<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1999
REGISTRATION NO. 333-76877
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WILLIAMS COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 73-1462856
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM G. VON GLAHN, ESQ.
SENIOR VICE PRESIDENT, LAW
WILLIAMS COMMUNICATIONS GROUP, INC.
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RANDALL H. DOUD, ESQ. MARLENE ALVA, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP DAVIS POLK & WARDWELL
919 THIRD AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 735-3000 (212) 450-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED PRICE PER NOTE OFFERING PRICE(1) REGISTRATION FEE(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
____ % senior notes due 200__.......... 100% $1,300,000,000 $361,400
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999
PROSPECTUS
$
[WILLIAMS COMMUNICATIONS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
___ % SENIOR NOTES DUE 200 _
----------------------
We are a subsidiary of The Williams Companies, Inc., and following this
offering and the concurrent equity offering described in this prospectus, The
Williams Companies, Inc. will continue to hold a controlling interest in our
stock.
At June 30, 1999, assuming that this offering and several other
transactions described in the prospectus which are to take place at the same
time as this offering had occurred, our subsidiaries would have had $3.1 billion
of liabilities, including $1.0 billion of debt owed to The Williams Companies,
Inc. The notes will effectively rank junior to these liabilities and debt.
INVESTING IN THE NOTES INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public offering price, plus accrued interest from
______________........................................... __% $__
Underwriting discount...................................... __% $__
Proceeds, before expenses, to our company.................. __% $__
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The notes will be ready for delivery only through The Depository Trust
Company on or about ________ , 1999.
----------------------
MERRILL LYNCH & CO. LEHMAN BROTHERS SALOMON SMITH BARNEY
----------------------
The date of this prospectus is ________, 1999.
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.
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 9
This Prospectus Contains Forward-
Looking Statements............... 22
Use of Proceeds.................... 23
Capitalization..................... 24
Selected Consolidated Financial and
Operating Data................... 25
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 31
Industry Overview.................. 58
Business........................... 65
Regulation......................... 96
Management......................... 104
Principal Stockholders............. 119
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Relationships and Related Party
Transactions..................... 122
Relationship Between Our Company
and Williams..................... 124
Description of the Notes........... 132
Description of Other Indebtedness
and Other Financing
Arrangements..................... 182
Important United States Federal Tax
Considerations of the Notes to
Non-U.S. Holders................. 185
Underwriting....................... 188
Legal Matters...................... 190
Experts............................ 190
Where You Can Find Additional
Information...................... 191
Index to Financial Statements...... F-1
</TABLE>
Until __________, 1999, all dealers that buy, sell or trade our notes,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE> 4
PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that may
be important to you. You should read the entire prospectus, including the
section entitled "Risk Factors" and our consolidated financial statements and
related notes, before deciding to invest in our notes.
WILLIAMS COMMUNICATIONS GROUP, INC.
We own or lease, 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 six months ended June 30, 1999, the percentage of revenue, before
intercompany eliminations, attributable to each unit was 19.7% for our network
unit, 69.2% for our solutions unit and 13.3% 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.
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. By the end of the year 2000,
we expect that the Williams network will consist of 33,120 miles of fiber optic
cable connecting 125 cities, of which 65% is currently installed and 59%
operational. Our single fiber network, which Williams excluded from its sale of
its original network in 1995, makes up 9,700 of these miles. Of the 23,420 miles
of new construction, we will construct and wholly own 9,500 miles and will
obtain the remaining 13,920 miles through leasing or joint ownership
arrangements. 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.
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
1
<PAGE> 5
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. 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 objective is to be the premier provider of
advanced, integrated communications solutions to businesses.
OUR STRATEGIC INVESTMENTS UNIT
Through 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. Our domestic strategic investments include our
ownership of Vyvx, a leading video transmission service for major broadcasters
and advertisers, and minority interests in several U.S. communications
companies. Our international strategic investments include ownership interests
in communications companies located in Brazil, Australia and Chile.
CONCURRENT INVESTMENTS IN OUR COMMON STOCK
We have entered into agreements with SBC Communications Inc., Intel
Corporation and Telefonos de Mexico under which SBC, Intel and Telefonos de
Mexico will invest an aggregate of at least $725 million in our common stock at
the initial public offering price per share less the underwriting discount. We
have also entered into arrangements with each of these companies under which we
and they will purchase each other's services and, in the case of SBC and
Telefonos de Mexico, we will also sell each other's products.
The consummation of the initial SBC investment of at least $425 million,
the equity offering referred to below and the notes offering will occur
simultaneously. The closing of the notes offering is contingent upon the closing
of the equity offering and the initial SBC investment. The closing of the equity
offering is contingent upon the closing of the initial SBC investment. The Intel
and Telefonos de Mexico investments, and any additional SBC investment, are
expected to close within a few days following the consummation of the offerings
and the initial SBC investment. For more information about the concurrent
investments, see the section of this prospectus entitled "Business -- Strategic
alliances."
CONCURRENT EQUITY OFFERING
Concurrent with the notes offering, we are selling shares of our common
stock in an initial public offering under a separate prospectus. We estimate
that the net proceeds to our company from this initial public offering will be
approximately $607.8 million (or approximately $699.8 million if the
underwriters in the equity offering exercise their over-allotment option in
full), based on an assumed initial public offering price of $22.00 per share.
We have applied to have our common stock listed on the New York Stock
Exchange under the symbol "WCG."
RISK FACTORS
You should consider carefully the risks of an investment in our notes. See
the section of this prospectus entitled "Risk Factors" for more information.
2
<PAGE> 6
THE NOTES OFFERING
The following is a brief summary of select terms of the notes offering. For
a more complete description of the terms of the notes see the section of this
prospectus entitled "Description of the Notes."
Issuer..................... Williams Communications Group, Inc.
Notes offered.............. $______ billion aggregate principal amount of __%
senior notes due 200_.
Maturity................... __________, 200_.
Interest payment dates..... ______ and ______, beginning __________.
Ranking.................... The notes will be senior unsecured obligations of
our company, ranking equally with all of our
existing and future senior unsecured debt. The
notes will be senior to all our subordinated debt
and junior to our secured debt as to the assets
securing this debt. We are a holding company with
substantially all of our operations conducted
through subsidiaries. We are dependent upon cash
flow from those entities to meet our obligations,
including obligations under the notes. Accordingly,
the notes effectively will rank junior to all
liabilities of our subsidiaries. The term
"subordinated debt" is defined in the section of
this prospectus entitled "Description of the
Notes -- Certain definitions."
As of June 30, 1999, after giving pro forma effect
to the offerings, the concurrent investments, the
recharacterization of $200 million of paid-in
capital to amounts due to Williams and the
financings described in this prospectus and our use
of the net proceeds from the offerings and the
concurrent investments,
- we would have had outstanding no senior debt
ranking equally with or senior to the notes
- our subsidiaries would have had approximately
$3.1 billion of liabilities, including $1.0
billion of debt owed to Williams
Optional redemption........ Prior to __________, 200_, we may redeem the notes,
in whole or in part, at any time at a make-whole
price. The make-whole price will represent a
premium based upon the present value of the
remaining payments to be made with respect to the
notes to be redeemed.
After __________, 200 , we may redeem the notes,
in whole or in part, at any time at the redemption
prices (expressed as percentages of principal
amount at maturity) set forth below, plus accrued
and unpaid interest, if any, to the redemption
date, if redeemed during the 12-month period
beginning on __________ of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C> <C>
200_................................
---------
200_................................
---------
200_................................
---------
200_ and thereafter.................
---------
</TABLE>
3
<PAGE> 7
Equity offering optional
redemption............... Before __________, 2002, we may redeem up to 35% of
the aggregate principal amount of the notes with
the net proceeds of one or more specified offerings
at __% of the principal amount thereof, plus
accrued interest, if at least 65% of the aggregate
principal amount of the notes originally issued
remains outstanding after such redemption. See the
section of this prospectus entitled "Description of
the Notes -- Optional redemption."
Change of control.......... Upon specified change of control events, each
holder of notes may require us to repurchase all or
a portion of its notes at a purchase price in cash
equal to 101% of the principal amount of the notes,
plus accrued and unpaid interest. We cannot
guarantee that we will have sufficient funds to pay
the purchase price for all of the notes that
holders might deliver upon a change of control. See
the sections of this prospectus entitled "Risk
Factors" and "Description of the Notes -- Change of
control triggering event" for more information.
Covenants.................. The indenture governing the notes will contain
covenants that, among other things, will limit our
ability and the ability of our restricted
subsidiaries to:
- incur additional debt
- pay dividends on, redeem or repurchase our
capital stock
- make investments
- issue or sell capital stock of restricted
subsidiaries
- create certain liens
- sell assets
- enter into sale and leaseback transactions
- make dividend or other payments to us
- in the case of our restricted subsidiaries,
guarantee debt
- engage in transactions with affiliates
- consolidate, merge or transfer all or
substantially all our assets and the assets of
our subsidiaries on a consolidated basis
These covenants are subject to important exceptions
and qualifications, which are described in the
section of this prospectus entitled "Description of
the Notes."
Use of proceeds............ We estimate that the net proceeds from the notes
offering will be approximately $1.27 billion, the
net proceeds from the equity offering will be
approximately $607.8 million and the net proceeds
from the concurrent investments will be at least
$725 million. We intend to use these net proceeds,
together with other borrowings and available funds,
to develop and light the Williams network, repay
portions of our debt, fund operating losses and for
working capital and general corporate purposes. See
the section of this prospectus entitled "Use of
Proceeds" for more information.
4
<PAGE> 8
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 sections of this prospectus entitled "Selected Consolidated
Financial and Operating Data" and "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 June 30, 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 460,000,000 shares of
capital stock outstanding after the equity offering and the concurrent
investments and does not include any exercise of the over-allotment option by
the underwriters of the equity offering, the issuance of up to 794,857
additional shares that SBC may elect to purchase 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 per share has been adjusted to include the
interest expense impact of $1.3 billion of debt with an interest rate of 10% as
if the debt had been issued on January 1, 1998.
The Statement of Operations Data reflects certain items and events that
affect comparability with other years as described in the section of this
prospectus entitled "Selected Consolidated Financial and Operating Data."
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 1999, 1998 and
1997 included in other expense of $26.7 million, $23.2 million and $29.0
million, respectively, 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
5
<PAGE> 9
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 in September 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> 10
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 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.............. $ 197,389 $ 52,042 $ 194,936 $ 43,013 $ 11,063
Solutions............ 692,492 672,096 1,367,404 1,189,798 568,072
Strategic
Investments....... 133,469 102,612 221,410 217,966 132,477
Eliminations......... (22,211) (25,024) (50,281) (22,264) (6,425)
----------- ----------- ----------- ----------- -----------
Total
revenues... 1,001,139 801,726 1,733,469 1,428,513 705,187
Operating expenses:
Cost of sales........ 765,742 587,238 1,294,583 1,043,932 517,222
Selling, general and
administrative.... 264,852 206,996 489,173 329,513 152,484
Provision for
doubtful
accounts.......... 11,810 2,696 21,591 7,837 2,694
Depreciation and
amortization...... 62,112 40,759 87,081 71,863 32,378
Other................ 26,913 1,033 34,245 32,269 500
----------- ----------- ----------- ----------- -----------
Total
operating
expenses... 1,131,429 838,722 1,926,673 1,485,414 705,278
----------- ----------- ----------- ----------- -----------
Loss from operations... $ (130,290) $ (36,996) $ (193,204) $ (56,901) $ (91)
=========== =========== =========== =========== ===========
Net loss............... $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514)
=========== =========== =========== =========== ===========
Historical per share
data (basic):
Net loss............. $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514)
Weighted average
shares
outstanding....... 1,000 1,000 1,000 1,000 1,000
Pro forma per share
data (basic):
Net loss............. $ (.58) $ (.24) $ (.69) $ (.07) $ (.01)
Weighted average
shares
outstanding....... 460,000,000 460,000,000 460,000,000 460,000,000 460,000,000
OTHER FINANCIAL DATA:
EBITDA................. $ (41,524) $ 3,763 $ (82,973) $ 44,005 $ 32,287
Deficiency of earnings
to fixed charges..... (155,319) (42,023) (209,745) (19,897) (1,545)
Net cash provided by
(used in) operating
activities........... (36,932) (76,462) (300,810) 147,858 (1,775)
Net cash provided by
financing
activities........... 898,926 324,122 890,623 225,953 226,009
Net cash used in
investing
activities........... (830,292) (251,425) (559,099) (363,494) (224,186)
Capital expenditures... 572,387 253,971 401,004 276,249 66,900
</TABLE>
7
<PAGE> 11
<TABLE>
<CAPTION>
AT JUNE 30, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 73,706 $2,062,562
Working capital............................................ 424,178 2,413,034
Property, plant and equipment, net......................... 1,060,635 1,060,635
Total assets............................................... 3,171,438 5,194,194
Long-term debt, including long-term debt due within one
year..................................................... 1,414,603 2,304,603
Total liabilities.......................................... 2,219,572 3,109,572
Total stockholders' equity................................. 951,866 2,084,622
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31, 1999
----------------
(NUMBERS
APPROXIMATE)
<S> <C>
OPERATING DATA:
Planned route miles......................................... 33,120
Single fiber network route miles.......................... 9,700
Other route miles wholly owned............................ 9,500
Route miles under our asset defeasance program............ 3,270
Route miles jointly owned................................. 1,520
Route miles through dark fiber rights..................... 9,130
Route miles in operation.................................... 19,490
Planned retained fiber miles................................ 400,000
</TABLE>
Route miles are actual miles of the path over which fiber optic cable is
installed.
