- -------
Net prepaid (accrued) benefit cost....................... $ (16) $ 2,329
======= =======
Included in the accompanying consolidated balance sheet
as follows:
Prepaid benefit cost................................... $ 2,196 $ 3,791
Accrued benefit cost................................... (2,212) (1,462)
------- -------
Net prepaid (accrued) benefit cost....................... $ (16) $ 2,329
======= =======
</TABLE>
F-25
<PAGE> 212
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net pension expense for the Solutions LLC plans consisted
of the following for the years ended December 31:
Components of net periodic pension expense:
Service cost........................................... $ 4,604 $ 1,770
Interest cost.......................................... 2,972 1,130
Expected return on plan assets......................... (4,293) (1,551)
Amortization of prior service credit................... (280) (117)
Recognized net actuarial gain.......................... (83) (18)
------- -------
Net periodic pension expense............................. $ 2,920 $ 1,214
======= =======
The following are the weighted-average assumptions
utilized as of December 31 of the year indicated:
Discount rate.......................................... 7.0% 7.1%
Expected return on plan assets......................... 10.0 10.0
Rate of compensation increase.......................... 5.0 5.0
</TABLE>
Williams maintains various defined contribution plans in which WCG is
included. WCG's costs related to these plans were $16,415,000, $9,564,000 and
$5,934,000 in 1998, 1997 and 1996, respectively. These costs increased over the
period from 1996 to 1998 primarily due to acquisitions (see Note 2).
Included in selling, general and administrative expenses for 1998 is an
accrual of $11,500,000 related to the modification of WCG's employee benefit
program associated with vesting of paid time off. In December 1998, WCG
increased the number of days in the new paid time off policy and changed the
benefits with regard to sick pay.
F-26
<PAGE> 213
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS
Investments as of March 31, 1999 (unaudited) and December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1999 (UNAUDITED) 1998 1997
---------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity method:
ATL.................................. $ 64,892 $144,767 $ --
Others............................... 463 454 6,132
-------- -------- -------
65,355 145,221 6,132
Cost method:
ATL.................................. 313,559 -- --
Others............................... 53,501 28,001 3,332
-------- -------- -------
367,060 28,001 3,332
Advances to investees................... 4,997 4,997 7,619
Marketable equity
securities -- Concentric Network
Corporation.......................... 197,592 82,936 11,087
-------- -------- -------
$635,004 $261,155 $28,170
======== ======== =======
</TABLE>
No dividends were received from investments in companies carried on the
equity basis for 1998, 1997 or 1996.
Included in the investments table above are noncurrent marketable equity
securities which are classified as available for sale under the scope of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
carrying amount of this investment is reported at fair value with net unrealized
appreciation or depreciation reported as a component of stockholder's equity. A
comparison of the carrying amount of this investment to cost as of March 31,
1999 (unaudited) and December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31, -------------------------------------------
1999 (UNAUDITED) 1998 1997
-------------------- -------------------- --------------------
FAIR VALUE FAIR VALUE FAIR VALUE
(CARRYING (CARRYING (CARRYING
COST AMOUNT) COST AMOUNT) COST AMOUNT)
------- ---------- ------- ---------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Concentric Network
Corporation........ $41,543 $197,592 $41,543 $82,936 $15,000 $11,087
</TABLE>
WCG acquired 710,036 warrants to purchase common stock of Concentric
Network Corporation in connection with WCG's acquisition of Concentric Network
Corporation common stock in 1997. No basis was allocated to the warrants as the
fair value of the warrants was considered to be nominal at the date the warrants
were acquired. Each warrant entitles the holder thereof to purchase one share of
Concentric Network Corporation common stock for $3. The warrants expire in 2002.
As of May 26, 1999, the Concentric Network Corporation investment has
depreciated since March 31, 1999, to a fair value of $168,870,000 based upon the
May 26, 1999 stock price of $32.
F-27
<PAGE> 214
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 13, 1999, the Brazilian Central Bank removed the limits of
variations of the Brazilian Real compared to the U.S. dollar, allowing free
market fluctuation of the exchange rate. As a result, the value of the Real in
U.S. dollars has declined 30% from December 31, 1998 to March 31, 1999.
Williams has granted WCG an option to acquire Williams' entire equity and
debt interest in Lightel S.A. -- Tecnologia da Informacao, a Brazilian
telecommunications company, at net book value. The option is exercisable at any
time from January 1, 2000 to January 1, 2001 and is payable entirely in WCG's
Class B common stock. The net book value of Williams investment in Lightel as of
December 31, 1998 was approximately $170 million including advances of $100
million. WCG has not assigned any value to the option as of December 31, 1998.
At December 31, 1998, WCG owned 30% of the preferred shares in ATL and 30%
of the common stock through participation in a limited liability company.
Effective January 1, 1999, WCG adopted prospectively the provisions of the
consensus of EITF Issue No. 98-13. Prior to application of EITF 98-13, WCG
applied the equity method to its entire stock investment in ATL. As a result of
the adoption of EITF 98-13, WCG reclassified its $97 million preferred stock
investment, previously classified as an equity method investment, to a cost
method investment. On March 25, 1999, WCG invested $265 million in ATL to
acquire a 19% ownership in ATL's outstanding common stock and to increase WCG's
ownership in ATL's outstanding preferred stock to 73%. The impact of the
adoption of EITF 98-13 on results of operations for the three months ended March
31, 1999 was to decrease WCG's net loss by $12.5 million.
On March 25, 1999, WCG pledged 49% and 100% of its investment in ATL's
common and preferred stock, respectively, as collateral for a U.S. dollar
denominated $521 million loan from Ericsson Project Finance AB to ATL. In
addition, Lightel pledged 49% of its 51% investment in ATL common stock and 100%
of its 27% investment in ATL preferred stock as collateral for the loan. The
loan principal is due on March 25, 2002.
Summarized financial position as of December 31, 1998 and results of
operations for the period from inception (March 26, 1998) to December 31, 1998
for ATL are as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 55,641
Noncurrent assets........................................... 1,572,276
Current liabilities......................................... (522,385)
Long-term debt.............................................. (26,427)
Other noncurrent liabilities................................ (649,743)
----------
Stockholders' equity........................................ $ 429,362
==========
Revenues.................................................... $ 29,953
Gross profit................................................ $ 281
Net loss.................................................... $ (42,277)
</TABLE>
On March 30, 1999, WCG acquired 19.9% of the common stock of Metrocom S.A.,
a start-up telecommunications company in Chile, for $15 million. WCG also paid
$9.5 million for warrants to purchase up to an additional 30.1% of Metrocom S.A.
The warrants have an aggregate exercise price of approximately $10 million and
expire March 30, 2002. The investment in Metrocom S.A. is accounted for under
the cost method.
F-28
<PAGE> 215
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of March 31, 1999 (unaudited) and December
31 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
DEPRECIABLE MARCH 31, -----------------------
LIVES 1999 1998 1997
-------------- ----------- ----------- ---------
(IN YEARS) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiber........................ 25-30 $ 116,511 $ 116,439 $ 23,712
Optronics.................... 7-10 196,550 167,997 144,191
Right-of-way................. 20-40 135,113 135,113 5,291
Computer equipment........... 3 73,979 65,126 29,835
Customer premise equipment... 3 32,059 30,616 30,736
General office furniture and
fixtures................... 3-5 57,428 61,300 32,935
Buildings and leasehold 30 or life of
improvements............... lease 46,985 41,154 10,961
Construction in progress..... Not applicable 199,252 130,063 218,752
Other........................ Various 133,875 127,886 37,642
--------- --------- ---------
991,752 875,694 534,055
Less accumulated
depreciation and
amortization............ (210,428) (179,969) (126,403)
--------- --------- ---------
$ 781,324 $ 695,725 $ 407,652
========= ========= =========
</TABLE>
In 1996, WCG agreed to exchange dark fiber along one of its fiber routes
for dark fiber from another party's route. The agreement was subsequently
amended to include exchanges of both dark fiber and fiber capacity leases. In
the nonmonetary exchange of dark fiber, WCG assigned a basis of approximately
$50.6 million to the dark fiber received, representing the book value of the
dark fiber relinquished.
In connection with its fiber build projects, WCG periodically enters into
various agreements to obtain the use of property rights from Williams' pipeline
companies in exchange for telecommunications services. Under these agreements,
WCG commits to provide various levels and types of services as consideration for
the right-of-way obtained. As of December 31, 1998, such commitments were not
material.
Commitments for construction and acquisition of property, plant and
equipment are approximately $808,183,000 as of December 31, 1998. Included in
this amount is $470,440,000 for the purchase of optronics equipment from Nortel
to be used in building the network pursuant to an agreement with Nortel to
purchase $600 million of optronics equipment. In addition, included in the
commitments is $315,556,000 for the purchase of wireless capacity.
On December 17, 1998, WCG entered into two agreements with WinStar
Communications, Inc. ("WinStar"). WCG has a 25 year indefeasible right to use
approximately 2% of WinStar's wireless local capacity in exchange for payments
equal to $400 million. WinStar has a 25 year indefeasible right to use four
strands of WCG's fiber over 15,000 route miles on the network, a transmission
capacity agreement with a minimum commitment for approximately $120 million in
specified circuits over a twenty-year term and colocation space rental and
maintenance services
F-29
<PAGE> 216
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in exchange for monthly payments equal to an aggregate of approximately $644
million over the next seven years. As of March 31, 1999, WinStar has paid WCG
approximately $15.3 million. WinStar has constructed approximately 60 hubs, or
antenna sites, which are currently available to WCG. WinStar intends to
construct 270 hubs by the end of 2001, and WCG will have the ability to use all
of these hubs. WCG will pay WinStar the $400 million over the next four years as
WinStar completes construction of the hubs. As of March 31, 1999, WCG has paid
WinStar approximately $84 million.
