<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1999
REGISTRATION NO. 333-76007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
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>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $0.01 per share(3).................. $750,000,000 $208,500
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 promulgated under the Securities Act
of 1933.
(2) Previously paid.
(3) This registration statement also pertains to Rights to purchase Series A
Participating Preferred Stock of the registrant. Until the occurrence of
certain prescribed events the Rights are not exercisable, are evidenced by
the certificates for the Common Stock and will be transferred along with and
only with such securities. Thereafter, separate Rights certificates will be
issued representing one Right for each share of Common Stock held subject to
adjustment pursuant to anti-dilution provisions.
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
EXPLANATORY NOTE
This registration statement contains two forms of prospectus, one to be
used in connection with an offering in the United States and Canada and one to
be used in a concurrent international offering outside the United States and
Canada. The U.S. prospectus and the international prospectus will be identical
in all respects except for the front cover page and back cover page. The front
cover page and back cover page for the international prospectus included in this
registration statement are each labelled "Alternate International Page." The
form of U.S. prospectus is included in this registration statement and the form
of the front and back cover pages of the international prospectus follow the
U.S. prospectus.
<PAGE> 3
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, DATED , 1999
PROSPECTUS
[WILLIAMS LOGO]
SHARES
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
------------------
We are selling ____________ shares of our common stock. The underwriters
named in this prospectus may purchase up to ____________ additional shares of
our common stock from us under certain circumstances.
This is an initial public offering of our common stock. We currently expect
the initial public offering price to be between $________ and $________ per
share, and we have applied to have our common stock listed on the New York Stock
Exchange under the symbol "WCG."
We are a subsidiary of The Williams Companies, Inc. and following this
offering The Williams Companies, Inc. will continue to hold a controlling
interest in our stock.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds, before expenses, to Williams Communications Group,
Inc. ..................................................... $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------
<TABLE>
<S> <C> <C>
Joint Book-Running Managers Co-Lead Manager
SALOMON SMITH BARNEY LEHMAN BROTHERS MERRILL LYNCH & CO.
Structural
Advisor
</TABLE>
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
, 1999
<PAGE> 4
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....................... 9
This Prospectus Contains Forward-
Looking Statements............... 21
Use of Proceeds.................... 22
Dividend Policy.................... 22
Capitalization..................... 23
Dilution........................... 24
Selected Consolidated Financial and
Operating Data................... 25
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 31
Industry Overview.................. 56
Business........................... 63
Regulation......................... 95
Management......................... 103
Principal Stockholders............. 119
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Relationships and Related Party
Transactions..................... 123
Relationship Between Our Company
and Williams..................... 125
Description of Capital Stock....... 132
Description of Indebtedness and
Other Financing Arrangements..... 142
Shares Eligible for Future Sale.... 147
Important United States Federal Tax
Consequences of Our Common Stock
to Non-U.S. Holders.............. 149
Underwriting....................... 152
Legal Matters...................... 156
Experts............................ 157
Where You Can Find Additional
Information...................... 157
Index to Financial Statements...... F-1
</TABLE>
Until __________, 1999, all dealers that buy, sell or trade our common
stock, 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> 5
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 common stock.
Unless otherwise indicated, or the context otherwise requires, all
information in this prospectus assumes that the underwriters do not exercise
their over-allotment option.
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 three business units are our network unit, our
communications equipment solutions unit, and our strategic investments unit. 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.
For the three months ended March 31, 1999, the percentage of revenue
attributable to each unit was 21.6% for our network unit, 67.2% for our
solutions unit and 13.6% for our strategic investments unit. 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. Throughout 1999
and 2000, we expect our network unit to contribute an increasing percentage of
our total revenues and by 2001 we expect our network unit to contribute the
largest percentage of our total revenues and to be the primary source of our
revenue.
Prior to the initial public offering of our common stock, our company was a
wholly-owned subsidiary of The Williams Companies, Inc., which first entered the
communications business in 1985 by pioneering the placement of fiber optic
cables in pipelines that were no longer in use.
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.
OUR BUSINESS UNITS
OUR NETWORK UNIT
Our network unit offers voice, data, Internet and video services, as well
as rights of use in dark fiber, on our low-cost, high-capacity nationwide
network. Dark fiber is fiber optic cable that we install but for which we do not
provide communications transmission services. We focus on providing
communications services to other communications companies as they seek to
benefit from the growth in communications demand. The Williams network currently
consists of approximately 21,400 miles of installed fiber optic cable, of which
18,770 miles are in operation, or lit. We plan to extend the Williams network,
utilizing pipeline and other rights of way, to connect 125 cities by the end of
the year 2000. Rights of way are rights to install fiber along routes owned by
other parties. We expect that by the end of 2000 the Williams network's total
route miles, or actual miles of the path over which fiber optic cable is
installed, will encompass a total of over 33,000 route miles of fiber optic
cable.
The Williams network transports information as "packets," which are data
organized for transmission over circuits shared simultaneously by several users.
Newly developed equipment
1
<PAGE> 6
enables networks using this packet technology to carry voice, video and data
more efficiently and at a lower cost than traditional telephone networks. The
technology we use is known as asynchronous transfer mode, or ATM.
OUR NETWORK UNIT'S STRATEGY
Our network unit'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 communications capacity
- establish ourselves as a low-cost provider
OUR SOLUTIONS UNIT
Our solutions unit distributes and integrates communications equipment from
leading vendors for the voice and data communications needs of businesses of all
sizes as well as for governmental, educational and non-profit institutions. Our
solutions unit provides planning, design, implementation, management,
maintenance and optimization services for the full life cycle of the equipment.
We also sell the communications services of select network customers and other
carriers to our solutions unit's customers. Our solutions unit's broad range of
voice and data products and services allows us to serve as a single-source
provider of solutions for our customers' communications needs. 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.
OUR SOLUTIONS UNIT'S 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 our network's carrier customers
OUR STRATEGIC INVESTMENTS UNIT
Through our strategic investments unit, 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, a leading video transmission service for major broadcasters and
advertisers, 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.
2
<PAGE> 7
CONCURRENT INVESTMENTS IN OUR COMMON STOCK
- SBC. On February 8, 1999, we entered into agreements with SBC
Communications Inc. under which SBC will invest $500 million in our
company. We and SBC will sell each other's products and we and SBC will
purchase each other's services on a preferred provider basis.
- Intel. On May 24, 1999, we entered into an agreement with Intel
Corporation under which Intel will invest $200 million in our company. We
and Intel Internet Data Services will purchase each other's services.
- Telefonos de Mexico. On May 25, 1999, we entered into an agreement with
Telefonos de Mexico under which Telefonos de Mexico will invest $25
million in our company, which may be increased to $100 million if SBC
agrees to reduce its investment. We and Telefonos de Mexico will sell
each other's products and provide services to each other for 20 years.
Each of the concurrent investments by SBC, Intel and Telefonos de Mexico 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 and the notes
offering referred to below will occur simultaneously and are each contingent
upon each other. The Intel and Telefonos de Mexico investments are expected to
occur within a few days following the consummation of the offerings and the SBC
investment. For more information about the concurrent investments, see the
section of this prospectus entitled "Business -- Strategic alliances."
CONCURRENT NOTES OFFERING
Concurrent with the equity offering, we are offering approximately $1.3
billion aggregate principal amount of ____% senior notes due 200_ by means of a
separate prospectus.
For more information about the notes offering, see the section of this
prospectus entitled "Description of Indebtedness and Other Financing
Arrangements -- Notes."
3
<PAGE> 8
THE EQUITY OFFERING
Common stock offered in the
equity offering........... ______ shares
Common stock sold in the
concurrent investments.... ______ shares
Subtotal................. ______ shares
Class B common stock owned
by Williams.............. ______ shares
Total capital stock to be
outstanding after the
equity offering and the
concurrent
investments............ 450,000,000 shares
Use of proceeds............... We estimate that the net proceeds from the
equity offering will be approximately $606.7
million. We estimate that the net proceeds from
the notes offering will be approximately $1.27
billion and the net proceeds from the
concurrent investments will be approximately
$725 million. We intend to use these net
proceeds to develop and light the Williams
network, fund operating losses, repay portions
of our debt and for working capital and general
corporate purposes. See the section "Use of
Proceeds" for more information.
Voting rights:
Common stock................ One vote per share
Class B common stock........ Ten votes per share
Other common stock
provisions.................... Apart from the different voting rights, the
holders of common stock and Class B common
stock generally have identical rights. See the
section "Description of Capital Stock" for more
information.
Proposed NYSE symbol.......... "WCG"
Dividend policy............... We do not intend to pay cash dividends on our
common stock in the foreseeable future. See the
section "Dividend Policy" for more information.
The number of shares of common stock to be outstanding immediately after
the equity offering and the concurrent investments does not take into account
the issuance of up to ______ shares of common stock which the underwriters have
the option to purchase solely to cover over-allotments, if any, 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. See the section "Management -- New stock-based and incentive
plans of our company" for more information. The indicated number of shares of
common stock sold in the concurrent investments is based on an assumed initial
public offering price of $____ per share, the midpoint of the price range on the
cover page of this prospectus.
RISK FACTORS
You should consider carefully the risks of an investment in our common
stock. See the section of this prospectus entitled "Risk Factors" for more
information.
4
<PAGE> 9
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 its network business to LDDS Communications,
Inc. (now MCI WorldCom, Inc.) for approximately $2.5 billion. The sale included
Williams' nationwide fiber optic network and the associated consumer, business
and carrier customers. Williams excluded from the sale an approximately 9,700
route-mile single fiber optic strand on its original nationwide network, its
telecommunications equipment distribution business and Vyvx. The single fiber,
along with Vyvx, our solutions unit 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 $200 million of paid-in capital to amounts due
to Williams
Pro forma earnings per share is based upon an assumed 450,000,000 shares of
capital stock outstanding after the equity offering and the concurrent
investments and does not include any exercise of the underwriters'
over-allotment option 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. Pro forma net
loss has been adjusted to include the interest expense impact of $1.3 billion of
debt with an interest rate of 9% as if the debt had been issued on January 1,
1998 and the repayment of $315 million of debt under the interim credit facility
as if the repayment had occurred on January 1, 1999.
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. We will account for the options granted in exchange for existing
Williams options as new fixed awards and record compensation expense over the
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 vesting period
5
<PAGE> 10
based on the initial public offering price. Assuming that employees elect to
exchange all eligible deferred shares and options, based upon current economic
value, we estimate that the compensation expense relating to the options and
deferred shares will be approximately $____ million over the vesting periods, of
which we estimate that approximately $__ million will be expensed during the
remainder of 1999, and approximately $____ million 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 unit.
- In October 1997, management and ownership of the fiber optic strand
excluded from the sale to LDDS were transferred from our strategic
investments unit to our network unit and intercompany transfer pricing
was established prospectively.
- In January 1998, the non-compete agreement with MCI WorldCom expired and
our network unit entered the communications network business.
- Other expense in 1997 included $42.0 million of charges primarily related
to the decision to sell our learning content business, which was our
venture in the strategic investments unit involved in the development of
training materials and manuals and provision of training classes, and the
write-down of assets and development expenses associated with other
activities in the strategic investments unit. Other expense in 1998
included a $23.2 million loss related to exiting a venture in the
strategic investments unit 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 represents
earnings before interest, income taxes, depreciation and amortization and other
non-recurring or non-cash items, such as equity earnings or losses and minority
interest. Excluded from the computation of EBITDA are charges in 1998 and 1997
included in other expense of $23.2 million and $42.0 million described above and
gains recognized in 1997 and 1996 of $44.5 million and $15.7 million. The $44.5
million gain in 1997 is attributable to our sale of 30% of Solutions LLC to
Nortel. The $15.7 million gain in 1996 is attributable to the sale of rights to
use communications frequencies. 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 the permanent credit facility, which we
expect to enter into after the completion of the offerings but before September
1, 1999, our discretionary use of funds reflected by EBITDA will be limited in
order to conserve funds for capital expenditures and debt service.
6
<PAGE> 11
<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....... 68,144 51,347 221,410 217,966 132,477
Eliminations......... (11,767) (12,187) (50,281) (22,264) (6,425)
----------- ----------- ----------- ----------- -----------
Total
revenues... 502,161 387,772 1,733,469 1,428,513 705,187
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... $ (46,820) $ (24,590) $ (188,404) $ (62,701) $ (91)
=========== =========== =========== =========== ===========
Net loss............... $ (74,141) $ (26,498) $ (180,929) $ (35,843) $ (3,514)
=========== =========== =========== =========== ===========
Historical per share
data (basic):
Net loss............. $ (74,141) $ (26,498) $ (180,929) $ (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............. $ (.23) $ (.15) $ (.66) $ (.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) $ 50,005 $ 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>
7
<PAGE> 12
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 96,847 $2,379,687
Working capital........................................... 501,447 2,784,287
Property, plant and equipment, net........................ 781,324 781,324
Total assets.............................................. 2,872,921 5,189,661
Long-term debt, including long-term debt due within one
year.................................................... 1,144,056 2,329,056
Total liabilities......................................... 1,838,847 3,023,847
Total stockholders' equity................................ 1,034,074 2,165,814
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
----------------
(NUMBERS
APPROXIMATE)
<S> <C>
OPERATING DATA:
Planned route miles......................................... 33,120
Retained network route miles.............................. 9,700
Route miles to be acquired................................ 9,320
Route miles in construction............................... 14,100
Route miles in operation.................................... 18,770
Planned retained fiber miles................................ 420,000
</TABLE>
Planned route miles are the total route miles that we expect the Williams
network to traverse upon completion. Retained network route miles are the route
miles traversed by the single fiber optic strand that Williams excluded 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 route miles on our network) 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.
8
<PAGE> 13
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in shares of our common stock.
RISKS RELATING TO OUR NETWORK UNIT
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 which we cannot control could increase its estimated costs
and delay its scheduled completion, either of which could have a material
adverse effect on our business.
In addition to factors described elsewhere in "Risk Factors," factors out
of our control include:
- 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
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."
OUR NETWORK UNIT 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,
9
<PAGE> 14
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
- greater international presence
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 or other remedies to
10
<PAGE> 15
them, which would reduce our revenues. Service disruptions could also damage our
reputation with customers, 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
OUR NETWORK UNIT HAS GENERATED LOSSES IN ITS LIMITED OPERATING HISTORY, WHICH WE
EXPECT WILL CONTINUE
Our network unit 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, our network unit 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; IF WE ARE UNABLE TO OBTAIN AND MAINTAIN
RIGHTS OF WAY OVER DESIRED ROUTES ON COMMERCIALLY REASONABLE TERMS, OUR
PROFITABILITY MAY BE ADVERSELY AFFECTED
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, we may incur additional costs which could
have a material adverse effect on our business. We are a party to litigation
challenging our right to use railroad rights of way which the plaintiff is
seeking to have certified as a class action. It is likely that we will be
subject to other suits challenging use of all of our railroad rights of way and
the plaintiffs will also seek class certification. Approximately 15% of our
network is installed on railroad rights of way. This litigation may increase our
costs and adversely affect our profitability. See "Business -- Legal
proceedings."
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.
11
<PAGE> 16
Costs of obtaining local services from other carriers comprise a
significant proportion of the operating expenses of long distance carriers,
including our network unit. 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 our
network unit'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 UNIT
OUR SOLUTIONS UNIT HAS EXPERIENCED LOSSES WHICH MAY CONTINUE IN THE FUTURE
In 1998, our solutions unit 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 our solutions unit 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 -- Our solutions unit" 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 our solutions
unit's 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. See the section of this prospectus entitled
"Business -- Our solutions unit -- LLC agreement with Nortel" for more
information.
OUR SOLUTIONS UNIT 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 other companies that offer services to integrate
systems and equipment of different types. 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.
12
<PAGE> 17
RISKS RELATING TO OUR COMPANY
AFTER THE OFFERINGS, WILLIAMS MAY NOT 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 may not 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. At March 31, 1999, as adjusted to give
effect to the offerings, the concurrent investments, the recharacterization of
$200 million of paid-in capital to amounts due to Williams, the payment of
related expenses and the application of the net proceeds to repay debt, we would
have had approximately $2.3 billion of long-term debt, approximately $2.2
billion of stockholders' equity and a debt-to-equity ratio of approximately 1.08
to 1. We have made additional borrowings since March 31, 1999 under our interim
credit facility and anticipate making further borrowings under our interim
credit facility or our new permanent credit facility, all of 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
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.
13
<PAGE> 18
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 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
COMPLETE THE WILLIAMS NETWORK AND TO CONDUCT OUR BUSINESS GENERALLY 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
- 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
14
<PAGE> 19
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 our solutions unit in 1998 were due to high turnover of
managerial, technical and sales personnel, as well as insufficient management
resources to run our solutions unit. 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 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, the
affected agreement may be terminated
- 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
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.
INTEL COULD TERMINATE OUR STRATEGIC ALLIANCE, WHICH COULD HARM OUR BUSINESS
Our alliance agreements with Intel are material to us and Intel may
terminate these agreements in certain cases. If the alliance agreements with
Intel are terminated for any reason before our initial public offering is
completed, then either party would have the right to cancel the planned purchase
by Intel of our common stock. If this occurs, we would not receive the
anticipated proceeds from the sale of our common stock to Intel and would not
have the revenues that we anticipate from the alliance in the future.
TELEFONOS DE MEXICO COULD TERMINATE OUR STRATEGIC ALLIANCE, WHICH COULD HARM OUR
BUSINESS
Our alliance agreements with Telefonos de Mexico are material to us and
Telefonos de Mexico may terminate these agreements in certain cases. If the
alliance agreements with Telefonos de Mexico are terminated for any reason
before our initial public offering is completed, then either party would have
the right to cancel the planned purchase by Telefonos de Mexico of our common
stock. If this occurs, we would not receive the anticipated proceeds
15
<PAGE> 20
from the sale of our common stock to Telefonos de Mexico and would not have the
revenues that we anticipate from the alliance in the future.
WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS, AS A RESULT OF WHICH THE LOSS
OF EVEN A SINGLE CUSTOMER OR A FEW CUSTOMERS COULD HAVE A MATERIAL ADVERSE
IMPACT ON OUR BUSINESS
We currently derive a large percentage of the revenue generated by our
network unit and Vyvx from a small number of customers, as a result of which the
loss of even a single customer or a few customers could have a material adverse
impact on our business. There is no guarantee that these customers will continue
to do business with us after the expiration 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 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 our solutions unit, 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,
16
<PAGE> 21
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 the
services, equipment and pricing for our intrastate services in most of these
jurisdictions. In addition, some of our alliance partners are subject to
extensive regulation, which could adversely affect the expected benefits of our
arrangements with them by preventing us or them from selling each other's
products and services as planned. 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
17
<PAGE> 22
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 Brazilian Real
in U.S. dollars has declined approximately 33% from December 31, 1998 to June
30, 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.
RISKS RELATING TO OUR RELATIONSHIP WITH WILLIAMS
WILLIAMS HAS SIGNIFICANT CONTROL OVER OUR COMPANY, WHICH COULD ADVERSELY AFFECT
OUR STOCKHOLDERS
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. As a result, Williams will
be in a position to cause our company to take actions that benefit only
Williams.
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 seven 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. There could
be potential conflicts of interest
18
<PAGE> 23
when these directors and officers are faced with decisions that could have
different implications for our company and Williams.
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 may be suitable
for both us and Williams. As a result, it is possible that these directors and
executive officers could place the interests of Williams ahead of our interests
when the two are incompatible. 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.
WE RELY ON WILLIAMS FOR ADMINISTRATIVE SERVICES WHICH WILLIAMS COULD CEASE TO
PROVIDE TO US; WE MAY BE UNABLE TO REPLACE THESE SERVICES IN A TIMELY MANNER OR
ON FAVORABLE TERMS
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 COMMON STOCK
THE POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR
STOCKHOLDERS
Prior to the equity offering, you could not buy or sell our common stock
publicly. Although an application will be made to list our shares of common
stock on the NYSE, an active public market for our common stock might not
develop or be sustained after the equity offering. Moreover, even if such a
market does develop, the market price of our common stock may decline below the
initial public offering price. The market price of our common stock could be
subject to significant fluctuations due to a variety of factors, including
actual or anticipated fluctuations in our operating results and financial
performance, announcements of technological innovations by our existing or
future competitors or changes in financial estimates by securities analysts.
Historically, the market prices for securities of emerging companies in the
communications industry have been highly volatile. In addition, the stock market
has experienced volatility that has affected the market prices of equity
securities of many companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of our common stock. Furthermore, following periods of
volatility in the market price of a company's securities, stockholders of such a
company have
19
<PAGE> 24
often instituted securities class action litigation against the company. Any
such litigation against our company could result in substantial costs and a
diversion of management's attention and resources, which could adversely affect
the conduct of our business.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING MAY ADVERSELY AFFECT OUR
STOCK PRICE
The market price of our common stock could drop in response to possible
sales of a large number of shares of common stock in the market after the equity
offering or to the perception that such sales could occur. As a result, we may
be unable to raise additional capital through the sale of equity at prices
acceptable to us.
We have entered into a registration rights agreement with Williams which
enables Williams to require us to register shares of our common stock owned by
Williams and to include those shares in registrations of common stock made by us
in the future. We have also entered into agreements with SBC, Intel and
Telefonos de Mexico which provide these three companies with registration rights
which enable them to require us to register shares of our common stock they own
after a period of time. If these companies exercise their registration rights,
the additional shares that become eligible for public sale as a consequence
could affect the price at which our shares trade.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BY-LAWS COULD LIMIT OUR SHARE PRICE
AND DELAY A TAKEOVER OR CHANGE IN CONTROL OF OUR COMPANY
Our restated certificate of incorporation and by-laws include provisions
that could delay, deter or prevent a future takeover or change in control of our
company. These provisions include the disproportionate voting rights of the
Class B common stock (relative to the common stock) to elect a majority of the
members of our board of directors and the authorization of our board to issue,
without stockholder approval, one or more series of preferred stock. In
addition, our directors are organized into multiple classes and the members of
only one class are elected each year. These provisions and our stockholder
rights plan may have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of our company, even
though such a change in ownership would be economically beneficial to our
company and our stockholders. See the section of this prospectus entitled
"Description of Capital Stock" for more information.
20
<PAGE> 25
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 shares of our common stock.
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.
21
<PAGE> 26
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
shares of common stock will be approximately $606.7 million, or
approximately $____ million if the underwriters exercise their over-allotment
option in full, based on an assumed initial public offering price of $____ per
share. We estimate that the net proceeds we will receive from the notes offering
will be approximately $1.27 billion. 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, together with borrowings under our permanent credit facility, 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. See
the section of this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and capital
resources -- Anticipated funding sources and uses."
At the time of the offerings we anticipate that we will have approximately
$600 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 credit facility were
used to repay $315 million of bank borrowings under our revolving credit
facility, which were incurred to pay for our network unit's capital expenditures
and to fund other cash needs.
DIVIDEND POLICY
We have not paid any cash dividends on our capital stock since 1997. We do
not expect to pay cash dividends on our capital stock in the foreseeable future.
The terms of the notes and our other debt agreements place limitations on the
payment of cash dividends. We currently intend to retain our future earnings, if
any, to finance the operation and development of our business. Future dividends,
if any, will be determined by our board of directors and will depend on the
success of our operations, capital needs, financial conditions, contractual
restrictions and other factors that our board of directors considers. See the
section of this prospectus entitled "Description of Indebtedness and Other
Financing Arrangements" for more information.
22
<PAGE> 27
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 $200 million
of paid-in capital to amounts due to 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 $____, the midpoint of the price
range on the cover of this prospectus. The table assumes that the underwriters
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 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 $2,379,687
========== ==========
Long-term debt due within one year......................... $ 622 $ 622
========== ==========
Long-term debt:
Due to affiliates........................................ $ 825,044 1,025,044
__% senior notes due 200_................................ -- 1,300,000
Other.................................................... 318,390 3,390
---------- ----------
Total long-term debt.................................. 1,143,434 2,328,434
Stockholders' equity:
Common stock, $1.00 par value per share:
1,000 shares authorized; and 1,000 shares issued and
outstanding......................................... 1 --
Class A common stock, $0.01 par value per share:
1,000,000,000 shares authorized; and ____ shares
issued and outstanding.............................. --
Class B common stock, $0.01 par value per share:
500,000,000 shares authorized; and ____ shares issued
and outstanding..................................... --
Preferred stock, $0.01 par value per share:
500,000,000 shares authorized; no shares issued or
outstanding......................................... -- --
Capital in excess of par value........................... 1,356,891
Accumulated deficit...................................... (392,091) (392,091)
Accumulated other comprehensive income................... 69,273 69,273
---------- ----------
Total stockholders' equity......................... 1,034,074 2,165,814
---------- ----------
Total capitalization............................ $2,177,508 $4,494,248
========== ==========
</TABLE>
23
<PAGE> 28
DILUTION
As of March 31, 1999, our consolidated net tangible book value was $610.1
million, or $____ per share of common stock, based on the expected number of
450,000,000 shares outstanding upon completion of the equity offering and the
concurrent investments. Consolidated net tangible book value per share
represents the total amount of our consolidated tangible assets, reduced by the
amount of total consolidated liabilities and divided by the number of shares of
common stock outstanding. Tangible assets are defined as our consolidated
assets, excluding intangible assets such as goodwill. After giving effect to the
equity offering and the concurrent investments, after deducting underwriting
discounts and commissions and estimated expenses, the recharacterization of $200
million of paid-in capital to amounts due to Williams and after application of
the net proceeds from the offerings and the concurrent investments, our net
consolidated tangible book value at March 31, 1999 would have been approximately
$1.74 billion, or $____ per share. This represents an immediate increase in
consolidated net tangible book value of approximately $____ per share to
Williams and an immediate dilution of $____ per share to new investors in the
equity offering.
Dilution per share represents the difference between the price per share to
be paid by new investors and the net consolidated tangible book value per share
immediately after the equity offering and the concurrent investments. The
following table illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
----------
Consolidated net tangible book value before the equity
offering, the concurrent investments and the
recharacterization of $200 million of paid-in capital to
amounts due to Williams...................................
-----
Consolidated increase per share attributable to new
investors, including the concurrent investments...........
-----
Adjusted consolidated tangible book value per share after
the equity offering, the concurrent investments and the
recharacterization of $200 million of paid-in capital to
amounts due to Williams...................................
----------
Net consolidated tangible book value dilution per share to
new investors............................................. $
----------
</TABLE>
This table does not take into account the issuance of deferred shares or
the exercise of options to be granted at the time of the completion of the
equity offering. See the section of this prospectus entitled "Management -- New
stock-based and incentive plans of our company." If these amounts had been taken
into consideration, assuming the exercise of all options and the receipt of the
full amount of cash consideration, the dilution per share to new investors would
have been reduced by $____ per share.