Planned route miles are the total route miles that we expect the Williams
network to traverse upon completion.
Single fiber 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.
Other route miles wholly owned are those other route miles that we wholly
own or will wholly own and either have constructed or plan to construct along
our rights of way. Rights of way are rights to install fiber optic cable along
routes owned by other parties.
Route miles under our asset defeasance program are those route miles that
we are in the process of constructing over our rights of way under our asset
defeasance program and which we will lease upon completion. The asset defeasance
program provides cash which we may use, as agent for a trust, to buy and install
fiber optic cable and equipment in order to construct portions of our network.
For more information concerning the asset defeasance program, see the section of
this prospectus entitled "Description of Other Indebtedness and Other Financing
Arrangements -- Asset defeasance program."
Route miles jointly owned are those route miles which we jointly own or
will jointly own.
Route miles through dark fiber rights are those route miles over which we
plan to obtain rights in dark fiber.
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> 12
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in our notes.
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 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,
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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
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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. Our network unit experienced operating losses of $27.7 million in 1998
and $45.4 million for the six months ended June 30, 1999. 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
which the plaintiffs seek to have certified as class actions which challenge,
among other things, our right to use railroad rights of way. 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.
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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
Our solutions unit experienced operating losses of approximately $59.0
million in 1998 and approximately $21.0 million for the six months ended June
30, 1999. 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. Periodically, our distribution agreements expire
and we must negotiate new agreements if we desire to continue distributing the
vendor's products at competitive prices. In addition, under our distribution
agreement with Nortel, if we do not purchase a minimum percentage of our total
product mix from Nortel, we each have the option to change the ownership
structure of Solutions LLC. If Nortel is no longer an owner of Solutions LLC,
there is no guarantee that Nortel would continue its distribution agreement with
our solutions unit once it is no longer required to do so under the terms of the
agreement. 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
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name recognition than we currently have. We also face competition from lower
cost providers and from new entrants to the market.
RISKS RELATING TO OUR COMPANY
AFTER THE OFFERINGS, WILLIAMS 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
$155.3 million for the six months ended June 30, 1999, $209.7 million in 1998,
$19.9 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 June 30, 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 $2.1
billion of stockholders' equity and a debt-to-equity ratio of approximately 1.11
to 1. We have made additional borrowings since June 30, 1999 under our interim
credit facility and anticipate making further borrowings under our new permanent
credit facility or our new short term loan 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
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refinance all or a part of our debt or to raise additional capital. We do not
know if refinancing our debt will be possible at that time or if we will be able
to find someone who will lend us more money, nor do we know upon what terms we
could borrow more money.
RESTRICTIONS AND COVENANTS IN OUR DEBT AGREEMENTS LIMIT OUR ABILITY TO CONDUCT
OUR BUSINESS AND COULD PREVENT US FROM OBTAINING FUNDS WHEN WE NEED THEM IN THE
FUTURE
The notes and some of our other debt and financing arrangements contain a
number of significant limitations that will restrict our ability to conduct our
business and to:
- borrow additional money
- pay dividends or other distributions to our stockholders
- make investments
- create liens on our assets
- sell assets
- enter into transactions with affiliates
- engage in mergers or consolidations
These restrictions may limit our ability to obtain future financing, fund
needed capital expenditures or withstand a future downturn in our business or
the economy.
IF WE ARE UNABLE TO COMPLY WITH THE RESTRICTIONS AND COVENANTS IN OUR DEBT
AGREEMENTS, THERE COULD BE A DEFAULT UNDER THE TERMS OF THESE AGREEMENTS, WHICH
COULD RESULT IN AN ACCELERATION OF PAYMENT 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
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- investor confidence in the telecommunications industry and our company
- the success of the Williams network
- provisions of tax and securities laws that are conducive to raising
capital
WE MUST ATTRACT AND RETAIN QUALIFIED EMPLOYEES TO ENSURE THE GROWTH AND SUCCESS
OF OUR COMPANY
We believe that our growth and future success will depend in large part on
our ability to attract and retain highly skilled and qualified personnel. Any
inability of ours in the future to hire, train and retain a sufficient number of
qualified employees could impair our ability to manage and maintain our business
and our customers' communications infrastructures. Some of the problems
experienced by 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 OR TELEFONOS DE MEXICO COULD EACH TERMINATE OUR STRATEGIC ALLIANCE WITH
IT, WHICH COULD HARM OUR BUSINESS
Our alliance agreements with Intel and Telefonos de Mexico are each
material to us and Intel or Telefonos de Mexico may terminate its agreements
with us in certain cases. If either of these alliance agreements is terminated
for any reason before our initial public offering is completed, then the related
purchase of our common stock could be cancelled. If this occurs, we would not
receive the anticipated proceeds from the sale of our common stock and would not
have the revenues that we anticipate from the alliances in the future.
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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,
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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
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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
HOLDERS OF OUR NOTES
After completion of the equity offering and the concurrent investments,
Williams will hold 100% of our Class B common stock and will therefore own
shares with approximately 98% 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
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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. 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 NOTES
WE DEPEND ON OUR SUBSIDIARIES TO PROVIDE US WITH FUNDS TO MEET OUR OBLIGATIONS
BUT THEY ARE NOT OBLIGATED TO REPAY THE NOTES -- IF OUR SUBSIDIARIES ARE UNABLE
TO DIVIDEND CASH TO US WHEN WE NEED IT, WE MAY BE UNABLE TO SATISFY OUR
OBLIGATIONS UNDER THE NOTES, INCLUDING MAKING INTEREST AND PRINCIPAL PAYMENTS
We are a holding company with limited direct operations and few assets
other than the stock of our subsidiaries. We are dependent on the cash flows of
our subsidiaries to meet our obligations, including the payment of principal of
and interest on the notes. If our subsidiaries are unable to dividend cash to us
when we need it, we may be unable to meet these obligations. Our subsidiaries
are separate legal entities that will have no obligation to pay any amounts due
under the notes or to make any funds available for payment of amounts due under
the notes, whether by dividends, loans or other payments, unless they are
required to become guarantors of the notes. Initially, none of our subsidiaries
will guarantee the payment of the notes. In addition, the ability of our
subsidiaries to make any payments or advances to us is limited by the laws of
the relevant jurisdictions in which our subsidiaries are organized or located.
In some cases, prior or subsequent approval of any such payments or advances may
be required from applicable regulatory bodies or other governmental entities.
See the sections of this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
capital resources," "Business" and "Description of the Notes" for more
information.
19
<PAGE> 23
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS EFFECTIVELY JUNIOR TO EXISTING
AND FUTURE DEBT OF OUR SUBSIDIARIES -- THE RIGHTS OF HOLDERS OF NOTES TO
PARTICIPATE IN THE ASSETS OF ANY OF OUR SUBSIDIARIES UPON ANY LIQUIDATION OR
REORGANIZATION OF ANY SUBSIDIARY WILL BE SUBJECT TO THE PRIOR CLAIMS OF THAT
SUBSIDIARY'S CREDITORS
The notes will effectively rank junior to all existing and future
liabilities of our subsidiaries, including trade payables. The rights of holders
of notes to participate in the assets of our subsidiaries upon any liquidation
or reorganization of any subsidiary will rank junior to the prior claims of that
subsidiary's creditors. At June 30, 1999, after giving pro forma effect to the
offerings, the concurrent investments, the recharacterization of $200 million of
paid-in capital to amounts due to affiliates -- Williams, the financings
described in this prospectus and the application of the net proceeds from the
offerings and the concurrent investments, our subsidiaries would have had
approximately $3.1 billion of outstanding liabilities, including $1.0 billion of
debt owed to Williams. The terms of the indenture for the notes will permit us
and our subsidiaries to incur substantial amounts of debt, including under our
interim credit facility, our permanent credit facility and the Williams note.
WE MAY INCUR DEBT IN THE FUTURE THAT IS SECURED BY OUR ASSETS AND THAT WOULD
RANK SENIOR TO THE NOTES -- THE RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENTS
ON THE NOTES WILL BE JUNIOR TO THE RIGHTS OF HOLDERS OF OUR SECURED DEBT
The rights of holders of notes will rank junior to the rights of the
holders of all of our secured debt to the extent of the value of the assets
securing our secured debt. The terms of the indenture for the notes permit us
to, and our other debt agreements will permit us and our subsidiaries to, incur
secured debt.
WE MAY NOT BE PERMITTED TO REPURCHASE THE NOTES AS REQUIRED BY THE INDENTURE OR
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO PAY FOR THE
NOTES -- IF WE FAIL TO COMPLY WITH THE INDENTURE OUR DEBT CAN BE ACCELERATED
If there is a change of control of our company and the rating of the notes
declines, unless we have given a notice of redemption, each holder of notes will
have the right to require us to repurchase all or any part of that holder's
notes at a purchase price in cash equal to 101% of the principal amount, plus
accrued and unpaid interest, if any. However, our ability to repurchase notes
may be limited by the terms of then-existing contractual obligations of our
company and of our subsidiaries. If this is the case, then in order to
repurchase notes upon a change of control, we would have to repay all of our
obligations under these agreements or would have to obtain the consent of
holders of this debt. We cannot assure you that we will have adequate financial
resources to repurchase the notes in the event of a change of control,
particularly if we have to refinance other indebtedness. If we are unable to
repurchase the notes upon a change of control, our failure to purchase tendered
notes would constitute an event of default under the indenture. This and other
events of default can cause acceleration of our other debt.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES
There is currently no trading market for the notes and we cannot guarantee
that a market for the notes will develop in the future. In addition, we cannot
guarantee the price at which holders might sell their notes. If a trading market
were to develop, the notes could trade at prices that may be higher or lower
than the initial offering price of the notes. We do not intend to apply for
listing or quotation of the notes on any securities exchange or inter-dealer
quotation system. Prevailing market prices from time to time will depend on many
factors, including then-existing interest rates, our operating results and cash
flow and the market for similar securities.
20
<PAGE> 24
The underwriters have advised us that they currently intend to make a
market in the notes after the consummation of the notes offering. However, the
underwriters are not obligated to do so and they may discontinue any
market-making with respect to the notes at any time without notice. Accordingly,
even if a trading market for the notes does develop, we cannot make any
assurances as to the liquidity of that market. See the section of this
prospectus entitled "Underwriting" for more information.
In addition, the liquidity of and trading market for the notes may be
adversely affected by declines in the market for high-yield securities
generally. Such a decline may adversely affect liquidity and trading markets
independent of our financial performance and prospects.
21
<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 our notes.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions, as they relate to our management, are intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties.
22
<PAGE> 26
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the notes offering
will be approximately $1.27 billion. We estimate that the net proceeds we will
receive from the sale of the shares of common stock will be approximately $607.8
million, or approximately $699.8 million if the underwriters of the equity
offering exercise their over-allotment option in full, based on an assumed
initial public offering price of $22.00 per share. In addition, we estimate that
we will receive $725 million in net proceeds from the concurrent investments,
excluding the issuance of additional shares that SBC may elect to purchase. The
net proceeds from the issuance of these additional shares will depend on whether
SBC's initial investment is $425 million or $500 million and whether the
underwriters of the equity offering exercise their over-allotment option and
will range from $9.5 million (based on a $425 million initial investment by SBC
and no exercise of the over-allotment option by the underwriters of the equity
offering) to $16.5 million (based on a $500 million initial investment by SBC
and the exercise in full of the over-allotment option by the underwriters of the
equity offering). We also anticipate having available to us borrowings from a
new permanent credit facility as well as funds from other sources, as described
in 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 cash uses."
We intend to use the net proceeds from the offerings and the concurrent
investments, together with borrowings under our permanent credit facility and
funds from other sources, primarily to develop and light the Williams network
and to repay debt that was incurred to develop and light the Williams network.
At the time of the completion of the offerings, we estimate that the capital
expenditures remaining to be made for this purpose will be approximately $2.3
billion and that the debt to be so repaid will be approximately $1.0 billion. We
will also use these proceeds, borrowings and other funds to fund operating
losses, for working capital and for general corporate purposes. For more
information about our anticipated funding sources and our uses of these funds,
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 cash uses."
The indebtedness which we plan to repay with the proceeds of the offerings
and the concurrent investments consists of approximately $500 million which we
plan to borrow under our permanent credit facility and approximately $500
million which we plan to borrow under a new short term loan facility. We expect
to enter into these facilities prior to the completion of the offerings.
Borrowings under these facilities will be used to repay borrowings under our
current interim credit facility at the time we enter into these facilities.
Borrowings under the interim credit facility were used primarily to develop and
light the Williams network.
Borrowings under the permanent credit and short term loan facilities which
we will repay with the proceeds from the offerings are anticipated to bear
interest at the rate of LIBOR plus 2.25%. The permanent credit facility will
consist of a revolving facility which will extend for a six-year term, and a
term facility which will extend for a seven-year term. The short term loan
facility will expire December 31, 1999. Borrowings under the interim credit
facility bear interest at the rate of LIBOR plus .875%. See the section of this
prospectus entitled "Description of Other Indebtedness and Other Financing
Arrangements."