As a result of certain valuation matters and various timing differences
associated with the payment and receipt of cash, Williams cash payments to
WinStar represent cash advances. Accordingly, as WCG pays WinStar, a portion of
the payments will be recorded as an advance that will be returned based upon
WinStar's payment schedule.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Under Williams' centralized cash management system, WCG's cash accounts
reflect credit balances to the extent checks written have not been presented for
payment. The amount of these credit balances included in accounts payable is
$51,831,000 and $23,255,000 as of December 31, 1998 and 1997, respectively.
Accrued liabilities as of December 31 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Employee costs......................................... $ 68,025 $ 49,276
Deferred revenue....................................... 67,228 45,601
Job costs and customer deposits........................ 19,161 19,258
Warranty............................................... 10,967 13,232
Other.................................................. 33,295 49,612
-------- --------
$198,676 $176,979
======== ========
</TABLE>
10. LONG-TERM DEBT
Long-term debt (excluding amounts due affiliates as disclosed in Note 14)
as of March 31, 1999 (unaudited) and December 31 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1999 (UNAUDITED) 1998 1997
---------------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Credit agreement......................... $315,000 $ -- $125,000
Other.................................... 4,012 3,710 1,941
-------- ------ --------
319,012 3,710 126,941
Current maturities....................... 622 690 1,195
-------- ------ --------
Long-term debt........................... $318,390 $3,020 $125,746
======== ====== ========
</TABLE>
In July 1997, Solutions LLC and Williams entered into an unsecured credit
agreement with a bank. Under the terms of the credit agreement, Solutions LLC
has access to $300,000,000. Interest is payable monthly and accrues at rates
which vary with current market conditions. At
F-30
<PAGE> 217
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, the interest rate was 6.2%. On January 26, 1999, WCG was
added to the unsecured credit agreement and agreed that the aggregate borrowings
would not exceed $400,000,000, including Solutions LLC's availability. Williams
is the guarantor for WCG under the credit agreement. WCG and Solutions LLC's
availability under the credit agreement is subject to borrowings by other
Williams affiliates. On March 25, 1999, WCG borrowed $265 million under the
credit agreement for the additional investment in ATL described in Note 7. At
March 31, 1999, the interest rate was 7.75%.
On April 16, 1999, WCG entered into a $1.4 billion unsecured revolving
credit facility which is guaranteed by Williams. The facility will expire on
September 30, 1999. As of April 30, 1999, WCG has borrowed $300 million on this
facility, of which the proceeds were used to reduce the outstanding amount under
the July 1997 unsecured credit agreement.
Cash payments for interest were $2,427,000, $5,467,000 and $205,000 in
1998, 1997 and 1996, respectively.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below presents changes in the components of accumulated other
comprehensive income (loss).
<TABLE>
<CAPTION>
UNREALIZED FOREIGN
APPRECIATION CURRENCY
(DEPRECIATION) TRANSLATION
ON SECURITIES ADJUSTMENTS TOTAL
-------------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of December 31, 1996............ $ -- $ -- $ --
Current period change:
Pre-income tax amount.................... (3,913) (1,131) (5,044)
Income tax benefit....................... 1,565 -- 1,565
-------- -------- --------
Balance as of December 31, 1997............ (2,348) (1,131) (3,479)
Current period change:
Pre-income tax amount.................... 45,305 (1,792) 43,513
Income tax expense....................... (15,328) -- (15,328)
-------- -------- --------
29,977 (1,792) 28,185
-------- -------- --------
Balance as of December 31, 1998............ 27,629 (2,923) 24,706
Current period change:
Pre-income tax amount (unaudited)........ 114,657 (23,194) 91,463
Income tax expense (unaudited)........... (46,896) -- (46,896)
-------- -------- --------
67,761 (23,194) 44,567
-------- -------- --------
Balance as of March 31, 1999 (unaudited)... $ 95,390 $(26,177) $ 69,273
======== ======== ========
</TABLE>
12. STOCK-BASED COMPENSATION
Williams and WCG have several plans providing for Williams
common-stock-based awards to its employees and employees of its subsidiaries.
The plans permit the granting of various types of awards including, but not
limited to, stock options, stock-appreciation rights, restricted stock and
deferred stock. Awards may be granted for no consideration other than prior and
future services or based on certain financial performance targets being
achieved. The purchase price per
F-31
<PAGE> 218
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share for stock options and the grant price for stock-appreciation rights may
not be less than the market price of the underlying stock on the date of grant.
Depending upon terms of the respective plans, stock options become exercisable
after three or five years, subject to accelerated vesting if certain future
stock prices or specific financial performance targets are achieved. Stock
options expire ten years after grant.
Williams' employee stock-based awards are accounted for under provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Williams' fixed plan common stock
options do not result in compensation expense, because the exercise price of the
stock options equals the market price of the underlying stock on the date of
grant.
SFAS No. 123, "Accounting For Stock-Based Compensation," requires that
companies who continue to apply APB Opinion No. 25 disclose pro forma net income
assuming that the fair-value method in SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net loss for WCG was $194.4 million,
$40.5 million and $4.0 million for 1998, 1997 and 1996, respectively. Reported
net loss was $185.0 million, $35.8 million and $3.5 million for 1998, 1997 and
1996, respectively. Pro forma amounts for 1998 include the remaining total
compensation expense from the awards made in 1997, as these awards fully vested
in 1998 as a result of the accelerated vesting provision. Pro forma amounts for
1997 include the remaining total expense from the awards made in 1996, as these
awards fully vested in 1997 as a result of the accelerated vesting provisions.
Since compensation expense from stock options is recognized over the future
years' vesting period for pro forma disclosure purposes, and additional awards
generally are made each year, pro forma amounts may not be representative of
future years' amounts. The following summary represents stock option information
for WCG employees.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C>
Options granted.................................... 2,226 2,193 2,078
Weighted-average grant date fair value............. $ 8.19 $ 5.98 $ 3.92
Options outstanding -- December 31................. 5,897 4,954 3,015
Options exercisable -- December 31................. 3,800 2,726 962
</TABLE>
13. LEASES
Future minimum annual rentals under noncancellable operating leases as of
December 31, 1998 are payable as follows:
<TABLE>
<CAPTION>
OFF-NETWORK
OFFICE CAPACITY
RENTAL AND EQUIPMENT OTHER TOTAL
-------- ------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1999............................. $ 24,756 $ 78,730 $ 5,019 $108,505
2000............................. 21,173 133,651 5,030 159,854
2001............................. 17,935 102,917 1,689 122,541
2002............................. 13,118 90,422 691 104,231
2003............................. 11,169 68,196 691 80,056
Thereafter....................... 38,825 450 9,788 49,063
-------- -------- ------- --------
Total minimum annual rentals..... $126,976 $474,366 $22,908 $624,250
======== ======== ======= ========
</TABLE>
F-32
<PAGE> 219
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, WCG entered into an operating lease agreement covering a
portion of its fiber optic network. The total estimated cost of the network
assets to be covered by the lease agreement is $750 million. The lease term will
include an interim term, during which the covered network assets will be
constructed, that is anticipated to end no later than December 31, 1999, and a
base term. The interim and base terms are expected to total five years, and if
renewed, could total seven years.
WCG has an option to purchase the covered network assets during the lease
term at an amount approximating the lessor's cost. Williams provides a residual
value guarantee equal to a maximum of 89.9% of the transaction. The residual
value guarantee is reduced by the present value of the actual lease payments. In
the event that WCG does not exercise its purchase option, WCG expects the fair
market value of the covered network assets to substantially reduce Williams
payment under the residual value guarantee. WCG's disclosures for future minimum
annual rentals under noncancellable operating leases do not include amounts for
the residual value guarantee. As of March 31, 1999 (unaudited) and December 31,
1998, $368 million and $287 million, respectively, of costs have been incurred
by the lessor.
Total capacity expense incurred from leasing from a third party's network
(off-network capacity expense) was $110,804,000, $68,824,000 and $45,033,000 in
1998, 1997 and 1996, respectively. All other rent expense was $37,826,000,
$24,912,000 and $17,588,000 in 1998, 1997 and 1996, respectively. Included in
other rent expense is office space charged from affiliates of $3,664,000,
$2,475,000 and $2,247,000 in 1998, 1997 and 1996, respectively.
14. RELATED PARTY TRANSACTIONS
Williams charges its subsidiaries, including WCG, for certain corporate
administrative expenses, which are directly identifiable or allocable to the
subsidiaries. Nortel also charges Solutions LLC for certain corporate
administrative expenses which are directly identifiable or allocable to
Solutions LLC. Details of such charges for the three months ended March 31, 1999
and 1998 (unaudited) and the years ended December 31 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, (UNAUDITED) YEAR ENDED DECEMBER 31,
---------------------- ---------------------------
1999 1998 1998 1997 1996
--------- --------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Direct costs, charged from:
Williams.................. $ 4,573 $ 2,783 $13,364 $ 8,418 $ 6,370
Nortel.................... 182 3,855 10,727 15,260 --
Allocated charges from
Williams.................. 3,350 4,492 11,654 9,230 6,643
------- ------- ------- ------- -------
$ 8,105 $11,130 $35,745 $32,908 $13,013
======= ======= ======= ======= =======
</TABLE>
The above costs are reflected in selling, general and administrative
expenses in the accompanying consolidated statements of operations. In
management's estimation, the allocation methodologies used are reasonable and
approximate amounts that would have been incurred on a stand-alone basis.