The following table sets forth, on a pro forma basis at March 31, 1999, the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid to us by Williams, by SBC, by Intel,
by Telefonos de Mexico and by the new investors purchasing shares of common
stock in the equity offering, before deducting estimated underwriting discounts
and commissions and estimated expenses of the equity offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Williams..................... % $ % $
SBC, Intel and Telefonos de
Mexico..................... $
Investors in the equity
offering................... $
----------- ----- -------------- -----
Total................... 100.0% $ 100.0% $
=========== ===== ============== =====
</TABLE>
24
<PAGE> 29
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 its network business to LDDS for
approximately $2.5 billion. The sale included Williams' nationwide fiber optic
network and the associated consumer, business and carrier customers. Along the
original nationwide network, Williams kept an approximately 9,700 route-mile
single fiber optic strand (the "Retained WilTel Network"), its
telecommunications equipment distribution business and Vyvx, a leading provider
of multimedia fiber transmission for the broadcast industry. This fiber strand
can only be used to transmit video and multimedia services, including Internet
services, through July 1, 2001. The Retained WilTel Network, along with Vyvx,
our solutions unit 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 450,000,000 shares of
capital stock outstanding after the equity offering and the concurrent
investments and does not include any exercise of the underwriters' overallotment
option or the issuance of shares of common stock pursuant to deferred share
awards or option grants under our company's stock-based plans for directors,
officers and other employees. Pro forma net loss has been adjusted to include
the interest expense impact of $1.3 billion of debt with an interest rate of 9%
as if the debt had been issued on January 1, 1998 and the repayment of $315
million of debt under the interim credit facility as if the repayment had
occurred on January 1, 1999.
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. We will account for the options granted in exchange for existing
Williams options as new fixed awards and record compensation expense over the
vesting period for the options based on the difference between the initial
public offering price and the exercise
25
<PAGE> 30
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 vesting period based on the initial public offering price.
Assuming that employees elect to exchange all eligible deferred shares and
options, based upon current economic value, we estimate that the compensation
expense relating to the options and deferred shares will be approximately $____
million over the vesting periods, of which we estimate that approximately $____
million will be expensed during the remainder of 1999 and approximately $____
million will be expensed annually in 2000, 2001 and 2002.
Included in other financial data are EBITDA amounts. EBITDA represents
earnings before interest, income taxes, depreciation and amortization and other
non-recurring or non-cash items, such as equity earnings or losses and minority
interest. Excluded from the computation of EBITDA are charges in 1998 and 1997
included in other expense of $23.2 million and $42.0 million described below and
the gains recognized in 1997 and 1996 of $44.5 million and $15.7 million
described below. 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,
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 the permanent credit facility, which we expect to enter into after
completion of the offerings but before September 1, 1999, 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 its network business to LDDS for
approximately $2.5 billion. The sale included 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 rights to
use communications frequencies 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 unit. 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 our strategic investments unit to our network unit
and intercompany transfer pricing was established prospectively. In
addition, consulting, outsourcing and the management of Williams'
internal telephone operations, activities previously performed within our
strategic investments unit, were transferred to our network unit. For
26
<PAGE> 31
comparative purposes, the 1996 and 1997 consulting, outsourcing and
internal telephone management activities previously performed in our
strategic investments unit that were transferred to our network unit have
been reflected in our network unit's results. See Note 3 to our
consolidated financial statements for more information regarding segment
disclosures.
- Other expense in 1997 included $42.0 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 unit. Other expense in 1998 included a $23.2
million loss related to exiting a venture in the strategic investments
unit 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.
- The recharacterization of $200 million of paid-in capital to amounts due
to Williams.
27
<PAGE> 32
<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... 68,144 51,347 221,410 217,966
Eliminations............ (11,767) (12,187) (50,281) (22,264)
------------ ------------ ------------ ------------
Total
revenues..... 502,161 387,772 1,733,469 1,428,513
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.............. (46,820) (24,590) (188,404) (62,701)
Interest accrued.......... (10,536) (1,739) (18,650) (8,714)
Interest capitalized...... 4,135 1,739 11,182 7,781
Equity losses............. (10,159) (1,479) (7,908) (2,383)
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............... 568,072 494,919 396,640
Strategic Investments... 132,477 44,000 18,247
Eliminations............ (6,425) -- --
------------ ------------ ------------
Total
revenues..... 705,187 538,919 414,887
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.............. (91) 20,281 (2,752)
Interest accrued.......... (17,367) (13,999) (7,405)
Interest capitalized...... -- -- --
Equity losses............. (1,601) (72) 243
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>
28
<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>
Income (loss) from
continuing operations
before income taxes..... (56,693) (27,264) (186,026) (33,805)
(Provision) benefit for
income taxes............ (17,448) 766 5,097 (2,038)
------------ ------------ ------------ ------------
Loss from continuing
operations.............. (74,141) (26,498) (180,929) (35,843)
Income from discontinued
operations.............. -- -- -- --
------------ ------------ ------------ ------------
Net income (loss)......... $ (74,141) $ (26,498) $ (180,929) $ (35,843)
============ ============ ============ ============
Historical per share data
(basic):
Loss from continuing
operations........... $ (74,141) $ (26,498) $ (180,929) $ (35,843)
Income from discontinued
operations........... $ -- $ -- $ -- $ --
Net income (loss)....... $ (74,141) $ (26,498) $ (180,929) $ (35,843)
Weighted average shares
outstanding.......... 1,000 1,000 1,000 1,000
Pro forma per share data
(basic):
Loss from continuing
operations........... $ (.23) $ (.15) $ (.66) $ (.08)
Income from discontinued
operations........... $ -- $ -- $ -- $ --
Net income (loss)....... $ (.23) $ (.15) $ (.66) $ (.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>
29
<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>
OTHER FINANCIAL DATA:
EBITDA.................... $ (19,242) $ (5,595) $ (80,873) $ 50,005
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.............. 2,872,921 1,557,337 2,337,546 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.................. 1,034,074 963,301 1,006,682 862,702
<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>
30
<PAGE> 35
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 network unit and our solutions unit.
Through our third business unit, the strategic investments unit, 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 its network business to LDDS for
approximately $2.5 billion. The sale included Williams' nationwide fiber optic
network and the associated consumer, business and carrier customers. Williams
excluded from the sale the Retained WilTel Network, its telecommunications
equipment distribution business and Vyvx. The Retained WilTel Network, along
with Vyvx, our solutions unit 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.
On May 27, 1999, Williams contributed its 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
contributed to us.
In October 1997, management and ownership of the Retained WilTel Network
were transferred from our strategic investments unit to our network unit and
intercompany transfer pricing was established prospectively. In addition,
consulting, outsourcing and the management of Williams' internal telephone
operations, activities previously performed within our strategic investments
unit, were transferred to our network unit. For comparative purposes, the 1996
and 1997 consulting, outsourcing and internal telephone management activities
previously performed in our strategic investments unit that were transferred to
our network unit have been reflected in our network unit'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, our
network unit contributed approximately 11.2% of our total consolidated revenues,
our solutions unit contributed approximately 78.9% of our total consolidated
revenues and our strategic investments unit primarily contributed the remainder.
Throughout 1999 and 2000, we expect our network unit to contribute an increasing
percentage of our total consolidated revenues and by 2001 we expect our network
unit to contribute the largest percentage of our revenues and to be the primary
source of our income from operations on a consolidated basis. In addition, as a
result of our alliances, we expect a
31
<PAGE> 36
higher concentration of revenue from SBC, Intel and Telefonos de Mexico. Over
the next few years, revenue increases in our solutions unit are expected to be
modest, with higher revenue growth expected during the same period in our
strategic investments unit.
OUR NETWORK UNIT
Our network unit's business consists of network services and dark fiber
sales. Our network services include:
- packet-based data services
- private line services, which are dedicated direct connections between
locations
- voice services
- local services
- optical wave services
- 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. Our
network unit's revenues also include intercompany and affiliate revenues for our
management of Williams' internal telephone operations and our management of the
Retained WilTel Network.
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 our network unit's maintenance of the
cable.
Our network unit'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 Telefonos de Mexico, we expect a significant
change in our network unit's revenue mix over the next few years. In 1998,
approximately 33% of our total revenues from our network unit were generated
from sales of dark fiber. We expect that the percentage of total revenues from
our network unit attributable to dark fiber sales will increase in 1999 but will
decrease as a percentage of total revenues from our network unit after 1999. By
2001, revenues from our network unit are expected to consist primarily of voice
services and packet-based data service for communications transmissions.
32
<PAGE> 37
OUR SOLUTIONS UNIT
Our solutions unit's 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 of connections 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, which
are offices with multiple persons making and answering calls and performing
functions such as taking orders, answering service- and product-related
questions and telemarketing. Revenues from data equipment consist mainly of the
sale of routers, which connect two or more data networks, switches, which are
devices that open, close, select or complete circuits, hubs, which are devices
on a data network to which other devices such as printers and computers are
connected, and other equipment that comprise corporate voice and data networks.
We expect the provision of professional services will generate an
increasing portion of our solutions unit's 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
Our solutions unit's cost of sales consists primarily of cost of goods,
labor costs for design and installation and operations and maintenance personnel
costs.
Issues relating to our solutions unit's business performance. Our
solutions unit's 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
33
<PAGE> 38
- 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
- inability to accurately calculate sales compensation in a timely manner
- increased selling, general and administrative costs
Our solutions unit's 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.
OUR STRATEGIC INVESTMENTS UNIT
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 currently have significant
investments in Concentric Network Corporation, UniDial Communications and
UtiliCom Networks. 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 contributed to us. 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 Algar Telecom S/A,
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 -- Algar" for more
information.
34
<PAGE> 39
In addition, revenues from our strategic investments unit 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
Our strategic investments unit's cost of sales consists primarily of
off-net capacity costs and operations and maintenance personnel costs.
During the second quarter, management determined that the businesses that
provide audio and video conferencing services and closed-circuit video
broadcasting services for businesses were held for sale. On June 30, 1999, we
signed an agreement with Genesys, S.A. to sell our business which provides audio
and video conferencing services for approximately $39.0 million. We anticipate
that this transaction will close prior to August 31, 1999. The expected selling
price of both the sale to Genesys and of the other business less costs to sell
the assets is expected to result in a loss of approximately $26.0 million in the
second quarter of 1999. Costs associated with exit activities could result in
additional charges of up to $4.0 million.
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.......................... 21.6% 5.5% 11.2% 3.0% 1.6%
Solutions........................ 67.2 84.4 78.9 83.3 80.6
Strategic Investments............ 13.6 13.2 12.8 15.3 18.8
Eliminations..................... (2.4) (3.1) (2.9) (1.6) (1.0)
----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of sales.................... 77.6 74.4 74.7 73.1 73.3
Selling, general and
administrative................ 24.5 26.7 28.1 22.6 21.6
Provision for doubtful
accounts...................... 1.7 0.4 1.2 0.5 0.4
Depreciation and amortization.... 5.5 4.9 4.9 4.9 4.6
Other............................ -- (0.1) 2.0 3.2 0.1
----- ----- ----- ----- -----
Total operating expenses...... 109.3 106.3 110.9 104.3 100.0
----- ----- ----- ----- -----
Loss from operations............... (9.3)% (6.3)% (10.9)% (4.3)% --
===== ===== ===== ===== =====
</TABLE>
35
<PAGE> 40
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 $22.2 million, an
increase in equity losses of $8.7 million and an increase in 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
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, as a result of
the tax sharing agreement which we have entered into with Williams. 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.
Our network unit accounted for $9.6 million of the increase in losses from
operations, our solutions unit accounted for $10.7 million of the increase in
losses from operations and our strategic investments unit accounted for $1.9
million of the increase in losses from operations. We discuss these results in
detail below by segment.
OUR NETWORK UNIT
The table below summarizes our network unit'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>
Our network unit'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.
Our network unit'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
36
<PAGE> 41
5.4% for the three months ended March 31, 1999 from 22.2% for the three months
ended March 31, 1998. Our network unit'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.
Our network unit'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 in 1998, due primarily to an increase in
the number of employees and the expansion of the infrastructure to support the
Williams network.
Our network unit'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.
OUR SOLUTIONS UNIT
The table below summarizes our solutions unit'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:
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>
Our solutions unit's 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.
Our solutions unit's 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. Our solutions unit's cost of sales
increased $5.4 million, or 2.2%, to $246.8 million for the three
37
<PAGE> 42
months ended March 31, 1999 from $241.4 million for the same period in 1998, due
primarily to the increased revenue.
Our solutions unit's 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.
Our solutions unit's 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 the provision reflects adjustments to
our reserves based on unresolved billing and collection issues.
Our solutions unit's 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.
OUR STRATEGIC INVESTMENTS UNIT
The table below summarizes our strategic investments unit'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:
Vyvx............................ $ 39,287 $ 40,130 $ 161,201 $ 162,009 $ 99,974
PowerTel........................ 11,542 -- 11,248 -- --
Other........................... 17,315 11,217 48,961 55,957 32,503
-------- -------- --------- --------- --------
Total revenues............... 68,144 51,347 221,410 217,966 132,477
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.............. $(17,923) $(16,029) $(101,722) $(103,031) $(14,728)
======== ======== ========= ========= ========
ATL and other equity losses....... $(10,159) $ (1,479) $ (7,908) $ (2,383) $ (1,601)
======== ======== ========= ========= ========
</TABLE>
Our strategic investments unit's revenues increased $16.8 million, or 33%,
to $68.1 million for the three months ended March 31, 1999 from $51.3 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 $6.1 million in increases primarily related to audio and video
conferencing and closed-circuit video broadcasting services for businesses.
Our strategic investments unit's gross profit increased to $16.0 million
for the three months ended March 31, 1999 from $8.4 million for the same period
in 1998, while gross margin increased to 23.5% for the three months ended March
31, 1999 from 16.4% for the same period in 1998. Our strategic investments
unit's cost of sales increased $9.2 million, or 21%, to
38
<PAGE> 43
$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.
Our strategic investments unit's 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 same period in 1998, primarily
as a result of the $5.3 million impact of the August 1998 acquisition of
PowerTel.
Our strategic investments unit's equity losses increased to $10.2 million
for the three months ended March 31, 1999 from $1.5 million for the same period
in 1998 due primarily to the March 1998 investment in ATL-Algar Telecom Leste
S.A. ATL had significant pre-operational losses in the construction of a digital
cellular network in 1998 and the three months ended March 31, 1999.
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 $180.9 million in 1998 compared to a net loss
of $35.8 million in 1997, an increase of $145.1 million from 1997. The increase
in our net loss is primarily attributable to an increase in losses from
operations of $125.7 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.
Our network unit accounted for $31.0 million of the increase in losses from
operations and our solutions unit accounted for $96.0 million of the increase in
losses from operations, partially offset by a $1.3 million decrease in losses
from operations in our strategic investments unit.
39
<PAGE> 44
OUR NETWORK UNIT
Our network unit'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 our network unit in
October 1997 and the establishment of intercompany transfer pricing.
Our network unit'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. Our network unit'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 operating and maintenance expenses. Costs
associated with higher intercompany revenues primarily account for the remainder
of the increased cost.
Our network unit'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 $7.7 million of
increased information systems costs and $8.0 million for a new national
advertising campaign.
Our network unit'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 our strategic investments unit to our network
unit.
OUR SOLUTIONS UNIT
In 1997 and 1998, several integration issues relating to the combination of
Nortel's equipment distribution business with ours had an adverse impact on our
solutions unit's operating results. Although these issues began in 1997, our
financial results were not materially adversely impacted until 1998. See the
section above entitled "-- Overview -- Our solutions unit -- Issues relating to
our solutions unit's 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, our solutions unit's total segment operating
results declined from operating income of $37.1 million in 1997 to an operating
loss of $59.0 million in 1998.
Our solutions unit's 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 -- Our solutions unit -- Issues relating to
our solutions unit's business performance."
Our solutions unit's 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. Our solutions unit's 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 $121.4 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
40
<PAGE> 45
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.
Our solutions unit's 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 $23.3 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 our solutions unit's 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 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.
Our solutions unit's 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.
Our solutions unit's 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.
OUR STRATEGIC INVESTMENTS UNIT
Our strategic investments unit's revenues increased $3.4 million, or 2%, to
$221.4 million in 1998 from $218.0 million in 1997, due primarily to the $11.2
million impact of our investment in PowerTel and a $9.1 million increase from
audio and video conferencing and closed-circuit video broadcasting services for
businesses. This was partially offset by 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.
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. Our total investment represents a 36% economic
interest in PowerTel, which will increase to 45% after we make all of our
remaining required cash contributions of $39 million. We also hold 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%
41
<PAGE> 46
ownership, our consolidated financial statements reflect revenues of $11.2
million and operating expenses of $14.5 million.
Our strategic investments unit's gross profit decreased to $43.4 million in
1998 from $62.1 million in 1997, while gross margin decreased to 19.6% in 1998
from 28.5% in 1997. Our strategic investments unit's 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 our network unit 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 our strategic investments unit's 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 our learning content
business.
Our strategic investments unit's 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.
Our strategic investments unit's 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 our
network unit in October 1997 were offset by increases related to new video and
teleport equipment. Depreciation and amortization related to PowerTel totaled
$0.9 million.
Our strategic investments unit's 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 $42.0 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.
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 19% 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. The strategic investments unit had
1998 equity losses in ATL of $4.2 million. ATL incurred significant
pre-operational losses in the construction of a digital cellular network in
1998.
42
<PAGE> 47
CONSOLIDATED NON-OPERATING COSTS
Our net interest expense increased $6.5 million to $7.5 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 our solutions unit in 1998 as compared to operating profit in
1997. In 1997, we 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 $62.6 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.
Our network unit accounted for $2.5 million of the increase in losses from
operations. These losses were offset somewhat by an increase in our solutions
unit's operating income of $28.2 million. Our strategic investments unit
accounted for $88.3 million of the increase in losses from operations.
OUR NETWORK UNIT
Our network unit's revenues increased $31.9 million, or 289%, to $43.0
million in 1997 from $11.1 million in 1996, due primarily to $13.6 million in
consulting and outsourcing revenues attributable to the March 1997 acquisition
of Critical Technologies, Inc., a company which
43
<PAGE> 48
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 our
strategic investments unit to our network unit in October 1997.
Our network unit'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. Our network unit'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 our
strategic investments unit to our network unit and the $8.0 million impact of
the acquisition of Critical Technologies.
Our network unit'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.
Our network unit'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 our strategic investments unit to our network unit and the
acquisition of Critical Technologies.
OUR SOLUTIONS UNIT
Our solutions unit's 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 $535.6 million
from the April 1997 combination of Nortel's equipment distribution business with
ours.
During 1997, our solutions unit 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.
Our solutions unit's 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. Our solutions unit's 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.
Our solutions unit's 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.
Our solutions unit's 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.
44
<PAGE> 49
OUR STRATEGIC INVESTMENTS UNIT
Our strategic investments unit's revenues increased $85.5 million, or 65%,
to $218.0 million in 1997 from $132.5 million in 1996, due primarily to
acquisitions which contributed revenues of $80.6 million. Our strategic
investments unit's 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 our strategic investments unit's product offerings to include satellite
links, audio and video conferencing, closed-circuit video broadcasting for
businesses and advertising distribution.
Our strategic investments unit's gross profit increased to $62.1 million in
1997 from $49.0 million in 1996, while gross margins decreased to 28.5% in 1997
from 37.0% 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.
Our strategic investments unit's 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.
Our strategic investments unit's 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.
Our strategic investments unit's other expense 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 our
strategic investments unit's 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.
45
<PAGE> 50
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. Some amounts denominated in dollars represent amounts actually
denominated in foreign currencies. These amounts have been converted from these
currencies as of recent dates.
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, our solutions unit became a borrower under the
revolving credit facility among Williams, other Williams subsidiaries and
certain banks. Our solutions unit 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, including those of our solutions unit,
under this facility would not exceed $400 million. Our borrowings under this
facility other than borrowings by our solutions unit 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 June 15, 1999, we had spent approximately
$430 million in cash under this program, and we anticipate that at the closing
of the offerings we will have spent approximately $500 million under this
program. Our obligations under the lease are partially guaranteed by Williams.
For more information regarding our obligations under this program, see the
section of this prospectus entitled "Description of Indebtedness and Other
Financing Arrangements -- Asset defeasance program."
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, approximately $500 million in principal was outstanding under the
interim facility.
46
<PAGE> 51
We intend to replace the current revolving credit facility and interim loan
facility after the completion of the offerings, but on or before September 1,
1999, with a $1.0 billion permanent credit facility for our subsidiary, Williams
Communications, Inc. This permanent credit facility will not be guaranteed by
Williams. For more information regarding the permanent credit facility, see
"Description of Indebtedness and Other Financing Arrangements -- Permanent
credit facility."
Upon the completion of the offerings and the recharacterization of $200
million from paid in capital to amounts due to Williams, we estimate we will
have approximately $1.0 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. See the section of the prospectus entitled
"Capitalization."
ANTICIPATED FUNDING SOURCES AND USES
We anticipate total cash expended from March 31, 1999 through December 31,
2000 to approximate $4.2 billion as set forth in the table below:
PROJECTED SOURCES AND USES*
(IN MILLIONS)
<TABLE>
<S> <C>
Sources:
Net proceeds from the equity offering....................... $ 607
Net proceeds from the concurrent investments**.............. 725
Net proceeds from the notes offering........................ 1,268
Term loan borrowings........................................ 500
Revolving credit facility borrowings........................ 320
Asset defeasance program.................................... 380
Inventory and asset sales................................... 360
------
4,160
======
Uses:
Capital expenditures:
Network................................................... $3,440
Other business units...................................... 300
------
Total capital expenditures....................... 3,740
Revolving credit facility................................... 315
Intercompany debt........................................... 25
Other....................................................... 80
------
4,160
======
</TABLE>
- ---------------
* This table excludes borrowings and repayments under the interim loan facility
entered into on April 16, 1999.
** Based on $425/500 million from SBC, $100/25 million from Telefonos de Mexico
and $200 million from Intel.
Some of our funding sources include the following:
- We expect to receive approximately $725 million from the concurrent
investments. For more detail regarding the concurrent investments, see
the section of this prospectus entitled "Business -- Strategic
alliances."
- Concurrently with the equity offering, we expect to issue in the notes
offering approximately $1.3 billion principal amount of publicly traded
debt securities.
47
<PAGE> 52
- We intend to enter into a new $1.0 billion 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.
- 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. As of March 31, 1999, $382 million in
construction costs had been incurred and the remaining capacity under
this program was $368 million. At June 15, 1999, approximately $430
million in construction costs had been incurred and the remaining
capacity under this program was $320 million.
- Asset sales consist primarily of proceeds from the sale of dark fiber.
Our primary anticipated cash need is funding capital expenditures for our
network unit for construction costs, including the purchase and deployment of
fiber optic cable, equipment costs and other costs including capitalized
interest. We spent approximately $1.4 billion under our network capital plan
through June 30, 1999, of which $747 million had been spent through March 31,
1999.
A significant portion of our equipment costs will be for advanced
electronics transmitting light pulses over the fibers carrying communications
signals, voice switches for voice services and routers for Internet services.
This equipment will support increased capacity on the Williams network and
additional network services particularly in the areas of data and voice.
Our network's construction contracts typically cover all or a portion of a
cable construction project. While our network may use the same contractors on
different projects, it has no long-term construction agreements. Our network has
long-term equipment purchase contracts with Nortel and Ascend Communications,
Inc.
CAPITAL COMMITMENTS
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:
In addition to the network unit's capital plan described above, 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.
We have committed approximately $50 million for our solutions unit to
complete its transition to common information systems during 1999.
We also have commitments to purchase Nortel's interest in our solutions
unit under certain circumstances. After 1999, Nortel may require us to purchase
up to one-third of its 30% interest in our solutions unit at the then-fair
market value. The fair market value would be determined at the time of the
purchase and would be dependent on a number of factors, some of which are
subjective. Nortel may also require us to purchase its entire interest in our
solutions unit at market value in the event of a change in control of either us
or Nortel or in the event our solutions unit's purchases of Nortel equipment do
not meet certain targets. To date our solutions unit has met the equipment
purchase 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.
48
<PAGE> 53
With respect to our strategic investments unit, we expect to invest an
additional $39 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. Our ownership interests
could be diluted if we fail to make required capital contributions.
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 $641 million for ATL over the next three years 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 $30 million for PowerTel over the next three years to
construct communications networks to serve Brisbane, Melbourne and
Sydney, Australia
If ATL cannot meet its cellular license payments, it could lose its
licenses. Also, our ownership interest in ATL has been pledged to secure a loan
made to ATL and in the event of a loan default, we could lose our ownership
interests.
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 net proceeds from the offerings, the amount funded by
Williams, our borrowings under our bank facilities, the funds available under
the asset defeasance program and proceeds from the sales of inventory and assets
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 net proceeds from the offerings, the amount
funded by Williams, our borrowings under our bank facilities and the funds
available under the asset defeasance program that will continue in place
following the completion of the offerings, see the section of this prospectus
entitled "Description of Indebtedness and Other Financing Arrangements."
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
49
<PAGE> 54
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.
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 a $314 million preferred stock investment in a
Brazilian telecommunications venture. Estimating cash flow by year from this
investment is not practicable, given that the cash flows from or liquidations of
this investment are uncertain. In recent months, the Brazilian economy has
experienced significant volatility resulting in a 30% reduction in the Brazilian
Real against the U.S. dollar. However, management believes the fair value of
this investment approximates the carrying value. An additional 20% reduction in
the value of the Brazilian Real against the U.S. dollar could result in up to a
$63 million reduction in the value of this investment. This analysis assumes a
direct correlation in the fluctuation of the Brazilian Real against the value of
our investment. 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 this investment warrant the need for such consideration.
At March 31, 1999, the net assets of foreign operations that we consolidate
are located in various other countries throughout the world and approximate 7%
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 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. A 20% decrease in the respective functional
currencies against the U.S. dollar would have an impact of approximately $15
million on our financial position. 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.
50
<PAGE> 55
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 our solutions unit's "SIMS" database which holds our solutions
unit's customer records and our network unit's provisioning and ordering
fulfillment system.