23
<PAGE> 27
CAPITALIZATION
The following table sets forth our capitalization at June 30, 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 $22.00 per share. The table assumes
that the underwriters of the equity offering do not exercise their
over-allotment option and that SBC does not purchase the up to 794,857
additional shares of our common stock that it may elect to purchase. The table
also 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>
JUNE 30, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Cash and cash equivalents.................................. $ 73,706 $2,062,562
========== ==========
Long-term debt due within one year......................... $ 372 $ 372
========== ==========
Long-term debt:
Due to affiliates........................................ $ 800,956 1,000,956
__% senior notes due 200_................................ -- 1,300,000
Bank borrowings.......................................... 613,275 3,275
---------- ----------
Total long-term debt.................................. 1,414,231 2,304,231
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 64,565,035 shares
issued and outstanding.............................. -- 646
Class B common stock, $0.01 par value per share:
500,000,000 shares authorized; and 395,434,965 shares
issued and outstanding.............................. -- 3,954
Preferred stock, $0.01 par value per share:
500,000,000 shares authorized; no shares issued or
outstanding......................................... -- --
Capital in excess of par value........................... 1,391,160 2,519,317
Accumulated deficit...................................... (516,924) (516,924)
Accumulated other comprehensive income................... 77,629 77,629
---------- ----------
Total stockholders' equity......................... 951,866 2,084,622
---------- ----------
Total capitalization............................ $2,366,097 $4,388,853
========== ==========
</TABLE>
24
<PAGE> 28
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 six months ended
June 30, 1999 and 1998. Our consolidated balance sheets 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 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 network, comprised of a single fiber optic strand and associated
equipment, its telecommunications equipment distribution business and Vyvx, a
leading provider of multimedia fiber transmission for the broadcast industry.
The single fiber network can only be used to transmit video and multimedia
services, including Internet services, through July 1, 2001. The single fiber
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 460,000,000 shares of
capital stock outstanding after the equity offering and the concurrent
investments and does not include any exercise of the over-allotment option by
the underwriters of the equity offering, the issuance of up to 794,857
additional shares that SBC may elect to purchase 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 10% as if the debt had been issued on
January 1, 1998.
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> 29
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 $15.7
million over the vesting periods, of which we estimate that approximately $5.4
million will be expensed during the remainder of 1999 and approximately $3.0
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 1999, 1998 and
1997 included in other expense of $26.7 million, $23.2 million and $29.0
million, respectively, 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 in September 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 single fiber 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
26
<PAGE> 30
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 $29.0 million of charges primarily related
to the decision to sell our learning content business. 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. Other expense for the six
months ended June 30, 1999 included $26.7 million of charges related to
the sale of our audio and video conferencing and closed-circuit video
broadcasting services businesses.
- 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 leases accounted for as sales-type leases. Dark fiber revenues for
this period were $64.1 million. Revenues from dark fiber for the six
months ended June 30, 1999 were $71.9 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> 31
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Network................. $ 197,389 $ 52,042 $ 194,936 $ 43,013 $ 11,063 $ -- $ --
Solutions............... 692,492 672,096 1,367,404 1,189,798 568,072 494,919 396,640
Strategic Investments... 133,469 102,612 221,410 217,966 132,477 44,000 18,247
Eliminations............ (22,211) (25,024) (50,281) (22,264) (6,425) -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
revenues..... 1,001,139 801,726 1,733,469 1,428,513 705,187 538,919 414,887
Operating expenses:
Cost of sales........... 765,742 587,238 1,294,583 1,043,932 517,222 402,336 316,891
Selling, general and
administrative....... 264,852 206,996 489,173 329,513 152,484 93,560 78,552
Provision for doubtful
accounts............. 11,810 2,696 21,591 7,837 2,694 2,932 3,866
Depreciation and
amortization......... 62,112 40,759 87,081 71,863 32,378 21,050 18,554
Other................... 26,913 1,033 34,245 32,269 500 (1,240) (224)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses..... 1,131,429 838,722 1,926,673 1,485,414 705,278 518,638 417,639
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from
operations.............. (130,290) (36,996) (193,204) (56,901) (91) 20,281 (2,752)
Interest accrued.......... (29,033) (6,250) (18,650) (8,714) (17,367) (13,999) (7,405)
Interest capitalized...... 8,798 4,556 11,182 7,781 -- -- --
Equity losses............. (18,682) (2,739) (7,908) (2,383) (1,601) (72) 243
Investing income.......... 4,762 1,267 1,931 670 296 405 41
Minority interest in
(income) loss of
subsidiaries............ 11,272 (4,904) 15,645 (13,506) -- -- --
Gain on sale of interest
in subsidiary........... -- -- -- 44,540 -- -- --
Gain on sale of assets.... -- -- -- -- 15,725 -- --
Other income (loss),
net..................... (758) (44) 178 508 (108) 148 44
------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations
before income taxes..... (153,931) (45,110) (190,826) (28,005) (3,146) 6,763 (9,829)
(Provision) benefit for
income taxes............ (45,834) 1,183 5,097 (2,038) (368) (8,380) (2,710)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing
operations.............. (199,765) (43,927) (185,729) (30,043) (3,514) (1,617) (12,539)
Income from discontinued
operations.............. -- -- -- -- -- 1,018,800 94,001
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)......... $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514) $ 1,017,183 $ 81,462
============ ============ ============ ============ ============ ============ ============
Historical per share data
(basic):
Loss from continuing
operations........... $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514) $ (1,614) $ (12,539)
Income from discontinued
operations........... $ -- $ -- $ -- $ -- $ -- $ 1,018,800 $ 94,001
Net income (loss)....... $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514) $ 1,017,183 $ 81,462
Weighted average shares
outstanding.......... 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Pro forma per share data
(basic):
Loss from continuing
operations........... $ (.58) $ (.24) $ (.69) $ (.07) $ (.01) $ -- $ (.03)
Income from discontinued
operations........... $ -- $ -- $ -- $ -- $ -- $ 2.26 $ .21
Net income (loss)....... $ (.58) $ (.24) $ (.69) $ (.07) $ (.01) $ 2.26 $ .18
Weighted average shares
outstanding.......... 460,000,000 460,000,000 460,000,000 460,000,000 460,000,000 460,000,000 460,000,000
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA.................... $ (41,524) $ 3,763 $ (82,973) $ 44,005 $ 32,287 $ 41,331 $ 15,802
Ratio of earnings to fixed
charges................. -- -- -- -- -- 1.43 --
(Deficiency) excess of
earnings to cover fixed
charges................. $ (155,319) $ (42,023) $ (209,745) $ (19,897) $ (1,545) $ 6,856 $ (9,829)
Net cash provided by (used
in) operating
activities.............. (36,932) (76,462) (300,810) 147,858 (1,775) 34,144 41,389
Net cash provided by
financing activities.... 898,926 324,122 890,623 225,953 226,009 47,022 27,764
Net cash used in investing
activities.............. (830,292) (251,425) (559,099) (363,494) (224,186) (81,189) (58,844)
Capital expenditures...... 572,387 253,971 401,004 276,249 66,900 32,412 12,616
BALANCE SHEET DATA:
Working capital........... $ 424,178 $ 224,771 $ 284,358 $ 150,965 $ 145,865 $ 80,989 $ 64,110
Net assets of discontinued
operations.............. -- -- -- -- -- -- 743,622
Property, plant and
equipment, net.......... 1,060,635 634,361 712,404 413,452 174,091 98,128 70,415
Total assets.............. 3,171,438 1,704,577 2,338,546 1,511,834 721,687 413,630 1,086,329
Long-term debt, including
long-term debt due
within one year......... 1,414,603 230,339 624,420 126,941 2,702 189,031 164,067
Total liabilities......... 2,219,572 744,445 1,330,864 643,332 194,434 319,409 340,831
Total stockholders'
equity.................. 951,866 960,132 1,007,682 868,502 527,253 94,221 745,498
</TABLE>
30
<PAGE> 34
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 or lease, 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 single fiber network, its telecommunications
equipment distribution business and Vyvx. The single fiber 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 single fiber 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> 35
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 revenues
generated from dark fiber. Our network services include:
- packet-based data services, or the transport of information as "packets,"
which are data organized for transmission over circuits shared
simultaneously by several users
- private line services, which are dedicated direct connections between
locations
- voice services
- local calling area services to provide local capacity to our carrier
customers
- optical wave services, which allow a customer exclusive long-term use of
a portion of the transmission capacity of a fiber optic strand
- 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
single fiber network.
Beginning in 1998, our revenues also included dark fiber leases accounted
for as sales-type leases. A dark fiber lease 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 lease 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. For these sales-type leases, revenue is generally
recognized at the time of delivery and acceptance of the fiber. However, see
"Accounting pronouncements" below for a discussion of future revenue recognition
related to dark fiber leases. Dark fiber leases that do not meet the criteria
for sales-type lease accounting are accounted for as operating leases and the
cash received is recognized as revenue over the term of the lease.
Grants of rights in dark fiber generally provide the customers with the
risks and benefits of ownership. However, we retain title to the fibers. We
maintain control over physical access to the cable containing the fibers in
order to protect the integrity of the fibers used by us or other customers.
Consequently, the agreements granting rights in dark fiber obligate us to
provide maintenance services for the cable. In return, the customer pays us for
providing such maintenance services during the term of the agreement. In some
instances, the customer provides us with similar services pursuant to an
agreement to grant rights in dark fiber held by us on the customer's system.
Most dark fiber customers also elect to use equipment space and related
services, such as power, provided by us along the route of the dark fiber for
which we receive additional revenue from recurring charges. In most cases, we
have the right to increase these charges to match inflation.
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<PAGE> 36
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 dark fiber leases accounted for as sales-type leases 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. By 2001,
revenues from our network unit are expected to consist primarily of voice
services and packet-based data services for communications transmissions. In
1998 and the first six months of 1999, approximately 33% and 36%, respectively,
of our network unit's total revenues were generated from dark fiber. However, as
a result of recent accounting pronouncements discussed below, we do not expect
this level of revenues from dark fiber transactions to continue.
We evaluate our grants to customers of rights in dark fiber under lease
accounting rules. Certain of our grants of rights in dark fiber were accounted
for as sales-type leases even though title does not actually transfer to our
customers under our existing grants of rights in dark fiber. Sales-type lease
accounting effectively treats a transaction as a sale, resulting in the
recognition of revenues and cost of sales. Through June 30, 1999, all of our
network unit's revenues included in the category of dark fiber represented
revenues recorded from transactions accounted for as sales-type leases.
In June 1999, the Financial Accounting Standards Board issued a new
interpretation effective for transactions entered into after June 30, 1999 that
has the effect of requiring transfer of title to be an included element in order
to account for a grant of rights in dark fiber as a sales-type lease.
Accordingly, sales-type lease accounting will no longer be appropriate for the
grants of rights in dark fiber for transactions entered into after June 30,
1999. Transactions for which title is not transferred will be accounted for as
operating leases with revenues recognized ratably over the term of the grant of
the rights in dark fiber.
See "Accounting pronouncements" below for additional discussion of future
revenue recognition related to dark fiber leases.
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 system of
devices that open, close, select or complete paths for the transmission of
signals that connect to destinations 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
33
<PAGE> 37
functions such as taking orders, answering service- and product-related
questions and telemarketing. Revenues from data equipment consist mainly of the
sale of the following:
- routers, which connect two or more data networks
- switches, which are devices that open, close, select or complete paths
through which the transmission signal flows to connect to its destination
- hubs, which are devices on a data network to which other devices such as
printers and computers are connected
- 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 the design and operational support of voice, data and integrated
networks, which are network systems that combine voice and data services, for
companies and organizations, 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
- 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
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<PAGE> 38
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 -- Our strategic investments unit -- International -- Algar
Telecom" for more information.
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.
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<PAGE> 39
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>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------------------
1999 1998 1998 1997 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Network.......................... 19.7% 6.5% 11.2% 3.0% 1.6%
Solutions........................ 69.2 83.8 78.9 83.3 80.6
Strategic Investments............ 13.3 12.8 12.8 15.3 18.8
Eliminations..................... (2.2) (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.................... 76.5 73.2 74.7 73.1 73.3
Selling, general and
administrative................ 26.5 25.8 28.2 23.1 21.6
Provision for doubtful
accounts...................... 1.2 0.3 1.2 0.5 0.4
Depreciation and amortization.... 6.2 5.1 5.0 5.0 4.6
Other............................ 2.6 0.2 2.0 2.3 0.1
----- ----- ----- ----- -----
Total operating expenses...... 113.0 104.6 111.1 104.0 100.0
----- ----- ----- ----- -----
Loss from operations............... (13.0)% (4.6)% (11.1)% (4.0)% --
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
CONSOLIDATED RESULTS
We experienced a net loss of $199.8 million for the six months ended June
30, 1999 compared to a net loss of $43.9 million for the six months ended June
30, 1998, an increase of $155.9 million from the prior period. The increase in
net loss included an increase in losses from operations of $93.3 million
(including a charge of $26.7 million related to the sale of our audio and video
conferencing and closed-circuit video broadcasting services businesses), an
increase in equity losses of $15.9 million and an increase in net interest
expense of $18.5 million, somewhat offset by a change in minority interest
results of $16.2 million. Net loss was also increased by $47.0 million pursuant
to our tax sharing agreement with Williams. 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 six months ended June 30, 1999 increased $47.0
million from a benefit of $1.2 million for the six months ended June 30, 1998 to
a provision of $45.8 million for the six months ended June 30, 1999.