Included in WCG's revenues are charges to Williams and its subsidiaries and
affiliates for managing their internal telephone operations of $2,342,000,
$1,878,000, $7,710,000, $5,217,000 and $4,918,000 for the three months ended
March 31, 1999 and 1998 (unaudited) and the years
F-33
<PAGE> 220
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1998, 1997 and 1996, respectively. In addition, WCG's
revenues include charges to Williams' gas pipelines for managing microwave
frequencies of $1,067,000, $1,053,000, $4,254,000, $3,754,000 and $1,381,000 for
the three months ended March 31, 1999 and 1998 (unaudited) and the years ended
December 31, 1998, 1997 and 1996, respectively.
As of March 31, 1999 (unaudited) and December 31, 1998 and 1997, WCG's net
amount due to or due from affiliates consists of an unsecured promissory note
agreement with Williams for both advances to and from Williams depending on the
respective cash positions of the companies. The agreement does not require
periodic principal payments or commitment fees and accordingly is normally
classified as noncurrent as periodic principal payments are not required.
Interest on noncurrent receivables and payables is accrued monthly and rates
vary with market conditions. The interest rate for noncurrent receivables and
payables with Williams at the end of the period was 5.6%, 5.8% and 6.2% for
March 31, 1999 (unaudited) and December 31, 1998 and 1997, respectively. In
addition, the net amount due to or from affiliates consists of normal course
receivables and payables resulting from the use of each others services. A
summary of these payables and receivables as of March 31, 1999 (unaudited) and
December 31 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1999 (UNAUDITED) 1998 1997
---------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Due from Williams...................... $ -- $ 3,881 $ --
======== ======== ========
Due to affiliates:
Williams............................... $ 32,222 $ -- $ 24,636
Nortel................................. 30,685 37,187 98,948
Other.................................. 1,243 1,323 --
-------- -------- --------
Total due to affiliates.................. $ 64,150 $ 38,510 $123,584
======== ======== ========
Noncurrent:
Due from Williams...................... $ -- $ -- $ 97,097
======== ======== ========
Due to affiliates:
Williams............................ $818,114 $614,343 $ --
Other............................... 6,930 6,367 --
-------- -------- --------
Total due to affiliates.................. $825,044 $620,710 $ --
======== ======== ========
</TABLE>
Interest expense to Williams was $9,307,000, $467,000, $16,933,000,
$2,657,000 and $16,776,000 for the three months ended March 31, 1999 and 1998
(unaudited) and the years ended December 31, 1998, 1997 and 1996, respectively.
No amounts were paid to Williams for interest in the three months ended March
31, 1999 (unaudited) or the years ended December 31, 1998, 1997 and 1996.
Interest income from Williams was $2,932,000 in 1997. There was no interest
income from Williams for the three months ended March 31, 1999 (unaudited) or
the years ended December 31, 1998 and 1996.
In connection with the formation of Solutions LLC, a $160,873,000 note
payable to Nortel was established which was paid by Solutions LLC in August
1997. Total interest expensed and paid on the note during 1997 was $2,491,000.
F-34
<PAGE> 221
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Solutions LLC purchased inventory from Nortel for use in equipment
installations for $467,476,000 in 1998 and $310,599,000 for the period from
April 30, 1997 (date on which Nortel became a related party) to December 31,
1997. Solutions LLC has a distribution agreement with Nortel that extends
through December 2002. If for two consecutive years the percentage of Nortel
products purchased by Solutions LLC falls below approximately 78% and the rate
of growth of the purchase of Nortel products by Solutions LLC during the
two-year period is below that of other Nortel distributors, Nortel may require
WCG to buy, or WCG may require Nortel to sell, Nortel's entire interest in
Solutions LLC at market value.
In addition, Network purchased from Nortel optronics for use on its network
for $99,311,000 in 1998 and $30,241,000 for the period from April 30, 1997 to
December 31, 1997.
15. COMMITMENTS AND CONTINGENCIES
During 1998, Solutions LLC and one of its equipment suppliers amended an
existing take-or-pay contract for equipment purchases. The amended purchase
commitment terms require Solutions LLC equipment purchases from the supplier
totaling $10,000,000, $19,000,000 and $25,000,000 during the twelve-month
periods ended March 31, 1999, 2000 and 2001, respectively. Solutions LLC met its
March 31, 1999 commitment.
WCG is a party to various claims, legal actions and complaints arising in
the ordinary course of business. In the opinion of management, the ultimate
resolution of all claims, legal actions and complaints after consideration of
amounts accrued, insurance coverage, or other indemnification arrangements will
not have a materially adverse effect upon WCG's future financial position,
results of operations or cash flows.
16. FINANCIAL INSTRUMENTS
FAIR VALUE METHODS
The following methods and assumptions were used by WCG in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet approximate fair value due to the short-term maturity of
these instruments.
Investments -- cost method and advances to investees: Fair value of
other cost method investments and advances to investees are estimated to
approximate historically recorded amounts as the operations underlying
these investments are in their initial phases.
Long-term debt: WCG's long-term debt consists primarily of variable
rate borrowings, including amounts from affiliates, for which the carrying
value approximates the fair value.
OFF-BALANCE-SHEET CREDIT AND MARKET RISK
In 1997, WCG entered into an agreement with Williams whereby WCG would sell
to Williams, on an ongoing basis, certain of WCG's accounts receivable. At
December 31, 1998 and 1997, $33,767,000 and $25,664,000 of WCG's accounts
receivable have been sold, respectively, to Williams. On January 31, 1999, WCG's
agreement with Williams expired and was not renewed.
F-35
<PAGE> 222
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
WCG's customers include numerous corporations. Approximately 68% and 86% of
receivables at December 31, 1998 and 1997, respectively, are for Solutions
related services. Approximately 25% and 3% of receivables at December 31, 1998
and 1997, respectively, are for Network related services. WCG serves a wide
range of customers, none of which is individually significant to its business.
While sales to these various customers are generally unsecured, the financial
condition and creditworthiness of customers are routinely evaluated.
17. SUBSEQUENT EVENTS
On February 8, 1999 WCG and SBC announced a series of alliance agreements
in addition to SBC's plans to acquire up to 10% of the common stock of WCG. The
private investment is expected to occur simultaneously with the initial public
offering. SBC's initial investment will be limited to $500 million, which will
be reinvested by WCG in its business. If SBC's investment equals less than 10%
of the common stock, SBC has the ability to purchase the remainder of the 10% in
subsequent public offerings, if they occur. SBC's purchase of WCG stock is
contingent upon due diligence, WCG completing its initial public offering and
the continuing existence of the agreement under which WCG provides network
transport services. The initial public offering price, less the underwriters'
discount will determine the price of the SBC shares.
Once SBC receives regulatory approval to enter the long-distance business
within one state in its local service territory, it will have one seat on the
WCG board of directors. WCG will serve as SBC's preferred provider for all
domestic U.S. transport services. SBC will be WCG's preferred provider for
platform products and certain international transport services, so long as such
preferred services are provided at mutually acceptable prices and regulations do
not prohibit such an arrangement. WCG will work with SBC to connect SBC's
international cables to WCG's domestic network. The agreement also will allow
both parties to cross-market certain of each others services, and specifically
enable Solutions to offer SBC-branded products and services as an addition to
its array of voice and data communication equipment products and network
services.
Williams has a call option to purchase not less than all of the shares of
stock acquired by SBC, in the event of the termination, other than due to a
breach by WCG, of certain agreements with SBC, provided that Williams has at
least a 50% interest in WCG. The purchase price is equal to the market price at
the time of exercise less the underwriting discounts and commissions applicable
to the shares at the time of the initial offering.
On May 21, 1999, WCG entered into two memoranda of understanding with
Metromedia Fiber Network, Inc. under which both parties agree to enter into
20-year agreements with the other, providing for the following:
- Metromedia will lease to WCG approximately 86,000 miles of dark fiber
on its local networks and will provide WCG with maintenance services
and dark fiber connectivity to approximately 250 points of presence
and data centers, in exchange for approximately $317 million payable
by WCG over the duration of the agreement
- Metromedia will lease from WCG six dark fibers over approximately
14,000 miles of fiber optic cable on the Williams Network and WCG will
provide colocation and maintenance services in exchange for
approximately $317 million payable by Metromedia over the duration of
the agreement
F-36
<PAGE> 223
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 24, 1999, WCG and Intel Corporation, on behalf of Intel Internet
Data Services, entered into a long-term master alliance agreement. The alliance
agreement provides that WCG and Intel Internet Data Services will purchase
services from one another pursuant to a service agreement and create a
co-marketing arrangement, each of which will have shorter terms than that of the
master alliance agreement. The parties' obligations under the alliance agreement
are subject to, among other conditions, completion of the service agreement and
co-marketing agreement by June 15, 1999. The services WCG will provide include
domestic transport services and may also include Internet connectivity. Intel
will provide web hosting services pursuant to the co-marketing arrangement.
Intel also entered into a securities purchase agreement with WCG and
Williams to purchase at the closing of this offering the number of shares of
common stock equal to $200 million divided by the initial public offering price
less the underwriting discount. The parties' obligations under the securities
purchase agreement are subject to closing conditions, including that the
alliance agreement is in full effect and that at least $500 million is raised in
this offering and that necessary governmental approvals have been obtained.
In connection with its purchase of common stock, Intel has agreed not to
transfer any of its shares of common stock to anyone except affiliates for a
period of eighteen months, but this transfer restriction provision will be
terminated if we have a change of control. In addition, the transfer restriction
does not prohibit Intel from participating in future registered offerings
initiated by us or from engaging in hedging transactions commencing six months
from the date of the equity offering. Intel also has registration rights in
connection with its holdings.
On May 25, 1999, WCG entered into various service and an alliance
agreements with TelMex.