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 June 30, 1999,
approximately 94% of our IT systems
51
<PAGE> 56
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 2% of our IT
systems, which are deemed compliant by vendors or employees, have not yet been
validated; of this 2%, we have categorized 100% as critical. Approximately 4%
have been identified as not Year 2000 compliant; of this 4%, we have categorized
100% as critical. Approximately 99% of our Non-IT systems have been tested and
were found to be compliant. Less than 1% remain to be tested and have been
categorized as critical. Less than 1% 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 June 30, 1999 we had sent approximately 9000 letters and questionnaires to
third parties who have conducted business with us during the last three years.
While the response rate has been 37% 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 44%
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 purchases and will be capitalized with the remaining
amounts expensed. Through April 30, 1999, approximately $5.2 million has been
expensed 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.
52
<PAGE> 57
- 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 shifted 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
- 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
53
<PAGE> 58
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, our solutions unit 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 our solutions unit's customer base. Monetary
support for the team and our solutions unit's Year 2000 project is provided for
out of each department's budget.
Our solutions unit 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. Our solutions unit 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 our solutions unit believes it has sufficient resources to provide
timely support to its customers that require product migrations or upgrades, our
solutions unit has set a July 31, 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, our solutions unit will be reviewing its work projects to
54
<PAGE> 59
address customer service. To ensure timely delivery from its suppliers, our
solutions unit 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 our solutions unit.
55
<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
56
<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, and divided the country
into approximately 200 local access and transport areas which delineate the
areas between which the regional Bell operating companies are prohibited from
providing long distance services and in which the regional Bell operating
companies are authorized to provide local exchange services. The regional Bell
operating companies 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 regional Bell operating companies 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.
57
<PAGE> 62
Other long distance providers purchased services primarily from these three new
networks or 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 regional Bell operating
companies 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 regional Bell
operating companies 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 local Bell operating companies to interconnect with competing
carriers on non-discriminatory terms
- requires local Bell operating companies to lease parts of their networks,
including the telephone lines that connect an end-user to a local
exchange carrier's device for opening, closing or completing connections,
to competing carriers at cost-based prices
- requires local Bell operating companies to provide service at wholesale
rates to competing carriers for resale to end-users
- allows a regional Bell operating company to provide interexchange
services originating from wireless equipment or from non-wireless
equipment outside of the regional Bell operating companies' exchange
areas. A regional Bell operating company will be allowed to provide
interexchange service originating from non-wireless equipment within its
exchange areas if the FCC finds that the regional Bell operating company
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
regional Bell operating companies 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.
58
<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
59
<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 our solutions unit, 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, local Bell operating companies continue to provide the vast majority
of local telephone services within their markets. However, as a result of
regulatory and technological changes over the past few years, a number of
competitive local exchange carriers, have begun to compete with the local Bell
operating companies.
The FCC reports that in 1996 local service revenues totaled approximately
$97 billion, with 109 competitive local exchange carriers accounting for about
$1 billion in revenues. The market share of competitive local exchange carriers
has grown rapidly in the last few years. According to the President's Council of
Economic Advisers, at the end of 1998 competitive local exchange carriers served
about five million lines, or 2% to 3% of local lines in the U.S.; because
competitive local exchange carriers have focused on serving the largest and most
profitable customers, competitive local exchange carriers accounted for about 5%
of the local telephone services market by revenue in 1998.
Leading competitive local exchange carriers 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 local telephone services, competitive local exchange carriers provide
interexchange services and other services such as mobile telecommunications,
video and/or Internet-related services. Cable television systems provide local
telecommunications services in many areas. Cellular and other wireless service
providers also provide local telephone 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%.
60
<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 -- International."
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 our solutions unit, 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.
61
<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.
62
<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 provide solutions for the comprehensive voice and data
needs of organizations of all sizes. Our business units are our network unit,
our solutions unit and our strategic investments unit.
Our network unit 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 over 33,000 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 21,400 route miles of installed fiber optic cable, with 18,770 of
those miles in operation, or lit.
Our solutions unit 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 customers of our network unit and other
carriers to our solutions unit's customers. We serve an installed base of
approximately 100,000 customer sites in the U.S. and Canada. Our solutions unit
has approximately 1,200 sales personnel, approximately 2,400 technicians and
approximately 800 engineering personnel in 110 offices.
Through our strategic investments unit, 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.
Our solutions unit contributed approximately 78.9% of our total revenues
during 1998, approximately 83.3% of our total revenues during 1997 and
approximately 80.6% of our total revenues during 1996. Our strategic investments
unit contributed approximately 12.8% of our total revenues during 1998,
approximately 15.3% of our total revenues during 1997 and approximately 18.8% of
our total revenues during 1996. Our network unit contributed approximately 11.2%
of our total revenues during 1998, approximately 3.0% of our total revenues
during 1997 and approximately 1.6% of our total revenues during 1996.
As a result of the expansion of the Williams network, we expect our network
unit to contribute an increasing percentage of our total consolidated revenues
and by 2000 we expect our network unit 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
63
<PAGE> 68
in our solutions unit are expected to be modest, with higher growth expected
during the same period in our strategic investments unit.
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, Telefonos de Mexico, Metromedia Fiber Network, 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 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 WilTel network business to LDDS (now MCI
WorldCom) for approximately $2.5 billion. The sale included the nationwide fiber
optic network and the associated consumer, business and carrier customers.
Williams excluded from the sale 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
64
<PAGE> 69
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
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.
OUR NETWORK UNIT
We own, operate and are extending a nationwide fiber optic network. We
offer services over the Williams network to communications companies, including
regional Bell operating companies, long distance carriers, competitive local
exchange carriers, Internet service providers, international carriers and
utilities.
65
<PAGE> 70
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 unit 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, Telefonos de Mexico, 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.
- 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.
- Utilize 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
66
<PAGE> 71
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 and reduced cost access to
the services of our strategic alliance partners. 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.
NETWORK INFRASTRUCTURE
We anticipate that the Williams network will total over 33,000 route miles
connecting 125 cities when completed by the end of the year 2000. For the period
from March 31, 1999 through December 31, 2000, we anticipate that we will spend
approximately $3.4 billion 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)........ 9,320 4,620 11 9 0.3
Completed fiber builds....... 5,200 4,450 102 21 1
Future fiber builds.......... 8,900 -- 100 24 2
------ ------
Total............. 33,120 18,770
====== ======
</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 7,400 route miles from IXC and other
carriers, of which 5,500 route miles have had fiber optic cable installed.
We intend to acquire an additional 1,800 route miles by the end of 2000.
We currently have approximately 21,400 route miles of fiber optic cable
primarily installed in the ground, with approximately 18,770 of those miles
currently in operation. Of the approximately 18,770 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
67
<PAGE> 72
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 72% of the Williams network
in terms of network route miles and we have obtained and plan to obtain the
remaining 28% 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. We lease approximately 23% of our network capacity currently in use.
However, the leased capacity we currently use constitutes approximately 7% of
the total capacity currently available on our network. 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.
Network design and infrastructure. The newer portions of the Williams
network we are constructing have the following characteristics:
- Multi-service platform. A multi-service operating system allows
traditional voice, data, Internet and video services to be provided on a
single ATM operating system. Most other carriers use multiple platforms,
or operating systems, 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.
68
<PAGE> 73
- 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, which is a
capacity of 9.953 gigabits per second, 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 temporary
connection voice services on the Williams network. We will install the
new 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.
A traditional network consists of multiple layers of equipment, each
designed for a specific function. This design results in increased initial
investment, operating/maintenance expenses, and complexity. The capacity
potential of the equipment is limited and because of the complexity and amount
of equipment, the development of new services may take longer. The layers of
equipment in a traditional network include: digital cross connect systems
specific to the other types of equipment and which allow customers to access the
network, dedicated voice switch equipment which provides voice services by
completing voice calls, frame relay switch equipment and IP, or Internet
protocol, router equipment which interacts with the ATM switch equipment to
provide specific packet-based data services, including ATM, frame relay and
Internet transport services. Each equipment type ultimately requires significant
interfaces with SONET equipment with a limited use of DWDM equipment and maximum
use of fiber.
69
<PAGE> 74
The contrast in the number and width of each type of network equipment
represented in the traditional network versus the Williams network diagram
illustrates how the Williams network design is able to effectively use equipment
which provides multiple service offerings. This eliminates the requirement for
dedicated layers of equipment, thus simplifying the network while increasing
service flexibility. In the Williams network design, the need for a digital
cross connect system is eliminated. The multi-service aggregation switch
interacts with various transmission protocols and uses ATM packets to provide
various packet-based data services including ATM, frame relay services and
Internet transport services. The voice switch provides voice services using ATM
packets. The ATM switch is able to interact directly with the DWDM equipment
bypassing extensive SONET equipment usage. The simplicity in the unique Williams
network design results in lower costs and faster development and delivery of
services versus the traditional network design.
[FLOW CHART CONTRASTING TRADITIONAL NETWORK DESIGN
WITH THE WILLIAMS NETWORK DESIGN]
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 constructed portions of the
Williams network.
70
<PAGE> 75
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 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 June
30, 1999, we had agreements in place for approximately 90% of the rights of way
needed to complete the Williams network. As of June 30, 1999, the remaining
rights of way needed for completion of the Williams network consisted of
approximately 3,300 route miles located primarily in the Western U.S. Almost all
of our rights of way extend through at least 2018.
71
<PAGE> 76
The following table sets forth our current and future plans as of June 30,
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) Completed 150 150
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 830 --
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 270 --
Bandon, Oregon -- Eugene, Oregon 4th quarter 1999 250 --
Corpus Christi -- Houston -- Laredo -- San
Antonio(1) 4th quarter 1999 740 --
Denver -- Salt Lake City 4th quarter 1999 570 --
Miami -- Tampa -- Tallahassee 4th quarter 1999 530 --
New Orleans -- Tallahassee 4th quarter 1999 480 --
Albany -- Boston 1st quarter 2000 180 --
Sacramento -- Portland(5) 1st quarter 2000 690 --
Los Angeles -- Phoenix -- San Antonio --
Houston 2nd quarter 2000 1,630 --
New York -- Boston 2nd quarter 2000 250 --
Salt Lake City -- Sacramento -- San
Francisco 2nd quarter 2000 850 --
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: 23,420 9,070
====== =====
</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> 77
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
- optical wave services
- 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 others' 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 Metromedia Fiber Network
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 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 sale of
73
<PAGE> 78
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.
Optical wave services. The packet-based DWDM technology used in the
Williams network allows us to offer optical wave services to our customers.
These services 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. This capacity we use to provide optical wave services is in addition to
the capacity used by us to provide our other services. We are able to derive
sixteen wavelengths from a single fiber strand with current technology and plan
to derive up to thirty-two wavelengths from 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 optical wave services users. We believe that
many potential customers will be interested in optical wave services because
they allow 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 our solutions unit's resources to
expand and support our customers' networks. We are deploying new management
tools, including our customer network management system, 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. Our customer network management system 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 regional Bell operating companies, Internet service providers,
long distance carriers, international carriers, utilities and other providers
who desire high-speed connectivity on a carrier services basis. We have entered
into strategic alliances with SBC, Intel, Telefonos de Mexico, Metromedia Fiber
Network, WinStar, Intermedia and U S WEST and others and have strategic
investments in UniDial, Concentric and UtiliCom, as well as international
strategic investments in communications companies located in Brazil, Australia
and Chile. These alliances and investments help to increase our volume of
business and provide additional customers for our network and solutions units.
We do not believe these alliances and investments will adversely impact our
relationships with our other customers. For more information about our strategic
alliances, see "-- Strategic alliances" below.
74
<PAGE> 79
Sales to Intermedia accounted for approximately 31.2% of our network unit's
revenues from external customers in 1998. Sales to Qwest accounted for
approximately 26.2% of our network unit'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 our network unit's
revenues from external customers in 1998. Our remaining customers each accounted
for less than 3% of our network unit's revenues from external customers in 1998.
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 have only recently
begun to offer some of our services and products and as a result we may have
fewer and less well-established customer relationships than some of our
competitors.
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.
The prices we can charge our customers for transmission capacity on the
Williams network could decline due to installation by us and our competitors,
some of which are expanding
75
<PAGE> 80
capacity on their existing networks or developing new networks, of fiber and
related equipment that provides substantially more transmission capacity than
needed. If prices for network services significantly decline, we may experience
a decline in revenues which would have a material adverse effect on our
operations.
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.
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 directly
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.
OUR SOLUTIONS UNIT
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 our 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 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.
76
<PAGE> 81
Selected statistics of our solutions unit 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>
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 our network unit's carrier customers. We are able to
distribute the products and services of our network unit's customers to
our solutions unit's customer base. We are currently using our solutions
unit's 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 our network unit's carrier customers
provides our network unit with a valuable point of differentiation.
77
<PAGE> 82
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
Equipment sales and services provided approximately 78% of total
consolidated revenues for 1998, 83% of total consolidated revenues for 1997 and
79% of total consolidated revenues for 1996.
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, which are communications networks over
small areas 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
78
<PAGE> 83
implement customized call center solutions for customers with complex
requirements. We also maintain a computer telecommunications 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.
- 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 OUR SOLUTIONS UNIT'S 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 -- Our solutions
unit."
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 our solutions unit's revenues in 1998. We estimate that
product sales from the next three largest vendors accounted for approximately 6%
of our solutions unit's 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.
79
<PAGE> 84
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 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 regional Bell operating
companies. 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.
Some of our competitors have strong existing relationships with our customers
and potential customers resulting in a competitive disadvantage for us. We are
also at a disadvantage in that our costs exceed those of manufacturers, limiting
our ability to engage in price competition with such manufacturers. However,
most manufacturers of equipment are focused on selling their own equipment and
do not provide converged solutions.
80
<PAGE> 85
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.
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
subsidiary, Nortel Communications Systems, Inc., which includes Bell Atlantic
Meridian Systems, and TTS Meridian Systems, Inc.
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.
OUR STRATEGIC INVESTMENTS UNIT
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.
STRATEGY
Our objectives for our strategic investments unit are:
- To continue to expand our international presence
- To continue to invest in companies that increase demand for the products
and services of our network and solutions units
81
<PAGE> 86
- To make and manage and, where appropriate in the case of non core
businesses, dispose of investments to increase profitability
- To secure cost-effective access to needed products and services
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. Vyvx also distributes
advertisements and other media to local television stations.
While Vyvx has over approximately 2,000 active customers, approximately 40%
of its total revenue is derived from its top ten customers. Its largest customer
accounts for approximately 19% of its total revenues. Competition is based
primarily on service quality and reliability and network reach and, to a lesser
extent, on price. Vyvx provides superior customer service and quality and
extensive domestic reach. Our competitors include some of the largest domestic
and international communications companies, which have greater financial
resources and name recognition. We are at a disadvantage in international
broadcasting because our competitors have greater international presence.
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. Prior to March 31, 2002, we
may also be required to purchase up to 906,679 shares at the current market
price so long as such purchase would not violate any law or regulation or
otherwise have a material adverse effect on our company. Concentric has agreed
to purchase at least $21 million of services and equipment from us prior to
December 1, 2002. Through at least 2007 and for so long as we own at least 5% of
Concentric's common stock, we are Concentric's preferred provider of
communications equipment and 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. During this period, Concentric must first try to buy all
services and equipment it requires from us if we provide the products Concentric
requires. Our solutions unit 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. We are discussing with
Concentric an expansion of our commercial relationship but such discussions are
in preliminary stages.
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
82
<PAGE> 87
UniDial which provides for UniDial to buy all of its required carrier services
from us until October 2002, subject to UniDial's commitments existing at the
date of the agreement. 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 our solutions unit
to sell UniDial's products and services and for UniDial to handle the billing
and collection relating to our solutions unit's 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 Telemetry and ChoiceSeat. 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.
INTERNATIONAL
On May 27, 1999, Williams contributed to us interests in communications
ventures in Brazil (ATL), Australia (PowerTel) and Chile (MetroCom). We are
responsible for any capital or other commitments which Williams had related to
these interests. Williams has granted us an option to acquire its interest in a
holding company whose subsidiaries are communications service providers in
Brazil (Algar). We may acquire additional interests in these and other
international ventures in the future.
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. Before Williams contributed its interest in ATL to
us, ATL was owned by Williams, SKTI-US LLC and Algar Telecom S/A. As of March
31, 1999, Williams owned a 55% direct interest in ATL and an indirect interest
in ATL through its ownership in SKTI-US LLC. Before Williams contributed its
interest to us, SKTI-US LLC was owned by Williams and SK Telecom Co., Ltd.,
Korea's largest wireless telecommunications provider.
We obtained from Williams its option to acquire SK Telecom's interest in
SKTI-US LLC once permitted under Brazilian regulations. In 1998, Williams
acquired a 20% non-voting economic interest in ATL. Also in 1998, SKTI-US LLC
acquired a 10% economic interest,
83
<PAGE> 88
representing a 30% voting interest, in ATL. On March 25, 1999, Williams
purchased from Algar for $265 million an additional 35% economic interest,
representing a 19% voting interest, in ATL. This investment reduces Algar'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, the shareholders of ATL, including Williams, pledged 49%
of their common ATL stock and all of their preferred ATL 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.
We and Williams have held preliminary discussions concerning the
possibility of our increasing our ownership in ATL through our purchase from
Algar of Algar's investment in ATL. There is no assurance that these discussions
will result in any agreement.
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.
Algar. Williams currently owns a 20% equity interest in Algar. Algar S.A.
Empreendimentos e Participacoes, a Brazilian conglomerate, owns 74% of Algar.
The remaining 6% of Algar is owned by the International Finance Corporation.
We have the right during the period from January 1, 2000 through January 1,
2001 to purchase all of Williams' equity and debt investments in Algar and any
interests in ATL that Williams acquires at the net book value of Williams'
investment in Algar and ATL at the time of the purchase. At March 31, 1999, this
net book value was approximately $155 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.
Williams purchased the 20% economic interest in Algar, 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 Algar. Beginning in
January 2002 and until an initial public offering of Algar, Williams has a right
to sell its entire interest in Algar for at least the amount of Williams'
investment plus interest. Williams has the ability to maintain its ownership
level in Algar in the event of capital increases.
Algar'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.
84
<PAGE> 89
Other majority-owned subsidiaries of Algar 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.
[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. Williams has contributed its interests in PowerTel to us.
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
85
<PAGE> 90
districts of these cities. The three Australian utilities have entered into a
20-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.
We currently own 159,574,468 shares, or 35%, of the common stock of
PowerTel and 31,914,894 shares, or 100%, of convertible cumulative preferred
stock of PowerTel. Our 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 our option at any time until August 2003. We
currently hold a majority of PowerTel's board seats, are entitled to elect the
majority of the directors of PowerTel, to appoint the executive officers of
PowerTel and to operate the company. We are 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. Our ownership in PowerTel will
increase to 45% after we have made all of our 60 million Australian dollar cash
contribution. We also have options to purchase 44,680,851 shares of common
stock, which would increase our interest by 3%, at an exercise price of 0.47
Australian dollars per share. These options are exercisable at any time until
August 2003. We also have a 2.4% ownership interest in PowerTel through an
earlier investment made by Williams.
MetroCom. On March 30, 1999, Williams acquired a 19.9% equity interest in
MetroCom S.A. which it has contributed to us. 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.
We also have warrants to purchase shares of MetroCom's common stock which
would increase our interest to 50%. Williams purchased the common stock and the
warrants for $24.5 million. Williams employees occupy the chief executive
officer and certain other key management positions.
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 provider 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.
86
<PAGE> 91
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.
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, subject to certain exceptions, 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 all voice or data switching assets which are physically located in that
state and of which SBC has been the primary user. The option must be exercised
within one year of the receipt of authorization. Williams then has one year
after SBC's exercise of the option to migrate traffic, install replacement
assets and complete other transition activities. 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
87
<PAGE> 92
- 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, causing a material
adverse effect on the commercial value of the relationship to us
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 Department of Justice
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 Indiana Utility Regulatory Commission has asserted its
jurisdiction to approve the proposed merger. On June 4, 1999, SBC and Ameritech
appealed that decision to the Indiana Court of Appeals. The Indiana Utility
Regulatory Commission has scheduled hearings and a briefing schedule to
determine whether the proposed merger is in the public interest. 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 either approve, approve subject to certain conditions imposed on the
companies, or deny approval of the merger. Following discussion with the staff
of the FCC, SBC and Ameritech proposed certain conditions to the merger. On July
1, 1999, the FCC asked for public comment on the conditions and expects to vote
on them in late summer 1999.
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, if any, 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.
88
<PAGE> 93
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 until at
least 2009
- 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 Telefonos de Mexico's investment would increase
from $25 million to $100 million.
INTEL
Intel Corporation is a 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 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.
89
<PAGE> 94
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.
TELEFONOS DE MEXICO
Telefonos de Mexico, S.A. de C.V., the largest communications provider in
Mexico, currently provides long distance and local services primarily in Mexico.
On May 25, 1999, we entered into agreements with Telefonos de Mexico under
which, subject to any necessary U.S. and Mexican regulatory requirements:
- Telefonos de Mexico 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 Telefonos de Mexico for 20 years
- we and Telefonos de Mexico 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 the lowest cost provider. Both we and Telefonos de Mexico 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.
Certain of the provisions relating to the preferred provider relationship
and competitive pricing requirements will not be implemented until changes to
the international settlement system currently in place pursuant to U.S. and
Mexican regulations occur. Due to Telefonos de Mexico's dominant position in
Mexico, the international settlement system requires that Telefonos de Mexico
split its traffic terminating in the U.S. on a basis proportionate to that of
U.S. carriers terminating traffic in Mexico. We anticipate that changes will be
enacted by the end of 2000. See the section of this prospectus entitled
"Regulation -- Settlement costs for international traffic."
We and Telefonos de Mexico have agreed on a mechanism for the development
of mutually beneficial projects intended to interconnect the Williams network
with the Telefonos de Mexico 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 Telefonos de Mexico.
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 Telefonos de Mexico 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
90
<PAGE> 95
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.
Telefonos de Mexico 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,
Telefonos de Mexico's investment would increase to $100 million.
The obligation to make the Telefonos de Mexico investment is subject to
conditions at closing, including that the alliance agreement with Telefonos de
Mexico be in full effect.
In connection with its purchase of our common stock Telefonos de Mexico has
agreed to certain restrictions and will receive certain privileges, including
the following:
- Telefonos de Mexico has agreed not to acquire more than 10% of our common
stock for a period of 10 years
- Telefonos de Mexico 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
- Telefonos de Mexico 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
Telefonos de Mexico 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 Telefonos de Mexico under the securities purchase agreement in the
event of the termination of certain agreements with Telefonos de Mexico.
Williams, for so long as it has a 50% interest in our common stock, has a right
of first purchase with respect to any shares of common stock not purchased by
our company.
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 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 dark fiber of up to 3,200 route miles 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 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
91
<PAGE> 96
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. As of March 31, 1999,
we had received approximately $15.3 million.
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 also provide
various of our services to U S WEST.
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.
92
<PAGE> 97
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. For more information regarding the operating lease agreement, see the
section of this prospectus entitled "Description of Indebtedness and Other
Financing Arrangements -- Asset defeasance program."
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. Our solutions unit occupies approximately 192,000 square feet of
office space in Houston, Texas which it subleases from Williams.
EMPLOYEES
As of June 30, 1999, excluding our unconsolidated strategic investments, we
had a total of 9,411 employees, 1,050 of whom were served by collective
bargaining agreements. The following shows the number of our employees broken
down by segment:
<TABLE>
<S> <C>
Network 1,199
Solutions 6,211
Strategic Investments 972
Corporate 1,029
-----
Total 9,411
=====
</TABLE>
LEGAL PROCEEDINGS
Class actions have been filed against other communications carriers which
challenge the carriers' rights to install and operate fiber optic systems along
railroad rights of way. Approximately 15% of our network is installed on
railroad rights of way. We are a party to litigation challenging our right to
use railroad rights of way over which we have installed approximately 28 miles
of our network. The plaintiff in this action is seeking to have this matter
certified as a class action. It is likely that we will be subject to other suits
challenging use of all of our railroad rights of way and that the plaintiffs
will also seek class certification. We cannot quantify the impact of such claims
at this time.
93
<PAGE> 98
REPORTS TO STOCKHOLDERS
We intend to furnish our stockholders 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.
94
<PAGE> 99
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 regional
Bell operating companies' entry into providing long distance services. We
believe that the regional Bell operating companies' 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 a regional Bell operating company 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 a regional Bell operating
company 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 regional Bell operating company 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 regional Bell
operating companies for entry and has denied several of these petitions. We
expect that additional petitions for entry will be filed, and that the regional
Bell operating companies 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.
95
<PAGE> 100
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 local
Bell operating companies' 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 local Bell operating
companies and other rate regulation for smaller local Bell operating companies.
The FCC may adopt rules allowing local Bell operating companies 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 local Bell operating companies'
unbundled network elements and services to competitive local exchange carriers,
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 competitive local exchange carriers. However, the
Supreme Court instructed the FCC to reconsider an earlier determination
regarding the extent to which local Bell operating companies are required to
unbundle elements of their networks and provide those unbundled networks to
competitive local exchange carriers. In addition, certain local Bell operating
companies 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.
96
<PAGE> 101
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 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 local Bell
operating companies 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 local Bell operating companies and competitive local
exchange carriers regarding the prices local Bell operating companies charge for
interconnection of network elements with, and resale of, services by competitive
local exchange carriers; 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.
97
<PAGE> 102
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.
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.
98
<PAGE> 103
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 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 is charged with most
competition-related regulatory functions and price control arrangements. The
Australian Communications Authority 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 Australian Competition and Consumer Commission 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 Australian
Competition and Consumer Commission and the Australian Communications Authority.
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 Australian Competition and
Consumer Commission determines which services are regulated. Other services may
be supplied on commercially negotiated terms subject to the
99
<PAGE> 104
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 Australian Competition and Consumer Commission 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 Australian
Competition and Consumer Commission has issued a draft report in favor of
regulating noncompetitive access services with pricing based on total service
long-run incremental cost.
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 Australian Communications Authority 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 Australian Competition and Consumer Commission 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 Australian Competition and Consumer
Commission'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 Australian Competition
and Consumer Commission have expressed the view that Telstra's interconnect and
wholesale pricing is too high. The Australian Competition and Consumer
Commission does not currently have power to set interconnect prices generally.
The Australian Competition and Consumer Commission is only empowered to settle
disputes between specific parties in relation to a limited number of services.
Even where the Australian Competition and Consumer Commission 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
100
<PAGE> 105
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 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.
SETTLEMENT COSTS FOR INTERNATIONAL TRAFFIC
International switched long distance traffic between two countries
typically is exchanged under correspondent agreements between carriers each
owning network transmission facilities in their respective countries.