Our network unit accounted for $30.3 million of the increase in losses from
operations, our solutions unit accounted for $33.6 million of the increase in
losses from operations and our strategic investments unit accounted for $29.4
million of the increase in losses from operations, primarily due to the $26.7
million charge referred to above. We discuss these results in detail below by
segment.
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<PAGE> 40
OUR NETWORK UNIT
The table below summarizes our network unit's results for the six months
ended June 30, 1999 and 1998 and for the last three fiscal years:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Dark fiber........................ $ 71,927 $ -- $ 64,100 $ -- $ --
Leased capacity and other......... 96,855 23,282 73,367 16,637 --
Intercompany...................... 21,947 24,750 49,759 21,159 6,145
Affiliates........................ 6,660 4,010 7,710 5,217 4,918
-------- -------- -------- -------- --------
Total revenues................. 197,389 52,042 194,936 43,013 11,063
Operating expenses:
Cost of sales..................... 185,858 40,968 157,379 29,211 4,681
Selling, general and
administrative................. 43,384 20,841 51,499 6,512 632
Provision for doubtful accounts... 40 42 136 -- --
Depreciation and amortization..... 13,481 5,135 13,228 4,012 --
Other............................. 2 203 410 -- --
-------- -------- -------- -------- --------
Total operating expenses....... 242,765 67,189 222,652 39,735 5,313
-------- -------- -------- -------- --------
Income (loss) from operations....... $(45,376) $(15,147) $(27,716) $ 3,278 $ 5,750
======== ======== ======== ======== ========
</TABLE>
Our network unit's revenues increased $145.3 million, or 279%, to $197.4
million for the six months ended June 30, 1999 from $52.1 million for the same
period in 1998. The increase was due primarily to $71.9 million of revenues from
dark fiber leases accounted for as sales-type leases and $68.0 million of
revenues from services provided to customers of the Williams network.
Our network unit's gross profit increased to $11.5 million for the six
months ended June 30, 1999 from $11.1 million for the same period in 1998 while
gross margin decreased to 5.8% for the six months ended June 30, 1999 from 21.3%
for the six months ended June 30, 1998. Our network unit's cost of sales
increased $144.9 million, or 354%, to $185.9 million for the six months ended
June 30, 1999 from $41.0 million for the same period in 1998, due primarily to
$54.2 million of construction costs associated with dark fiber leases accounted
for as sales-type leases, $47.1 million of higher off-net capacity costs
incurred prior to the completion of the Williams network and $16.0 million of
higher operating and maintenance expenses.
Our network unit's selling, general and administrative expenses increased
$22.5 million, or 108%, to $43.4 million for the six months ended June 30, 1999
from $20.8 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 $8.3 million, or
163%, to $13.5 million for the six months ended June 30, 1999 from $5.1 million
for the same period in 1998, reflecting the impact of completing the
construction of various segments of the Williams network.
37
<PAGE> 41
OUR SOLUTIONS UNIT
The table below summarizes our solutions unit's results for the six months
ended June 30, 1999 and 1998 and for the last three fiscal years:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------
1999 1998 1998 1997 1996
-------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
New systems and upgrades....... $403,818 $376,339 $ 791,518 $ 674,604 $306,110
Maintenance and customer
service orders.............. 271,431 289,378 556,392 508,319 251,221
Other.......................... 15,148 4,739 16,029 5,363 9,379
Affiliates..................... 2,095 1,640 3,465 1,512 1,362
-------- -------- ---------- ---------- --------
Total revenues.............. 692,492 672,096 1,367,404 1,189,798 568,072
Operating expenses:
Cost of sales.................. 501,697 487,035 1,009,475 881,112 435,490
Selling, general and
administrative.............. 177,817 152,318 355,014 234,615 105,891
Provision for doubtful
accounts.................... 11,115 1,536 19,231 5,622 1,526
Depreciation and
amortization................ 22,686 18,702 36,637 30,142 16,023
Other.......................... 124 (142) 6,013 1,255 255
-------- -------- ---------- ---------- --------
Total operating expenses.... 713,439 659,449 1,426,370 1,152,746 559,185
-------- -------- ---------- ---------- --------
Income (loss) from operations.... $(20,947) $ 12,647 $ (58,966) $ 37,052 $ 8,887
======== ======== ========== ========== ========
</TABLE>
Our solutions unit's revenues increased $20.4 million, or 3%, to $692.5
million for the six months ended June 30, 1999 from $672.1 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 $190.8 million for the six
months ended June 30, 1999 from $185.1 million for the same period in 1998,
while gross margin increased to 27.6% for the six months ended June 30, 1999
from 27.5% for the same period in 1998. Our solutions unit's cost of sales
increased $14.7 million, or 3.0%, to $501.7 million for the six months ended
June 30, 1999 from $487.0 million for the same period in 1998, due primarily to
the increased revenue.
Our solutions unit's selling, general and administrative expenses increased
$25.5 million, or 16.7%, to $177.8 million for the six months ended June 30,
1999 from $152.3 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 $9.6 million
to $11.1 million for the six months ended June 30, 1999 from $1.5 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 $4.0 million,
or 21.3%, to $22.7 million for the six months ended June 30, 1999 from $18.7
million for the same period in 1998, due primarily to the CNG acquisition and
depreciation related to systems infrastructure.
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<PAGE> 42
OUR STRATEGIC INVESTMENTS UNIT
The table below summarizes our strategic investments unit's results for the
six months ended June 30, 1999 and 1998 and for the last three fiscal years:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1999 1998 1998 1997 1996
-------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Vyvx............................. $ 79,968 $ 79,689 $ 161,201 $162,009 $ 99,974
PowerTel......................... 19,323 -- 11,248 -- --
Other............................ 34,178 22,923 48,961 55,957 32,503
-------- -------- --------- -------- --------
Total revenues................ 133,469 102,612 221,410 217,966 132,477
Operating expenses:
Cost of sales.................... 100,398 84,259 178,010 155,873 83,476
Selling, general and
administrative................ 43,651 33,837 82,660 88,386 45,961
Provision for doubtful
accounts...................... 655 1,118 2,224 2,215 1,168
Depreciation and amortization.... 25,945 16,922 37,216 37,709 16,355
Other............................ 26,787 972 27,822 31,014 245
-------- -------- --------- -------- --------
Total operating expenses...... 197,436 137,108 327,932 315,197 147,205
-------- -------- --------- -------- --------
Loss from operations............... $(63,967) $(34,496) $(106,522) $(97,231) $(14,728)
======== ======== ========= ======== ========
ATL and other equity losses...... $(18,682) $ (2,739) $ (7,908) $ (2,383) $ (1,601)
======== ======== ========= ======== ========
</TABLE>
Our strategic investments unit's revenues increased $30.9 million, or 30%,
to $133.5 million for the six months ended June 30, 1999 from $102.6 million for
the same period in 1998. The increase is primarily attributable to $19.3 million
in international activity as a result of the August 1998 acquisition of PowerTel
and $11.3 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 $33.1 million
for the six months ended June 30, 1999 from $18.4 million for the same period in
1998, while gross margin increased to 24.8% for the six months ended June 30,
1999 from 17.9% for the same period in 1998. Our strategic investments unit's
cost of sales increased $16.1 million, or 19.2%, to $100.4 million for the six
months ended June 30, 1999 from $84.3 million for the same period in 1998,
primarily due to $16.7 million in increased costs attributable to the August
1998 acquisition of PowerTel.
Our strategic investments unit's selling, general and administrative
expenses increased $9.9 million, or 29.3%, to $43.7 million for the six months
ended June 30, 1999 from $33.8 million for the same period in 1998, primarily as
a result of the $9.4 million impact of the August 1998 acquisition of PowerTel.
Our strategic investments unit's equity losses increased to $18.7 million
for the six months ended June 30, 1999 from $2.7 million for the same period in
1998 due primarily to the March 1998 investment in ATL-Algar Telecom Leste S.A.,
which was formed to acquire a concession for cellular licenses in Brazil in the
states of Rio de Janeiro and Espirito Santo. Following the contribution from
Williams, our investment in ATL totaled $415 million, representing a direct 55%
and indirect 10% economic interest and a direct 19% and indirect 30% voting
interest. On March 11, 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. ATL had significant pre-
39
<PAGE> 43
operational losses in the construction of a digital cellular network in 1998 and
the six months ended June 30, 1999.
During the second quarter of 1999, management determined that the
businesses that provide audio and video conferencing services and closed-circuit
video broadcasting services for businesses were held for sale. Upon that
determination, we ceased accruing depreciation and amortization for those
businesses. On June 30, 1999, we signed an agreement, which closed effective
July 31, 1999, with Genesys, S.A. to sell our business that provides audio and
video conferencing services. In addition, effective July 31, 1999, we signed and
closed an agreement with Cyberstar L.P. to sell our business which provides
closed-circuit video broadcasting services for businesses. Proceeds from these
two transactions totalled approximately $50.0 million. In the second quarter of
1999 we recognized a pre-tax loss of $26.7 million related to the sales of these
businesses consisting of a $22.8 million impairment charge to write-down the
assets to fair value based on the expected net sales proceeds and exit costs of
$3.9 million, consisting of $2.8 million of contractual obligations and $1.1
million of employee-related costs.
CONSOLIDATED NON-OPERATING COSTS
Our net interest expenses for the six months ended June 30, 1999 increased
$18.5 million from the same period of the prior year as interest expense
incurred to finance operations and capital expenditures exceeded amounts
capitalized for the period by $20.2 million. Our minority interest in (income)
loss of subsidiaries is attributable to Nortel's 30% ownership of Solutions LLC
as well as the other PowerTel stockholders' 64% ownership of PowerTel since
February 1999 and 78% ownership of PowerTel prior to February 1999. The change
in minority interest resulted in an increase in income for the six months ended
June 30, 1999 of $11.3 million compared to a reduction in income for the same
period in 1998 of $4.9 million. The 1999 amount attributable to Nortel is $5.3
million and the 1999 amount attributable to PowerTel is $6.0 million. In 1998,
the minority interest amount was all attributable to Nortel.
For the six months ended June 30, 1999, we recorded a tax provision of
$45.8 million, compared to a tax benefit of $1.2 million for the same period in
1998. The increase in our tax provision is primarily due to an increase in our
deferred taxes pursuant to our tax sharing agreement with Williams. The
depreciation of the Williams network that has begun resulted in a significant
deferred tax expense for us in 1999 with no current benefit for the net
operating losses generated under the tax sharing agreement. Under our tax
sharing agreement with Williams, after the equity offering we will generally
receive the benefit of net operating losses only while we remain part of the
Williams consolidated tax group and only to the extent we would be able to
utilize them if we filed separate income tax returns.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED RESULTS
We experienced a net loss of $185.7 million in 1998 compared to a net loss
of $30.0 million in 1997, an increase of $155.7 million from 1997. The increase
in our net loss is primarily attributable to an increase in losses from
operations of $136.3 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.
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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 dark fiber leases accounted for as
sales-type leases, $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 single fiber network from
our strategic investments unit 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 dark fiber leases accounted for as
sales-type leases, $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 single fiber 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
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<PAGE> 45
$43.5 million of the increased costs are direct costs associated with
maintenance and customer service orders revenues. $31.6 million of the increased
costs are attributable to higher indirect costs which are primarily attributable
to maintenance and customer service orders revenues.
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, $36.4 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 at June 30, 1999
represented 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 up to
5%. 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
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despite our less than 50% 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 single fiber 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 $5.7 million, or 6%, to $82.7 million in 1998 from $88.4
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
$0.5 million, or 1%, to $37.2 million in 1998 from $37.7 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 single fiber 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 $3.2
million, or 10%, to $27.8 million in 1998 from $31.0 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 $29.0 million primarily
related to our decision and commitment to sell the learning content business.
Our 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.
CONSOLIDATED NON-OPERATING COSTS
Our net interest expense increased $6.5 million to $7.4 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 in (income) loss of subsidiaries is attributable to
Nortel's 30% ownership of Solutions LLC as well as the other stockholders' 78%
ownership of PowerTel. The
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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 $30.0 million in 1997 compared to a net loss of
$3.5 million in 1996, representing an increase in net loss of $26.5 million, or
757%, from the prior year. The increase in net loss was due to increased losses
from operations of $77.2 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 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 single fiber 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 single fiber network from
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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 single
fiber 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 on these contracts are initially recognized upon delivery of the
equipment with the remaining revenues under the contracts being recognized over
the installation period based on the relationship of incurred labor to total
estimated labor. 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.
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
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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 $42.4 million, or 92%, to $88.4 million in 1997 from $46.0
million in 1996, primarily attributable to the acquired operations.
Our strategic investments unit's depreciation and amortization increased
$21.3 million, or 130%, to $37.7 million in 1997 from $16.4 million in 1996,
primarily attributable to the acquired operations.