In addition, on May 25, 1999, TelMex entered into a securities purchase
agreement with WCG and Williams to purchase at the closing of the equity
offering up to the number of shares of common stock equal to $100 million
divided by the initial public offering price less the underwriting discount.
TelMex's obligation and ability to make the investment is subject to
conditions at closing, including that the alliance agreement with TelMex be in
full effect and that SBC approves the portion of TelMex's investment that
exceeds $25 million, which would require SBC's investment to be limited to $425
million.
In connection with its purchase of WCG common stock TelMex has agreed to
certain restrictions and will receive certain privileges, including the
following:
- TelMex has agreed not to acquire more than 10% of WCG's common stock for
a period of 10 years
- TelMex has agreed not to transfer to anyone, except affiliates, any of
its shares of WCG's common stock for a period of 3 1/2 years, but this
transfer restriction provision will be terminated if WCG has a change of
control
- TelMex has agreed that WCG has the right, for a period of 3 1/2 years, to
repurchase WCG stock at market value less the underwriter's discount if
the alliance agreement is terminated for any reason other than a breach
by WCG
F-37
<PAGE> 224
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TelMex also has registration rights in connection with its holdings.
On May 27, 1999, Williams contributed its investments in the holding
companies, which owned the investments in ATL, PowerTel and MetroCom, to WCG at
their historical book values.
F-38
<PAGE> 225
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Williams Communications Group, Inc.
We have audited the accompanying combined statements of income and changes
in net assets and combined statements of cash flows of the Direct Sales
Subsidiary, Nortel Communications Systems ("NCS") and TTS Meridian Systems, Inc.
("TTS") (collectively, the "Business") of Enterprise Networks of Northern
Telecom Limited ("Nortel") for the four months ended April 30, 1997 and the year
ended December 31, 1996. These financial statements are the responsibility of
the Business' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards 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 disclosure 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 combined results of the Business' operations and
changes in net assets and its cash flows for the four months ended April 30,
1997 and the year ended December 31, 1996, in conformity with generally accepted
accounting principles in the United States.
DELOITTE & TOUCHE LLP
Toronto, Ontario
March 26, 1999
F-39
<PAGE> 226
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
COMBINED STATEMENTS OF INCOME AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1997 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Sales....................................................... $250,205 $733,111
Cost of Sales............................................... 182,539 527,980
-------- --------
Gross Profit................................................ 67,666 205,131
-------- --------
Selling, general and administrative......................... 55,242 167,234
Other....................................................... -- 1,023
-------- --------
Operating income............................................ 12,424 36,874
Interest income............................................. 592 1,405
-------- --------
Income before provision for income taxes.................... 13,016 38,279
Provision for income taxes (Note 5)......................... 5,330 16,018
-------- --------
Net income.................................................. $ 7,686 $ 22,261
======== ========
Net Assets:
Beginning of period......................................... $131,505 $140,201
Net Income.................................................. 7,686 22,261
Distribution from/(to) Nortel............................... 8,339 (30,957)
-------- --------
End of period............................................... $147,530 $131,505
======== ========
</TABLE>
F-40
<PAGE> 227
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
1997 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.................................................. $ 7,686 $ 22,261
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,121 6,993
Deferred taxes............................................ 705 (2,508)
Loss on write-down of property and equipment.............. -- 1,108
Cash provided (used) by changes in:
Receivables............................................ (12,859) 3,928
Inventories............................................ (1,873) (3,721)
Prepaid expenses....................................... 69 428
Accounts payable and accrued liabilities............... (2,832) 4,236
Distribution from/(to) Nortel.......................... 8,339 (30,957)
Other.................................................. 396 4,308
-------- --------
Net cash provided by operating activities................... 1,752 6,076
-------- --------
INVESTING ACTIVITIES
Payments for purchases of property and equipment............ (1,752) (6,076)
-------- --------
Net cash used by investing activities....................... (1,752) (6,076)
-------- --------
Increase in cash............................................ -- --
Cash at beginning of periods................................ -- --
-------- --------
Cash at end of periods...................................... $ -- $ --
======== ========
</TABLE>
F-41
<PAGE> 228
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOUR MONTHS ENDED APRIL 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
(THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION OF THE COMBINED FINANCIAL STATEMENTS
On April 30, 1997 the combined net assets of the Direct Sales Subsidiary,
Nortel Communications Systems, Inc. ("NCS"), and TTS Meridian Systems, Inc.
("TTS"), (collectively the "Business") of Enterprise Networks of Northern
Telecom Limited ("Nortel") were sold to a newly formed entity. Under the terms
of the purchase and sale agreement, Williams Communications Group, Inc. ("WCG")
and Nortel formed a new entity, Wiltel Communications, LLC (today known as
Williams Communications Solutions, LLC or "WCS").
The accompanying combined statements of income and changes in net assets,
and combined statements of cash flows ("the statements") have been prepared to
reflect the income, changes in net assets and cash flows associated with the
Business as if it had operated on a stand alone basis rather than as part of
Nortel.
The Business is comprised of the following:
-- NCS, which includes the following divisions: NCS East and NCS West; and
the consolidated subsidiaries Nortel Federal Systems, Inc., and Bell
Atlantic Meridian Systems ("BA Meridian"). BA Meridian was a joint
venture general partnership previously owned 80% by NCS and 20% by Bell
Atlanticom Systems Inc. Immediately prior to transferring the combined
net assets of the Business to WCS, Nortel purchased the 20% interest in
BA Meridian held by Bell Atlanticom Systems Inc. On April 30, 1997, 100%
of BA Meridian's net assets were sold to WCS, as part of the combined
net assets contributed, and;
-- TTS
All transactions and balances between combined entities have been
eliminated.
The combined statements include 100% of the results of BA Meridian. The 20%
portion owned by Bell Atlanticom Systems Inc. and included in these combined
statements amounted to $386 and $2,089 of net income, for the four months ended
April 30, 1997 and the year ended December 31, 1996, respectively.
The transfer of the net assets of the Business was governed by the
following agreements: the Limited Liability Agreement of Wiltel Communications,
LLC, dated as of April 1, 1997; the Formation Agreement between Northern Telecom
Inc., and Williams Communications Group, Inc. dated as of April 1, 1997, and the
Share Purchase Agreements for TTS Meridian Systems, Inc., by and between
Northern Telecom Limited and Williams Telecommunications Systems, Inc. ("WTI"),
dated April 30, 1997, collectively referred to as the "Agreement."
2. THE BUSINESS
The Business' principal activity is the marketing, sales and distribution
of telecommunications equipment. The Business is highly dependent on Nortel, as
substantially all of the products distributed are purchased from Nortel.
F-42
<PAGE> 229
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUES AND RELATED COST OF SALES
Revenues and related costs for contracts and customer service orders are
recognized on a percentage-of-completion basis for individual contracts or
elements thereof, based on work performed, date of delivery to customer site,
and the ratio of costs incurred, to total estimated costs. The equipment portion
of contracts is recognized upon shipment.
Maintenance contract revenue is deferred and recognized over the life of
the contract on a straight-line basis.
TRANSLATION OF FOREIGN CURRENCIES
Except for TTS, the functional currency of each of the combined entities is
the U.S. dollar. The functional currency of TTS is the Canadian dollar. TTS'
operations are translated as follows:
i. Assets and liabilities are translated at the exchange rates in
effect at the balance sheet date.
ii. Revenues and expenses, including gains and losses on foreign
exchange transactions, are translated at average rates for the period.
iii. The unrealized translation gains and losses on the Business' net
investment, including long-term intercompany advances, in these operations
are normally accumulated in a separate component of stockholders' equity,
which would be described as currency translation adjustment ("CTA").
For the purposes of these financial statements CTA was not material, and
has been included as part of the combined net assets.
DEPRECIATION
Depreciation is generally calculated under the straight-line method using
rates based on the expected useful lives of the assets of 5 to 10 years. The
underlying assets being depreciated consist principally of computers and
telecommunications equipment, furniture and fixtures, vehicles and leasehold
improvements.
The cost of maintenance and repairs, which do not significantly improve or
extend the life of the respective assets, is charged to expense as incurred.
GOODWILL
Goodwill represents the excess, at the dates of acquisition, of the costs
over the fair values of the net assets of certain companies acquired by the
Business, and is amortized on a straight-line basis over an estimated life of 3
years. The carrying value of goodwill is evaluated to determine whether a
potential permanent impairment exists, management considers the financial
condition and expected future earnings before tax using projected financial
performance. A permanent impairment in the value of goodwill is written off
against earnings in the year such impairment is identified.
F-43
<PAGE> 230
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Business, except for the TTS portion, was not a taxable entity when
operated by Nortel; rather, its tax position was considered as part of the
consolidated tax calculation performed for Nortel. For the purposes of
presenting the Business as a stand alone entity an estimate of the tax position
has been calculated. The Business used the asset and liability method of
accounting for deferred income taxes. Under this method, deferred income tax
assets and liabilities are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, computed based on the rates and
provisions as measured by tax laws.
USE OF ESTIMATES
The statements reflect the operations and cash flows of the Business. The
statements have been prepared from the books, records and accounts of the
Business (including combining workpapers and supporting entries) on the basis of
established accounting methods, policies, practices and procedures and the
judgements and estimation methodologies used by Nortel and the Business, in
accordance with the generally accepted accounting principles of the United
States. All of the allocations and estimates reflected in the statements are
based on assumptions and estimates that management believes to be reasonable.
Actual results could differ significantly from those estimates.
WARRANTIES
Warranty and product allowances on sales are estimated and charged to cost
of sales at the time the products are sold to customers.
RECENT ACCOUNTING STANDARDS
Due to the sale of the Business on April 30, 1997, the results of
operations, cash flows and financial position for the Business subsequent to
that date would be included in the financial statements of WCS. New accounting
standards would be taken into consideration by WCS in the preparation of their
financial statements.