Correspondent agreements generally provide for, among other things, the
termination of traffic in, and return traffic to, the carriers' respective
countries at a negotiated accounting rate. Settlement costs, typically one-half
of the accounting rate, are reciprocal fees owed by one international carrier to
another for transporting traffic on its facilities and terminating that traffic
in the other country. The FCC and regulators in foreign countries may regulate
agreements between U.S. and foreign carriers.
101
<PAGE> 106
The FCC's international settlements policy governs the settlements between
U.S. carriers and their foreign corespondents and prevents foreign carriers from
discriminating among U.S. carriers in bilateral accounting rate negotiations.
The policy requires
- the equal division of accounting rates
- non-discriminatory treatment of U.S. carriers
- proportionate return of inbound traffic
Agreements governed under the policy must be filed publicly with and
approved by the FCC. Recently, the FCC limited application of the policy, which
now applies only to U.S. carrier arrangements with certain foreign carriers with
market power in their respective countries. For example, U.S. carrier
arrangements with Telefonos de Mexico continue to be subject to the policy, but
U.S. carrier arrangements with a Telefonos de Mexico competitor in Mexico are
not subject to the policy. The FCC also recently decided to exempt certain
foreign routes from the policy, depending upon the ability of U.S. carriers to
terminate traffic on those routes at rates substantially below benchmarks set by
the agency. However, Mexico is not currently an exempted route. Other countries
have policies similar to that of the FCC.
Resale of international private lines allows carriers to bypass the
settlement rate system, and, therefore, the need to negotiate accounting rates
with foreign carriers with market power and obtain termination of international
traffic in the United States and foreign countries at substantially reduced
rates. The FCC's private line resale policy currently prohibits a carrier from
reselling international private leased circuits to provide switched services to
or from a country unless certain conditions are met.
Currently, Mexican carriers other than Telefonos de Mexico can engage in
such resales under FCC rules, but the Mexican regulator has not permitted such
resales. If Mexico approves such resales but the FCC continues to restrict
Telefonos de Mexico from engaging in such resales, competitors of Telefonos de
Mexico would be permitted to engage in low-cost termination of traffic between
the United States and Mexico, but Telefonos de Mexico would be precluded from
doing so. Recently, AT&T and Telefonos de Mexico agreed to an accounting rate of
$.38 per minute, which falls within the FCC's prescribed benchmark for Mexico.
Accordingly, it is possible that the FCC will soon permit such resales by
Telefonos de Mexico on the U.S.-Mexico route, which would allow Telefonos de
Mexico and its competitors to terminate traffic in Mexico and, through their
U.S. correspondents, the United States once Mexico allows such resales.
102
<PAGE> 107
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the date of this
prospectus 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
H. Brian Thompson...................... 60 Director (upon completion of the equity offering)
Roy A. Wilkens......................... 56 Director (upon completion of the equity offering)
David P. Batow......................... 47 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 Group Executive
Patti L. Schmigle...................... 40 Senior Vice President, Solutions
Scott E. Schubert...................... 46 Senior Vice President and Chief Financial Officer
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 the
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.
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
103
<PAGE> 108
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.
H. Brian Thompson will be appointed as an independent director of our board
concurrently with the completion of the offerings. Mr. Thompson has been
Chairman and Chief Executive Officer of Global TeleSystems Group, Inc. since
March 1999. From January to March 1999, he served as non-executive chairman of
Telecom Eireann, Ireland's incumbent telephone company. From June to December
1998, Mr. Thompson served as Vice Chairman of Qwest Communications International
Inc. after its merger with LCI International. From 1991 to June 1998, Mr.
Thompson served as Chairman and Chief Executive Officer of LCI International.
Mr. Thompson also serves as a member of the board of directors of Bell Canada
International Inc. and PageNet
104
<PAGE> 109
do Brazil, as co-chairman of the Global Information Infrastructure Commission,
and as chairman of the Advisory Committee for Telecommunications for Ireland's
Department of Public Enterprise. Mr. Thompson's term as a director will expire
at the annual stockholders' meeting in 2001.
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., Splitrock Services, Inc. and McLeod USA
Incorporated. 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 equal in value to $40,000
and an annual grant of ten-year, fully exercisable options to purchase 8,000
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.
105
<PAGE> 110
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
Williams' human resources department and was based upon compensation survey
information relevant to companies of similar size in the communications
industry.
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.
106
<PAGE> 111
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 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. Effective June 7, 1999, Mr. Littlefield became
Senior Vice President and Group Executive of our company. Since 1997, Mr.
Littlefield had been Senior Vice President and Chief Financial Officer of our
company. 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.
Patti L. Schmigle has been Senior Vice President of our company since 1997
and has been Senior Vice President, Solutions since June 30, 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 became 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 had 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.
107
<PAGE> 112
William G. von Glahn has been Senior Vice President, Law of our company
since March 1999. Mr. von Glahn has been the general counsel of Williams 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.
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.
108
<PAGE> 113
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 the three years 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(3) COMPENSATION(4)
- --------------------------- -------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Howard E. Janzen.............. 1998 $400,000 $126,000 $2,574,000(5) 30,000 $12,050
President, Chief Executive 1997 300,000 105,000 45,000 60,000 10,131
Officer and Director 1996 250,000 108,282 46,406 60,002 9,496
Delwin L. Bothof.............. 1998 $210,000 $ 46,857 $ 650,082 15,000 $12,800
Senior Vice President, 1997 184,000 55,956 26,530(6) 30,000 10,131
Domestic Strategic 1996 176,200 55,096 23,613 45,000 9,496
Investments
Lawrence C. Littlefield,
Jr.......................... 1998 $190,000 $ 42,394 $ 207,169 15,000 $12,800
Senior Vice President and 1997 175,000 53,219 22,808 30,000 10,131
Group Executive 1996 165,000 24,948 306,943(7) 81,000 9,496
Garry K. McGuire.............. 1998 $290,000 $ 30,441 $ 643,046 15,000 $ 9,600
Senior Vice President, 1997 100,000 105,308 318,695(8) 50,000 0
Solutions (until June 30,
1999)
Frank M. Semple............... 1998 $240,000 $ 91,350 $ 669,150 15,000 $12,800
Senior Vice President, 1997 210,717 95,404 40,888 50,000 10,131
Network 1996 196,820 82,664 35,428 45,000 9,496
</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
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 -- for 1998, 1,769 shares valued at $54,000, for 1997,
1,963 shares valued at $45,000 and for 1996, 2,776 shares valued at $46,406;
Mr. Bothof -- for 1998, 658 shares valued at $20,082, for 1997, 1,047 shares
valued at $23,981 and for 1996, 1,414 shares valued at $23,613; Mr.
Littlefield -- for 1998, 596 shares valued at $18,169, for 1997, 995 shares
valued at $22,808 and for 1996, 640 shares valued at $10,693; Mr.
McGuire -- for 1998, 428 shares valued at $13,046, for 1997, 1,970 shares
valued at $45,132 and for 1996, no shares; and Mr. Semple -- for 1998, 1,283
shares valued at $39,150, for 1997, 1,784 shares valued at $40,888 and for
1996, 2,120 shares valued at $35,428. 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
109
<PAGE> 114
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) Adjusted to reflect stock splits.
(4) 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.
(5) 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.
(6) Amounts include the dollar value as of the date of grant of 138 shares of
Williams deferred stock awards under the terms of The Williams Companies,
Inc. stock plan for nonofficer employees. The value of the award at the date
of grant was $2,549.
(7) Amounts include the dollar value as of the date of grant of 18,000 shares of
Williams deferred stock awards under the terms of The Williams Companies,
Inc. stock plan for nonofficer employees. The value of the award at the date
of grant was $296,250.
(8) Amounts include the dollar value as of the date of grant of 12,000 shares of
Williams deferred stock awards under the terms of The Williams Companies,
Inc. stock plan for nonofficer employees. The value of the award at the date
of grant was $273,563.
Messrs. Janzen, Bothof and Littlefield 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.
110
<PAGE> 115
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.
111
<PAGE> 116
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 $31.1375 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 May 10, 1999, loans aggregating approximately $30.8
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
112
<PAGE> 117
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
113
<PAGE> 118
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
114
<PAGE> 119
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
115
<PAGE> 120
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
116
<PAGE> 121
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 2,700,000.
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 750,000.
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. Except
for one-fourth of the shares issued in exchange which will vest at the closing
of the equity offering, 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
117
<PAGE> 122
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. 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 independent directors of our company and Williams or our suppliers and
customers. See the section of this prospectus entitled "Underwriting" for more
information.
118
<PAGE> 123
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, and for stock options
denominated as dollar amount awards, the number of shares indicated below have
been determined based on an assumed initial offering price of $____ per share
and a price per share of Williams common stock of $49.00, which was the trading
price of Williams common stock on June 21, 1999. Other than for Mr. Wilkens, a
significant percentage of the options to purchase common stock indicated for
each individual will not be exercisable 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
underwriters' overallotment option.
<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% %
SBC Communications, Inc.(1)............. -- --
Intel Corporation....................... -- --
Telefonos de Mexico, S.A. de C.V.(1).... -- -- *
Keith E. Bailey......................... -- 100,000 100,000 * *
John C. Bumgarner, Jr. ................. -- 50,000 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 * *
H. Brian Thompson....................... -- 14,000 14,000 * *
Roy A. Wilkens.......................... -- 14,000 14,000 * *
</TABLE>
119
<PAGE> 124
<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>
Delwin L. Bothof........................ 70,000 * *
Lawrence C. Littlefield, Jr. ........... 70,000 * *
Frank M. Semple......................... 100,000 * *
All directors and executive officers as
a group (22 persons).................. * *
</TABLE>
- ---------------
* Less than 1%.
(1) If SBC consents to reduce its investment to $425 million so that Telefonos
de Mexico can invest an additional $25 million, SBC would receive ______
shares, or __% of the total shares outstanding, and Telefonos de Mexico
would receive ______ shares, or __% of the total shares outstanding. If SBC
has an investment of $500 million, SBC would receive ______ shares, or __%
of the total shares outstanding, and Telefonos de Mexico would receive
______ shares, or __% of the total shares outstanding.
120
<PAGE> 125
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 SEC. 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 *
H. Brian Thompson..........................
Roy A. Wilkens............................. 400,000 -- 400,000
Delwin L. Bothof........................... 132,981 52,500 185,481 *
Lawrence C. Littlefield, Jr. .............. 121,840 108,500 230,340 *
Frank M. Semple............................ 61,685 162,500 224,185 *
All directors and executive officers as a
group (22 persons)....................... -- -- -- --
</TABLE>
- ---------------
* Less than 1%.
(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. Thompson, , including over which he
has sole
121
<PAGE> 126
investment and voting power; Mr. Wilkens, 104,524, over all of 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, 35,542, including 1,194 over which he has
sole voting and investment power; Ms. Schmigle, , including
over which she has sole voting and investment power; and all executive
officers as a group, , including 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 SEC 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.
122
<PAGE> 127
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. Charges are for
communications services which we obtain from MCI WorldCom and resell internally.
Our agreement with MCI WorldCom, which we entered into at the time we sold our
business to them, provides us with certain amounts of service on the MCI
WorldCom network for a 35-year term. We are provided services on the portion of
the network which it owns at no cost, and on portions which it leases at its
cost. We resell these communication services to Williams, its subsidiaries and
affiliates at market rates.
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. We own portions of these microwave
frequencies which we acquired from and lease to the gas pipelines. These leases
are for a 10-year term and the rental payments are equal to our purchase cost
plus a market rate of return.
Williams grants our directors and officers fully recourse 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. We anticipate that the loans
made by Williams to our directors and officers will remain outstanding Williams
loans after the offerings. We anticipate that Williams will continue to make
loans to our directors and officers on similar terms to enable them to exercise
Williams stock options. We may make loans to our officers and directors,
including loans to enable them to exercise stock options to purchase our common
stock. We anticipate that the terms of these loans will be fully recourse and
otherwise similar to those for Williams loans.
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
</TABLE>
123
<PAGE> 128
<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>
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............ $ 428,427.82 $ 960,551.80 $ 1,869,699.99
Jack D. McCarthy............ 6.23% $ 321,312.50 $ 1,095,763.30 $ 1,054,388.82
Jack D. McCarthy............ 6.42% $ 265,031.98 $ 878,651.17 $ 844,523.79
Jack D. McCarthy............ 5.59% $ 158,731.67 $ 696,532.02 $ 680,189.94
Jack D. McCarthy............ 4.83% $ 301,392.00 $ 0 $ 1,256,752.75
Total............ $1,046,468.15 $ 2,670,946.49 $ 3,835,855.30
William G. von Glahn........ 5.83% $ 73,234.13 $ 443,131.30 $ 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% $ 70,049.95 $ -- $ 604,298.96
Total............ $ 311,094.99 $ 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 $ 1,132,545.47
Total............ $ 180,664.33 $ 1,131,060.57 $ 1,132,545.47
Grand Total...... $7,165,084.57 $28,095,553.22 $30,751,293.21
</TABLE>
In connection with his employment, Williams has agreed to loan Scott E.
Schubert approximately $4,000,000 to provide funds to exercise options granted
by his former employer. Currently Mr. Schubert has two such loans outstanding,
which were made on June 22, 1999, the first in the principal amount of
$1,200,000 and bearing an interest rate of 4.98% and the second in the principal
amount of $800,000 and bearing an interest rate of 5.37%. John C. Bumgarner, one
of our directors and our Senior Vice President, 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 our subsidiaries to make similar payments
approximating $60,000 per month for the term of the leases.
Garry McGuire, Senior Vice President, Solutions (until June 30, 1999), 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.
124
<PAGE> 129
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 the 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.
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 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
125
<PAGE> 130
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.
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.
ALGAR CALL OPTION
We have entered into an agreement with Williams granting us the option to
acquire Williams' equity and debt interests in Algar. For more information, see
the section of this prospectus entitled "Business -- Strategic
investments -- International -- Algar."
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
126
<PAGE> 131
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 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.
127
<PAGE> 132
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 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 interim loan facility 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 interim
loan facility 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
128
<PAGE> 133
contingent obligations in connection with financings by ATL in total amount of
approximately $53 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 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.
129
<PAGE> 134
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.
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
130
<PAGE> 135
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 debt, 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 to purchase Williams'
investment in Algar 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.
131
<PAGE> 136
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions of our capital
stock. For a more detailed description, see our restated certificate of
incorporation and by-laws, copies of which we have filed as exhibits to the
registration statement, and the applicable provisions of Delaware law.
Immediately prior to the closing of the equity offering, we will restate
our certificate of incorporation to change our authorized capital stock to
1,000,000,000 shares of Class A common stock (which we refer to as common stock
in this prospectus), 500,000,000 shares of Class B common stock and 500,000,000
shares of preferred stock, par value $0.01 per share, and to convert all 1,000
outstanding shares of our current common stock into a total of ________ shares
of our newly created Class B common stock.
COMMON STOCK AND CLASS B COMMON STOCK
GENERAL
The holders of common stock and Class B common stock have identical rights
except with respect to voting, conversion and transfer.
VOTING RIGHTS
Holders of our common stock are entitled to one vote per share on all
matters to be voted on by stockholders, while holders of Class B common stock
are entitled to ten votes per share. Holders of shares of common stock and Class
B common stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority of the votes entitled to be cast by all holders of common
stock and Class B common stock present in person or represented by proxy, voting
together as a single class, subject to any voting rights granted to holders of
any preferred stock. Except as otherwise provided by law or in our restated
certificate of incorporation, and subject to any voting rights granted to
holders of any outstanding preferred stock, amendments to our restated
certificate of incorporation must be approved by a majority of the votes
entitled to be cast by all holders of common stock and Class B common stock
present in person or represented by proxy, voting together as a single class.
However, amendments to our restated certificate of incorporation that would
alter or change the powers, preferences or special rights of the common stock so
as to affect them adversely also must be approved by a majority of the votes
entitled to be cast by the holders of the common stock, voting as a separate
class. Any amendment to our restated certificate of incorporation to increase
the authorized shares of any class requires the approval only of a majority of
the votes entitled to be cast by all holders of common stock and Class B common
stock present in person or represented by proxy, voting together as a single
class, subject to the rights set forth in any series of preferred stock created
as described below.
DIVIDENDS
Holders of our common stock and Class B common stock will share equally on
a per share basis in any dividend declared by the board of directors, subject to
any preferential rights of any outstanding preferred stock. Dividends consisting
of shares of common stock and Class B common stock may be paid only as follows:
(a) shares of common stock may be paid only to holders of common stock, and
shares of Class B common stock may be paid only to holders of Class B common
stock; and
(b) the number of shares so paid will be equal on a per share basis with
respect to each outstanding share of common stock and Class B common stock.
132
<PAGE> 137
We may not split, reclassify, subdivide or combine shares of either class
of common stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class.
ISSUANCE OF CLASS B COMMON STOCK, OPTIONS OR WARRANTS
Subject to certain provisions regarding dividends and other distributions
described above and except for payment of the purchase price for the Algar
option, we will not be entitled to issue additional shares of Class B common
stock, or issue options, rights or warrants to subscribe for additional shares
of Class B common stock, except that we may make a pro rata offer to all holders
of common stock of rights to purchase additional shares of the class of common
stock held by them. The common stock and the Class B common stock will be
treated equally with respect to any offer we make to holders of common stock of
options, rights or warrants to subscribe for any of our other capital stock.
MERGER OR CONSOLIDATION
In the event of a merger or consolidation, the holders of common stock and
Class B common stock will be entitled to receive the same per share
consideration, if any, except that if the consideration includes voting
securities, or the right to acquire voting securities or securities exchangeable
for, or convertible into, voting securities, we may, but are not required to,
provide for the holders of Class B common stock to receive consideration
entitling them to ten times the number of votes per share as the consideration
being received by holders of the common stock.
CONVERSION OF CLASS B COMMON STOCK
Our Class B common stock will be convertible into common stock on a
share-for-share basis at the option of the holder at any time, or automatically
upon transfer to a person or entity which is not a permitted transferee. In
general, permitted transferees will include Williams, its direct and indirect
subsidiaries, any person or entity in which Williams or any successor
beneficially owns, directly or indirectly, at least 50% of the equity or the
voting securities, any successor of any of the foregoing and stockholders of
Williams who receive our Class B common stock in a tax-free spin-off. A tax-free
spin-off generally means a transaction in which stockholders of Williams receive
shares of our common stock or Class B common stock as a distribution with
respect to, or in exchange for, stock of Williams without being required to
recognize gain or loss for federal income tax purposes by reason of Section 355
of the Code (or any corresponding provision of any successor statute). Following
any distribution of Class B common stock to stockholders of Williams, shares of
Class B common stock will no longer be convertible into shares of common stock.
Shares of Class B common stock transferred to stockholders of Williams in a
tax-free spin-off will not be converted into shares of common stock and,
following a tax-free spin-off, shares of Class B common stock will be
transferable as Class B common stock, subject to applicable laws.
PREFERRED STOCK
Our board of directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, and the board of directors may fix the numbers of shares of each series
and the designation, powers, privileges, preferences and rights and the
qualifications, limitations and restrictions of the shares of each series.
The specific matters that our board of directors may determine include the
following:
- the designation of each series
- the number of shares of each series
133
<PAGE> 138
- the rate of any dividends
- whether any dividends shall be cumulative or non-cumulative
- the terms of any redemption
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of our company
- rights and terms of any conversion or exchange
- restrictions on the issuance of shares of the same series or any other
series
- any voting rights
The Series A preferred stock described below under "-- Stockholder rights
plan" is a series of preferred stock that has been authorized by our board.
Although no shares of preferred stock are currently outstanding and we have
no current plans to issue preferred stock, the issuance of shares of preferred
stock, or the issuance of rights to purchase shares of preferred stock, could be
used to discourage an unsolicited acquisition proposal. For example, a business
combination could be impeded by issuing a series of preferred stock containing
class voting rights that would enable the holder or holders of this series to
block such a transaction. Alternatively, a business combination could be
facilitated by issuing a series of preferred stock having sufficient voting
rights to provide a required percentage vote of the stockholders. In addition,
under certain circumstances, the issuance of preferred stock could adversely
affect the voting power and other rights of the holders of the common stock.
Although our board is required to make any determination to issue any preferred
stock based on its judgment as to the best interests of our stockholders, it
could act in a manner that would discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock over prevailing market prices of the stock. Our board does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or applicable stock exchange
requirements.
LIMITATION ON LIABILITY OF DIRECTORS
Our restated certificate of incorporation provides, as authorized by
Section 102(b)(7) of the Delaware General Corporation Law, that our directors
will not be personally liable to us or our stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability imposed by law, as
in effect from time to time, for the following:
- any breach of the director's duty of loyalty to our company or our
stockholders
- any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL
- any transaction from which the director derived an improper personal
benefit
The inclusion of this provision in our restated certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against our directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
our company and our stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are a Delaware corporation and subject to Section 203 of the DGCL.
Generally, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the time a
134
<PAGE> 139
stockholder became an interested stockholder unless, as described below, certain
conditions are satisfied. Thus, it may make acquisition of control of our
company more difficult. See "-- Limitations on changes of control of our
company" below. The prohibitions in Section 203 of the DGCL do not apply if the
following occur:
- prior to the time the stockholder became an interested stockholder, our
board of directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of our company outstanding at the time the
transaction commenced
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by our board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder
Under Section 203 of the DGCL, a business combination includes the
following:
- any merger or consolidation of our company with the interested
stockholder
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of our company, to or with the interested stockholder of
assets of our company having an aggregate market value equal to 10% or
more of either the aggregate market value of all the assets of our
company or the aggregate market value of all the outstanding stock of our
company
- certain transactions resulting in the issuance or transfer by our company
of our stock to the interested stockholder
- certain transactions involving our company which have the effect of
increasing the proportionate share of the stock of any class or series of
our company which is owned by the interested stockholder
- certain transactions in which the interested stockholder receives
financial benefits provided by us
Under Section 203 of the DGCL, an interested stockholder generally is one
of the following:
- any person that owns 15% or more of the outstanding voting stock of our
company
- any person that is an affiliate or associate of our company and was the
owner of 15% or more of the outstanding voting stock of our company at
any time within the three-year period prior to the date on which it is
sought to be determined whether that person is an interested stockholder
- the affiliates or associates of that person
Because Williams will own more than 15% of our voting stock before we
become a public company and upon completion of the equity offering, Section 203
of the DGCL by its terms is currently not applicable to business combinations
with Williams even though Williams owns 15% or more of our outstanding stock. If
any other person acquires 15% or more of our outstanding stock, that person will
be subject to the provisions of Section 203 of the DGCL.
PROVISIONS OF OUR RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
Our by-laws contain provisions requiring that advance notice be delivered
to us of any business to be brought by a stockholder before an annual or special
meeting of stockholders and providing for certain procedures to be followed by
stockholders in nominating persons for election
135
<PAGE> 140
to our board. Generally, these advance notice provisions require that the
stockholder must give written notice to the secretary of our company:
- in the case of an annual meeting, not less than 90 days nor more than 120
days before the first anniversary of the preceding year's annual meeting
of stockholders
- in the case of a special meeting, not less than 90 days, or, if later, 10
days after the first public announcement of the date of the special
meeting, nor more than 120 days prior to the scheduled date of such
special meeting
In each case, the notice must set forth specific information regarding the
stockholder giving the notice and each director nominee or other business
proposed by the stockholder, as applicable, as provided in our by-laws.
Notwithstanding the foregoing, any stockholder, including Williams, who together
with its affiliates owns capital stock entitled to exercise a majority of the
voting power in an election of directors, may nominate one or more individuals
for election as directors by giving notice to our company not later than five
days before the scheduled date for the election of directors. Generally, only
business set forth in the notice for a special meeting of stockholders may be
conducted at a special meeting.
Our by-laws provide, in accordance with our restated certificate of
incorporation, that except as may be provided in connection with the issuance of
any series of preferred stock, the number of directors shall be fixed from time
to time exclusively pursuant to a resolution adopted by a majority of the whole
board, as that term is defined in our restated certificate of incorporation. 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. See
the section of the prospectus entitled "Management -- Our directors" for more
information.
Subject to the rights of the holders of any series of preferred stock to
elect and remove additional directors under specified circumstances, on or after
the time when Williams and its affiliates own less than 50% of the voting power
of our then-outstanding capital stock, a director of our company may be removed
only for cause by affirmative vote of the holders of at least a majority of the
voting power of all of our outstanding shares generally entitled to vote in the
election of directors, voting together as a single class, and vacancies on our
board may only be filled by the affirmative vote of a majority of the remaining
directors. Prior to the time when Williams and its affiliates own less than 50%
of our then-outstanding capital stock, subject to the rights of holders of any
series of preferred stock, a director of our company may be removed, with or
without cause, by the affirmative vote of the holders of at least a majority of
the voting power of all voting stock then outstanding, voting together as a
single class, and vacancies on our board may be filled only by the affirmative
vote of at least 80% of the remaining directors then in office.
Our restated certificate of incorporation provides that, on or after the
time when Williams and its affiliates own less than 50% of our then-outstanding
capital stock, stockholders may not act by written consent in lieu of a meeting.
On or after the time when Williams and its affiliates own less than 50% of our
then-outstanding capital stock, special meetings of the stockholders may be
called only by a majority of the whole board, but may not be called by
stockholders. Before the time when Williams and its affiliates own less than 50%
of our then-outstanding capital stock, the secretary of our company is required
to call a special meeting of the stockholders at the request of Williams or its
affiliates and stockholder action may be taken by written consent in lieu of a
meeting.
136
<PAGE> 141
In general, our by-laws may be altered or repealed and new by-laws adopted
by the holders of a majority of the voting stock or by a majority of the whole
board. However, certain provisions, including those relating to the limitation
of actions by stockholders taken by written consent, the calling of special
stockholder meetings, other stockholder actions and proposals and certain
matters related to our board, may be amended only by the affirmative vote of
holders of at least 80% of the total voting stock.
LIMITATIONS ON CHANGES OF CONTROL OF OUR COMPANY
The provisions of our restated certificate of incorporation and by-laws
described above, as well as the stockholder rights plan described below and the
provisions of Section 203 of the DGCL, could have the following effects, among
others:
- delaying, deferring or preventing a change in control
- delaying, deferring or preventing the removal of existing management
- deterring potential acquirors from making an offer to our stockholders
- limiting any opportunity of our stockholders to realize premiums over
prevailing market prices of our common stock in connection with offers by
potential acquirors
Any of the above could occur, notwithstanding that a majority of our
stockholders might benefit from such a change in control or offer.