Our strategic investments unit's other expense increased $30.8 million to
$31.0 million from $0.2 million in 1996, due primarily to charges totaling $29.0
million in 1997 primarily related to our decision and commitment to sell our
learning content business, resulting in a $22.7 million charge. 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.
CONSOLIDATED NON-OPERATING COSTS
Our net interest expense decreased $16.4 million to $0.9 million in 1997
from $17.4 million in 1996 as a result of our funding needs and resources in
1997 as compared to 1996 and as a result of the capitalization of interest
beginning in 1997 for network construction projects. Our cash from financing
activities decreased $0.1 million to $225.9 million in 1997 from $226.0 million
in 1996. Most of our 1997 funding was provided by capital contributions from
Williams, while in 1996 funding included both borrowings and capital
contributions from Williams.
Our minority interest expense in 1997 is attributable to Nortel's 30%
ownership of Solutions LLC and resulted in expense in 1997 of $13.5 million
compared to none in 1996. This change was due to the April 1997 combination with
Nortel.
We recognized a $44.5 million gain in 1997 on the sale of the 30% ownership
interest in Solutions LLC to Nortel based on the excess of the fair value over
the net book value of the assets conveyed to Nortel. In 1996, we recorded a gain
of $15.7 million from the sale of communication assets for $38.0 million.
In 1997, we recorded a tax expense of $2.0 million compared to a tax
expense of $0.4 million in 1996. The notes to our consolidated financial
statements include a reconciliation of the expected benefit to the actual
provision or benefit. The 1997 and 1996 expenses reflect our inability to
utilize net operating losses under our tax sharing agreement with Williams.
LIQUIDITY AND CAPITAL RESOURCES
Our operations currently do not provide positive cash flow. Accordingly, we
have funded capital expenditures, acquisitions and other cash needs through a
combination of borrowings and capital contributions from Williams as well as
external borrowings when required. After the completion of the offerings, we
plan on financing future cash outlays through internally generated and external
funds without relying on cash advances, credit support or contributions from
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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 June 30, 1999 to fund capital
expenditures and investments, pay debt and make acquisitions was approximately
$2.6 billion. Of this amount, approximately $811.1 million was expended for
acquisitions and approximately $1.3 billion was used for capital expenditures,
of which approximately $1.2 billion was spent to construct and light the
Williams network. In addition, total cash used in operating activities was
approximately $190.1 million during the same period.
Cash provided during this same period by loans and capital contributions
from Williams totaled approximately $1.8 billion, of which approximately $701
million was for the buildout of the Williams network. Total cash provided by
external borrowings was approximately $1.1 billion. As of June 30, 1999, working
capital was $424.2 million. At December 31, 1998, 1997 and 1996, working capital
was approximately $284.4 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.
During 1999, our total borrowings under this credit facility reached $315
million; however, as of June 30, 1999, all borrowings under this facility had
been repaid utilizing proceeds from the interim credit facility described below
and there was no outstanding balance under this credit facility. In August 1999,
the facility was amended to remove us and our solutions unit as borrowers under
this facility.
During 1998, we entered into an asset defeasance program. We lease portions
of the network under this program. The lessor is a trust which receives cash
through sales of its notes and equity. We, as construction agent for the trust,
use this cash to construct the network over our rights of way. The maximum
amount available for the network under this asset defeasance program is $750
million. As of June 30, 1999, approximately $495 million had been spent under
this program for the network and there was an additional approximately $255
million available. 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 Other 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 the
completion of the offerings, we entered into a $1.4 billion interim credit
facility on April 16, 1999. Our obligations under the interim credit facility
are guaranteed by Williams. The facility terminates on September 30, 1999. As of
June 30, 1999, approximately $610.0 million was outstanding under the interim
credit facility.
We intend to replace the interim credit facility in September 1999 with a
$1.0 billion permanent credit facility for our subsidiary, Williams
Communications, Inc. Assuming conditions to the termination of the guarantee are
satisfied, this permanent credit facility will not be guaranteed by Williams
following the completion of the offerings. We also intend to enter into a $750
million short term loan facility in September 1999 to provide funds to repay a
portion of the borrowings outstanding under the interim credit facility and to
finance capital
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expenditures for our business units through the completion of the offerings.
Borrowings under this short term loan facility will be repaid from the proceeds
of the concurrent investments and the offerings and the facility will be
cancelled at that time. For more information regarding the permanent credit
facility and the short term loan facility, see the sections of this prospectus
entitled "Description of Other Indebtedness and Other Financing
Arrangements -- Permanent credit facility" and "-- Short term loan 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 sections of this prospectus entitled
"Capitalization" and "Description of Other Indebtedness and Other Financing
Arrangements -- Williams note."
ANTICIPATED FUNDING SOURCES AND CASH USES
We anticipate total cash expended from June 30, 1999 through December 31,
2000 to approximate $3.7 billion as set forth in the table below:
PROJECTED SOURCES AND USES
(IN MILLIONS)
<TABLE>
<S> <C>
Sources:
Net proceeds from the equity offering....................... $ 608
Net proceeds from the concurrent investments................ 725
Net proceeds from the notes offering........................ 1,266
Net increase in bank borrowings............................. 390
Asset defeasance program.................................... 255
Proceeds from grants of dark fiber rights................... 480
------
$3,724
======
Uses:
Capital expenditures:
Network................................................... $2,710
Other business units and corporate level.................. 230
------
Total capital expenditures....................... 2,940
Payments for wireless capacity.............................. 200
Debt service payments....................................... 385
Lease payments under asset defeasance program............... 55
Other....................................................... 144
------
$3,724
======
</TABLE>
FUNDING SOURCES
Our primary funding sources include the following:
- Equity offering: Concurrently with the notes offering, we expect to
consummate the equity offering and receive net proceeds of approximately
$607.8 million.
- Concurrent investments: We expect to receive at least $725 million from
the concurrent investments in our company, consisting of at least $425
million from SBC, $100 million from Telefonos de Mexico and $200 million
from Intel. The concurrent investments are conditioned upon the
completion of the equity offering and the continuation of the respective
alliances. For more detail regarding the concurrent investments and
events which may result in the termination of the alliances, see the
section of this prospectus entitled "Business -- Strategic alliances."
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- Bank borrowings: We intend to enter into a new $1.0 billion permanent
credit facility that we will use to replace and pay a portion of the
outstanding balance on the $1.4 billion interim credit facility. We will
make new borrowings under this new permanent credit facility as and when
needed. We expect that after giving effect to the use of proceeds from
the offerings and the concurrent investments we will have no outstanding
borrowings under this facility and that by December 31, 2000 we will have
borrowed all of the $1.0 billion available under this facility. The table
does not reflect borrowings under our revolving credit facility, interim
credit facility or short term loan facility since all of these facilities
will have been repaid on or prior to the completion of the offerings.
- Asset defeasance program: The asset defeasance program provides cash
which we may use, as agent for the trust, to buy and install fiber optic
cable and equipment in order to construct portions of our network that we
lease upon completion. We have the right to acquire these assets from the
lessor upon the expiration of the lease term. We expect that from June
30, 1999 through the time of completion of the offerings we will have
increased our use of the $750 million of availability under this program
from approximately $495 million to $625 million and that by December 31,
1999 we will have used the entire availability under this program.
- Proceeds from grants of dark fiber rights: We expect to generate
approximately $65 million in proceeds from grants of rights in dark fiber
during the period from June 30, 1999 through the completion of the
offerings and an additional approximately $415 million in proceeds
through December 31, 2000. Of these amounts, $60 million in proceeds from
July 1, 1999 through December 31, 2000 have been or will be generated
under our agreement with WinStar described in the section of this
prospectus entitled "Business -- Strategic alliances -- WinStar."
CASH USES
Our primary cash uses include the following:
- Network capital expenditures: 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. 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. We spent approximately $1.2 billion under our
network capital plan through June 30, 1999. We estimate that during the
period from June 30, 1999 through December 31, 2000, we will spend a
total of approximately $2.7 billion on our network. This amount includes
expenditures made under our asset defeasance program, as agent for the
trust, and expenditures made for dark fiber. We estimate that of this
amount approximately $1.2 billion will be spent for conduit, fiber optic
cable, right of way acquisition and construction costs and approximately
$1.5 billion will be spent for equipment.
- Other business units and corporate level capital expenditures: Of the
$230 million in estimated total capital expenditures for our solutions
and strategic investments business units and corporate level capital
expenditures for the period of June 30, 1999 through
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December 31, 2000, we expect to use approximately $103 million for
construction of PowerTel's network, approximately $52 million for
corporate level leasehold improvements and equipment, approximately $46
million for systems upgrades and equipment for our solutions business
unit, approximately $21 million for equipment for Vyvx and approximately
$8 million for other items.
- Payments for wireless capacity: At June 30, 1999, we had payments of
approximately $280 million, payable over four years, remaining on our
$400 million commitment under our agreement with WinStar described in the
section of this prospectus entitled "Business -- Strategic
alliances -- WinStar." The payments required during the period from June
30, 1999 through December 31, 2000 will be approximately $200 million.
- Debt service payments: We estimate that during the period from June 30,
1999 through December 31, 2000 we will pay approximately $360 million in
interest expense, based on an assumed rate of interest of 10% on the
notes and an average LIBOR over this period of 5.75%. We also estimate
that we will repay approximately $25 million in principal under our
approximately $1.0 billion Williams note during this period.
- Lease payments under asset defeasance program: We expect that during the
period from June 30, 1999 through December 31, 2000 we will pay
approximately $55 million in lease payments under our asset defeasance
program.
- Other: Of the $144 million in estimated total other cash uses during the
period from June 30, 1999 through December 31, 2000, we expect to invest
approximately $47 million in PowerTel and pay fees under our bank
facilities of approximately $28 million, with the remainder to fund
operating deficits.
We believe that the net proceeds from the offerings and the concurrent
investments, the amount funded by Williams, our borrowings under our bank
facilities, the funds available under the asset defeasance program, proceeds
from grants of dark fiber rights and cash on hand 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.
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.
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 Other Indebtedness and Other Financing Arrangements."
OTHER POTENTIAL CASH USES
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. 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
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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. In either case, 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.
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, Williams has granted us an option to acquire
its entire equity and debt interests in Algar Telecom at net book value. At June
30, 1999, this net book value was approximately $150 million. 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 -- Our strategic investments
unit -- International -- Algar Telecom."
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 $581 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.
In the event that we need to fulfill the potential cash commitments
described above, we intend to fund these payments from borrowings under our bank
facilities. If operating cash flows are not sufficient or if we are not able to
borrow sufficient funds under our bank facilities, we would expect to obtain
additional funding from other sources, which may include equity sales.
INFLATION
Inflation has not significantly affected our operations during the past
three years.
ACCOUNTING PRONOUNCEMENTS
We adopted the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5) effective January 1, 1999. SOP 98-5 requires that all start-up costs be
expensed and that the effect of adopting SOP 98-5 be reported as the cumulative
effect of a change in accounting principle. The effect of adopting SOP 98-5 on
our results of operations was immaterial.
We adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," during
the fourth quarter of 1998. SFAS No. 131 established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas and major customers.
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In June 1999, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement
No. 66." The interpretation is effective for sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. Under this
interpretation, dark fiber is considered integral equipment and accordingly
title must transfer to a lessee in order for a lease transaction to be accounted
for as a sales-type lease. After June 30, 1999, the effective date of FASB
Interpretation No. 43, sales-type lease accounting will no longer be appropriate
for dark fiber leases and therefore these transactions will be accounted for as
operating leases unless title to the fibers under lease transfers to the lessee
or if the agreement was entered into prior to June 30, 1999.
MARKET RISK DISCLOSURES
INTEREST RATE RISK
We have interest rate exposure related to our existing credit facilities
and a note payable to Williams. Borrowings under our existing credit facilities
and note payable to Williams are influenced by changes in short-term LIBOR
interest rates. In addition to the notes, we will have interest rate risk
associated with our permanent credit facility, which we expect will replace our
interim credit facility. The permanent credit facility will be influenced by
changes in LIBOR rates. The notes will be subject to interest rate risk
resulting from a future decrease in interest rates on obligations with
comparable terms below the interest rate on the notes. None of our existing or
proposed arrangements require us to manage or hedge the risks related to
interest rate movements and we currently do not mitigate the risk through the
use of interest rate swaps or other derivative instruments. However, subsequent
to the offerings we may choose to manage our risk associated with interest rate
movements through an appropriate balance of fixed and variable rate obligations.
To maintain an effective balance of fixed and variable obligations, we may elect
to enter into specific interest rate swaps or other derivative instruments as we
deem necessary.
The following table provides information as of December 31, 1998 about the
Williams note. The table presents principal cash flows and weighted average
interest rates by maturity dates. At December 31, 1998, we had no borrowings
outstanding under existing credit facilities.