4. GOODWILL
Total goodwill amortization charged to operations for the four months ended
April 30, 1997 and the year ended December 31, 1996 was $333 and $1,283,
respectively.
F-44
<PAGE> 231
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED
APRIL 30, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Current
Federal..................................... $1,851 $13,868
State/Provincial............................ 601 2,150
------ -------
2,452 16,018
------ -------
Deferred
Federal..................................... 2,528 --
State/Provincial............................ 350 --
------ -------
2,878 --
------ -------
Total provision............................... $5,330 $16,018
====== =======
</TABLE>
Reconciliations of the benefit for income taxes from the statutory rate to
the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED
APRIL 30, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Statutory rate................................ 35.00% 35.00%
Increases (reductions) in taxes from:
State/Provincial rate....................... 7.78 5.43
Goodwill.................................... 0.13 0.66
Other....................................... 0.58 0.83
----- -----
Total provision............................... 43.49% 41.92%
===== =====
</TABLE>
The tax provision above is an estimate to reflect what the Business would
have paid had it been a stand alone company. Therefore, cash taxes paid are not
disclosed in these statements. Actual income taxes payable, if any, were paid by
Nortel, on behalf of the Business, on a consolidated basis.
6. PLANS FOR EMPLOYEES' PENSIONS
As the Business was part of Nortel as of April 30, 1997 and December 31,
1996, the eligible employees of the Business were members of the Nortel pension
plans. Nortel has non-contributory defined benefit pension plans covering
substantially all of its employees. The benefits are based on length of service
and rates of compensation.
Nortel's policy is to fund pensions based on widely used actuarial methods
as permitted by pension regulatory authorities. The funded amounts reflect
actuarial assumptions regarding compensation, interest, and other projections.
Plan assets are represented primarily by common stocks, bonds, debentures,
secured mortgages, and property.
Pension costs reflected in the combined statements of income are based on
the unit credit method of valuation of pension plan benefits.
F-45
<PAGE> 232
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following disclosure presents the estimated expense and funded status
reconciliations for the portions of the Nortel plan allocated to WCS employees
as if the Business had operated on a stand alone basis. Subsequent to April 30,
1997, WCS curtailed the plan relating to the transferred employees and later
settled the plan. As a result the plan as described below no longer exists.
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
PLAN ASSETS AND LIABILITIES:
Plan assets at fair value............................. $45,464 $43,069
------- -------
Actuarial present value of benefit obligation
Accumulated benefit obligation
Vested........................................... 21,507 20,228
Non-vested....................................... 4,534 4,266
Effect of salary projection......................... 17,322 16,299
------- -------
Projected benefit obligation.......................... 43,363 40,793
------- -------
Excess of plan assets at fair value over projected
benefit obligations................................. 2,101 2,276
Less:
Unrecognized net transition assets.................. 1,000 1,030
Unrecognized prior service costs.................... (1,225) (1,251)
Unrecognized net gains.............................. 557 557
------- -------
Pension asset....................................... $ 1,769 $ 1,940
======= =======
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
PENSION EXPENSE:
Service cost -- benefits earned....................... $ 1,424 $ 3,702
Interest cost on projected plan benefits.............. 1,163 2,926
Estimated return on plan assets....................... (1,301) (3,254)
Other
Amortization of net asset........................... (29) (88)
Amortization of unrecognized prior service cost..... 26 59
Amortization of net loss............................ -- 2
------- -------
Total expense for the period.......................... $ 1,283 $ 3,347
======= =======
Assumptions:
Discount rates...................................... 7.75% 7.75%
Rate of return on assets............................ 9.00% 9.00%
Rate of compensation increase....................... 4.5% 4.5%
</TABLE>
F-46
<PAGE> 233
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
7. POST RETIREMENT BENEFITS
The eligible employees of the Business were included in the Nortel post
retirement plans. The plans provided certain benefits other than pension to the
employees. The net post retirement costs include the following components:
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
PLAN ASSETS AND LIABILITIES:
Plan assets at fair value............................. $ -- $ --
Accumulated post retirement benefit obligation........ 14,435 13,621
-------- --------
Deficiency of plan assets at fair value over projected
benefit obligation.................................. (14,435) (13,621)
Unrecognized prior service costs...................... 4,447 4,548
Unrecognized net gains................................ (183) (183)
-------- --------
Post retirement liability............................. $(10,171) $ (9,256)
======== ========
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
POST RETIREMENT EXPENSE:
Service cost........................................... $429 $1,095
Interest cost.......................................... 385 966
Other
Amortization of unrecognized prior service costs..... 100 300
---- ------
Total expense for the period........................... $914 $2,361
==== ======
Assumptions:
Weighted average discount rate....................... 7.75% 7.75%
Rate of compensation increase........................ 4.50% 4.50%
</TABLE>
The effect of a 1% increase in the assumed health care cost trend is not
material. The plan was unfunded at April 30, 1997 and December 31, 1996.
8. RELATED PARTY TRANSACTIONS
Transactions with Nortel and affiliated companies are significant. These
transactions occur at prices established between the Business and Nortel.
The Business purchased equipment based on Distribution Agreements with
other Nortel operating units, in the amount of $91,500 for the four months ended
April 30, 1997 and $287,100 for the year ended December 31, 1996. These amounts
reflect transfer prices equivalent to amounts which would have been charged to
any other third party distributor.
Pursuant to service arrangements with Nortel the Business paid
approximately $15,309 to Nortel during the four months ended April 30, 1997 and
$50,867 during the year ended December 31, 1996 for fringe benefits, accounting,
computer and other administrative services provided by Nortel. The charges were
based on actual costs incurred or allocated costs based on relative factors such
as square foot occupancy or head count. In management's estimates, the allocated
methodologies used are reasonable. In addition these amounts reflect fair value,
and
F-47
<PAGE> 234
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
approximate amounts that would have been incurred by the Business had it
purchased these services from third parties.
9. INFORMATION ON BUSINESS SEGMENT BY GEOGRAPHIC AREA
The Business operates in one business segment, telecommunications
equipment, and its activity consists of the sales and distribution of Nortel
products in North America.
GEOGRAPHIC AREA
The point of origin (the location of the selling organization) of revenues
and the location of the assets determine the geographic areas. The following
table sets forth information by geographic area:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED YEAR ENDED
APRIL 30, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Total revenues:
United States............................... $223,860 $651,429
Canada...................................... 26,345 81.682
-------- --------
Total customer revenues....................... 250,205 733,111
-------- --------
Contribution to operating earnings:
United States............................... 56,599 172,558
Canada...................................... 11,067 32,573
-------- --------
67,666 205,131
General corporate expenses.................... 54,650 166,852
-------- --------
Income before income taxes.................... $ 13,016 $ 38,279
======== ========
</TABLE>
10. STOCK-BASED COMPENSATION
Certain employees of the Business were participants of the Northern Telecom
Limited 1986 Stock Option Plan As Amended and Restated ("the Plan"). Under the
Plan, options to purchase common shares of Nortel were granted at the market
value on the effective date of the grant. Generally, options become exercisable
over two or three years, depending on the year of the grant, and expire after
ten years.
The Business' employee stock-based awards were accounted for under
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Common stock options do
not result in compensation expense, because the exercise price of the stock
options equals the market price of the underlying stock on the effective date of
grant.
SFAS No. 123, "Accounting For Stock-Based Compensation," requires that
companies who continue to apply APB Opinion No. 25 disclose pro forma net income
assuming that the fair-value method in SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net income for the Business was $6,376
and $20,987 for the four months ended April 30, 1997 and the year ended December
31, 1996, respectively. Reported net income was $7,686 and $22,261, for the four
months ended April 30, 1997, and the year ended December 31, 1996,
F-48
<PAGE> 235
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Since compensation expense from stock options is recognized over
the future years' vesting period for pro forma disclosure purposes, and
additional awards generally are made each year, pro forma amounts may not be
representative of future years' amounts.
These options were not assumed by WCS on the transfer of the net assets of
the Business, and employees could continue to hold the options of Nortel common
shares under the Plan.
<TABLE>
<CAPTION>
APRIL 30, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Options granted for the period.................... 144,200 135,900
Weighted-average grant date fair value............ $ 13.22 $ 9.92
Options outstanding at period end................. 282,600 240,286
Options exercisable at period end................. 60,850 54,786
</TABLE>
11. COMMITMENTS
As at April 30, 1997, the future minimum lease payments under operating
leases consisted of:
<TABLE>
<S> <C>
Remaining 8 months of 1997.................................. $10,017
1998........................................................ 12,276
1999........................................................ 8,330
2000........................................................ 5,276
2001........................................................ 1,532
Thereafter.................................................. 601
-------
Total....................................................... $38,032
=======
</TABLE>
Rent expense on operating leases for the four months ended April 30, 1997
and the year ended December 31, 1996 amounted to $4,738 and, $14,053,
respectively.
12. CONTINGENT LIABILITIES
The Business is, from time to time, a litigant in various claims and
proceedings arising from the normal course of business. Although the outcome of
these proceedings cannot be precisely determined, management believes, based on
currently known facts and circumstances, that the disposition of these matters
will not have a material adverse effect on the Business' financial position.
13. CREDIT RISK
The Business is exposed to credit risk from customers. Such risk is
minimized due to the nature of the telecommunications distribution business
which results in the Business transacting with a large number of diverse
customers.