TRANSACTIONS AND CORPORATE OPPORTUNITIES
Our restated certificate of incorporation includes provisions which
regulate and define the conduct of certain business and affairs of our company
from the time of the completion of the equity offering until the time Williams
ceases to be a significant stockholder of our company. These provisions serve to
determine and delineate the respective rights and duties of our company,
Williams, and some of our directors and officers in anticipation of the
following:
- directors, officers and/or employees of Williams may serve as directors
of our company
- Williams may engage in lines of business that are the same, similar or
related to, overlap or compete with our lines of business, subject to the
separation agreement
- our company and Williams will engage in material business transactions,
including pursuant to the various agreements described above
Our company may, from time to time, enter into and perform agreements with
Williams to engage in any transaction, and to agree to compete or not to compete
with each other, including to allocate, or to cause their respective directors,
officers and employees to allocate, corporate opportunities between themselves.
Our restated certificate of incorporation provides that no such agreement, or
its performance, shall be considered contrary to any fiduciary duty of Williams,
as the controlling stockholder of our company, or of any such director, officer
and/or employee, if any of the following conditions are satisfied:
- the agreement was entered into before our company ceased to be a
wholly-owned subsidiary of Williams and is continued in effect after this
time
- the agreement or transaction was approved, after being made aware of the
material facts of the relationship between our company and Williams and
the material terms and facts of the agreement or transaction, by:
- our board, by affirmative vote of a majority of directors who are not
interested persons
- by a committee of our board consisting of members who are not
interested persons, by affirmative vote of a majority of those members
137
<PAGE> 142
- by one or more of our officers or employees who is not an interested
person and who was authorized by our board or a board committee as
specified above or, in the case of an employee, to whom authority has
been delegated by an officer to whom the authority to approve such an
action has been so delegated
- the agreement or transaction was fair to our company as of the time it
was entered into by our company
- the agreement or transaction was approved by affirmative vote of a
majority of the shares of capital stock entitled to vote and who do vote
on the agreement or transaction, excluding Williams and any interested
person in respect of such agreement or transaction
For purposes of these provisions, an interested person is generally an
individual who has a personal financial interest in the relevant transaction.
The provisions of our restated certificate of incorporation with regard to
such transactions and/or corporate opportunities shall terminate when Williams,
together with its affiliates, ceases to be the owner of voting stock
representing 25% or more of the votes entitled to be cast by the holders of all
the then outstanding voting stock; provided, however, that the termination shall
not terminate the effect of these provisions with respect to any agreement
between our company and Williams that was entered into before the time of
termination or any transaction entered into in the performance of such
agreement, whether entered into before or after such time, or any transaction
entered into between our company and Williams or the allocation of any
opportunity between them before such time. These provisions do not alter the
fiduciary duty of loyalty of our directors under applicable Delaware law. By
becoming a stockholder in our company, you will be deemed to have notice of and
have consented to these provisions of our restated certificate of incorporation.
LISTING
We have applied for our common stock to be listed on the New York Stock
Exchange under the symbol "WCG."
TRANSFER AGENT
Our transfer agent and registrar for our common stock is The Bank of New
York.
STOCKHOLDER RIGHTS PLAN
Our board has adopted a stockholder rights plan. Pursuant to the rights
plan, one right will be issued and attached to each outstanding share of capital
stock. Each right will entitle the holder, in circumstances described below, to
purchase from our company a unit consisting of one one-hundredth of a share of
Series A junior preferred stock, par value $0.01 per share, at an exercise price
of $100 per right, subject to adjustment in certain events.
Initially, the rights will be attached to all certificates representing
outstanding shares of capital stock and will be transferred with and only with
these certificates. The rights will become exercisable and separately
certificated only upon the distribution date, which will occur upon the earlier
of the following:
- ten business days following a public announcement that a person or group
other than certain exempt persons has acquired or obtained the right to
acquire beneficial ownership of 15% or more of the shares of common stock
then outstanding
- ten business days, or later if determined by our board prior to any
person acquiring 15% or more of the shares of common stock then
outstanding, following the commencement or
138
<PAGE> 143
announcement of an intention to commence a tender offer or exchange offer
that would result in a person or group becoming an acquiring person
As soon as practicable after the distribution date, certificates will be
mailed to holders of record of capital stock as of the close of business on the
distribution date. From and after the distribution date, the separate
certificates alone will represent the rights. Prior to the distribution date,
all shares of capital stock issued will be issued with rights. Shares of capital
stock issued after the distribution date will not be issued with rights, except
that shares issued pursuant to any of the following that exist prior to the
distribution date may be issued with rights:
- the exercise of stock options that exist prior to the distribution date
- under employee plans or arrangements that exist prior to the distribution
date
- upon exercise, conversion or exchange of certain securities
- in other cases as may be deemed appropriate by our board
The final expiration date of the rights will be at the close of business on
June 30, 2009, unless earlier redeemed or exchanged by us as described below.
In the event that a person acquires 15% or more of the shares of common
stock then outstanding, except pursuant to any action or transaction approved by
our board before the person acquires 15% or more of the shares of common stock
then outstanding, each holder of a right other than that person and certain
related parties, whose rights will automatically become null and void, will
thereafter be entitled to receive, upon exercise of the right, a number of
shares of common stock, or, in certain circumstances, cash, property or other
securities of our company, having a current market price averaged over the
previous 30 consecutive trading days equal to two times the exercise price of
the right.
In the event that, at any time on or after a person acquires 15% or more of
the shares of common stock then outstanding, our company effects a merger or
other business combination in which it is not the surviving entity, or any
shares of our capital stock are changed into or exchanged for other securities,
or 50% or more of its assets, cash flow or earning power is sold or transferred,
then each holder of a right, except rights owned by any person who has acquired
15% or more of the shares of common stock then outstanding or certain related
parties, which will have become void as set forth above, shall thereafter have
the right to receive, upon exercise, a number of shares of common stock of the
acquiring company having a fair market value equal to two times the exercise
price of the right.
The exercise price payable, and the number of units of Series A preferred
stock, shares of capital stock or other securities or property issuable, upon
exercise of the rights are subject to adjustment from time to time to prevent
dilution in the event of a stock dividend or distribution on the capital stock,
a grant or distribution to holders of the capital stock of certain subscription
rights, warrants, evidence of indebtedness, cash or other assets, or other
similar events.
No fractional units will be issued. In lieu thereof, an adjustment in cash
will be made based on the market price of the common stock on the last trading
date prior to the date of exercise. Pursuant to the rights plan, we reserve the
right to require prior to the occurrence of one of the events that triggers the
ability to exercise the rights that, upon any exercise of rights, a number of
rights be exercised so that only whole shares of Series A preferred stock will
be issued.
We will also have the option, at any time after a person acquires 15% or
more of our capital stock as described above on and before that person becomes,
or simultaneously with that person becoming, the beneficial owner of 50% or more
or the shares of rights plan voting stock then outstanding, to exchange the
rights, other than rights owned by an acquiring person or certain
139
<PAGE> 144
related parties, which will have become void, in whole or in part, at an
exchange ratio of one share of capital stock, and/or other equity securities
deemed to have the same value as one share of capital stock, per right, subject
to adjustment.
At any time prior to the close of business on the tenth business day
following the stock acquisition date, our company, by vote of a majority of our
board, may redeem the rights in whole, but not in part, at a price of $0.01 per
right, payable, at our option, in cash, shares of capital stock or such other
consideration as our board may determine. The rights will terminate at the time
so designated by our board and thereafter the only right of the holders of
rights will be to receive the redemption price.
For as long as the rights are redeemable, our company may, except with
respect to the redemption price, amend the rights plan in any manner, including
to extend the time period in which the rights may be redeemed. After the time
the rights cease to be redeemable, we may amend the rights in any manner that
does not materially adversely affect the interests of holders of the rights as
such. Until a right is exercised, the holder, as such, will have no rights as a
stockholder of our company, including the right to vote or to receive dividends.
Our restated certificate of designations of the Series A preferred stock
provides that each share of Series A preferred stock that may be issued upon
exercise of the rights will be entitled to receive, when, as and if declared,
cash and non-cash dividends equal to:
- a dividend multiple of 100 times the aggregate per share amount of all
cash and non-cash dividends declared or paid on the common stock, subject
to adjustments for stock splits or dividends payable in common stock or
reclassifications of common stock
- preferential quarterly cash dividends of $.01 per share, less any
dividends received
Holders of Series A preferred stock will have a vote multiple of 100 votes
per share, subject to adjustments for stock splits or dividends payable in
common stock or reclassifications of common stock and, except as otherwise
provided by the certificate of designations, our restated certificate of
incorporation or applicable law, shall vote together with holders of capital
stock as a single class. In the event that the preferential quarterly cash
dividends are in arrears for six or more quarterly dividend payment periods,
holders of Series A preferred stock will have the right to elect two additional
members to our board, to serve until the next annual meeting of our company or
until such earlier time as all accrued and unpaid preferential quarterly cash
dividends are paid in full.
In the event of the liquidation, dissolution or winding up of our company,
after provision for liabilities and any preferential amounts payable with
respect to any preferred stock ranking senior to the Series A preferred stock,
the holders of any Series A preferred stock will be entitled to receive
liquidation payments per share in an amount equal to the greater of the
following:
- $100.00 plus an amount equal to accrued and unpaid dividends and
distributions thereon to the date of payment
- a liquidation multiple of 100 times the aggregate amount to be
distributed per share to holders of capital stock, subject to adjustments
for stock splits or dividends payable in common stock or
reclassifications of common stock
The rights of the Series A preferred stock as to dividends, voting and
liquidation are protected by antidilution provisions.
In the event of a consolidation, merger or other transaction in which the
shares of capital stock are exchanged, holders of shares of Series A preferred
stock will be entitled to receive the amount and type of consideration equal to
the per share amount received by the holders of the
140
<PAGE> 145
capital stock, multiplied by the highest of the dividend multiple, the vote
multiple or the liquidation multiple as in effect immediately prior to the
event.
Except for the acquisition of shares of Series A preferred stock in any
other manner permitted by law, our certificate of designations or our restated
certificate of incorporation, the shares of Series A preferred stock are not
redeemable at the option of our company or any holder thereof.
The rights will have certain anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire our company
without the approval of our board. As a result, the overall effect of the rights
may be to render more difficult or discourage any attempt to acquire our
company, even if such acquisition may be in the interest of our stockholders.
Because our board can redeem the rights or approve a permitted offer, the rights
will not interfere with a merger or other business combination approved by our
board.
The rights plan excludes Williams and its affiliates and associates from
being considered acquiring persons until Williams first ceases to beneficially
own 15% or more of the rights plan voting stock then outstanding.
141
<PAGE> 146
DESCRIPTION OF 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.
NOTES
GENERAL
The notes are to be issued under an indenture, to be dated as of
____________, 1999, between us and The Bank of New York, as trustee. The notes
are general unsecured senior obligations of ours, and will rank on a parity with
all our other unsecured senior indebtedness.
The notes will be limited to $1.3 billion aggregate principal amount and
will mature on ____________ , 200_. Interest on the notes will be payable on
____________ and ____________ of each year, commencing ____________ at the rate
of ____% per annum. Prior to ____________, 200_, we may redeem all or part of
the notes at any time at a make-whole price specified in the indenture. In
addition, any time or from time to time prior to ____, 2002, we may redeem up to
35% of the aggregate principal amount of the notes at a redemption price equal
to ______% of the principal amount of the notes so redeemed, with the net cash
proceeds of one or more offerings of common stock as described in the indenture.
The notes will also be redeemable, at our option, in whole or in part, at any
time after ____________, 200__, at redemption prices starting at ____% of their
principal amount and declining to 100% of their principal amount on or after
____________, plus accrued and unpaid interest. Upon a change of control of our
company, each note holder will have the right to require us to purchase that
holder's notes.
COVENANTS
The indenture contains certain restrictive covenants, including, among
others, the following:
- a limitation on our ability and that of our subsidiaries to incur
indebtedness
- a limitation on our ability and that of our subsidiaries to, directly or
indirectly, make certain payments, including payment of dividends,
prepayment of subordinated indebtedness, the repurchase of capital stock
and making of investments
- a limitation on our ability to allow to exist certain dividend and other
payment restrictions affecting our subsidiaries
- a limitation on our ability to sell or to permit any subsidiary to issue
or sell capital stock of a subsidiary
- a limitation on our ability and that of our subsidiaries to consummate
certain asset dispositions unless certain conditions are fulfilled
- limitations on transactions with affiliates
- limitations on our ability and that of our subsidiaries to incur liens
In addition, the indenture limits our ability to merge with or to transfer
all or substantially all of our assets to another person. Except as set forth
above, the indenture does not contain any material quantitative financial
requirements. The notes provide for acceleration upon customary events of
default.
As of the date of the indenture, all of our subsidiaries will be subject to
the restrictive covenants described above. However, if we meet certain
conditions, we have the ability to designate subsidiaries as "unrestricted,"
which means they will no longer be subject to these covenants.
142
<PAGE> 147
REVOLVING CREDIT FACILITIES
We currently have available loan commitments 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. Our
solutions unit 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 LOAN FACILITY
In April 1999, we entered into a $1.4 billion unsecured revolving interim
loan facility with four 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. At the date of this prospectus, we have approximately $500
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
Bank of America, N.A. and The Chase Manhattan Bank have committed to
provide a $1.0 billion credit facility for our subsidiary, Williams
Communications, Inc., described below. The commitment requires that the facility
be entered into on or before September 1, 1999. The credit facility will consist
of a $500 million seven-year senior multi-draw amortizing term loan facility and
a $500 million six-year senior reducing revolving credit facility. We may borrow
under the term loan facility during a one-year period beginning on the
commencement date of the credit facility. We may borrow under the revolving
credit facility throughout its six-year term.
The loans will bear interest based on our debt ratings by Standard & Poors
Investor Services, Inc. and Moody's Investors Services Inc. We expect the
initial annual rate of interest to be LIBOR plus 2.25%.
Term loans must be repaid beginning in the fourth year of the term loan
facility: 15% of the term loans must be repaid during the fourth year, 25%
during the fifth year, 30% during the sixth year and 30% during the seventh
year. The commitments under the revolving credit facility will be permanently
reduced by 20% in the fourth year, by 30% in the fifth year, and by 50% in the
sixth year. We must repay amounts borrowed under the revolving credit facility
to the extent these amounts are in excess of the remaining commitments.
We are required to prepay the loans by an amount equal to:
- 100% of net cash proceeds from sales of assets to the extent these
proceeds are not reinvested in core assets or permitted acquisitions
- 50% of excess cash flow beginning in 2001
- 100% of net cash proceeds received from the issuance of debt after the
offerings, except permitted debt
143
<PAGE> 148
Prepayment is not required from excess cash flow and is required from only
50% of the proceeds received from issuing debt if the ratings assigned to the
facilities by Standard & Poors and Moody's are not less than BBB- and Baa3,
respectively, or if the ratio of total debt to adjusted EBITDA is less than 3.5
to 1.0. The lenders may terminate the permanent credit facility and declare all
loans outstanding under the permanent credit facility due and payable if an
event of default occurs under the permanent credit facility. Events of default
under the permanent credit facility include:
- nonpayment of principal or other amounts due under the facilities
- material misrepresentations
- covenant violations
- a cross-default to our other material debt
- certain bankruptcy and ERISA events
- material judgments
- a downgrade by Standard & Poors or Moody's of the senior unsecured debt
of Williams to less than BBB- or Baa3, respectively
- a change of control of our company
The loans shall be unsecured except that if at any time the rating for the
permanent credit facility assigned by Standard & Poors is less than BB- or by
Moody's is less than Ba3, we must provide the lenders with security interests
and liens upon substantially all of our assets.
The credit facility will contain restrictive and financial maintenance
covenants. Restrictive covenants will include limitations on:
- additional debt
- leases
- creation of liens
- guarantees
- sales of assets
- mergers, consolidations, liquidations and dissolutions
- investments, loans and advances
- dividends and other payments with respect to our capital stock and common
stock of our subsidiaries
- material changes to our charter or the indenture for the notes
- sale and leaseback transactions
- material changes in our lines of business
Financial maintenance covenants will include:
- a total debt to contributed capital requirement
- a minimum EBITDA plus dark fiber sales cash revenues requirement
- a limitation on capital expenditures
- a total debt to adjusted EBITDA requirement
- a senior debt to adjusted EBITDA requirement
- an adjusted EBITDA to interest expense requirement
The terms of and exceptions to these covenants have not been determined.
The commitment is subject to a number of significant conditions including:
- no material adverse condition or change affecting our business,
operations, conditions or prospects
- completion of and satisfaction with a due diligence inspection of us
- no material disruption of or adverse change in financial, banking or
capital markets
144
<PAGE> 149
- negotiation, execution and delivery of definitive loan documentation on
or before September 1, 1999
- receipt of either gross proceeds from the equity offering and the
concurrent investments of not less than $1 billion and gross proceeds
from the notes offering of not less than $1.3 billion, or a Williams
guarantee of our obligations under the permanent credit facility
Our ability to borrow under the permanent credit facility is subject to
additional conditions, many of which require lender satisfaction or are based on
lender determination.
The lenders intend to syndicate all or part of their commitments to a group
of financial institutions. We have agreed that pricing, structure, amount and
other terms of the facilities may be changed if the lenders determine advisable
to ensure successful syndication or optimal credit structure. We may however
reject such changes and terminate the commitments.
We expect to borrow the amounts necessary under the permanent credit
facility to repay the interim loan facility and as and when needed for our
capital investment plan and for working capital and general corporate purposes.
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 March 31, 1999, Williams' total capital contributions to
us were approximately $1.4 billion and our borrowings provided by Williams were
$818.1 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 $1.0 billion in
borrowings from Williams. At that time, these borrowings will be converted into
a seven-year amortizing note payable by Williams Communications, Inc. to
Williams that will bear interest at an annual rate based on our credit rating,
expected initially to be LIBOR plus 2.25%. 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 completion of the offerings.
The Williams note will rank senior to the notes. It will rank equal to the
permanent credit facility except to the extent the permanent credit facility is
secured and as set forth in an intercreditor agreement to be entered into by
Williams and the credit facility lenders. Under the intercreditor agreement,
Williams will agree that the Williams note will be subordinated to rights of the
lenders in any bankruptcy, insolvency, liquidation or dissolution of the
borrower and in the event of default under the credit facility, with some
exceptions to be negotiated.
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 includes
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
145
<PAGE> 150
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 June 15, 1999, approximately $430 million of
construction costs for the Williams network had been funded, and we anticipate
that at the closing of the offerings approximately $500 million will have been
funded.
146
<PAGE> 151
SHARES ELIGIBLE FOR FUTURE SALE
After the equity offering and the concurrent investments, we will have
approximately 450,000,000 shares of common stock outstanding, ________ of which
will be owned by SBC, Intel and Telefonos de Mexico in the aggregate and up to
______ of which will be owned by our directors and executive officers. If the
underwriters exercise their over-allotment option in full, we will have a total
of approximately ________ shares of common stock outstanding. There will also be
outstanding options to purchase up to ________ shares of our common stock that
will be issued to directors and selected officers and other employees of our
company and Williams. In addition, we will have ________ shares of Class B
common stock outstanding, all of which will be owned by Williams. The Class B
common stock is convertible into common stock on a share-for-share basis at the
option of the holder at any time, or automatically upon transfer to a person or
entity which is not a permitted transferee. See the section of our prospectus of
"Description for Capital Stock" for more information. All of the common stock
sold in the equity offering will be freely transferable without restriction or
further registration under the Securities Act, except for shares acquired by our
directors and executive officers. The shares of Class B common stock to be
retained by Williams and the shares of common stock to be acquired the
concurrent investments are not being acquired under the equity offering and will
have restrictions on resale.
We, Williams, SBC, Intel, Telefonos de Mexico, our directors and executive
officers and selected customers and suppliers who are purchasing common stock in
the equity offering have agreed, subject to certain exceptions, not to offer,
sell, or otherwise dispose of any capital 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. Williams is
not under any contractual obligation to retain our common stock or Class B
common stock, except during this 180-day period. SBC, Intel and Telefonos de
Mexico have agreed to additional restrictions on transfer of the shares of our
common stock acquired by them. We can give no assurance concerning how long
these parties will continue to hold their common stock after the equity
offering.
The shares of common stock acquired by SBC, Intel and Telefonos de Mexico
will be restricted securities, and, as such, will be subject to the resale
limitations of Rule 144 of the Securities Act.
The shares of Class B common stock held by Williams and the shares of
common stock acquired by any of our other affiliates will also be subject to the
resale limitations of Rule 144 of the Securities Act. Rule 144 defines an
affiliate as a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
the issuer.
In general, a stockholder subject to Rule 144 who has owned common stock of
an issuer for at least one year may, within any three-month period, sell up to
the greater of:
- 1% of the total number of shares of common stock then outstanding; and
- the average weekly trading volume of the common stock during the four
weeks preceding the stockholder's required notice of sale.
Rule 144 requires stockholders to aggregate their sales with other
stockholders with which it is affiliated for purposes of complying with this
volume limitation. A stockholder who has owned common stock for at least two
years, and who has not been an affiliate of the issuer for at least 90 days, may
sell common stock free from the volume limitation and notice requirements of
Rule 144.
147
<PAGE> 152
Following expiration of the 180-day period noted above, Williams will be
entitled to require us to use our best efforts to register for sale under the
Securities Act any shares of common stock held by it or any of its affiliates or
that may be received by it upon conversion of its Class B common stock. SBC,
Intel and Telefonos de Mexico also have registration rights. See the sections of
this prospectus entitled "Relationship Between Our Company and Williams" and
"Business -- Strategic alliances."
We cannot estimate the number of shares of common stock that may be sold by
third parties in the future because these sales will depend on market prices and
other factors.
Prior to the equity offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that future sales of shares
of our common stock or the availability of our shares for sale would have on the
prevailing market price of our common stock. Sales of a significant number of
shares of our common stock, or the perception that these sales could occur,
could adversely affect the prevailing market price of our common stock and could
impair our future ability to raise capital through an offering of equity
securities. See "Risk Factors -- Risks relating to our common stock -- Shares
eligible for public sale after this offering may adversely affect our stock
price."
148
<PAGE> 153
IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES
OF OUR COMMON STOCK 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 common stock
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 common stock who is not a U.S. person
is a non-U.S. holder. We assume in this discussion that you will hold our common
stock 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, partnership or owner of more than 5% of our
common stock. 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 common stock, 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
DIVIDENDS
Dividends paid to a non-U.S. holder will generally be subject to
withholding of U.S. federal income tax at the rate of 30%. If, however, the
dividend is effectively connected with the conduct of a trade or business in the
U.S. by the non-U.S. holder, the dividend 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 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. For
purposes of determining whether tax is to be withheld at a reduced rate as
specified by a treaty, we generally will presume that dividends we pay on or
before December 31, 2000, to an address in a foreign country are paid to a
resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a non-U.S. holder generally will be required to
provide certification as to that non-U.S. holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether,
149
<PAGE> 154
for purposes of applying a treaty, dividends that we pay to a non-U.S. holder
that is an entity should be treated as paid to holders of interests in that
entity.
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 common stock 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 U.S. expatriates
- we are or have been during certain periods a "United States real property
holding corporation" for U.S. federal income tax purposes
If we are or have been a United States real property holding corporation, a
non-U.S. holder will generally not be subject to U.S. federal income tax on gain
recognized on a sale or other disposition of our common stock provided that:
- the non-U.S. holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of our outstanding common
stock and
- our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes
We believe that our common stock will be traded on an established securities
market for this purpose in any quarter during which it is listed on the NYSE.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a non-U.S. holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax, generally
at a rate of 10% of the proceeds. Any amount withheld pursuant to a withholding
tax will be creditable against a non-U.S. holder's U.S. federal income tax
liability.
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 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
Our common stock 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 be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends.
150
<PAGE> 155
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 will generally not apply to dividends
that we pay on our common stock to a non-U.S. holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker 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 or other taxable
disposition of our common stock 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 established 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 withholding 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.
151
<PAGE> 156
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, the underwriters of the equity offering in the United
States and Canada named below, for whom Salomon Smith Barney Inc., Lehman
Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting
as U.S. representatives, and the underwriters of the concurrent equity offering
outside the United States and Canada named below, for whom Lehman Brothers
International (Europe), Salomon Brothers International Limited and Merrill Lynch
International are acting as international representatives, severally agreed to
purchase, and we have agreed to sell to the underwriters, the number of shares
set forth opposite the name of each underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
U.S. underwriters:
Salomon Smith Barney Inc. ................................
Lehman Brothers Inc. .....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................
Banc of America Securities LLC............................
CIBC World Markets Corp...................................
Credit Suisse First Boston Corporation....................
Donaldson, Lufkin & Jenrette Securities Corporation.......
--------
Subtotal...............................................
--------
</TABLE>
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
International underwriters:
Lehman Brothers International (Europe)....................
Salomon Brothers International Limited....................
Merrill Lynch International...............................
Cazenove & Co.............................................
Bank of America International Limited.....................
CIBC World Markets International Limited..................
Credit Suisse First Boston (Europe) Limited...............
Donaldson, Lufkin & Jenrette International................
--------
Subtotal...............................................
--------
Total.......................................
========
</TABLE>
We refer to the U.S. underwriters and the international underwriters as the
underwriters and the U.S. representatives and international representatives as
the representatives. The underwriting agreement provides that the obligations of
the several underwriters to purchase the shares included in this offering are
subject to approval of legal matters by counsel as well as to other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares. The offering price and underwriting discounts and commissions per
share for the U.S. offering and the international offering are identical. The
closing of the U.S. offering is a condition to the closing of the international
offering and the closing of the international offering is a condition to the
closing of the U.S. offering.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to certain
152
<PAGE> 157
dealers at the public offering price less a concession not in excess of $____
per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $____ per share on sales to certain other dealers.
If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms. The representatives have advised us that the underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to ________ additional shares of our
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to its initial purchase commitment.