<TABLE>
<CAPTION>
FAIR VALUE AT
DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
----- ----- ----- ----- ----- ---------- ----- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VARIABLE RATE LIABILITIES
Note Payable to
Williams............... -- -- -- $ 614 -- -- $614 $614
Avg. Interest Rate..... LIBOR LIBOR LIBOR LIBOR
+ .75 + .75 + .75 + .75
</TABLE>
At June 30, 1999, borrowings under existing credit facilities and the
Williams note were $610 million and $794 million, respectively. The carrying
value of our borrowings under both arrangements approximates the fair value. We
expect to repay our interim credit facility through borrowings under our
permanent credit facility. The permanent credit facility is expected to be
entered into in September 1999 and is subject to a number of significant
conditions as described in the section of this prospectus entitled "Description
of Other Indebtedness and Other Financing Arrangements." Rates under this
facility will be based on LIBOR plus margins based on investment ratings and are
expected to be in the range of LIBOR plus 2.25% to 2.50%. We expect our
permanent credit facility to require repayment beginning in the fourth year of
the facility. However, we expect to repay a portion of our outstanding
borrowings under the permanent credit facility at the time of the offerings with
the net proceeds from the offerings.
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At the time of the offerings, the borrowings under the Williams note will
be converted into a seven-year amortizing note payable bearing interest at rates
equivalent to the rate on our permanent credit facility. Upon the conversion of
the Williams note we will be permitted to make minimum repayments of no less
than $25 million each fiscal year beginning June 30, 2000 for so long as no
default or event of default exists under the permanent credit facility.
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.
We have a preferred stock investment in a Brazilian telecommunications
venture totaling $101 million and $317 million at December 31, 1998 and June 30,
1999, respectively. Estimating cash flows by year from this investment is not
practicable, given that the cash flows from or liquidations of this investment
are uncertain. From December 31, 1998 through June 30, 1999, the Brazilian
economy experienced significant volatility resulting in a 33% reduction in the
value of the Brazilian Real against the U.S. dollar. However, at December 31,
1998 and June 30, 1999, management believes the fair value of this investment
approximated 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 our investment at June 30, 1999, assuming 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
remain uncertain, as does the long-term impact on our interest in this venture.
In the event that we exercise the option to acquire Williams' interest in Algar
Telecom, our investment in Brazil, and our exposure to fluctuations in the value
of the Brazilian Real against the U.S. dollar, would be increased.
The net assets of our operations that we consolidate are located in various
other countries throughout the world and approximate 8% and 10% of our total net
assets at December 31, 1998 and June 30, 1999, respectively. 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.
As an example, a 20% decrease in the respective functional currencies against
the U.S. dollar could have reduced stockholder's equity by approximately $18
million at June 30, 1999.
We presently do not utilize derivative or other financial instruments to
hedge the risk associated with the movement in foreign currencies. However,
management continually monitors fluctuations in these currencies and will
consider the use of derivative financial instruments or employment of other
investment alternatives if cash flows or investment returns so warrant.
YEAR 2000 READINESS DISCLOSURE
OUR STATE OF READINESS
Beginning on January 1, 2000, many 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 if there are only two digits being used.
We, with Williams, established a plan in 1997 to address Year 2000 issues
relating to the areas of our business that could be impacted by the date and
time change from 1999 to 2000.
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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 August 31, 1999,
all critical IT and Non-IT systems have been fully tested or otherwise validated
as compliant. An example of another way a system is validated as compliant is
when a business process is determined not to be date- and time-
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sensitive. 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 August 31, 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 $12.2 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 August 31, 1999, approximately $8.1 million has been
expensed and $233,000 has been capitalized. The $12.2 million in total costs has
been or is expected to be spent as follows:
- First quarter 1998. Prior to and during the first quarter of 1998, we
conducted the project awareness and inventory and assessment phases of
the project and incurred costs totaling $200,000.
- Second quarter 1998. We spent $700,000 on renovation and replacement and
the completion of the inventory and assessment phase.
- Third and fourth quarter 1998. We focused on the renovations and
replacement, and testing and validation phases in which a cost of
approximately $2.5 million was incurred.
- First quarter 1999. Renovations and replacement and testing and
validation continued, and contingency planning began. We spent
approximately $2 million during the first quarter of 1999.
- Second quarter 1999. Our primary focus shifted to testing and validation
and contingency planning and final testing, with approximately $3 million
spent.
- Third and fourth quarters 1999. We will focus primarily on contingency
planning and final testing and estimate that we will spend approximately
$3.5 million.
- First and second quarters 2000. We will be managing and reporting Year
2000 issues and estimate an additional $450,000 will be spent over this
period.
Of the approximately $4 million of future costs necessary to complete the
project on schedule, approximately $2 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
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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
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.
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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
As of August 31, 1999, all defined business contingency plans had been
completed 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 is continually reviewing and updating its contingency plan to
address both potential spikes in the demand for customer support and potential
problems with its suppliers. Based on customer demand, our solutions unit is
reviewing its work projects to 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.
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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
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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.
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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.
Among other things, 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 Bell
operating company'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 long distance
services originating from wireless equipment or from non-wireless
equipment outside of the regional Bell operating companies' historical
local service areas. A regional Bell operating company will be allowed to
provide long distance service originating from non-wireless equipment
within its historical local service 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 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.
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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
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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 1998 local service revenues totaled approximately
$102 billion, with over 400 local service competitors accounting for about $3.6
billion in revenues. The market share of local service competitors has grown
rapidly in the last few years. According to the FCC, local service competitors'
share of local service revenues increased from 1.0% in 1996 to 2.3% in 1997 and
to 3.5% 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%.
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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.
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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.
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BUSINESS
WILLIAMS COMMUNICATIONS GROUP, INC.
We own or lease, 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 33,120 route miles of fiber
optic cable, utilizing pipeline and other rights of way, to connect 125 cities
by the end of the year 2000. This total includes 9,700 route miles of our single
fiber network and 23,420 route miles of new construction. Of the new
construction, we intend to wholly own 9,500 route miles and lease or otherwise
obtain through joint ownership arrangements the remaining 13,920 route miles.
The Williams network currently consists of approximately 21,650 route miles of
installed fiber optic cable, with 19,490 of those miles in operation, or lit.
The installed fiber optic cable consists of:
- 9,700 route miles which are our single fiber network
- 2,280 other route miles wholly owned by us
- 2,570 route miles leased under our asset defeasance program
- 1,520 route miles jointly owned
- 5,580 route miles through rights in dark fiber
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
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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 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
network comprised of a single fiber optic strand and associated equipment along
the original 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 services provided in accordance with a tariff filed with a regulatory
agency detailing the terms, conditions and pricing of the services.
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As part of the sale to LDDS, Williams agreed not to reenter the
communications network business until January 1998. In January 1998, Williams
reentered the communications network business, announcing its plans to develop
the Williams network.
INDUSTRY AND MARKET OPPORTUNITIES
We believe we are uniquely positioned to take advantage of changes and
developments in the communications industry. These anticipated changes and
developments include:
- Innovations in technology. Technological innovations are increasing both
the supply of and demand for telecommunications transmission capacity
while also driving increased integration in voice and data networks.
Innovations in optics technologies, consisting of both higher quality
fiber optic cable and improved transmission electronics, have increased
the capacity and speed of advanced fiber optic networks while decreasing
the unit cost of transmission. This increased capacity and speed,
combined with continuing advancements in the power of microprocessors,
have resulted in the development of bandwidth-intensive applications,
growth in Internet usage and increases in the number of network users. We
are developing our advanced fiber optic network to meet the increasing
demand for transmission capacity.
- Increasing demand for communications services. We believe that there is
and will continue to be a significant growth in demand for long distance
data, Internet, voice and video services. The increase in computing
power, number of computers networked over the Internet and connection
speeds of networked computers are driving tremendous increases in
communications use for Internet and data services. Prices for cellular
and long distance voice services have decreased, resulting in increased
demand for these services. We believe video conferencing, digital
television and other multimedia applications being developed will
continue to increase demand for transmission capacity. We believe the
Williams network is well positioned to capture this growing demand.
- Deregulation within the communications industry. Around the world, the
communications industry is experiencing liberalization. In the U.S., the
long distance market became highly competitive in the 1980s following the
break up of AT&T, and the Telecommunications Act was designed to open
local markets to competition. Many new companies have formed to compete
for markets that have been traditionally dominated by a very small number
of providers. Our full-service platform enables both new entrants to
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.
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OUR NETWORK UNIT
We own or lease, 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.
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 designs 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
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pipeline rights of way gives us inherent advantages over other systems
built over more public rights of way, such as railroads, highways,
telephone poles or overhead power transmission lines. These advantages
include greater physical protection of the fiber system, lower
construction costs and lower operational costs.
- Establish international connectivity. We pursue strategic relationships
that allow us to exchange capacity on the Williams network for
cost-effective access and capacity on international networks or that
allow us to use our network construction and management experience to
construct international networks. We intend to establish alliances with
international carriers that will expand our capabilities throughout
Europe and other key markets. Select domestic alliances will also allow
us to provide international capabilities such as cost-effective use of
SBC's capacity on China-U.S. and Japan-U.S. submarine fiber optic cable
systems.
- Establish low-cost position. Our carrier market focus, network design
and strategic alliances as well as dark fiber leases 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 leases 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. We currently
have approximately 21,630 route miles of fiber optic cable primarily installed
in the ground, with approximately 19,490 of those miles currently in operation.
For the period from June 30, 1999 through December 31, 2000, we anticipate that
we will spend approximately $2.9 billion developing the Williams network.
We have constructed and plan to construct, including through our asset
defeasance program, 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 of rights in dark fiber. We manage the transmission
equipment on the fiber optic strands we obtain through acquisitions of rights in
dark fiber, usually for terms of 20 years, and we typically pay maintenance fees
to other network providers to maintain the fiber optic strands and rights of
way.
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The following table describes our network infrastructure (numbers are
approximate):
<TABLE>
<CAPTION>
AVERAGE AVERAGE
PLANNED MILES IN NUMBER NUMBER OF AVERAGE NUMBER
ROUTE MILES OPERATION OF FIBERS FIBERS RETAINED* OF SPARE CONDUITS
----------- --------- --------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Single fiber network(1)......... 9,700 9,700 1 1 N/A
Other fiber builds wholly
owned......................... 9,500 2,060 100 21.5 1.8
Fiber builds under our asset
defeasance program(2)......... 3,270 1,790 127 24 1.9
Fiber builds jointly owned(3)... 1,520 1,320 43 12 0
Routes through dark fiber
rights(4)..................... 9,130 4,620 11 9.5 0.3
------ ------
Total................. 33,120 19,490
====== ======
</TABLE>
- -------------------------
* This is the average number of fibers in each category that we expect to
retain for our own use and not grant rights in dark fiber to others.
(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 builds which are being constructed under our asset
defeasance program.
(3) This category consists of our fiber rights in builds which have been jointly
constructed, or rights in dark fiber acquired by, us, Enron Communications,
Inc. and Touch America, Inc. through a limited liability company, or LLC, in
which we share equal ownership and control. The LLC constructed the portion
of the route between Portland and Las Vegas and acquired rights in dark
fiber in the portion of the route between Las Vegas and Los Angeles and in
the Detroit-Cleveland route. The LLC owns the right-of-way over some of the
route it constructed, with each of us, Enron and Touch America also
contributing rights-of-way. The LLC will grant each of us, Enron and Touch
America rights in dark fibers, as well as grant rights in dark fibers to
others. We provide operational services to the LLC.
(4) This category consists of rights in dark fiber and conduits which we have
obtained or intend to obtain. We have already acquired approximately 7,130
route miles from IXC and other carriers, of which 5,300 route miles have had
fiber optic cable installed. We obtained rights in six dark fibers between
Los Angeles and New York City from IXC for 20 years. IXC obtained rights in
24 dark fibers between Houston and Washington, D.C. from us for 20 years. We
intend to acquire an additional 2,000 route miles by the end of 2000.
We are currently installing new transmission equipment on the single fiber
network to increase its transmission capacity and ensure its compatibility with
the newer portions of the Williams network. Due to advances in transmission
electronics, it is now possible to carry as much traffic on this single fiber
optic strand as on 128 fiber optic strands four years ago. In addition, the
single fiber 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 lease capacity from both long distance and local telecommunications
carriers, including our competitors, in order to meet the needs of our
customers. Leases of capacity are distinguished from rights in dark fiber in
that capacity leases are for only a portion of the fiber capacity and the lessor
supplies the equipment to transmit over the fiber. Capacity leases are generally
for terms of one month up to 5 years. We lease approximately 23% of our network
capacity currently in use. However, since we have more capacity available on our
network than we currently are using, 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.
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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 asynchronous transfer mode, or "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.
- 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
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Nortel DMS 250 voice switches will be deployed on the Williams network.
We will install the new switches in Anaheim, San Francisco, Kansas City,
Houston, Chicago, Atlanta and New York City.
The design of the Williams network is simpler than the design of the traditional
circuit-based network. The Williams network design eliminates specialized layers
of equipment. The fewer layers of equipment that remain are designed to provide
multiple service offerings. This increases flexibility, accelerating development
of new services. The elimination of unnecessary equipment also reduces our
initial investment, and our operating and maintenance expenses are reduced due
to less complexity. This simpler design of the Williams network as compared to a
network of more traditional design provides for the following advantages:
- lower costs
- faster development and delivery of services
- potential to carry more communications traffic across the network
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 leases of dark fiber, we generally plan to retain
approximately 24 fibers for our own use on the constructed portions of the
Williams network.
Points of presence. As of June 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.
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The following table sets forth our current and future plans for the
Williams network build. This table does not include the routes of the single
fiber network.