F-49
<PAGE> 236
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$
[WILLIAMS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
% SENIOR NOTES DUE 2009
-----------------------
PROSPECTUS
-----------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 237
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses payable by the Registrant in
connection with the equity offering described in this registration statement
(other than the underwriting discount and commissions) will be as follows*:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............... $ 208,500
NASD filing fee............................................. 30,500
New York Stock Exchange listing fee......................... **
Blue sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 1,050,000
Legal fees and expenses..................................... 1,500,000
Printing and engraving fees................................. 1,000,000
Miscellaneous............................................... **
----------
Total.................................................. $ **
==========
</TABLE>
- -------------------------
* All fees except the Securities and Exchange Commission and NASD filing fees
are estimates.
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware ("DGCL") provides that a Delaware corporation may indemnify any persons
who are, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding provided such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his or
her conduct was illegal. A Delaware corporation may indemnify any persons who
are, or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the corporation's best
interests except that no indemnification is permitted without judicial approval
if the officer or director is adjudged to be liable to the corporation. Where an
officer or director is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him or her against
the expenses which such officer or director has actually and reasonably
incurred.
II-1
<PAGE> 238
Section 145 further provides that the indemnification provisions of Section
145 shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office. The Restated Certificate of Incorporation contains a provision
eliminating, to the fullest extent permitted by the DGCL as it exists or may in
the future be amended, the liability of a director to the Company and its
stockholders for monetary damages for breaches of fiduciary or other duty as a
director. However, the DGCL does not currently allow such provision to limit the
liability of a director for: (i) any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of laws; (iii)
payment of dividends, stock purchases or redemptions that violate the DGCL; or
(iv) any transaction from which the director derived an improper personal
benefit. Such limitation of liability also does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Restated Certificate of Incorporation and the By-Laws also provide
that, to the fullest extent permitted by the DGCL as it exists or may in the
future be amended, the Company will indemnify and hold harmless any director who
is or was made a party or is threatened to be made a party to or is involved in
any manner in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Company or its
subsidiaries, and any person serving at the request of the Company as an
officer, director, partner, member, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust, employee benefit
plan or other enterprise and may indemnify any officer, employee or agent of the
Company; provided, however, that the Company will indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by the Restated
Certificate of Incorporation or By-Laws. In addition, the Company will pay the
expenses incurred by directors, and may pay the expenses incurred by other
persons that may be indemnified pursuant to the Restated Certificate and the
By-Laws, in defending any such proceeding in advance of its final disposition
upon receipt (unless the Company upon authorization of the Board of Directors
waives such requirement to the extent permitted by applicable law) of an
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
Company as authorized in the Restated Certificate of Incorporation or By-Laws or
otherwise. The Restated Certificate and the By-Laws also state that such
indemnification is not exclusive of any other rights of the indemnified party,
including rights under any indemnification agreements or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Purchase Agreement.*
3.1 Form of Restated Certificate of Incorporation of the
Company.**
3.2 Form of Restated By-laws of the Company.**
</TABLE>
II-2
<PAGE> 239
<TABLE>
<C> <S>
4.1 Specimen certificate of common stock.*
4.2 Specimen certificate of Class B common stock.*
4.3 Form of indenture governing notes.*
4.4 Form of note (contained in form of indenture filed as
Exhibit 4.3).
5.1 Opinion of William G. von Glahn, Esq.*
10.1 Securities Purchase Agreement among Williams Communications
Group, Inc., The Williams Companies, Inc. and Telefonos de
Mexico, S.A. de C.V., dated May 25, 1999.**
10.2 Alliance Agreement Between Telefonos De Mexico, S.A. de C.V.
and Williams Communications, Inc., dated May 25, 1999.**
10.3 Securities Purchase Agreement dated as of May 24, 1999 by
and among Williams Communication Group, Inc., The Williams
Companies, Inc. and Intel Corporation.**
10.4 Master Alliance Agreement Between Intel Internet Data
Services and Williams Communications, Inc., dated as of May
24, 1999.**
10.5 Memorandum of Understanding Regarding the Lease of Fiber
Strands by Metromedia Fiber Network Services, Inc. to
Williams Communications, Inc., dated May 21, 1999.**
10.6 Memorandum of Understanding Regarding the Lease of Fiber
Strands by Williams Communications, Inc. to Metromedia Fiber
Network Services, Inc., dated May 21, 1999.**
10.7 Loan Agreement dated as of April 16, 1999 among Williams
Communications Group, Inc., Bank of America National Trust
and Savings Association, and the other financial
institutions party hereto, Nationsbanc Montgomery Securities
LLC, Chase Securities Inc., Bank of Montreal, and The Bank
of New York.**
10.8 Shareholders Agreement by and among Metrogas S.A., Williams
International Telecom (Chile) Limited, and Metrocom S.A.,
dated March 30, 1999.**
10.9 Share Purchase Agreement by and Among Lightel, S.A.
Technologia de Informacao, Williams International ATL
Limited, Johi Representacoes Ltda and ATL-Algar Telecom
Leste, S.A., dated as of March 25, 1999.**
10.10 Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8, 1999.**
10.11 Transport Services Agreement dated February 8, 1999, between
Southwestern Bell Communication Services, Inc. and Williams
Communications, Inc.**
10.12 Securities Purchase Agreement dated February 8, 1999,
between SBC Communications Inc. and Williams Communications
Group, Inc.**
10.13 Second Amended and Restated Credit Agreement dated as of
July 23, 1997 among The Williams Companies, Inc., Northwest
Pipeline Corporation, Transcontinental Gas Pipeline
Corporation, Texas Gas Transmission Corporation, Williams
Pipeline Company, Williams Holdings of Delaware, Inc.,
WilTel Communications, LLC, and Amendment thereto dated as
of January 26, 1999.**
10.14 Amended and Restated Lease for Bank of Oklahoma Tower, as of
January 1, 1999, by and between Williams Headquarters
Building Company and The Williams Companies, Inc.**
</TABLE>
II-3
<PAGE> 240
<TABLE>
<C> <S>
10.15 Lease as of January 1, 1999, for Williams Technology Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.**
10.16 Lease as of January 1, 1999, for Williams Resource Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.**
10.17 Wireless Fiber IRU Agreement by and between WinStar
Wireless, Inc. and Williams Communications, Inc., effective
as of December 17, 1998.**
10.18 IRU Agreement between WinStar Wireless, Inc. and Williams
Communications, Inc., dated December 17, 1998 (long haul).**
10.19 UtiliCom Networks, Inc. Note and Warrant Purchase Agreement
dated December 15, 1998.**
10.20 Consolidated IRU Agreement by and among IXC Carrier, Inc.,
Vyvx, Inc. and The WilTech Group, dated December 9, 1998.**
10.21 Stock Purchase Agreement for CNG Computer Networking Group
Inc. by and among The Sellers (1310038 Ontario Inc., George
Johnston, Hayden Marcus, The H. Marcus Family Trust and Gary
White), WilTel Communications (Canada), Inc. and Williams
Communications Solutions, LLC, dated October 13, 1998.**
10.22 Preferred Stock Purchase by and among UniDial Holdings, Inc.
and Williams Communications, Inc., dated October 2, 1998.**
10.23 Amended and Restated Lease between State Street Bank & Trust
Co. of Connecticut, National Association, as Lessor, and
Williams Communications, Inc., as Lessee, as of September 2,
1998.**
10.24 Amended and Restated Participation Agreement dated as of
September 2, 1998, among Williams Communications, Inc.;