We, Williams, SBC, Intel and Telefonos de Mexico and our executive officers
and directors have agreed not to do any of the following, whether any
transaction described in clause (1), (2) or (3) below is to be settled by
delivery of common stock or other securities, in cash or otherwise, in each case
without the prior written consent of Salomon Smith Barney Inc. and Lehman
Brothers Inc., on behalf of the underwriters, for a period of 180 days after the
date of this prospectus:
(1) offer, sell, pledge, or otherwise dispose of, or enter into any transaction
or device which is designed or could be expected to, result in the
disposition by any person at any time in the future of, any shares of common
stock or securities convertible into or exchangeable for common stock, other
than any of the following:
- the common stock sold under this prospectus
- our issuance and sale of shares of common stock to SBC, Intel and
Telefonos de Mexico in connection with the concurrent investments
- our issuance of shares of Class B common stock to Williams in connection
with our exercise of the Algar option
- shares of common stock we issue pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date of this prospectus or pursuant to currently
outstanding options, warrants or rights
- shares of common stock we use as consideration for acquisitions or that
we issue in connection with strategic alliances, provided that the
recipient of these shares of our common stock agrees to be bound by the
transfer restrictions set forth in this prospectus for the remaining term
(2) sell or grant options, rights or warrants for shares of our common stock or
securities convertible into or exchangeable for our common stock except for
common stock and options for common stock which we issue or grant to our
officers, directors or employees
(3) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of shares of common stock
The U.S. underwriters and the international underwriters have entered into
an agreement among U.S. underwriters and international underwriters, pursuant to
which each U.S.
153
<PAGE> 158
underwriter has agreed that, as part of the distribution of the shares of common
stock offered in the U.S. offering:
- it is not purchasing any of these shares for the account of anyone other
than a U.S. person, which is generally U.S. or Canadian residents,
nationals or entities, and
- it has not offered or sold, will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
relating to the U.S. offering to anyone other than a U.S. person
In addition, pursuant to the agreement, each international underwriter has
agreed that, as part of the distribution of the shares of common stock offered
in the international offering:
- it is not purchasing any of the shares for the account of a U.S. person,
and
- it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
relating to the international offering to any U.S. person
The limitations described above do not apply to stabilization transactions
or to other transactions specified in the underwriting agreement and the
agreement among U.S. underwriters and international underwriters, including:
- some purchases and sales between U.S. underwriters and the international
underwriters
- some offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investments discretion
- purchases, offers or sales by a U.S. underwriter who is also acting as an
international underwriter or by an international underwriter who is also
acting as a U.S. underwriter
- other transactions specifically approved by the U.S. representatives and
the international representatives
Any offer of the shares of common stock in Canada will be made only
pursuant to an exemption from the prospectus filing requirement and an exemption
from the dealer registration requirement (where such an exemption is not
available, offers shall be made only by a registered dealer) in the relevant
Canadian jurisdiction where any such offer is made.
Each international underwriter has represented and agreed to all of the
following:
- It has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer or sell any
shares of common stock to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995.
- It has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the regulation with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom.
- It has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise be issued or passed upon.
Under the agreement between the U.S. underwriters and the international
underwriters, each international underwriter has further represented that it has
not offered or sold, and has agreed
154
<PAGE> 159
not to offer or sell, directly or indirectly, in Japan or to or for the account
of any resident of Japan, any of the shares of common stock in connection with
the distribution contemplated by this prospectus, except for offers and sales to
Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further agreed to send to any dealer who purchases
from it any of the shares of common stock a notice stating in substance that, by
purchasing these shares, the dealer represents and agrees that it has not
offered or sold, and will not offer or sell, any of these shares, directly or
indirectly, in Japan or to or for the account of any resident of Japan except
for offers or sales to Japanese international underwriters or dealers and except
pursuant to any exemption from the registration requirements of the Securities
and Exchange Law and otherwise in compliance with applicable provisions of
Japanese law, and that the dealer will send to any other dealer to whom it sells
any of these shares a notice containing substantially the same statements as set
forth in this sentence.
Pursuant to the agreement among the U.S. underwriters and international
underwriters, sales may be made between the U.S. underwriters and the
international underwriters of the number of shares of common stock as may be
mutually agreed. The price of any shares so sold shall be the public offering
price as then in effect for the shares of common stock being sold by the U.S.
underwriters and the international underwriters less an amount equal to the
selling concession allocable to those shares of common stock, unless otherwise
determined by mutual agreement. To the extent that there are sales between the
U.S. underwriters and the international underwriters pursuant to the agreement
among the U.S. underwriters and the international underwriters, the number of
shares of common stock available for sale by the U.S. underwriters or by the
international underwriters may be more or less than the amount specified on the
cover page of this prospectus.
In connection with the equity offering, Salomon Smith Barney Inc. and
Lehman Brothers Inc., on behalf of the underwriters, may purchase and sell
shares of our common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in the offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
our common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of our common stock made for the purpose of preventing
or retarding a decline in the market price of our common stock while this
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc. and Lehman Brothers Inc., in covering syndicate short
positions or making stabilizing purchases, repurchase shares originally sold by
that syndicate member.
Any of these activities may cause the price of our common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the NYSE, in
the over-the-counter market or otherwise and, if commenced, may be discontinued
at any time.
At our request, the underwriters have reserved up to ________ shares of
common stock offered in this prospectus for sale to all of the regular domestic
employees and independent directors of our company and of Williams and selected
suppliers and customers of our company at the initial public offering price set
forth on the cover page of this prospectus. Up to 7.0% of
155
<PAGE> 160
the common stock constituting the equity offering will be available for purchase
under the program, with no more than 0.7% of the common stock constituting the
equity offering to be available for purchase by the independent directors of our
company and Williams or our customers and suppliers. These persons must commit
to purchase no later than the close of business on the day following the date of
this prospectus. The number of shares available for sale to the general public
will be reduced to the extent these persons purchase reserved shares. Our
suppliers and customers who purchase shares of common stock will agree not to
sell these shares 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.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges in accordances with the laws and
practices of the country of purchase, in addition to the offering price set
forth on the cover of this prospectus.
We expect that more than 10% of the net proceeds of the offerings will be
paid to affiliates of certain of the underwriters. Accordingly, the offering is
being conducted in accordance with Rule 2720 of the National Association of
Securities Dealers, Inc., which requires that the initial public offering price
be no higher than that recommended by a qualified independent underwriter as
defined by the NASD. Salomon Smith Barney Inc. has agreed to serve in that
capacity in connection with the equity offering and performed due diligence
investigations and reviewed and participated in the preparation of the
registration statement of which this prospectus is a part. Salomon Smith Barney
Inc. will receive no compensation for acting in this capacity; however, we have
agreed to indemnify Salomon Smith Barney Inc. for acting as qualified
independent underwriter against certain liabilities under the Securities Act of
1933.
Certain of the underwriters of the equity 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 equity offering will act as underwriters for the notes
offering.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
LEGAL MATTERS
The validity of the common stock 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.
156
<PAGE> 161
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.
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 common
stock 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.
157
<PAGE> 162
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-41
Combined Statements of Income and Changes in Net Assets
for the four months ended April 30, 1997 and year ended
December 31, 1996...................................... F-42
Combined Statements of Cash Flows for the four months
ended April 30, 1997 and year ended December 31,
1996................................................... F-43
Notes to the Financial Statements......................... F-44
</TABLE>
F-1
<PAGE> 163
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
$4,228,000.
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 July 7, 1999
F-2
<PAGE> 164
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> 165
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).............. $ 502,161 $ 387,772 $ 1,733,469 $ 1,428,513 $ 705,187
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)........................... (46,820) (24,590) (188,404) (62,701) (91)
Interest accrued............... (10,536) (1,739) (18,650) (8,714) (17,367)
Interest capitalized........... 4,135 1,739 11,182 7,781 --
Equity losses (Note 3)......... (10,159) (1,479) (7,908) (2,383) (1,601)
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) (186,026) (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) $ (180,929) $ (35,843) $ (3,514)
=========== =========== =========== =========== ===========
Basic loss per share:
Net loss..................... $ (74,141) $ (26,498) $ (180,929) $ (35,843) $ (3,514)
Weighted average shares
outstanding............... 1,000 1,000 1,000 1,000 1,000
Pro-forma loss per share
(unaudited):
Net loss..................... $ (.16) $ (.06) $ (.40) $ (.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> 166
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)................................... 639,066 265,217 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........................................... $2,872,921 $2,337,546 $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.................................. (392,091) (317,896) (134,168)
Accumulated other comprehensive income (loss) (Note
11)............................................... 69,273 24,706 (3,479)
---------- ---------- ----------
Total stockholder's equity............................. 1,034,074 1,006,682 862,702
---------- ---------- ----------
Total liabilities and stockholder's equity............. $2,872,921 $2,337,546 $1,506,034
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 167
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................................ -- -- (180,929) -- (180,929)
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...................... (152,744)
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 (317,896) 24,706 1,006,682
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 $(392,091) $ 69,273 $1,034,074
== ========== ========= ======== ==========
</TABLE>
- ---------------
* Amounts for the three months ended March 31, 1999 are unaudited.
See accompanying notes.
F-6
<PAGE> 168
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) $(180,929) $ (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 7,908 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) (29,509) (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> 169
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 our
solutions unit 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 WilTel network business
to LDDS Communications, Inc. (now MCI WorldCom, Inc.) for approximately $2.5
billion. The sale included the nationwide fiber optic network and the associated
consumer, business and carrier customers. Williams excluded from the sale 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, our solutions unit 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> 170
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 a subsidiary 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, accounted
for under the equity method (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> 171
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> 172
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> 173
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
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. ("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 the cost in excess of historical
F-12
<PAGE> 174
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying values, which approximated fair value, 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.
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.
F-13
<PAGE> 175
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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................................ $1,776,349 $1,756,253 $1,533,140
Net loss................................ $ (189,707) $ (37,615) $ (11,162)
</TABLE>
F-14
<PAGE> 176
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 177
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) --
-------- ---------- ----------- ---------- ----------
Total segment revenues................................... $108,492 $ 337,292 $ 68,144 $ (11,767) $ 502,161
======== ========== =========== ========== ==========
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) $ (17,923) $ -- $ (46,820)
Equity losses.......................................... -- -- (10,159) -- (10,159)
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 $ 1,106,180 $ -- $2,872,921
Depreciation and amortization............................ $ 5,800 $ 10,571 $ 11,207 $ -- $ 27,578
</TABLE>
F-16
<PAGE> 178
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) --
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $ 21,166 $ 327,446 $ 51,347 $ (12,187) $ 387,772
======== ========== =========== ========== ==========
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) $ (16,029) $ -- $ (24,590)
Equity losses........................................... -- -- (1,479) -- (1,479)
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> 179
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) --
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $194,936 $1,367,404 $ 221,410 $ (50,281) $1,733,469
======== ========== =========== ========== ==========
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) $ (101,722) $ -- $ (188,404)
Equity losses........................................... -- -- (7,908) -- (7,908)
Add back -- allocated charges from parent............... 1,409 8,435 1,810 -- 11,654
-------- ---------- ----------- ---------- ----------
Total segment loss........................................ $(26,307) $ (50,531) $ (107,820) $ -- $ (184,658)
======== ========== =========== ========== ==========
Total assets.............................................. $727,119 $ 967,948 $ 642,479 $ -- $2,337,546
Equity method investments................................. $ -- $ -- $ 52,722 $ -- $ 52,722
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> 180
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) --
-------- ---------- ----------- ---------- ----------
Total segment revenues.................................... $ 43,013 $1,189,798 $ 217,966 $ (22,264) $1,428,513
======== ========== =========== ========== ==========
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 $ (103,031) $ -- $ (62,701)
Equity earnings (losses)................................ -- -- (2,383) -- (2,383)
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> 181
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) --
------- ---------- ----------- ---------- ----------
Total segment revenues..................................... $11,063 $ 568,072 $ 132,477 $ (6,425) $ 705,187
======= ========== =========== ========== ==========
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 $ (14,728) $ -- $ (91)
Equity losses............................................ -- -- (1,601) -- (1,601)
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............................................... $ -- $ 344,606 $ 377,081 $ -- $ 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> 182
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> 183
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> 184
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...................................... (2,952) 125 (962)
--------- -------- -------
Total loss before taxes...................... $(186,026) $(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) $(65,109) $(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 3,383 1,220 (207)
-------- ------- -------- -------- -------
Provision (benefit) for
income taxes......... $ 17,448 $ (766) $ (5,097) $ 2,038 $ 368
======== ======= ======== ======== =======
</TABLE>
F-23
<PAGE> 185
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> 186
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> 187
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> 188
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 -- common stock.................. $ 64,892 $ 48,256 $ --
Others............................... 463 454 6,132
-------- -------- -------
65,355 48,710 6,132
Cost method:
ATL -- preferred stock............... 317,621 100,573 --
Others............................... 53,501 28,001 3,332
-------- -------- -------
371,122 128,574 3,332
Advances to investees................... 4,997 4,997 7,619
Marketable equity
securities -- Concentric Network
Corporation.......................... 197,592 82,936 11,087
-------- -------- -------
$639,066 $265,217 $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> 189
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 Algar Telecom S/A, 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 Algar 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. 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%.
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, Algar 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.
If exercised, the warrants must be exercised in total and have an aggregate
exercise price of approximately $10 million. The warrants effectively expire
March 30, 2003. The investment in Metrocom S.A. is accounted for under the cost
method.
F-28
<PAGE> 190
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. The exchange of leases results in revenue of $100,000
per month and costs of sales in the same amount. The lease is a ten year lease
with a ten year renewal option. The amount to be paid under the renewal option
is to be determined at the time the renewal option is exercised based on fair
market value to be determined at that time. The economic life of the property is
25 years. Transfer of title does not occur at the end of the lease term and
there is not a bargain purchase option.
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.
F-29
<PAGE> 191
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-30
<PAGE> 192
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-31
<PAGE> 193
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Pro forma net income and earnings per share, assuming WCG had applied the
fair-value method of SFAS No. 123, "Accounting for Stock-Based Compensation," in
measuring compensation cost beginning with 1996 employee stock-based awards, are
as follows:
F-32
<PAGE> 194
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ -----------------
PRO PRO PRO
FORMA REPORTED FORMA REPORTED FORMA REPORTED
-------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Net loss (thousands)............... (190,329) (180,929) (40,543) (35,843) (4,014) (3,514)
Loss per share..................... (.42) (.40) (.09) (.08) (.01) (.01)
</TABLE>
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 fair value of the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: expected life of the stock options of approximately 5 years;
volatility of the expected market price of Williams common stock of 25 percent
(26 percent in 1997 and 22 percent in 1996); risk-free interest rate of 5.3
percent (6.1 percent in 1997 and 6.0 percent in 1996); and a dividend yield of
2.0 percent (1.7 percent in 1997 and 2.0 percent in 1996).
The following summary represents stock option information for WCG
employees:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C>
Options granted:
Williams plan.................................... 1,743 2,193 2,078
WCG plan......................................... 483 -- --
Weighted-average grant date fair value............. $ 8.19 $ 5.98 $ 3.92
Options outstanding -- December 31:
Williams plan.................................... 5,432 4,954 3,015
WCG plan......................................... 465 -- --
Options exercisable -- December 31:
Williams plan.................................... 3,800 2,726 962
WCG plan......................................... -- -- --
</TABLE>
The following summary represents deferred share information for WCG
employees:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Deferred shares granted:
Williams plan............................... 109,565 14,232 209,410
WCG plan.................................... 165,000 -- --
Weighted-average grant date fair value of
shares granted.............................. $ 31.59 $ 19.94 $ 16.24
Percent of grant expensed in year of grant.... 11% 100% 12%
Shares issued................................. 30,404 22,218 11,544
</TABLE>
Deferred shares are valued at the date of the award. The remaining value of
the deferred shares not expensed in the year granted is amortized over the
vesting period.
F-33
<PAGE> 195
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $ 79,730 $ 5,019 $109,505
2000............................. 21,173 134,851 5,030 161,054
2001............................. 17,935 104,117 1,689 123,741
2002............................. 13,118 91,622 691 105,431
2003............................. 11,169 69,396 691 81,256
Thereafter....................... 38,825 6,650 9,788 55,263
-------- -------- ------- --------
Total minimum annual rentals..... $126,976 $486,366 $22,908 $636,250
======== ======== ======= ========
</TABLE>
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
F-34
<PAGE> 196
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Direct costs
charged from Williams or Nortel represent the direct costs of goods or services
provided by Williams or Nortel at our request as well as the cost of centralized
administrative services. Williams allocates its cost of centralized
administrative services based on a logical representation of the benefits
received, such as allocating Williams' human resources department based on
employee headcount. Allocated charges from Williams represent an allocation of
general corporate charges based on a three factor formula which considers
operating results, property, plant and equipment and payroll. In management's
estimation, the allocation methodologies used are reasonable and the direct and
allocated charges 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 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
F-35
<PAGE> 197
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-36
<PAGE> 198
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-37
<PAGE> 199
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 dark fiber on up to 3,200 route miles on
its local networks, 6 to 96 fibers per segment 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 substantially all
of 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
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 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
F-38
<PAGE> 200
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 a non-exclusive alliance agreement with
Telefonos de Mexico. Under the terms of the agreement, both WCG and Telefonos de
Mexico must first seek to obtain select international wholesale services between
Mexico and the United States and various other services from each other. WCG and
Telefonos de Mexico will also sell each other's products to their respective
customers and negotiate the terms under which both parties will provide
installation and maintenance of communications equipment and other services for
the other. In addition, WCG and Telefonos de Mexico will interconnect their long
distance fiber-optic networks to jointly develop seamless voice, data and video
transport services to serve their respective markets.
In addition, on May 25, 1999, Telefonos de Mexico 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.
Telefonos de Mexico's obligation and ability to make the investment is
subject to conditions at closing, including that the alliance agreement with
Telefonos de Mexico be in full effect and that SBC approves the portion of
Telefonos de Mexico'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 Telefonos de Mexico has
agreed to certain restrictions and will receive certain privileges, including
the following:
- Telefonos de Mexico has agreed not to acquire more than 10% of WCG's
common stock for a period of 10 years
- Telefonos de Mexico 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
- Telefonos de Mexico 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
Telefonos de Mexico 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. The assets were transferred at their historical
book values, similar to a pooling of interests, as Williams had common control
over WCG and the holding companies contributed.
During the second quarter, management determined that the businesses that
provide audio and video conferencing services and closed-circuit video
broadcasting services for businesses were
F-39
<PAGE> 201
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
held for sale. On June 30, 1999, WCG signed an agreement with Genesys, S.A. to
sell its business which provides audio and video conferencing services for
approximately $39.0 million. WCG anticipates that this transaction will close
prior to August 31, 1999. The expected selling price of both the sale to Genesys
and of the other business less costs to sell the assets is expected to result in
a loss of approximately $26.0 million in the second quarter of 1999. Costs
associated with exit activities could result in additional charges of up to $4.0
million.
F-40
<PAGE> 202
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-41
<PAGE> 203
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-42
<PAGE> 204
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-43
<PAGE> 205
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-44
<PAGE> 206
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-45
<PAGE> 207
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-46
<PAGE> 208
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-47
<PAGE> 209
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-48
<PAGE> 210
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-49
<PAGE> 211
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-50
<PAGE> 212
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-51
<PAGE> 213
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
LEHMAN BROTHERS
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 214
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. 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
OUR SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE INTERNATIONAL PAGE]
SUBJECT TO COMPLETION, JULY , 1999
PROSPECTUS
_______ SHARES
[WILLIAMS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We will apply for
listing on the New York Stock Exchange under the symbol "WCG." We anticipate
that the initial public offering price will be between $
- ------ and $
- ------ per share.
We are offering
- ------------ shares. Of the shares being offered,
- ------------ shares are being offered outside the United States and Canada and
- ------------ shares are concurrently being offered in the United States and
Canada.
We are a subsidiary of The Williams Companies, Inc., and following this offering
The Williams Companies, Inc. will continue to hold a controlling interest in our
shares.
Investing in the shares involves risks. "Risk Factors" begin on page 9.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds, before expenses, to Williams Communications Group,
Inc....................................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to
- --------- additional shares of common stock on the same terms and conditions as
set forth above solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expects to deliver the shares to purchasers on or about
, 1999.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Joint Book-Running Managers Co-Lead Manager
LEHMAN BROTHERS SALOMON SMITH BARNEY MERRILL LYNCH
Structural Advisor INTERNATIONAL INTERNATIONAL
</TABLE>
CAZENOVE & CO.
BANK OF AMERICA INTERNATIONAL LIMITED
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
, 1999
<PAGE> 215
[ALTERNATE INTERNATIONAL PAGE]
SHARES
LOGO
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
---------------------------------------
PROSPECTUS
, 1999
---------------------------------------
LEHMAN BROTHERS
SALOMON SMITH BARNEY INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
CAZENOVE & CO.
BANK OF AMERICA INTERNATIONAL LIMITED
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
<PAGE> 216
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......................... 252,600
Blue sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 1,050,000
Legal fees and expenses..................................... 1,400,000
Printing and engraving fees................................. 1,000,000
Miscellaneous............................................... 48,400
----------
Total.................................................. $4,000,000
==========
</TABLE>
- -------------------------
* All fees except the Securities and Exchange Commission and NASD filing fees
are estimates.
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> 217
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.
II-2
<PAGE> 218
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting 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 certificate of designation of Series A Junior
Participating Preferred Stock.+
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 and Side Letter 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.+
</TABLE>
II-3
<PAGE> 219
<TABLE>
<C> <S>
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), together with Clarification Agreement effective as of
December 17, 1998 and Side Agreement dated March 31, 1999.+*
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 and Amendment No. 4, dated December 22, 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, and Amendment No. 1, dated June 14, 1999.+*
10.29 Distributorship Agreement by and between Northern Telecom Limited and WilTel
Communications, L.L.C., dated January 1, 1998.+*
</TABLE>
II-4
<PAGE> 220
<TABLE>
.30 10 Common Stock and Warrant Purchase Agreement by and among
Concentric Network Corporation and Williams Communications Group,
Inc., dated July 25, 1997.+
<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. and Vyvx,
Inc. 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 Communications 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.+
10.56 Stock purchase agreement by and between Williams Communications,
Inc. Conferencing Acquisition Corporation and Genesys, S.A. dated
as of June 30, 1999.++
10.57 Form of loan agreement and promissory note between Williams
Communications, Inc. and The Williams Companies, Inc.+
</TABLE>
II-5
<PAGE> 221
<TABLE>
.58 10 Williams Communications, Inc. Senior Credit Facilities Commitment
Letter, dated June 2, 1999.
<C> <S>
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).
23.5 Consent of H. Brian Thompson.+
23.6 Consent of Roy A. Wilkens.+
24 Power of Attorney.+
24.1 Power of Attorney of Michael P. Johnson, Sr. and Scott E.
Schubert.+
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>
- -------------------------
+ Previously filed.
++ To be filed by amendment.
* Portions of this exhibit have been redacted pursuant to a request for
confidential treatment which is currently being reviewed by the Securities
and Exchange Commission.
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.
II-6
<PAGE> 222
(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-7
<PAGE> 223
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Tulsa, Oklahoma on the 14th day of July, 1999.
WILLIAMS COMMUNICATIONS GROUP, INC.
By: /s/ REBECCA H. HILBORNE
-------------------------------------
Rebecca H. Hilborne
Attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the 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>
/s/ * Chief Executive Officer and July 14, 1999
------------------------------------------------ President (Principal Executive
Howard E. Janzen Officer)
/s/ * Chief Financial Officer (Principal July 14, 1999
------------------------------------------------ Accounting and Financial Officer)
Scott E. Schubert
/s/ * Director July 14, 1999
------------------------------------------------
Keith E. Bailey
/s/ * Director July 14, 1999
------------------------------------------------
John C. Bumgarner, Jr.
/s/ * Director July 14, 1999
------------------------------------------------
Brian E. O'Neill
/s/ * Director July 14, 1999
------------------------------------------------
James R. Herbster
/s/ * Director July 14, 1999
------------------------------------------------
Michael P. Johnson, Sr.
/s/ * Director July 14, 1999
------------------------------------------------
Steven J. Malcolm
/s/ * Director July 14, 1999
------------------------------------------------
Jack D. McCarthy
</TABLE>
* Pursuant to a power of attorney.
II-8
<PAGE> 224
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 July 7, 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
July 7, 1999
S-1
<PAGE> 225
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> 226
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting 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 certificate of designation of Series A Junior
Participating Preferred Stock.+
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 and Side Letter 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.+
</TABLE>
<PAGE> 227
<TABLE>
<C> <S>
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), together with Clarification Agreement effective as of
December 17, 1998 and Side Agreement dated March 31, 1999.+*
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 and Amendment No. 4, dated December 22, 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, and Amendment No. 1, dated June 14, 1999.+*
10.29 Distributorship Agreement by and between Northern Telecom Limited and WilTel
Communications, L.L.C., dated January 1, 1998.+*
</TABLE>
<PAGE> 228
<TABLE>
<C> <S>
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. and
Vyvx, Inc. 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 Communications 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.+
10.56 Stock purchase agreement by and between Williams
Communications, Inc. Conferencing Acquisition Corporation
and Genesys, S.A. dated as of June 30, 1999.++
10.57 Form of loan agreement and promissory note between Williams
Communications, Inc. and The Williams Companies, Inc.+
</TABLE>
<PAGE> 229
<TABLE>
<C> <S>
10.58 Williams Communications, Inc. Senior Credit Facilities
Commitment Letter, dated June 2, 1999.
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).
23.5 Consent of H. Brian Thompson.+
23.6 Consent of Roy A. Wilkens.+
24 Power of Attorney.+
24.1 Power of Attorney of Michael P. Johnson, Sr. and Scott E.
Schubert.+
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>
- -------------------------
+ Previously filed.
++ To be filed by amendment.
* Portions of this exhibit have been redacted pursuant to a request for
confidential treatment which is currently being reviewed by the Securities
and Exchange Commission.
<PAGE> 1
EXHIBIT 10.58
EXECUTION COPY
June 2, 1999
WILLIAMS COMMUNICATIONS, INC.
SENIOR CREDIT FACILITIES
COMMITMENT LETTER
Williams Communications, Inc.
One Williams Center
Tulsa, Oklahoma 74172
Attention:
Ladies and Gentlemen:
Williams Communications, Inc. ("you" or the "Borrower"), a wholly-owned
subsidiary of Williams Communications Group, Inc. ("Holdings"), a wholly-owned
subsidiary of The Williams Companies, Inc. (the "Parent") has requested that
Chase Securities Inc. ("CSI") and Banc of America Securities LLC ("BAS") agree
to act as Joint Lead Arrangers and Joint Book Managers in structuring, arranging
and syndicating up to $1,000,000,000 in senior credit facilities (the
"Facilities"), and that each of Bank of America, N.A. (NationsBank, N.A. d/b/a
Bank of America, N.A.) ("Bank of America") and The Chase Manhattan Bank ("Chase"
and, together with Bank of America, the "Primary Lenders") commit to provide
$500,000,000 of the Facilities and to serve as Administrative Agent and
Syndication Agent, respectively, for the Facilities. Your request for the
Facilities is made in connection with (i) the contribution by the Parent of
material subsidiaries that hold interests in international communications
projects and the contribution by Holdings of all of its material subsidiaries
(other than the Borrower), in each case to the Borrower (the "Reorganization"),
and (ii) (x) the proposed issuance by Holdings of not less than $1,000,000,000
of its common stock (the "Equity Issuance") and (y) a proposed offering by
Holdings of $1,300,000,000 of high yield senior notes due 2009 (the "Notes
Offering").