<TABLE>
<CAPTION>
APPROXIMATE
ESTIMATED APPROXIMATE MILES IN
ROUTES COMPLETION DATE ROUTE MILES OPERATION
- ------ ----------------- ----------- -----------
<S> <C> <C> <C>
Atlanta -- Jacksonville(1) Completed 370 370
Dallas -- Houston(2) Completed 250 250
Houston -- Atlanta -- Washington, D.C. Completed 1,830 1,830
Jacksonville -- Miami(1) Completed 330 330
Kansas City -- Denver(1) Completed 640 640
Los Angeles -- New York City(2) Completed 4,370 4,370
Los Angeles -- San Diego(3) Completed 150 150
Minneapolis -- Kansas City(1) Completed 450 450
Portland -- Salt Lake City -- Los Angeles(4) Completed 1,320 1,320
Daytona -- Orlando -- Tampa 3rd quarter 1999 160 80
Portland -- Seattle(3) 3rd quarter 1999 180 --
Detroit -- Cleveland(4) 4th quarter 1999 200 --
Los Angeles -- Sacramento -- Oakland -- San Jose(5) 4th quarter 1999 800 --
Washington, D.C. -- New York City(1) 4th quarter 1999 370 --
Bakersfield -- San Luis Obispo -- Fresno 4th quarter 1999 270 --
Bandon, Oregon -- Eugene, Oregon 4th quarter 1999 250 --
Corpus Christi -- Houston -- Laredo --
San Antonio(2) 4th quarter 1999 740 --
Denver -- Salt Lake City(1) 4th quarter 1999 570 --
Miami -- Tampa -- Tallahassee(1) 4th quarter 1999 540 --
New Orleans -- Tallahassee 4th quarter 1999 480 --
Albany -- Boston 1st quarter 2000 180 --
Sacramento -- Portland(5) 1st quarter 2000 690 --
Chicago -- Detroit(2) 2nd quarter 2000 280 --
Denver -- El Paso(2) 2nd quarter 2000 750 --
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 --
Dallas -- Charlotte(2) 4th quarter 2000 1,250 --
Houston -- Kansas City -- St. Louis -- Chicago 4th quarter 2000 1,300 --
Minneapolis -- Milwaukee -- Chicago(3) 4th quarter 2000 320 --
------ -----
TOTAL: 23,420 9,790
====== =====
</TABLE>
- -------------------------
(1) These routes are being constructed under our asset defeasance program.
(2) We acquired rights in dark fiber with no spare conduits along these routes.
(3) In addition to constructing one route with 2 spare conduits, we intend to
acquire rights in 12 dark fibers along a diverse route between these cities.
(4) These routes were jointly constructed or acquired by us, Enron and Touch
America with no spare conduits.
(5) We intend to acquire rights in 12 dark fibers on these routes along with two
spare conduits.
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
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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 rights
- 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 in some
areas 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 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 rights. We sell rights for dark fiber and related
services and may sell rights to conduit in the future. Sales of dark fiber
rights and conduit rights are accounted for as leases. 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 dark fiber rights
typically has a term which approximates the economic life of a fiber optic
strand (generally 20 to 30 years). Purchasers of dark fiber rights typically
install their own electrical and optical transmission equipment. Substantially
all of our current and planned builds include laying two
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spare conduits, and we may sell rights to use at least one of them. A purchaser
of conduit rights 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. We have entered into agreements
for sales of dark fiber rights with Frontier, IXC, WinStar and others. Payment
for dark fiber rights 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.
Purchasers of dark fiber rights, under most circumstances, have the right
to sublease dark fiber rights obtained. However, we are not permitted to grant
rights in dark fiber or future rights leased under our asset defeasance program
without the prior consent of the lessor. To date, we have not requested nor has
the lessor granted such consent.
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
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with our other customers. For more information about our strategic alliances,
see "-- Strategic alliances" below.
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.
We anticipate that over the next several years the distribution of our
revenues will shift in part as a result of increased usage of our services by
the companies with whom we have entered into strategic alliances. We anticipate
that at least through the end of 2000, SBC, Intel, Intermedia, WinStar and
Concentric will be among our top customers. Other factors affecting our revenue
mix include the installation of Nortel DMS 250 switches, which will allow us to
offer additional voice services for increased revenues, and the timing of
regulatory approval of SBC's ability to provide long distance services inside
its operating regions. In addition, we will recognize revenue from existing dark
fiber agreements upon completing currently unfinished segments of the Williams
network.
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
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- 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 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.
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.
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Our broad range of voice and data solutions allows us to serve as a
single-source provider for our customers' communications needs. We distribute
the products and services of a number of communications suppliers, primarily
Nortel, as well as Cisco, Octel (a division of Lucent), NEC, 3COM, Bell
Atlantic, SBC and U S WEST, and are therefore able to provide our customers with
multiple options. By offering equipment from a variety of vendors, we help
businesses optimize the productivity and reduce the cost of their communications
systems. We have expertise in the most complex network technologies to ensure
that products from various suppliers operate together effectively.
Selected statistics of our solutions unit as of June 30, 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
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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.
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.
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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 approximately 360 engineers and on-site technicians
to support several large U.S. corporations which have elected to turn
over to us the management and operation of all or substantial portions of
their communications environments. Increasingly, these clients are
outsourcing their data networking requirements in addition to their
traditional voice communications requirements to expand network
capability, improve productivity and decrease costs.
- Advanced call center applications. Our call center applications team
consists of approximately 50 software applications developers and
engineers who design and implement customized call center solutions for
customers with complex requirements. We also maintain a computer
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
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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.
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.
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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.
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
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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
- 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. Vyvx's contracts
with its largest customers are for terms which extend up to ten years. Most of
its contracts with its smaller customers are for one-year terms. Vyvx's largest
customer, Fox Entertainment Group, Inc., 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. Major competitors are AT&T, GlobeCast North America and Digital
Generation Systems, Inc. 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
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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
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 which matured on August 31, 1999, and which we
currently anticipate extending through December 31, 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.
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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 Telecom). 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. We own a 55%
direct interest in ATL and a 10% indirect interest in ATL through our 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. SK Telecom continues to own an interest in SKTI-US
LLC.
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, representing a 30% voting interest, in ATL. In
March 1999, Williams purchased from Algar Telecom for $265 million an additional
35% economic interest, representing a 19% voting interest, in ATL. This
investment reduces Algar Telecom's investment to a 35% economic interest,
representing a 51% voting interest, in ATL. Our investment in ATL totals $373
million.
In March 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.
We and Williams have held preliminary discussions concerning the
possibility of our increasing our ownership in ATL through our purchase from
Algar Telecom of its 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 545,000 subscribers as of June 30, 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 Telecom. Williams currently owns a 20% equity interest in Algar
Telecom. Algar S.A. Empreendimentos e Participacoes, a Brazilian conglomerate,
owns 74% of Algar Telecom. The remaining 6% of Algar Telecom 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 Telecom
and any interests in ATL that Williams acquires at the net book value of
Williams' investment in Algar Telecom and ATL at the time of the purchase. At
June 30, 1999, this net book value was approximately $150 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.
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Williams purchased the 20% economic interest in Algar Telecom, representing
a 5% voting interest, in January 1997 for approximately $65 million. In April
1998, Williams invested an additional $100 million in Algar Telecom 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 36% economic interest, representing a 21% voting interest in Algar
Telecom. Beginning in January 2002 and until an initial public offering of Algar
Telecom, Williams has a right to sell its entire interest in Algar Telecom for
at least the amount of Williams' investment plus interest. Williams has the
ability to maintain its ownership level in Algar Telecom in the event of capital
increases.
Algar Telecom's main communications subsidiaries and investments include:
- 35.0% of ATL
- 70.9% of Companhia de Telecomunicacoes do Brasil Central
- 33.7% of Tess S.A.
Other majority-owned subsidiaries of Algar Telecom 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 sold
approximately 403,000 fixed telephone lines, had approximately 375,000 lines in
service and had 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 1998. 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.
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OWNERSHIP STRUCTURE OF STRATEGIC INVESTMENTS IN BRAZIL*
[FLOW CHART OF OWNERSHIP]
- ---------------
* Indicated percentages are for economic interests, which in general are greater
than voting interests.
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 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.
As of June 30, 1999, we owned 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 2%, at
an exercise price of 0.47 Australian dollars per share.
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These options are exercisable at any time until August 2003. We also have a 2%
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.
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
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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
- 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
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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 Supreme
Court on July 30, 1999 ruled that the Indiana Utility Regulatory Commission
lacks authority under state law to assert jurisdiction over the merger. On
September 1, 1999, the Nevada Public Service Commission approved the merger,
subject to certain conditions agreed to by SBC. 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 $500 million divided by the initial public
offering price less the underwriting discount. SBC has agreed to assign its
right to invest $75 million of this $500 million initial investment to Telefonos
de Mexico, but SBC will remain obligated to invest the full $500 million in the
event that Telefonos de Mexico fails for any reason to make this $75 million
investment. In lieu of preemptive rights that SBC might otherwise have, we and
SBC have also agreed that SBC can elect to acquire from us additional shares of
our common stock at the same price paid for its other shares. Based on the
midpoint of the range of the initial public offering price of our common stock,
we estimate that SBC's additional investment will be approximately $9.5 million
if SBC's initial investment is $425 million ($13.9 million if the underwriters
of the equity offering exercise their over-allotment option in full) and
approximately $11.3 million if SBC's initial investment is $500 million ($16.5
million if the underwriters of the equity offering exercise their over-allotment
option in full). The obligation to make the SBC investment is subject to certain
conditions at closing, including that the agreement under which we provide
network transport services to SBC is in full effect.
In connection with its purchase of common stock SBC has agreed to certain
restrictions and will receive certain privileges, including the following:
- SBC has agreed not to acquire more than 10% of our common stock 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
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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.
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 which will support the
Web sites of third parties.
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.
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 August 9, 1999, Intel invested $5 million in CSI Incorporated, a company
in our strategic investments unit which markets Choice Seat(TM), an interactive
sports entertainment network delivered to specially equipped seats in sports
venues. Intel acquired an approximate 15% interest in CSI; we retained the
remaining approximate 85% interest.
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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
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 $100 million divided by the initial public offering price less
the underwriting discount. This amount includes a $75 million investment right
assigned to Telefonos de Mexico by SBC.
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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
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.
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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 for a period of 25 years. We will pay WinStar the $400 million over
the next four years as WinStar completes construction of the hubs. As of June
30, 1999, we had paid WinStar approximately $120 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 June 30, 1999, we
had received approximately $44.1 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. Through June 30, 1999, we received approximately $87 million from
Intermedia.
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 asset defeasance program, 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 or exchange 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
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of this prospectus entitled "Description of Other 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 90% 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 approximately 9,400 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 1,200
Solutions 6,200
Strategic Investments 1,000
Corporate 1,000
-----
Total 9,400
=====
</TABLE>
LEGAL PROCEEDINGS
We are subject to various types of litigation in connection with our
business and operations. However, with the possible exception of the Shrier
lawsuit described below, we do not believe that any of our pending litigation is
material to our business or operations.
Shrier v. Williams was filed on August 4, 1999, in the U.S. District Court
for the Northern District of Oklahoma. The plaintiff seeks to bring a nationwide
class action on behalf of all landowners on whose property we have installed
fiber optic cable without the permission of the landowner. The plaintiff is
seeking a declaratory ruling that we are trespassing, damages resulting from the
alleged trespass, damages based on our profits from use of the property and
damages from alleged fraud. Relief requested by the plaintiff includes
injunction against further trespass, actual and punitive damages and attorneys'
fees.
The plaintiff is an owner of property on which a pipeline right of way used
for the single-fiber network is located. We believe that we have all requisite
permission for our right of way over the plaintiff's land. We also do not
believe that the plaintiff has sufficient basis for certification of a class
action.
Other communications carriers have been successfully challenged with
respect to their rights over railroad rights of way, which are also challenged
by the plaintiff. Approximately 15% of the Williams network is installed on
railroad rights of way. In many areas, the railroad granting us the license
holds full ownership of the land, in which case its license should be sufficient
to give us valid rights to cross the property. In some states where the railroad
is not the property owner but has an easement over the property the law is
unsettled as to whether a landowner's approval
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is required. We did not generally obtain landowner approval where our right of
way was located on railroad easements. In most states, we have eminent domain
rights which we believe would limit our liability for any trespass damages. It
is likely that we will be subject to other purported class action suits
challenging our railroad or pipeline rights of way but we cannot quantify the
impact of such claims at this time. Thus, we cannot be certain that the
plaintiff's purported class action or other purported class actions, if
successful, will not have a material adverse effect on us.
REPORTS TO HOLDERS OF NOTES
We intend to furnish to holders of our notes annual reports containing
audited financial statements examined by our independent auditors and quarterly
reports containing unaudited financial statements for each of the first three
quarters of each fiscal year.
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
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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 and other goals. The FCC announced assessments for the third
quarter of 1999 of approximately 3.9% of gross interstate and 1.0% of gross
intrastate end-user revenues. On July 30, 1999, the U.S. Court of Appeals for
the Fifth Circuit upheld in part the FCC's order, but determined that
assessments must be limited to interstate revenues, which 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.
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.