State Street Bank & Trust Company of Conn., National
Association, as Trustee; Note Holders and Certificate
Holders; APA Purchasers; State Street Bank & Trust Co., as
Collateral Agent; and Citibank, N.A., as agent, with
Citibank, N.A. and Bank of Montreal as Co-Arrangers; Royal
Bank of Canada, as Documentation Agent; and Bank of America,
The Chase Manhattan Bank and Toronto Dominion, as Managing
Agents.**
10.25 Capacity Purchase Agreement between Williams Communications,
Inc. and Intermedia Communications, Inc., dated January 5,
1998 and Amendment dated August 5, 1998.**
10.26 Settlement and Release Agreement by and between WorldCom
Network Services, Inc. and Williams Communications, Inc.,
dated July 1, 1998.**
10.27 Umbrella Agreement by and between DownTown Utilities Pty
Limited, WilTel Communications Pty Limited, Spectrum Network
Systems Limited, CitiPower Pty, Energy Australia, South East
Queensland Electricity Corporation Limited, Williams
Holdings of Delaware Inc. and Williams International
Services Company, dated June 19, 1998.**
10.28 Carrier Services Agreement between Vyvx, Inc. and U S WEST
Communications, Inc., dated January 5, 1998.**
10.29 Distributorship Agreement by and between Northern Telecom
Limited and WilTel Communications, L.L.C., dated January 1,
1998.**
10.30 Common Stock and Warrant Purchase Agreement by and among
Concentric Network Corporation and Williams Communications
Group, Inc., dated July 25, 1997.**
</TABLE>
II-4
<PAGE> 241
<TABLE>
<C> <S>
10.31 Note and Warrant Purchase Agreement by and among Concentric
Network Corporation and Williams Communications Group, Inc.,
dated June 19, 1997.**
10.32 Limited Liability Company Agreement of WilTel
Communications, LLC, by and between Williams Communication
Group, Inc. and Northern Telecom, Inc., dated April 30,
1997.**
10.33 Share Purchase Agreement for TTS Meridian Systems Inc. by
and among Northern Telecom Limited, WilTel Communications,
LLC and 1228966 Ontario Inc., dated April 30, 1997.**
10.34 Formation Agreement by and between Northern Telecom, Inc.
and Williams Communications Group, Inc., dated April 1,
1997.**
10.35 Stock Purchase Agreement among ABC Industria e Comercio
S.A.-ABC INCO, Lightel S.A. Tecnologia da Informacao, Algar
S.A.-Empreendimentos e Participacoes and Williams
International Telecom Limited, dated January 21, 1997.**
10.36 Subscription and Shareholders Agreement among Lightel S.A.
Tecnologia da Informacao, Algar S.A.-Empreendimentos e
Participacoes and Williams International Telecom Limited,
dated January 21, 1997.**
10.37 Sublease Agreement as of June 1, 1996, by and between
Transcontinental Gas Pipeline Company and Williams
Telecommunications Systems, Inc.**
10.38 System Use and Service Agreement between WilTel, Inc.
("WilTel") and Vyvx, Inc. ("Vyvx") effective as of January
1, 1994.**
10.39 Form of administrative services agreement.**
10.40 Form of service agreement.**
10.41 Form of tax sharing agreement.**
10.42 Form of indemnification agreement.**
10.43 Form of rights agreement.**
10.44 Form of registration rights agreement.**
10.45 Form of separation agreement.**
10.46 Call Option Agreement by and among Williams Holdings of
Delaware, Inc., Williams International Company, Williams
International Telecom Limited, and Williams Communications
Group, Inc. dated May 27, 1999.**
10.47 Form of cross-license agreement.**
10.48 Form of technical, management and administrative services
agreement.**
10.49 The Williams Companies, Inc. 1996 Stock Plan.**
10.50 The Williams Companies, Inc. Stock Plan for Nonofficer
Employees.**
10.51 Williams Communications Stock Plan.**
10.52 Williams Communication Group, Inc. 1999 Stock Plan.**
10.53 Williams Pension Plan.**
10.54 Solutions LLC Pension Plan.**
10.55 Williams Communications Change in Control Severance Plan.*
12.1 Statement re: Computation of Ratios.**
21 List of Subsidiaries.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen S/C.
</TABLE>
II-5
<PAGE> 242
<TABLE>
<C> <S>
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of William G. von Glahn, Esq. (contained in opinion filed as Exhibit 5.1).
+24 Power of Attorney.
27.1 Financial Data Schedule -- Three Months Ended March 31, 1999.
27.2 Financial Data Schedule -- Three Months Ended March 31, 1998.
27.3 Restated Financial Data Schedule -- December 31, 1998.
27.4 Restated Financial Data Schedule -- December 31, 1997.
27.5 Restated Financial Data Schedule -- December 31, 1996.
</TABLE>
- -------------------------
* To be filed by amendment.
** Incorporated by reference to the Registration Statement on Form S-1 relating
to the equity offering (File No. 333-76007).
+ Previously filed.
(b) Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts and report of Ernst &
Young LLP thereon.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) it will provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit delivery to each
purchaser.
II-6
<PAGE> 243
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Tulsa, Oklahoma on the 28th day of May, 1999.
WILLIAMS COMMUNICATIONS GROUP, INC.
By: /s/ WILLIAM G. VON GLAHN
-------------------------------------
William G. von Glahn
Senior Vice President, Law
IN WITNESS WHEREOF, the undersigned have executed this instrument, all as
of the 28th day of May, 1999.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chief Executive Officer and May 28, 1999
- --------------------------------------------------- President (Principal Executive
Howard E. Janzen Officer)
* Chief Financial Officer May 28, 1999
- --------------------------------------------------- (Principal Accounting and
Lawrence C. Littlefield, Jr. Financial Officer)
* Director May 28, 1999
- ---------------------------------------------------
Keith E. Bailey
* Director May 28, 1999
- ---------------------------------------------------
John C. Bumgarner, Jr.
* Director May 28, 1999
- ---------------------------------------------------
Brian E. O'Neill
</TABLE>
II-7
<PAGE> 244
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director May 28, 1999
- ---------------------------------------------------
James R. Herbster
* Director May 28, 1999
- ---------------------------------------------------
Steven J. Malcolm
* Director May 28, 1999
- ---------------------------------------------------
Jack D. McCarthy
</TABLE>
* Pursuant to a power of attorney.
II-8
<PAGE> 245
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Williams Communications Group, Inc.
We have audited the consolidated financial statements of Williams
Communications Group, Inc. as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and have issued our report
thereon dated April 7, 1999, except for the matters described in the third
paragraph of Note 10 and Note 17, as to which the date is May 27, 1999 (included
elsewhere in this Registration Statement). The financial statements of ATL-Algar
Telecom Leste S.A., (an entity in which the Company has a 30% interest, at
December 31, 1998), have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the consolidated financial statements
relates to data included for ATL-Algar Telecom Leste S.A., it is based solely on
their report. Our audits also included the financial statement schedule listed
in Item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
May 27, 1999
S-1
<PAGE> 246
WILLIAMS COMMUNICATIONS GROUP
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(A)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSES OTHER DEDUCTIONS(B) BALANCE
--------- ---------- ----- ------------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1998................................... 12,787 21,591 -- 10,802 23,576
1997................................... 4,950 7,837 7,799(c) 7,799 12,787
1996................................... 6,427 2,694 -- 4,171 4,950
</TABLE>
- ---------------
(a)Deducted from related assets.
(b)Represents balances written off, net of recoveries and reclassifications.
(c)Primarily relates to acquisitions of businesses.
S-2
<PAGE> 247
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Purchase Agreement.*
3.1 Form of Restated Certificate of Incorporation of the Company.**
3.2 Form of Restated By-laws of the Company.**
4.1 Specimen certificate of common stock.*
4.2 Specimen certificate of Class B common stock.*
4.3 Form of indenture governing notes.*
4.4 Form of note (contained in form of indenture filed as Exhibit 4.3).
5.1 Opinion of William G. von Glahn, Esq.*
10.1 Securities Purchase Agreement among Williams Communications Group, Inc., The Williams
Companies, Inc. and Telefonos de Mexico, S.A. de C.V., dated May 25, 1999.**
10.2 Alliance Agreement Between Telefonos De Mexico, S.A. de C.V. and Williams
Communications, Inc., dated May 25, 1999.**
10.3 Securities Purchase Agreement dated as of May 24, 1999 by and among Williams
Communication Group, Inc., The Williams Companies, Inc. and Intel Corporation.**
10.4 Master Alliance Agreement Between Intel Internet Data Services and Williams
Communications, Inc., dated as of May 24, 1999.**
10.5 Memorandum of Understanding Regarding the Lease of Fiber Strands by Metromedia Fiber
Network Services, Inc. to Williams Communications, Inc., dated May 21, 1999.**
10.6 Memorandum of Understanding Regarding the Lease of Fiber Strands by Williams
Communications, Inc. to Metromedia Fiber Network Services, Inc., dated May 21, 1999.**
10.7 Loan Agreement dated as of April 16, 1999 among Williams Communications Group, Inc.,
Bank of America National Trust and Savings Association, and the other financial
institutions party hereto, Nationsbanc Montgomery Securities LLC, Chase Securities
Inc., Bank of Montreal, and The Bank of New York.**
10.8 Shareholders Agreement by and among Metrogas S.A., Williams International Telecom
(Chile) Limited, and Metrocom S.A., dated March 30, 1999.**
10.9 Share Purchase Agreement by and Among Lightel, S.A. Technologia de Informacao, Williams
International ATL Limited, Johi Representacoes Ltda and ATL-Algar Telecom Leste, S.A.,