CSI and BAS are pleased to advise you that they are willing to act as
joint book managers and joint lead arrangers for the Facilities. Bank of America
is pleased to advise you of its commitment to provide up to $500,000,000 of the
Facilities and
<PAGE> 2
Chase is pleased to advise you of its commitment to provide up to $500,000,000
of the Facilities (each such commitment to be allocated pro rata among each of
the Term Facility and Revolving Facility referred to below), in each case
subject to the terms and conditions set forth or referred to in this Commitment
Letter and in the Summary of Principal Terms and Conditions attached hereto as
Exhibit A (the "Term Sheet"). Subject to the terms of this Commitment Letter and
the Term Sheet, the Facilities will consist of (i) a $500,000,000 7-year senior
multi-draw amortizing term loan facility (the "Term Facility") and (ii) a
$500,000,000 6-year senior reducing revolving credit facility (with a letter of
credit sub-limit and a swingline loan sub-limit) (the "Revolving Facility").
It is agreed that Bank of America and Chase will act as the sole and
exclusive Administrative Agent and Syndication Agent, respectively, and that CSI
and BAS will act as the sole and exclusive advisors, book managers and arrangers
(in such capacity, the "Arrangers") for the Facilities, and each will, in such
capacities, perform the duties and exercise the authority customarily performed
and exercised by it in such roles. You agree that no other agents, co-agents or
arrangers will be appointed, no other titles will be awarded (other than the
appointment of certain institutions previously agreed upon as Co-Documentation
Agents and the appointment of Managing Agents to be mutually agreed upon) and
no compensation (other than that expressly contemplated by the Term Sheet and
the Fee Letter referred to below) will be paid in connection with the Facilities
unless you and we shall so agree.
CSI and BAS intend to syndicate the Facilities (including, in their
discretion, all or part of Bank of America's and Chase's commitments hereunder)
to a group of financial institutions (together with Bank of America and Chase,
the "Lenders") identified by them in consultation with you. CSI and BAS intend
to commence syndication efforts in respect of the Facilities promptly upon the
execution of this Commitment Letter and you agree actively to assist CSI and BAS
in completing such syndication satisfactorily to them. Such assistance shall
include (a) your and the Parent's using commercially reasonable efforts to
ensure that the syndication efforts benefit materially from your existing
lending relationships, (b) direct contact between senior management and advisors
of the Parent and the Borrower and the proposed Lenders, (c) assistance in the
preparation of a Confidential Information Memorandum and other marketing
materials to be used in connection with the syndication and (d) the hosting,
with CSI and BAS, of one or more meetings of prospective Lenders.
It is understood and agreed that CSI and BAS, in consultation with you,
will manage and control all aspects of the syndication, including decisions as
to the selection of the proposed Lenders and any titles offered to the proposed
Lenders,
2
<PAGE> 3
when commitments will be accepted, the final allocations of the commitments
among the Lenders and the amount and distribution of fees among the Lenders.
Upon the acceptance of the commitment of any Lender to provide a portion of any
of the Facilities, Bank of America and Chase shall be released pro rata from a
portion of their commitments with respect to such Facility in an aggregate
amount equal to the commitment of such Lender. In acting as Arrangers, CSI and
BAS will have no responsibility other than to arrange the syndications.
To assist CSI and BAS in their syndication efforts, you agree promptly
to prepare and provide to CSI and BAS all information with respect to the
Parent, Holdings, the Borrower and their respective subsidiaries and affiliates,
the Equity Issuance, the Notes Offering and the other transactions contemplated
hereby, including all financial information and Projections (the "Projections"),
as we may reasonably request in connection with the arrangement and syndication
of the Facilities. You hereby represent and covenant that (a) all information
other than the Projections (the "Information") that has been or will be made
available to CSI, BAS or any of the Lenders by you or any of your
representatives, taken as a whole, is or will be, when furnished, complete and
correct in all material respects and does not or will not, when furnished,
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not materially
misleading in light of the circumstances under which such statements are made
and (b) the Projections that have been or will be made available to CSI, BAS or
any of the Lenders by you or any of your representatives have been or will be
prepared in good faith based upon reasonable assumptions. You understand that in
arranging and syndicating the Facilities, we may use and rely on the Information
and Projections without independent verification thereof.
As consideration for each Primary Lender's commitment hereunder and
CSI's and BAS's agreement to perform the services described herein, you agree to
pay to the Administrative Agent, for the accounts of the Arrangers and the
Primary Lenders, the nonrefundable fees set forth in Annex I to the Term Sheet
and in the Fee Letter dated the date hereof and delivered herewith (the "Fee
Letter").
Each Primary Lender's commitment hereunder and CSI's and BAS's
agreement to perform the services described herein is subject to (a) there not
occurring or becoming known to such person any material adverse condition or
material adverse change in or affecting the business, operations, property,
condition (financial or otherwise) or prospects of Holdings and its subsidiaries
and affiliates (including the Borrower), taken as a whole, or the Parent and its
subsidiaries and affiliates, taken as a whole, (b) such person's completion of
and satisfaction in all respects with a due
3
<PAGE> 4
diligence investigation of Holdings and its subsidiaries and affiliates
(including the Borrower and its domestic and foreign subsidiaries and
affiliates), including investigation as to business, financial (including
projections), legal, tax, accounting and environmental matters and other
structural and ownership matters, (c) such person's not becoming aware after the
date hereof of any information or other matter affecting Holdings or any of its
subsidiaries or affiliates (including the Borrower) which is inconsistent in a
material and adverse manner with any such information or other matter disclosed
to such person prior to the date hereof, (d) there not having occurred a
material disruption of or material adverse change in financial, banking or
capital market conditions that, in the judgment of such person, could materially
impair the syndication of the Facilities, (e) such person's satisfaction that
prior to and during the syndication of the Facilities there shall be no
competing offering, placement or arrangement of any debt securities or bank
financing (other than the Notes Offering) by or on behalf of the Parent or
Holdings or any subsidiary or affiliate thereof (including the Borrower) without
the consent of the Arrangers, (f) receipt of pro forma income statements and
balance sheets of Holdings and its consolidated subsidiaries, prepared as of the
most recent fiscal quarter ended prior to the date of execution and delivery of
the documentation referred to below having given effect to the Reorganization,
the initial borrowings under the Facilities and, if the Equity Issuance and the
Notes Offering shall have been consummated on or prior to the closing date in
respect of the Facilities, the Equity Issuance and the Notes Offering, (g) such
person's review of, and satisfaction in its sole discretion with, (i) the
arrangements with respect to the Borrower's and the Parent's agreements to
purchase at the end of the lease term (or, at their option, earlier) all of the
ADP property (but only with, in the case of the Borrower, Additional Capital (as
defined in the Term Sheet)) and, in the case of a purchase by the Parent, to
contribute such property to the Borrower in exchange for equity securities of
Holdings or Qualifying Subordinated Debt (as defined in the Term Sheet) and (ii)
the waivers obtained under, and the amendments effected to, the ADP, (h) the
negotiation, execution and delivery on or before September 1, 1999 of definitive
documentation with respect to the Facilities satisfactory to such person and its
counsel, (i) the consummation of the Reorganization, (j) either (x) (1) the
receipt by Holdings of gross proceeds from the Equity Issuance of not less than
$1,000,000,000 and (2) the receipt by Holdings of gross proceeds from the Notes
Offering of not less than $1,300,000,000 or (y) a guarantee by the Parent of all
of the obligations of the Borrower in respect of the Facilities, in form and
substance satisfactory to the Primary Lenders, and (k) the other conditions set
forth or referred to in the Term Sheet. The terms and conditions of the Primary
Lenders' commitments hereunder, CSI's and BAS's agreement to perform the
services described herein and of the Facilities are not limited to those set
forth herein and in the Term Sheet. Those matters that are not covered by the
provisions hereof and of the Term Sheet are
4
<PAGE> 5
subject to the approval and agreement of the Primary Lenders, CSI, BAS and the
Borrower.
You agree (a) to indemnify and hold harmless CSI, BAS, each Primary
Lender, their respective affiliates and their respective officers, directors,
employees, advisors, and agents (each, an "indemnified person") from and against
any and all losses, claims, damages and liabilities to which any such
indemnified person may become subject arising out of or in connection with this
Commitment Letter, the Fee Letter, the Facilities, the use of the proceeds
thereof or any related transaction or any claim, litigation, investigation or
proceeding relating to any of the foregoing, regardless of whether any
indemnified person is a party thereto, and to reimburse each indemnified person
upon demand for any legal or other expenses incurred in connection with
investigating or defending any of the foregoing, provided that the foregoing
indemnity will not, as to any indemnified person, apply to losses, claims,
damages, liabilities or related expenses to the extent they are found by a
final, nonappealable judgment of a court to arise from the willful misconduct
or gross negligence of such indemnified person, and (b) to reimburse CSI, BAS,
each Primary Lender and their respective affiliates on demand for all reasonable
out-of-pocket expenses (including due diligence expenses, syndication expenses,
reasonable travel expenses, and reasonable fees, charges and disbursements of
counsel) incurred in connection with the Facilities and any related
documentation (including this Commitment Letter, the Term Sheet, the Fee Letter
and the definitive credit documentation) or the administration, amendment,
modification or waiver thereof. No indemnified person shall be liable for any
indirect or consequential damages in connection with its activities related to
the Facilities. No indemnified person shall be liable for any damages arising
from the use by others of Information or other materials obtained through
electronic, telecommunications or other information transmission systems or for
any special, indirect, consequential, exemplary or punitive damages in
connection with the Facilities.
This Commitment Letter shall not be assignable by you without the prior
written consent of CSI, BAS and the Primary Lenders (and any purported
assignment without such consent shall be null and void), is intended to be
solely for the benefit of the parties hereto and is not intended to confer any
benefits upon, or create any rights in favor of, any person other than the
parties hereto and, in the case of the preceding paragraph, the indemnified
parties. This Commitment Letter may not be amended or waived except by an
instrument in writing signed by you, CSI, BAS and each Primary Lender. This
Commitment Letter may be executed in any number of counterparts, each of which
shall be an original and all of which, when taken together, shall constitute one
agreement. Delivery of an executed signature page of this Commitment
5
<PAGE> 6
Letter by facsimile transmission shall be effective as delivery of a manually
executed counterpart hereof. This Commitment Letter (including the Term Sheet
annexed hereto) and the Fee Letter are the only agreements that have been
entered into among us with respect to the Facilities and set forth the entire
under standing of the parties with respect thereto. This Commitment Letter, the
Term Sheet and the Fee Letter shall be governed by, and construed in accordance
with, the laws of the State of New York. Each of the Borrower, CSI, BAS and the
Primary Lenders hereby submits to the jurisdiction of the United States District
Court for the Southern District of New York and of any New York State court
sitting in New York City for the purpose of all legal proceedings arising out of
or relating to this Commitment Letter, the Term Sheet, the Fee Letter or the
transactions contemplated hereby or thereby. Each of the Borrower, CSI, BAS and
the Primary Lenders hereby irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of the
venue of any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum and
to the right to have a trial by jury.
This Commitment Letter is delivered to you on the understanding that
none of this Commitment Letter, the Term Sheet or the Fee Letter or any of their
terms or substance shall be disclosed, directly or indirectly, to any other
person except (a) to your or the Parent's officers, agents and advisors who are
directly involved in the consideration of this matter or (b) as may be compelled
in a judicial or administrative proceeding or as otherwise required by law (in
which case you agree to inform us promptly thereof), provided, that the
foregoing restrictions shall cease to apply (except in respect of the Fee Letter
and its terms and substance) after this Commitment Letter has been accepted by
you.
You acknowledge that CSI, BAS and each Primary Lender may be providing
debt financing, equity capital or other services (including financial advisory
services) to other companies in respect of which you may have conflicting
interests regarding the transactions described herein and otherwise. None of
CSI, BAS or either Primary Lender will use confidential information obtained
from you by virtue of the transactions contemplated by this letter or their
other relationships with you in connection with the performance by it of
services for other companies, and none of CSI, BAS or either Primary Lender will
furnish any such information to other companies. You also acknowledge that none
of CSI, BAS or either Primary Lender has any obligation to use in connection
with the transactions contemplated by this letter, or to furnish to you,
confidential information obtained from other companies. You consent to the use
by CSI, BAS and each Primary Lender of your name and a description of the amount
6
<PAGE> 7
and type of the Facilities in advertisements published after the date of
execution and delivery of definitive credit documentation.
The compensation, reimbursement, indemnification and confidentiality
provisions contained herein and in the Fee Letter shall remain in full force and
effect regardless of whether definitive financing documentation shall be
executed and delivered and notwithstanding the termination of this Commitment
Letter, the Primary Lenders' commitments hereunder or CSI's and BAS's agreement
to perform the services described herein.
If the foregoing correctly sets forth our agreement, please indicate
your acceptance of the terms hereof and of the Term Sheet and the Fee Letter by
returning to Bank of America and Chase executed counterparts hereof and of the
Fee Letter not later than 5:00 p.m., New York City time, on June 4, 1999. Each
Primary Lender's commitment and CSI's and BAS's agreements herein will expire at
such time in the event Bank of America and Chase have not received such executed
counterparts in accordance with the immediately preceding sentence.
Bank of America, Chase, CSI and BAS are pleased to have been given the
opportunity to assist you in connection with this important financing.
Very truly yours,
BANK OF AMERICA, N.A.
(NATIONSBANK, N.A. d/b/a BANK
OF AMERICA, N.A.)
By:
------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By:
------------------------------------
Name:
Title:
7
<PAGE> 8
CHASE SECURITIES INC.
By:
------------------------------------
Name:
Title
BANC OF AMERICA
SECURITIES LLC
By:
------------------------------------
Name:
Title:
Accepted and agreed to as of
the date first written above by:
WILLIAMS COMMUNICATIONS, INC.
By:
--------------------------------
Name:
Title:
8
<PAGE> 9
EXHIBIT A
SENIOR CREDIT FACILITIES
Summary of Principal Terms and Conditions
June 2, 1999
I. PARTIES
Borrower: Williams Communications, Inc.
(the "Borrower"), a wholly-owned
subsidiary of Williams
Communications Group, Inc.
("Holdings").
Joint Book Managers
and Joint Lead Arrangers: Chase Securities Inc. and Banc of
America Securities LLC (in such
capacities, the "Arrangers").
Administrative Agent: Bank of America, N.A.
(NationsBank, N.A. d/b/a Bank of
America, N.A.) ("Bank of
America").
Syndication Agent: The Chase Manhattan Bank
("Chase").
Managing Agents: A group of financial institutions
reasonably accept able to the
Arrangers and the Borrower.
Lenders: A syndicate of banks, financial
institutions and other entities,
including Bank of America and
Chase, arranged by the Arrangers
(collectively, the "Lenders").
Letter of Credit
Issuing Banks: Bank of America and Chase (each,
an "Issuer").
Swingline Lenders: Bank of America and Chase (the
"Swingline Lenders").
II. SENIOR CREDIT FACILITIES
Type and Amount of
Facilities: (i) A multi-draw 7-year
amortizing senior term loan
facility in an aggregate
principal amount of
<PAGE> 10
$500,000,000 (the "Term Facility"
and the loans thereunder, the
"Term Loans").
(ii) A 6-year senior reducing
revolving credit facility (the
"Revolving Facility") in the
amount of $500,000,000 (the loans
thereunder, the "Revolving
Loans", and together with the
Term Loans and any loans under
any Incremental Facility (as
defined below), the "Loans").
(iii) The Borrower may request,
by notice to the Administrative
Agent and the Syndication Agent
at any time prior to the second
anniversary of the Closing Date,
at which time no default or event
of default shall have occurred
and be continuing, one or more
additional facilities each of
which shall be in an aggregate
principal amount of not less than
$100,000,000 and all of which
together shall not exceed
$500,000,000 in aggregate
principal amount (any such
additional facility, an
"Incremental Facility" and
together with the Term Facility
and the Revolving Facility, the
"Facilities"). The terms and
conditions of any such
Incremental Facility shall be as
agreed by the Borrower, the
Arrangers, the Syndication Agent
and the Administrative Agent,
provided that the average life
to maturity of the loans and
commitments under any such
Incremental Facility shall not be
less than the then existing
average life to maturity of the
Term Facility or the Revolving
Facility. Any such Incremental
Facility shall be offered, first,
on a pro rata basis to existing
Lenders and, to the extent that
the existing Lenders do not elect
to subscribe for any such
Incremental Facility, to such
other financial institutions as
the Borrower, the Syndication
Agent, the Administrative Agent
and the Arrangers shall agree. No
Lender shall have any obligation
to participate in any such
Incremental Facility.
Letters of Credit: A portion of the Revolving
Facility, not in excess of
$100,000,000, shall be available
for the issuance of
2
<PAGE> 11
letters of credit (the "Letters
of Credit") by the Issuers. No
Letter of Credit shall have an
expiration date after the earlier
of (a) one year after the date of
issuance and (b) five business
days prior to the Revolving
Facility Termination Date,
provided that any Letter of
Credit with a one-year tenor may
provide for the renewal thereof
for additional one-year periods
(which shall in no event extend
beyond the date referred to in
clause (b) above).
Drawings under any Letter of
Credit shall be reimbursed by
the Borrower (whether with its
own funds or with the proceeds of
Revolving Loans) on the same
business day. To the extent that
the Borrower does not so
reimburse the applicable Issuer,
the Lenders under the Revolving
Facility shall be irrevocably and
unconditionally obligated to
reimburse such Issuer on a pro
rata basis.
Swingline Loans: A portion of the Revolving Credit
Facility not in excess of
$50,000,000 shall be available
for swingline loans (the
"Swingline Loans") ratably from
the Swingline Lenders on same-day
notice to the Administrative
Agent. Any such Swingline Loans
will re duce availability under
the Revolving Credit Facility on
a dollar-for-dollar basis. Each
Lender under the Revolving Credit
Facility shall acquire, under
certain circumstances, an
irrevocable and unconditional pro
rata participation in each
Swingline Loan.
Availability: The Term Facility will be
available on a non-revolving
basis in multiple drawdowns (each
of which shall be in a minimum
amount to be agreed) occurring
during the period commencing on
the Closing Date and ending on
the date immediately prior to the
first anniversary of the Closing
Date (the "Term Facility
Termination Date").
The Revolving Facility will be
available on a revolving basis
during the period commencing on
the Closing
3
<PAGE> 12
Date and ending on the date
immediately prior to the sixth
anniversary of the Closing Date
(the "Revolving Facility
Termination Date").
Final Maturities: (i) Term Loans shall mature on
the seventh anniversary of the
Closing Date.
(ii) The commitments in respect
of the Revolving Facility shall
terminate, and all Revolving
Loans shall mature, on the sixth
anniversary of the Closing Date.
Purpose: The proceeds of the Term
Facilities and the Revolving
Facility shall be used (i) to
refinance the Existing Revolver
(as defined under "Initial
Conditions" be low), (ii) to make
capital expenditures and for
working capital requirements and
general corporate purposes of
the Borrower and its
subsidiaries, (iii) to repay the
Intercompany Note, to the extent
permitted herein, (iv) to pay the
fees and expenses associated with
the Facilities and (v) to make
permitted acquisitions.
III. CERTAIN PAYMENT PROVISIONS
Fees and Interest Rates: As set forth in Annex I.
Amortization Payments/
Reduction of Commitments: (i) Term Loans shall be repaid in
the aggregate percentages per
transaction year set forth below
(such amount to be paid in four
equal quarterly installments in
each transaction year).
<TABLE>
<CAPTION>
Transaction Year Amortization Percentage
---------------- -----------------------
<S> <C>
4th Year 15%
5th Year 25%
6th Year 30%
7th Year 30%
</TABLE>
(ii) The commitments under the
Revolving Facility shall be
permanently reduced in the
aggregate percentages
4
<PAGE> 13
per transaction year set forth
below (such amount to be applied
in four equal quarterly amounts
in each transaction year).
Concurrently therewith, Revolving
Loans shall be repaid (and cash
collateral will be provided in
respect of outstanding Letters of
Credit) so that the aggregate
principal amount of outstanding
Revolving Loans and
non-cash-collateralized Letters
of Credit does not exceed the
revolving commitments as so
reduced.
<TABLE>
<CAPTION>
Commitment
Transaction Year Reduction Percentage
---------------- --------------------
<S> <C>
4th Year 20%
5th Year 30%
6th Year 50%
</TABLE>
Mandatory Prepayments: The Borrower shall repay
outstanding Loans under each of
the Facilities (and the
commitments under the Revolving
Facility shall be permanently
reduced and, to the extent that
the aggregate amount of
outstanding Letters of Credit
exceeds the Revolving Facility
commitments as then reduced,
shall provide cash collateral
for outstanding Letters of
Credit), in each case as set
forth below, by an amount equal
to:
(i) 100% of the net cash proceeds
received from the sale or
disposition (including by way of
casualties and condemnations) of
all or any part of the assets of
Holdings or any of its
subsidiaries (other than
permitted dark fiber sales, sales
of non-core assets or sales of
inventory in the ordinary course
of business), to the extent such
net cash proceeds are not
reinvested in core assets or
permitted acquisitions within 12
months of the receipt thereof.
(ii) 50% of excess cash flow (to
be defined) for each fiscal year,
beginning with the 2001 fiscal
year; provided that no such
prepayment shall be required if
(x) the rating assigned to the
Facilities by Standard & Poors
Ratings Service ("S&P") is not
less than BBB-
5
<PAGE> 14
and the rating assigned to the
Facilities by Moody's Investors
Service Inc. ("Moody's") is not
less than Baa3 or (y) the ratio
of Total Debt to Adjusted EBITDA
is less than 3.5 to 1.0 as of the
last day of the most recently
ended fiscal quarter for which
financial statements have been
delivered (after giving pro forma
effect to the issuance of any
debt after the end of such fiscal
quarter).
(iii) 100% (or, if (x) the rating
assigned to the Facilities by
S&P is not less than BBB- and the
rating assigned to the Facilities
by Moody's is not less than Baa3
or (y) the ratio of Total Debt to
Adjusted EBITDA is less than 3.5
to 1.0 as of the last day of the
most recently ended fiscal
quarter for which financial
statements have been delivered
(after giving pro forma effect to
the issuance of any debt after
the end of such fiscal quarter),
50%) of the net cash proceeds
received from the issuance of
debt by Holdings or any of its
subsidiaries after the Closing
Date (other than debt permitted
under the limitation on
indebtedness covenant).
All mandatory prepayments shall
be made without penalty or
premium (except for LIBOR
breakage costs, if any) and shall
be applied (pro rata) to prepay
outstanding Term Loans and to
reduce Revolving Facility
commitments and repay Revolving
Loans (and then to provide cash
collateral for outstanding
Letters of Credit) in excess of
the Revolving Facility
commitments as then reduced.
Mandatory prepayments of the Term
Loans and mandatory reductions
of the Revolving Facility
commitments shall reduce
subsequent scheduled amortization
payments (or permanent reductions
of commitments, as applicable) in
inverse order of maturity.
6
<PAGE> 15
Optional Prepayments and
Commitment Reductions: Loans may be prepaid (subject to
compensation for LIBOR breakage
costs, if any) and commitments
may be reduced by the Borrower in
minimum amounts to be agreed
upon.
Optional prepayments of Term
Loans and optional reductions of
the Revolving Facility
commitments shall reduce
subsequent scheduled amortization
payments (or permanent
reductions of commitments, as
applicable) in inverse order of
maturity.
IV. CERTAIN CONDITIONS:
Initial Conditions: The availability of the
Facilities shall be conditioned
upon satisfaction of, among other
things, the following conditions
precedent (the date upon which
all such conditions precedent
shall be satisfied, the "Closing
Date"):
(a) Holdings and its subsidiaries
(including the Borrower) shall
have executed and delivered
satisfactory definitive financing
documentation with respect to the
Facilities (the "Credit
Documentation").
(b) The Parent shall have
executed and delivered the
Intercreditor Agreement (as
defined below).
(c) The Lenders shall be
satisfied in their sole
discretion with the proposed
structure of (i) the contribution
to the Borrower by The Williams
Companies, Inc. (the "Parent") of
its material subsidiaries that
hold interests in international
communications projects and by
Holdings of all of its material
subsidiaries (other than the
Borrower), in each case not
currently held, directly or
indirectly, by the Borrower (the
"Reorganization") and (h) the
capital structure of Holdings and
the Borrower, both before and
after giving effect to the
foregoing transactions.
7
<PAGE> 16
(d) The Lenders shall have
reviewed and be satisfied in
their sole discretion with the
terms of the Intercompany Note.
(e) The Lenders shall have
reviewed and be satisfied in
their sole discretion with (i)
the arrangements with respect to
the Borrower's and the Parent's
agreement to purchase, at the end
of the lease term (or, at their
option, earlier) all of the ADP
property (but only with, in the
case of the Borrower, Additional
Capital (as defined below)) and,
in the case of a purchase by the
Parent, to contribute such
property to the Borrower in
exchange for equity securities of
Holdings or Qualifying
Subordinated Debt (as defined
below) and (ii) the waivers
obtained under, the amendments
effected to, and the
off-balance-sheet accounting
treatment of, the ADP.
(f) The commitments under the
Borrower's existing senior
revolving credit facility (the
"Existing Revolver") shall have
been terminated, all amounts
outstanding thereunder shall
have been repaid in full and all
letters of credit issued
thereunder shall have been
canceled or arrangements
satisfactory to the issuer
thereof shall have been made for
the reimbursement of amounts
drawn or to be drawn thereunder.
All guarantees of amounts
outstanding under the Existing
Revolver shall have been
released.
(g) The Lenders, the
Administrative Agent and the
Arrangers shall have received all
fees required to be paid, and all
expenses for which invoices have
been presented, on or before the
Closing Date.
(h) All governmental and third
party approvals necessary or, in
the discretion of the
Administrative Agent, advisable
in connection with the
Reorganization, the financing
contemplated hereby, the
continuing operations of the
Borrower and its subsidiaries
and, if the issuance by Holdings
of its common stock to persons
8
<PAGE> 17
other than the Parent and its
subsidiaries (the "Equity
Issuance") and the offering (the
"Notes Offering") by Holdings of
its high yield senior notes due
2009 (the "High Yield Notes") are
consummated on or prior to the
Closing Date, the Equity Issuance
and the Notes Offering shall have
been obtained and be in full
force and effect.
(i) The Lenders shall have
received (i) satisfactory audited
consolidated financial statements
of Holdings for the two most
recent fiscal years ended prior
to the Closing Date as to which
such financial statements are
available and (ii) satisfactory
unaudited interim consolidated
financial statements of the
Borrower and Holdings for each
fiscal quarterly period ended
subsequent to the date of the
latest financial statements
delivered pursuant to clause (i)
of this paragraph as to which
such financial statements are
available.
(j) The Lenders shall have
received, and shall be satisfied
with, Holdings's and the
Borrower's pro forma income
statements and balance sheets,
and Holdings's and the Borrower's
projections for the fiscal years
1999 through 2007, in each of the
foregoing cases, having given
effect to the Reorganization, the
initial borrowings under the
Facilities and, if the Equity
Issuance and the Notes Offering
are consummated on or prior to
the Closing Date, the Equity
Issuance and the Notes Offering.
(k) The Lenders shall have
received such legal opinions,
documents and other instruments
(including, without limitation,
officers' solvency certificates)
as are customary for transactions
of this type or as they may
reasonably request.
(l) There shall be no materially
adverse litigation.
(m) The Lenders shall have
received and be satisfied with
all of the terms and conditions
of the indemnity
9
<PAGE> 18
to be provided by the Parent to
the Borrower in respect of
environmental matters.
(n) Immediately after giving
effect to the transactions
contemplated hereby to occur on
the Closing Date, there shall be
no debt of Holdings or any of its
restricted subsidiaries
outstanding other than (i) the
loans and letters of credit
outstanding under the Facilities,
(ii) if the closing in respect of
the Notes Offering shall have
occurred, the High Yield Notes,
(iii) the Intercompany Note, (iv)
outstandings under the ADP and
(v) other debt not to exceed
$35,000,000.
(o) Absence of any material
adverse change in the business,
condition (financial or
otherwise), operations,
properties, liabilities or
prospects of Holdings and its
subsidiaries, considered as a
whole, and the Parent and its
subsidiaries, considered as a
whole, in each case since the end
of the most recently ended fiscal
year for which audited financial
statements have been provided to
the Lenders.
(p) The Reorganization shall have
been consummated.
(q) either (x)(1) Holdings shall
have received gross proceeds from
(A) the Equity Issuance of not
less than $1,000,000,000 and (B)
the Notes Offering of not less
than $1,300,000,000, (2) the
terms and conditions of, and all
agreements, instruments and other
documents issued, entered into or
relating to the Equity Issuance
and the Notes Offering
(collectively, the "Other
Financing Documents") shall be in
form and substance satisfactory
to the Lenders and (3) the Equity
Issuance and the Notes Offering
shall have been consummated in
accordance with the Other
Financing Documents, without any
amendment, modification or waiver
unless consented to in writing by
the Lenders or (y) the Parent
shall have guaranteed all of the
obligations of the Borrower
under the Credit Documentation
pursuant
10
<PAGE> 19
to a guaranty agreement in form
and substance satisfactory to the
Lenders.
On-Going Conditions: The making of each extension of
credit (including any extension
of credit made on the Closing
Date) shall be conditioned upon
(a) the accuracy of all
representations and warranties
in the Credit Documentation
(including, without limitation,
the material adverse change and
litigation representations) and
(b) there being no default or
event of default in existence at
the time of, or after giving
effect to the making of, such
extension of credit. As used
herein and in the Credit
Documentation a "material adverse
change" shall mean any event,
development or circumstance that
has had or could reasonably be
expected to have a material
adverse effect on (a) the
business, assets, property,
condition (financial or
otherwise) or prospects of
Holdings and its subsidiaries,
taken as a whole, or (b) the
validity or enforceability of any
of the Credit Documentation or
the rights or remedies of the
Administrative Agent and the
Lenders thereunder.
V. SECURITY AND GUARANTEES
Security: If, at any time on or after the
Closing Date, the rating for the
Facilities assigned by S&P is
less than BB- or by Moody's is
less than Ba3, Holdings and all
direct and indirect restricted
subsidiaries of Holdings will
provide security interests and
liens upon substantially all
assets now or hereafter owned by
Holdings and such subsidiaries,
including, not limited to, all
capital stock of the Borrower and
any other subsidiaries of
Holdings and all accounts
receivable, inventory, patents
and trademarks, other general
intangibles and other personal
property and real property of
Holdings and such subsidiaries;
provided that (x) no foreign
subsidiary of Holdings shall be
required to pledge any assets
held by it, and not more than 66%
of the voting equity interests in
any foreign subsidiary shall be
required to be pledged, unless
the Required Lenders (as
11
<PAGE> 20
defined below) so request and (y)
no assets subject to the ADP
shall, so long as they shall be
subject thereto, be included as
collateral hereunder.
All security, if any, will be
released if (i) the Facilities
shall have terminated and all
obligations to the Lenders and
the Administrative Agent in
respect thereof shall have been
paid in full or (ii) after giving
effect to such release, the
rating for the Facilities
assigned by S&P is BB+ or greater
and by Moody's is Bal or greater.
Guarantees: The Facilities will be
guaranteed, on a joint and
several basis, by Holdings, all
of the direct and indirect
restricted subsidiaries of
Holdings and, unless the
condition set forth in clause
(q)(x) under "Initial Conditions"
above is satisfied, the Parent;
provided that no foreign
subsidiary of Holdings shall be
required to provide any such
guarantee unless the Required
Lenders so request. Such
guarantees will (i) provide for a
complete waiver by the guarantors
thereunder of any rights to
subrogation, reimbursement or
indemnification until such time
as the Facilities have been
terminated and all principal,
interest and other amounts due
thereunder have been indefeasibly
paid in full and (ii) in the case
of guarantees by subsidiaries of
Holdings, be limited to the
largest amount that would not
render the obligations subject to
avoidance under applicable
bankruptcy or fraudulent transfer
law.
VI. INTERCREDITOR AGREEMENT
The Lenders and the Parent (as
holder of the Intercompany Note)
will enter into an Intercreditor
agreement (the "Intercreditor
Agreement"), in form and
substance reasonably satisfactory
to the Required Lenders, pursuant
to which the Parent will agree
that (i) all obligations under
the Intercompany Note shall be
subordinated in all respects to
the rights of the Lenders in any
bankruptcy, insolvency,
liquidation or
12
<PAGE> 21
dissolution of the Borrower, (ii)
upon the occurrence and during
the continuance of a default or
event of default (with certain
exceptions to be agreed) under
the Facilities, (x) none of
Holdings, the Borrower or any
subsidiaries thereof may make
payments of principal, interest
or other amounts due or to become
due under, or in respect of, the
Intercompany Note and (y) the
Parent shall refrain from the
exercise of any and all remedies
that it could otherwise exercise
under the terms of the
Intercompany Note, by law or
otherwise, and (iii) it will not
transfer or assign the
Intercompany Note.
VII. CERTAIN DOCUMENTATION MATTERS
The Credit Documentation shall
contain representations,
warranties, covenants and events
of default customary for
financings of this type and other
terms deemed appropriate by the
Lenders (in each case applicable
to Holdings and its restricted
subsidiaries (including the
Borrower) and, if the Parent is a
guarantor, in a manner
substantially similar to its
existing credit facilities,
applicable to the Parent and its
restricted subsidiaries),
including, without limitation:
Representations and
Warranties: Financial statements; absence of
undisclosed material liabilities;
no material adverse change;
corporate existence; compliance
with law; corporate power and
authority; enforceability of
Credit Documentation; no conflict
with law or contractual
obligations; no material
litigation; no default; ownership
of property; liens; intellectual
property; no burdensome
restrictions; taxes; Federal
Reserve regulations; ERISA;
Investment Company Act; Public
Utility Holding Company Act;
subsidiaries; environmental
matters; labor matters; year 2000
compliance; and accuracy of
disclosure.
13
<PAGE> 22
Affirmative Covenants: Delivery of financial statements,
reports, accountants' letters,
projections, officers'
certificates and other
information requested by the
Lenders; payment of other
obligations, continuation of
business and maintenance of
existence and material rights and
privileges; compliance with laws
and material contractual
obligations; maintenance of
property and insurance;
maintenance of books and records;
right of the Lenders to inspect
property and books and records;
notices of defaults, litigation
and other material events;
further assurances regarding
collateral, if any; and
compliance with environmental
laws.
Financial Covenants: Financial maintenance covenants
to be calculated on the basis of
Holdings and its restricted
subsidiaries, on a consolidated
basis, with certain definitions
set forth in summary form under
"Definitions" below and others to
be determined (and certain income
statement components thereof to
be annualized for the periods
ending prior to a date to be
determined). Financial covenants
will include, without limitation
(and applicable for the periods
referred to below):
(i) Total Debt/Contributed
Capital (applies Closing Date
through a date to be determined)
(ii) Minimum EBITDA plus dark
fiber sales cash revenues (with
limitations on the amount of dark
fiber sales revenues to be
included for particular periods
to be agreed) (applies Closing
Date through a date to be
determined)
(iii) Limitation on Capital
Expenditures (with rollover of a
portion of unexpended amounts to
the next year permitted) (applies
Closing Date and thereafter)
(iv) Total Debt/Adjusted EBITDA
(applies from a date to be
determined and thereafter)
14
<PAGE> 23
(v) Senior Debt/Adjusted EBITDA
(applies from a date to be
determined and thereafter)
(vi) Adjusted EBITDA/Interest
Expense (applies from a date to
be determined and thereafter)
Negative Covenants: Limitations on: indebtedness
(including debt and/or preferred
stock of subsidiaries and
issuance of intercompany notes,
with exceptions to be agreed);
leases; liens (including a
prohibition on liens to secure
the Intercompany Note or the High
Yield Notes); guarantee
obligations; mergers,
consolidations, liquidations and
dissolutions; sales of assets
(with exceptions for sales of
dark fiber, provided that such
sales do not reduce the owned
network fiber count below a
minimum to be agreed); dividends
and other payments in respect of
capital stock; investments, loans
and advances (with exceptions for
investments in subsidiary
guarantors, investments in the
telecommunications industry
funded with Additional Capital
and a basket of $275,000,000);
activities of Holdings other than
the issuance of the High Yield
Notes, Qualifying Subordinated
Debt and permitted equity
securities and the ownership of
Borrower capital stock; payments
and modifications of the High
Yield Notes and other debt
instruments (including, without
limitation, the limitations on
payments of principal in respect
of the Intercompany Note referred
to below); modifications of
charter documents of Holdings and
its subsidiaries; transactions
with affiliates; sale and
leasebacks; changes in fiscal
year; negative pledge clauses;
and material changes in lines of
business.
Principal payments in respect of
the Intercompany Note shall be
prohibited prior to June 30,
2000. Thereafter, so long as no
default or event of default (with
certain exceptions to be agreed)
shall then exist:
15
<PAGE> 24
(i) principal payments in respect
of the Intercompany Note will be
permitted to be made with
Additional Capital; and
(ii) the Borrower will be
permitted to make other principal
payments in respect of the
Intercompany Note ("Other
Principal Payments") in an
aggregate amount not in excess of
$25,000,000 in any fiscal year,
provided that the aggregate
amount of such Other Principal
Payments shall not be limited so
long as if, prior to, and after
giving effect to, any such
payment, the ratio of Total Debt
to Adjusted EBITDA is less than
5.0 to 1.0.
Upon Other Principal Payment in
excess of $25,000,000 being made
in any fiscal year, the maximum
Total Debt to Adjusted EBITDA
covenant shall thereafter be
reduced (but not increased) to
5.0 to 1.0.
Events of Default: Nonpayment of principal when due;
nonpayment of interest, fees or
other amounts after a grace
period to be agreed upon;
material inaccuracy of
representations and warranties;
violation of covenants (subject,
in the case of certain
affirmative covenants, to a grace
period to be agreed upon);
cross-default; bankruptcy events;
certain ERISA events; material
judgments; ineffectiveness of
collateral documents, if any, or
guarantees; the senior unsecured
debt of the Parent shall be rated
less than BBB- by S&P or less
than Baa3 by Moody's; and a
change of control (the definition
of which is to be agreed, but
which shall include (i) failure
of Holdings to own 100% of the
outstanding capital stock of the
Borrower or failure of the Parent
to own, directly or indirectly,
more than 75% (or if (x) the
Facilities are rated at least
BBB- by S&P and Baa3 by Moody's
and (y) the condition set forth
in clause (q) (x) of "Initial
Conditions" under "Certain
Conditions" shall have been
satisfied, 35% of (1) the voting
power of all outstanding voting
stock of Holdings and (2) the
outstanding capital stock of
Holdings and (ii) any person
16
<PAGE> 25
(other than the Parent and its
subsidiaries) or group (as
defined in Sections 13(d) and
14(d) of the Securities Exchange
Act of 1934, as amended) owning
more than 35% of (1) the voting
power of all outstanding voting
stock of Holdings or (2) the
outstanding capital stock of
Holdings).
Financial Covenant Default
Cure Provisions: In the event that Holdings and
its restricted subsidiaries fail
to meet any financial maintenance
covenant in any fiscal quarter on
a consolidated basis, the Parent
shall have the right, but not the
obligation, to make a cash equity
contribution to Holdings by
purchasing equity securities of
Holdings (which Holdings shall
use to purchase equity securities
of the Borrower) in an amount
sufficient to enable Holdings and
its restricted subsidiaries to
meet such financial maintenance
covenant on a consolidated basis.
Such equity securities will not
be mandatorily redeemable or
convertible into debt, and will
provide that no dividends (other
than in the form of additional
equity securities) shall be
payable, in each case, until
after the termination of the
Facilities. Such right may not be
exercised in more than two
consecutive quarters or more than
three times in the aggregate
during the term of the
Facilities. The proceeds of any
such equity securities, to the
extent used to cure any such
financial maintenance covenant,
shall not be included in the
calculation of "Additional
Capital" except under
circumstances to be agreed.
Voting: Amendments and waivers with
respect to the Credit
Documentation shall require the
approval of Lenders holding a
majority of the commitments (or,
with respect to any Facility, if
the commitments under such
Facility have expired, the loans
outstanding under such Facility)
under the Facilities (the
"Required Lenders"), except that
(a) the consent of each Lender
directly affected thereby shall
be required with respect to (i)
reductions in the amount or
extensions of the scheduled
17
<PAGE> 26
date
of amortization or final maturity
of any Loan, (ii) reductions in
the rate of interest or any fee
or extensions of any due date
thereof, (iii) in creases in the
amount or extensions of the
expiry date of any Lender's
commitment and (iv) release of
all or substantially all of the
collateral, if any, or the
guarantors referred to above and
(b) the consent of 100% of the
Lenders shall be required with
respect to modifications to any
of the voting percentages.
Assignments
and Participations: The Lenders shall be permitted to
assign and sell participations in
their Loans and commitments,
subject, in the case of
assignments (other than to
another Lender or to an affiliate
of a Lender), to the consent of
the Administrative Agent, the
Issuers and, except during the
continuance of an event of
default, the Borrower (which
consent in each case shall not be
unreasonably withheld). Lenders
shall pay the Administrative
Agent a fee of $3,500 for each
assignment of Loans and
commitments hereunder. In the
case of partial assignments
(other than to another Lender or
to an affiliate of a Lender), the
minimum assignment amount shall
be $5,000,000 unless other wise
agreed by the Borrower and the
Administrative Agent.
Participants shall have the same
benefits as the Lenders with
respect to yield protection and
in creased cost provisions.
Voting rights of participants
shall be limited to those matters
with respect to which the
affirmative vote of the Lender
from which it purchased its
participation would be required
as described under "Voting"
above. Pledges of loans in
accordance with applicable law
shall be permitted without
restriction. Promissory notes
shall be issued under the
Facilities only upon request.
Yield Protection: The Credit Documentation shall
contain customary provisions (a)
protecting the Lenders against in
creased costs or loss of yield
resulting from changes in
reserve, tax, capital adequacy
and other requirements of
18
<PAGE> 27
law and from the imposition of or
changes in withholding or other
taxes and (b) indemnifying the
Lenders for "breakage costs"
incurred in connection with,
among other things, any
prepayment of a Euro dollar Loan
(as defined in Annex I) on a day
other than the last day of an
interest period with respect
thereto.
Expenses and
Indemnification: The Borrower shall pay (a) all
reasonable out-of-pocket
expenses of the Administrative
Agent, the Syndication Agent and
the Arrangers associated with the
syndication of the Facilities and
the preparation, execution,
delivery and administration of
the Credit Documentation and any
amendment or waiver with respect
thereto (including the reasonable
fees, disbursements and other
charges of a single counsel (plus
any local or specialized
counsel)), (b) fees pay able by
the Administrative Agent, the
Syndication Agent or to third
parties in connection with the
satisfaction of the conditions
precedent referred to above,
regardless of whether the Credit
Documentation is signed and (c)
all out-of-pocket expenses of the
Administrative Agent, the
Syndication Agent and the Lenders
(including the fees,
disbursements and other charges
of counsel) in connection with
the enforcement of the Credit
Documentation.
The Administrative Agent, the
Syndication Agent, the Arrangers
and the Lenders (and their
affiliates and their respective
officers, directors, employees,
advisors and agents) will have
no liability for, and will be
indemnified and held harmless
against, any loss, liability,
cost or expense incurred in
respect of the financing
contemplated hereby or the use or
the pro posed use of the proceeds
thereof (except to the extent
resulting from the gross
negligence or willful misconduct
of the indemnified party).
Governing Law and Forum: State of New York.
19
<PAGE> 28
Counsel to the Administrative
Agent, the Syndication
Agent and Arrangers: Davis Polk & Wardwell.
Definitions: Additional Capital = proceeds of
equity issuances by Holdings
(including the Equity Issuance) +
proceeds of offerings of debt
securities by Holdings (including
the Notes Offering) + proceeds of
Qualifying Subordinated Debt
issued after the Closing Date +
excess cash flow for fiscal years
from and after 2001 (to the
extent not required to be applied
to prepay the Facilities) -
$2,775,000,000 - any proceeds of
equity issuances used to cure
breaches of financial maintenance
covenants as provided under
"Financial Covenant Default Cure
Provisions" above, except under
circumstances to be agreed.
Adjusted EBITDA = EBITDA +
trailing four quarter dark fiber
sales cash revenues.
Contributed Capital = equity
contributed by Parent + Equity
Issuance cash proceeds + other
cash equity proceeds + Total Debt
EBITDA = net income + interest
expense (including the interest
component of rental expense under
the ADP) + income taxes +
depreciation and amortization
expense + non-cash extraordinary
or non-recurring charges - dark
fiber sales gains - amounts
attributable to affiliates that
are not consolidated restricted
subsidiaries (except to the
extent such amounts are received
in cash by the Borrower or a
consolidated restricted
subsidiary of the Borrower) -
extraordinary or non-recurring
gains.
Interest Expense = net cash
interest expense and the interest
component of rental expense under
the ADP.
Qualifying Subordinated Debt =
debt of Holdings (other than the
High Yield Notes) that matures at
least
20
<PAGE> 29
one year after the final maturity
of the Facilities, the terms and
conditions of which are
satisfactory to the Arrangers.
Senior Debt = Intercompany Note,
debt under the Facilities, any
other senior debt of the Borrower
and its restricted subsidiaries
and all outstandings under the
ADP, net of unrestricted cash and
cash equivalents in excess of
$10,000,000.
Total Debt = all debt of Holdings
and its restricted subsidiaries
and all outstandings under the
ADP, net of unrestricted cash and
cash equivalents in excess of
$10,000,000.
21
<PAGE> 30
Annex I
Interest and Certain Fees
Interest Rate Options: The Borrower may elect that the
loans under each Facility
comprising each borrowing bear
interest at a rate per annum
equal to:
the ABR plus the Applicable
Margin (such loans, "ABR Loans");
or
the Adjusted LIBO Rate plus the
Applicable Margin (such loans,
"Eurodollar Loans");
provided that upon the occurrence
and during the continuance of a
default, only ABR Loans will be
available and provided further
that Swingline Loans shall only
bear interest based upon the ABR.
As used herein:
"ABR" means the higher of (i) the
rate of interest publicly
announced by the Administrative
Agent from time to time as its
prime rate in effect at its
principal office in Dallas, Texas
(the "Prime Rate") and (ii) the
federal funds effective rate from
time to time plus 0.5%.
"Adjusted LIBO Rate" means the
LIBO Rate, as adjusted for
statutory reserve requirements
for eurocurrency liabilities.
"Applicable Margin" has the
meaning set forth on Schedule I
hereto.
"LIBO Rate" means the rate at
which eurodollar deposits in the
London interbank market for one,
two, three or six months (as
selected by the Borrower) are
quoted on the Telerate screen.
Interest Payment Dates: In the case of ABR Loans,
quarterly in arrears.
<PAGE> 31
In the case of Eurodollar Loans,
on the last day of each relevant
interest period and, in the case
of any interest period longer
than three months, on each
successive date three months
after the first day of such
interest period.
Commitment Fee: The Borrower shall pay a
commitment fee to the
Administrative Agent for the
account of the Lenders ratably in
accordance with their commitments
under each of the Facilities,
from and after the Closing Date,
on the average daily amount of
the unused (other than for
Swingline Loans) commitments
under each of the Facilities.
Such commitment fees shall be
payable quarterly in arrears and,
with respect to the commitments
under any Facility, on the date
of termination of such
commitments. The rate at which
such commitment fees accrue will
be:
<TABLE>
<CAPTION>
--------------------------------------------------
USAGE OF FACILITIES COMMITMENT FEE
--------------------------------------------------
<S> <C>
Less than 33.3% 1.00%
--------------------------------------------------
Less than 66.6% but equal
to or greater than 33.3% .75%
--------------------------------------------------
Equal to or greater than 66.6% .50%
--------------------------------------------------
</TABLE>
Letter of Credit Fees: The Borrowers shall pay a
commission on the undrawn amount
of all outstanding Letters of
Credit at a per annum rate equal
to the Applicable Margin then in
effect with respect to Eurodollar
Loans that are Revolving Loans.
Such commission shall be shared
ratably among the Lenders with
commitments under the Revolving
Facility in proportion to such
commitments and shall be payable
quarterly in arrears and on the
date of termination of such
commitments.
A fronting fee, calculated at a
rate per annum to be agreed
between the Borrower and the
applicable Issuer on the face
amount of each Letter of Credit
shall be payable quarterly in
arrears to such Issuer for its
own account. In addition,
customary administrative,
issuance, amendment, payment and
negotiation
2
<PAGE> 32
charges shall be payable to the
applicable Issuer for its own
account.
Default Rate: At any time when the Borrower is
in default in the payment of any
amount of principal due under the
Facilities, such amount shall
bear interest (i) in respect of
ABR Loans, at a rate per annum
equal to the sum of 2% plus the
highest Applicable Margin for ABR
Loans plus the ABR and (ii) in
respect of Eurodollar Loans, at a
rate per annum equal to the
higher of (x) 2% plus the highest
Applicable Margin for Eurodollar
Loans plus the LIBO Rate
applicable to such Loan on the
day before payment was due and
(y) the sum of 2% plus the
highest Applicable Margin for
ABR Loans plus the ABR. Overdue
interest, fees and other amounts
shall bear interest at 2% plus
the highest Applicable Margin
for ABR Loans that are Revolving
Loans plus the ABR.
Rate and Fee Basis: All per annum rates shall be
calculated on the basis of a year
of 360 days (or 365/366 days, in
the case of ABR Loans the
interest rate payable on which is
then based on the Prime Rate) for
actual days elapsed.
3
<PAGE> 33
Schedule I
"Applicable Margin" means, for any day, (i) the applicable rate per
annum set forth below under the caption "Eurodollar Spread" or "ABR Spread," as
the case may be, based upon the ratings by S&P and Moody's, respectively,
applicable on such date to the Facilities plus (ii) the applicable rate per
annum set forth below under the caption "Leverage Premium," unless the ratio of
Total Debt to Adjusted EBITDA, as determined by reference to the financial
statements delivered to the Administrative Agent in respect of the most recently
ended fiscal quarter of the Borrower is less than 6:00 to 1:00:
<TABLE>
<CAPTION>
===================================================================================================================
INDEX DEBT RATING EURODOLLAR SPREAD ABR SPREAD LEVERAGE PREMIUM
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LEVEL I BBB- and Baa3 or higher 1.00% 0.00% 0.25%
- -------------------------------------------------------------------------------------------------------------------
LEVEL II BB+ and Ba1 1.375% 0.375% 0.25%
- -------------------------------------------------------------------------------------------------------------------
LEVEL III BB and Ba2 1.75% 0.75% 0.25%
- -------------------------------------------------------------------------------------------------------------------
LEVEL IV BB- and Ba3 2.00% 1.00% 0.25%
- -------------------------------------------------------------------------------------------------------------------
LEVEL V Lower than BB- or lower than Ba3 2.25% 1.25% 0.25%
===================================================================================================================
</TABLE>
For purposes of the foregoing, (i) if neither S&P nor Moody's shall
have in effect a rating for the Facilities (other than by reason of the
circumstances referred to in the last sentence of this definition), then the
Applicable Margin shall be the rate set forth in Level V, (ii) if either S&P or
Moody's, but not both S&P and Moody's, shall have in effect a rating for the
Facilities, then the Applicable Margin shall be based on such rating, (iii) if
the ratings established by S&P and Moody's for the Facilities shall fall within
different Levels, then the Applicable Margin shall be based on the lower of the
two ratings, (iv) if the ratings established by S&P and Moody's for the
Facilities shall fall within the same Level, then the Applicable Margin shall be
based on that Level and (v) if the ratings established by S&P and Moody's for
the Facilities shall be changed (other than as a result of a change in the
rating system of S&P or Moody's), such change shall be effective as of the date
on which it is first announced by the applicable rating agency. Each change in
the Applicable Margin shall apply (other than with respect to the Leverage
Premium or as described in the immediately succeeding sentence) during the
period commencing on the effective date of such change and ending on the date
immediately preceding the effective date of the next such change. If the rating
system of S&P or Moody's shall change, or if either such rating agency shall
cease to be in the business of rating corporate debt obligations, the Borrower
and the Lenders shall negotiate in good faith to amend this definition to
reflect such changed rating system or the unavailability of ratings from such
rating agency and, pending the effectiveness of any such amendment, the
Applicable
4
<PAGE> 34
Margin shall be determined by reference to the rating most recently in effect
prior to such change or cessation.
5