dated as of March 25, 1999.**
10.10 Master Alliance Agreement between SBC Communications Inc. and Williams Communications,
Inc. dated February 8, 1999.**
10.11 Transport Services Agreement dated February 8, 1999, between Southwestern Bell
Communication Services, Inc. and Williams Communications, Inc.**
10.12 Securities Purchase Agreement dated February 8, 1999, between SBC Communications Inc.
and Williams Communications Group, Inc.**
</TABLE>
<PAGE> 248
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.13 Second Amended and Restated Credit Agreement dated as of July 23, 1997 among The
Williams Companies, Inc., Northwest Pipeline Corporation, Transcontinental Gas Pipeline
Corporation, Texas Gas Transmission Corporation, Williams Pipeline Company, Williams
Holdings of Delaware, Inc., WilTel Communications, LLC, and Amendment thereto dated as
of January 26, 1999.**
10.14 Amended and Restated Lease for Bank of Oklahoma Tower, as of January 1, 1999, by and
between Williams Headquarters Building Company and The Williams Companies, Inc.**
10.15 Lease as of January 1, 1999, for Williams Technology Center, by and between Williams
Headquarters Building Company and Williams Communications Group, Inc.**
10.16 Lease as of January 1, 1999, for Williams Resource Center, by and between Williams
Headquarters Building Company and Williams Communications Group, Inc.**
10.17 Wireless Fiber IRU Agreement by and between WinStar Wireless, Inc. and Williams
Communications, Inc., effective as of December 17, 1998.**
10.18 IRU Agreement between WinStar Wireless, Inc. and Williams Communications, Inc., dated
December 17, 1998 (long haul).**
10.19 UtiliCom Networks, Inc. Note and Warrant Purchase Agreement dated December 15, 1998.**
10.20 Consolidated IRU Agreement by and among IXC Carrier, Inc., Vyvx, Inc. and The WilTech
Group, dated December 9, 1998.**
10.21 Stock Purchase Agreement for CNG Computer Networking Group Inc. by and among The
Sellers (1310038 Ontario Inc., George Johnston, Hayden Marcus, The H. Marcus Family
Trust and Gary White), WilTel Communications (Canada), Inc. and Williams Communications
Solutions, LLC, dated October 13, 1998.**
10.22 Preferred Stock Purchase by and among UniDial Holdings, Inc. and Williams
Communications, Inc., dated October 2, 1998.**
10.23 Amended and Restated Lease between State Street Bank & Trust Co. of Connecticut,
National Association, as Lessor, and Williams Communications, Inc., as Lessee, as of
September 2, 1998.**
10.24 Amended and Restated Participation Agreement dated as of September 2, 1998, among
Williams Communications, Inc.; State Street Bank & Trust Company of Conn., National
Association, as Trustee; Note Holders and Certificate Holders; APA Purchasers; State
Street Bank & Trust Co., as Collateral Agent; and Citibank, N.A., as agent, with
Citibank, N.A. and Bank of Montreal as Co-Arrangers; Royal Bank of Canada, as
Documentation Agent; and Bank of America, The Chase Manhattan Bank and Toronto
Dominion, as Managing Agents.**
10.25 Capacity Purchase Agreement between Williams Communications, Inc. and Intermedia
Communications, Inc., dated January 5, 1998 and Amendment dated August 5, 1998.**
</TABLE>
<PAGE> 249
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.26 Settlement and Release Agreement by and between WorldCom Network Services, Inc. and
Williams Communications, Inc., dated July 1, 1998.**
10.27 Umbrella Agreement by and between DownTown Utilities Pty Limited, WilTel Communications
Pty Limited, Spectrum Network Systems Limited, CitiPower Pty, Energy Australia, South
East Queensland Electricity Corporation Limited, Williams Holdings of Delaware Inc. and
Williams International Services Company, dated June 19, 1998.**
10.28 Carrier Services Agreement between Vyvx, Inc. and U S WEST Communications, Inc., dated
January 5, 1998.**
10.29 Distributorship Agreement by and between Northern Telecom Limited and WilTel
Communications, L.L.C., dated January 1, 1998.**
10.30 Common Stock and Warrant Purchase Agreement by and among Concentric Network Corporation
and Williams Communications Group, Inc., dated July 25, 1997.**
10.31 Note and Warrant Purchase Agreement by and among Concentric Network Corporation and
Williams Communications Group, Inc., dated June 19, 1997.**
10.32 Limited Liability Company Agreement of WilTel Communications, LLC, by and between
Williams Communication Group, Inc. and Northern Telecom, Inc., dated April 30, 1997.**
10.33 Share Purchase Agreement for TTS Meridian Systems Inc. by and among Northern Telecom
Limited, WilTel Communications, LLC and 1228966 Ontario Inc., dated April 30, 1997.**
10.34 Formation Agreement by and between Northern Telecom, Inc. and Williams Communications
Group, Inc., dated April 1, 1997.**
10.35 Stock Purchase Agreement among ABC Industria e Comercio S.A.-ABC INCO, Lightel S.A.
Tecnologia da Informacao, Algar S.A.-Empreendimentos e Participacoes and Williams
International Telecom Limited, dated January 21, 1997.**
10.36 Subscription and Shareholders Agreement among Lightel S.A. Tecnologia da Informacao,
Algar S.A.-Empreendimentos e Participacoes and Williams International Telecom Limited,
dated January 21, 1997.**
10.37 Sublease Agreement as of June 1, 1996, by and between Transcontinental Gas Pipeline
Company and Williams Telecommunications Systems, Inc.**
10.38 System Use and Service Agreement between WilTel, Inc. ("WilTel") and Vyvx, Inc.
("Vyvx") effective as of January 1, 1994.**
10.39 Form of administrative services agreement.**
10.40 Form of service agreement.**
10.41 Form of tax sharing agreement.**
10.42 Form of indemnification agreement.**
10.43 Form of rights agreement.**
10.44 Form of registration rights agreement.**
10.45 Form of separation agreement.**
</TABLE>
<PAGE> 250
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.46 Call Option Agreement by and among Williams Holdings of Delaware, Inc., Williams
International Company, Williams International Telecom Limited, and Williams
Communications Group, Inc. dated May 27, 1999.**
10.47 Form of cross-license agreement.**
10.48 Form of technical, management and administrative services agreement.**
10.49 The Williams Companies, Inc. 1996 Stock Plan.**
10.50 The Williams Companies, Inc. Stock Plan for Nonofficer Employees.**
10.51 Williams Communications Stock Plan.**
10.52 Williams Communication Group, Inc. 1999 Stock Plan.**
10.53 Williams Pension Plan.**
10.54 Solutions LLC Pension Plan.**
10.55 Williams Communications Change in Control Severance Plan.*
12.1 Statement re: Computation of Ratios.**
21 List of Subsidiaries.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen S/C.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of William G. von Glahn, Esq. (contained in opinion filed as Exhibit 5.1).
+24 Power of Attorney.
27.1 Financial Data Schedule -- Three Months Ended March 31, 1999.
27.2 Financial Data Schedule -- Three Months Ended March 31, 1998.
27.3 Restated Financial Data Schedule -- December 31, 1998.
27.4 Restated Financial Data Schedule -- December 31, 1997.
27.5 Restated Financial Data Schedule -- December 31, 1996.
</TABLE>
- -------------------------
* To be filed by amendment.
** Incorporated by reference to the Registration Statement on Form S-1 relating
to the equity offering (File No. 333-76007).
+ Previously filed.
(b) Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts and report of Ernst &
Young LLP thereon.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial and Operating Data" and to the use of our
report on the financial statements dated April 7, 1999, except for the matters
described in the third paragraph of Note 10 and Note 17, as to which the date is
May 27, 1999 and our report on the financial statement schedule dated May 27,
1999, in the Registration Statement on Form S-1 and related prospectus of
Williams Communications Group, Inc. for the registration of its senior notes due
2009.
/s/ ERNST & YOUNG LLP
------------------------------------
ERNST & YOUNG LLP
Tulsa, Oklahoma
May 27, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the financial statements of ATL -- ALGAR TELECOM LESTE S.A. as of
December 31, 1998 and for the period from inception (March 26, 1998) through
December 31, 1998 (and to all references to our Firm) included in or made a part
of the amendment to the registration statement on Form S-1 of Williams
Communications Group, Inc.
/s/ ARTHUR ANDERSEN S/C
----------------------------------------
ARTHUR ANDERSEN S/C
Belo Horizonte, Brazil
May 26, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 26, 1999, in Amendment No. 1 to the
Registration Statement Form S-1 and related Prospectus of Williams
Communications Group, Inc. for the registration of its senior notes due 2009.
/s/ DELOITTE & TOUCHE LLP
----------------------------------------
DELOITTE & TOUCHE LLP
Toronto, Ontario
May 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 96,847
<SECURITIES> 0
<RECEIVABLES> 546,226
<ALLOWANCES> 33,241
<INVENTORY> 73,609
<CURRENT-ASSETS> 959,499
<PP&E> 991,752
<DEPRECIATION> 210,428
<TOTAL-ASSETS> 2,868,859
<CURRENT-LIABILITIES> 458,052
<BONDS> 1,143,434
0
0
<COMMON> 1
<OTHER-SE> 1,030,011
<TOTAL-LIABILITY-AND-EQUITY> 2,868,859
<SALES> 0
<TOTAL-REVENUES> 492,002
<CGS> 0
<TOTAL-COSTS> 540,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,437
<INTEREST-EXPENSE> 10,536
<INCOME-PRETAX> (56,693)
<INCOME-TAX> 17,448
<INCOME-CONTINUING> (74,141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,141)
<EPS-BASIC> (74,141.00)
<EPS-DILUTED> (74,141.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 386,293
<CGS> 0
<TOTAL-COSTS> 410,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,483
<INTEREST-EXPENSE> 1,739
<INCOME-PRETAX> (27,264)
<INCOME-TAX> (766)
<INCOME-CONTINUING> (26,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,498)
<EPS-BASIC> (26,498.00)
<EPS-DILUTED> (26,498.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,004
<SECURITIES> 0
<RECEIVABLES> 515,447
<ALLOWANCES> 23,576
<INVENTORY> 67,699
<CURRENT-ASSETS> 887,579
<PP&E> 875,694
<DEPRECIATION> 179,969
<TOTAL-ASSETS> 2,333,484
<CURRENT-LIABILITIES> 557,046
<BONDS> 623,730
0
0
<COMMON> 1
<OTHER-SE> 1,002,619
<TOTAL-LIABILITY-AND-EQUITY> 2,333,484
<SALES> 0
<TOTAL-REVENUES> 1,717,106
<CGS> 0
<TOTAL-COSTS> 1,900,282
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21,591
<INTEREST-EXPENSE> 18,650
<INCOME-PRETAX> (190,088)
<INCOME-TAX> (5,097)
<INCOME-CONTINUING> (184,991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (184,991)
<EPS-BASIC> (184,991.00)
<EPS-DILUTED> (184,991.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,290
<SECURITIES> 0
<RECEIVABLES> 303,887
<ALLOWANCES> 12,787
<INVENTORY> 63,484
<CURRENT-ASSETS> 560,179
<PP&E> 534,055
<DEPRECIATION> 126,403
<TOTAL-ASSETS> 1,506,034
<CURRENT-LIABILITIES> 409,214
<BONDS> 125,746
0
0
<COMMON> 1
<OTHER-SE> 862,701
<TOTAL-LIABILITY-AND-EQUITY> 1,506,034
<SALES> 0
<TOTAL-REVENUES> 1,426,130
<CGS> 0
<TOTAL-COSTS> 1,483,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,837
<INTEREST-EXPENSE> 8,714
<INCOME-PRETAX> (33,805)
<INCOME-TAX> 2,038
<INCOME-CONTINUING> (35,843)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,843)
<EPS-BASIC> (35,843.00)
<EPS-DILUTED> (35,843.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 703,586
<CGS> 0
<TOTAL-COSTS> 702,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,694
<INTEREST-EXPENSE> 17,367
<INCOME-PRETAX> (3,146)
<INCOME-TAX> 368
<INCOME-CONTINUING> (3,514)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,514)
<EPS-BASIC> (3,514.00)
<EPS-DILUTED> (3,514.00)
</TABLE>