On August 5, 1999, the FCC adopted an order and further notice of proposed
rulemaking to allow 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
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determined that calls to Internet service providers are interstate in nature and
proposed rules to govern compensation to carriers for transmitting these calls.
Although the FCC does not intend to require Internet service providers to pay
access charges or to contribute to universal service funds, the FCC's order
could affect the costs incurred by Internet service providers and the demand for
the offerings of some of our customers. Several appeals of the order have been
filed in the U.S. Court of Appeals for the District of Columbia Circuit.
The FCC has adopted rules for a multi-year transition to lower
international settlements payments by U.S. common carriers. We believe that
these rules are likely to lead to lower rates for certain international services
and increased demand for these services provided by certain of our customers.
The result is likely to be increased demand for capacity on the U.S. facilities,
including the Williams network, which provide these services.
Rules adopted by the FCC in 1996 and 1997, which are subject to pending
appeals and a stay, could impose significant limits on the ability of carriers
to maintain tariffs for interstate long distance services and to rely on tariffs
to state the prices, terms and conditions under which they offer interstate
services. Additional rules, adopted by the FCC on March 18, 1999, will require
long distance carriers to make specified public disclosures of their rates,
terms and conditions for 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 generally 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 regulated 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, at least to some extent, in 50 states. In a number of states, we have
pending applications for additional authority or are awaiting tariff approval.
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.
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LOCAL REGULATION
We are occasionally required to obtain street use and construction permits
and licenses and/or franchises to install and expand our fiber optic network
using municipal rights of way. Termination or failure to renew our existing
franchise or license agreements could have a material adverse effect on us. In
some municipalities where we have installed or anticipate constructing networks,
we are required to pay license or franchise fees based on a percentage of gross
revenue or on a per linear foot basis. We cannot guarantee that fees will remain
at their current levels following the expiration of existing franchises. In
addition, we could be at a competitive disadvantage if our competitors do not
pay the same level of fees as we do. However, the Telecommunications Act
requires municipalities to manage public rights of way in a competitively
neutral and non-discriminatory manner.
OTHER
Our operations are subject to a variety of federal, state, local and
foreign environmental, safety and health laws and governmental regulations.
These laws and regulations govern matters such as the generation, storage,
handling, use and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites and
endangered species and the health and safety of our employees.
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.
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A cellular concession has been granted to each of ATL and Tess for an
initial term of 15 years which may be renewed for equal periods at the
discretion of Anatel. Currently within each area only one cellular company may
operate in Band A and one in Band B; there are no personal communications
service carriers. The cellular concessions and other regulations impose a range
of restrictions on the companies' operations, corporate governance and
shareholders, with penalties for noncompliance, including loss of license and
monetary fines.
Long distance service is regulated pursuant to the General
Telecommunications Act. In April 1998, the government issued a general granting
plan for licenses, which split the country into four telecommunications areas.
Areas I and II include most of the states of the country. Area III corresponds
to the state of Sao Paulo. Area IV covers international calls and long distance
calls throughout the whole country. The operators in Areas I and II are also
able to provide long distance calls but only within the boundaries of the states
inside each area.
During 1999, the government of Brazil awarded through bid processes
licenses for other companies that will compete against the former Telebras
subsidiaries. Each company will be able to provide service in one of the four
areas. In 2000, the government may sell additional licenses in each wireless
market for personal communications service.
Each concession agreement establishes the service obligations for the
operator, based on the applicable legislation determined by Anatel. Anatel
defines maximum rates, but an operator can charge users lower rates. The rates
can be readjusted periodically but not less often than every 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.
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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 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
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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 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
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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.
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.
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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........................ 57 Director
John C. Bumgarner, Jr. ................ 57 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................. 52 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........................ 43 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................... 56 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
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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
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Inc. and PageNet 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.
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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.
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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.
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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. Bumgarner, 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.
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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
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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. Twenty-five percent of the shares will vest at the
time of the completion of the equity offering. Of the remaining shares,
20,000 will vest five years after the date of the grant and 40,000 will vest
ten years after the date of the 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.
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<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.
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<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 $31.1875 per share of Williams common stock at
December 31, 1998, less the exercise price. The values shown reflect the
value of options accumulated over periods of up to ten years. The values
reflected in the table had not been realized at that date and may not be
realized. In the event the options are exercised, their value will depend
upon the value of Williams common stock on the date of exercise.
Williams has extended to each of our directors and to some of our executive
officers loans in order to enable them to exercise stock options to purchase
Williams common stock. As of August 24, 1999, loans aggregating approximately
$32.3 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
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<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
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<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
115
<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
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<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
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<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, Mr. Schubert will receive
a grant of deferred shares with a value of $500,000 based on the initial public
offering price and Mr. Bumgarner will receive a grant of deferred shares with a
value of $333,333 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 489,500 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
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<PAGE> 122
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 common stock, we would issue approximately
510,000 deferred shares and we would grant options to purchase approximately
979,000 shares of our common stock.
DIRECTED STOCK PROGRAM
We intend to provide all regular domestic Williams employees, all of our
regular domestic employees, the independent directors of both companies and
selected suppliers and customers of our company with the opportunity to purchase
shares of our common stock in the equity offering. Employees who participate in
certain 401(k) plans will have the option to execute this purchase through the
401(k) plan. Up to 7.0% of the common stock constituting the equity offering
will be available for purchase under this program, with no more than 0.7% of the
common stock constituting the equity offering to be available for purchase under
this program by independent directors of our company and Williams or our
suppliers and customers.
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 29,600,000 shares, or 6.4%, of common
stock, and in the concurrent investments we will be selling 34,965,035 shares,
or 7.6%, of common stock, excluding up to 794,857 additional shares that SBC may
elect to purchase. 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 $22.00 per share
and an assumed price per share of Williams common stock of $44.00. Other than
for Messrs. Thompson and 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
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<PAGE> 123
the issuance of any shares of our common stock upon exercise of the
over-allotment option granted to the underwriters of the equity offering.
<TABLE>
<CAPTION>
PERCENT OF CLASS
SHARES OF SHARES ---------------------------------
COMMON UNDERLYING PRIOR TO THE AFTER THE
STOCKHOLDER STOCK OWNED OPTIONS TOTAL EQUITY OFFERING EQUITY OFFERING
- ----------- ----------- ---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
The Williams Companies, Inc. ...... 395,434,965 -- 395,434,965 100% 86.0%
SBC Communications, Inc............ (1) -- (1) -- (1)
Intel Corporation.................. 9,654,527 -- 9,654,527 -- 2.1
Telefonos de Mexico, S.A. de
C.V.............................. (1) -- (1) -- (1)
Keith E. Bailey.................... -- 100,000 100,000 -- *
John C. Bumgarner, Jr. ............ 15,152 50,000 65,152 -- *
James R. Herbster.................. -- 50,000 50,000 -- *
Howard E. Janzen................... 160,000 300,000 460,000 -- *
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 -- *
Delwin L. Bothof................... 40,000 70,000 110,000 -- *
Lawrence C. Littlefield, Jr. ...... 21,200 70,000 91,200 -- *
Frank M. Semple.................... 40,000 100,000 140,000 -- *
All directors and executive
officers as a group (22
persons)......................... 399,080 1,598,250 1,997,330 -- *
</TABLE>
- ---------------
* Less than 1%.
(1) If SBC's initial investment is $425 million and Telefonos de Mexico's
investment is $100 million, SBC would receive 20,496,745 shares, or 4.5% of
the total shares outstanding, and Telefonos de Mexico would receive
4,822,763 shares, or 1.0% of the total shares outstanding. If SBC's initial
investment is $500 million and Telefonos de Mexico's investment is $25
million, SBC would receive 24,113,817 shares, or 5.2% of the total shares
outstanding, and Telefonos de Mexico would receive 1,205,691 shares, or 0.3%
of the total shares outstanding. The foregoing amounts exclude 458,732
additional shares SBC has the right to acquire if its initial investment is
$425 million (670,430 if the underwriters of the equity offering exercise
their over-allotment option in full) and 543,692 additional shares SBC has
the right to acquire if its initial investment is $500 million (794,857 if
the underwriters of the equity offering exercise their over-allotment option
in full).
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 August 24, 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.
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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............................ 1,886,720 325,002 2,211,722 *
John C. Bumgarner, Jr. .................... 993,228 70,000 1,063,228 *
James R. Herbster.......................... 166,402(2) 203,904 370,306 *
Howard E. Janzen........................... 257,189 180,004 437,193 *
Michael P. Johnson, Sr..................... 20,601 5,250 25,851 *
Steven J. Malcolm.......................... 56,043 138,938 194,981 *
Jack D. McCarthy........................... 251,249 30,000 281,249 *
Brian E. O'Neill........................... 123,728 324,404 448,132 *
H. Brian Thompson.......................... -- -- -- *
Roy A. Wilkens............................. 400,000 -- 400,000
Delwin L. Bothof........................... 133,320 52,500 185,820 *
Lawrence C. Littlefield, Jr. .............. 123,457 108,500 231,957 *
Frank M. Semple............................ 62,053 162,500 224,553 *
All directors and executive officers as a
group (22 persons)....................... 4,916,296 2,124,615 7,040,911 1.6%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares held under the terms of incentive and investment plans as
follows: Mr. Bailey, 622,006, including 176,592 over which he has sole
voting and investment power; Mr. Bumgarner, 400,434, including 222,947 over
which he has sole voting and investment power; Mr. Herbster, 90,133,
including 44,322 over which he has sole voting and investment power; Mr.
Janzen, 145,149, including 58,641 over which he has sole voting and
investment power; Mr. Johnson, 20,601, including 559 shares over which he
has sole investment and voting power; Mr. Malcolm, 37,067, including 32,591
over which he has sole voting and investment power; Mr. McCarthy, 97,116,
including 43,273 over which he has sole voting and investment power; Mr.
O'Neill, 62,962, including 13,130 over which he has sole voting and
investment power; Mr. Wilkens, 104,524, over all of which he has sole voting
and investment power; Mr. Littlefield, 84,957, including 11,754 over which
he has sole voting and investment power; Mr. Semple, 85,402, including
53,702 over which he has sole voting and investment power; Mr. Bothof,
33,711, including 10,454 over which he has sole voting and investment power;
and all executive officers as a group, 1,995,763, including 868,755 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.
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<PAGE> 125
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 AUGUST 24, 1999
- ---- -------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Keith E. Bailey............. 6.28% $ 50,641.92 $ 171,408.39 $ 167,828.76
Keith E. Bailey............. 6.58% $ 71,656.20 $ 232,131.21 $ 227,066.23
Keith E. Bailey............. 6.42% $ 64,200.00 $ 266,050.00 $ 260,377.53
Keith E. Bailey............. 6.80% $ 144,190.19 $ 601,327.51 $ 587,796.08
Keith E. Bailey............. 5.68% $ 406,609.84 $ 1,472,720.00 $ 1,484,305.58
Keith E. Bailey............. 5.57% $1,026,811.18 $ 3,770,204.37 $ 3,819,716.37
Keith E. Bailey............. 5.54% $1,670,829.99 $ 6,143,571.06 $ 6,247,940.71
Total............ $3,434,939.32 $12,657,412.54 $12,795,031.26
John C. Bumgarner, Jr. ..... 5.91% $ 203,927.62 $ 1,218,159.86 $ 1,194,135.52
John C. Bumgarner, Jr. ..... 5.42% $ 559,102.89 $ 3,500,299.27 $ 3,559,017.84
Total............ $ 763,030.51 $ 4,718,459.13 $ 4,753,153.36
James R. Herbster........... 6.74% $ 17,864.37 $ 56,582.87 $ 55,320.13
James R. Herbster........... 6.49% $ 119,416.00 $ 391,883.22 $ 383,442.29
James R. Herbster........... 5.93% $ 77,115.43 $ 274,452.51 $ 270,057.97
Total............ $ 214,395.80 $ 722,918.60 $ 708,820.39
</TABLE>
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<PAGE> 126
<TABLE>
<CAPTION>
TOTAL LARGEST
INTEREST AMOUNT AMOUNT
INTEREST OVER TERM DUE DURING OUTSTANDING
NAME RATE OF LOAN 1998 AUGUST 24, 1999
- ---- -------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Howard E. Janzen............ 5.70% $ 80,997.64 $ 500,521.63 $ 491,127.43
Howard E. Janzen............ 5.69% $ 87,092.51 $ 320,823.16 $ 317,387.17
Howard E. Janzen............ 5.77% $ 38,864.87 $ 139,207.01 $ 139,739.41
Howard E. Janzen............ 4.71% $ 106,851.10 $ 0 $ 465,546.99
Howard E. Janzen............ 4.83% $ 114,621.70 $ 0 $ 483,919.35
Howard E. Janzen............ 5.37% $ 101,999.39 $ 0 $ 384,245.43
Total............ $ 530,427.21 $ 960,551.80 $ 2,281,965.78
Jack D. McCarthy............ 6.23% $ 321,312.50 $ 1,095,763.30 1,073,051.36
Jack D. McCarthy............ 6.42% $ 265,031.98 $ 878,651.17 $ 859,917.43
Jack D. McCarthy............ 5.59% $ 158,731.67 $ 696,532.02 $ 691,016.59
Jack D. McCarthy............ 4.83% $ 301,392.00 $ 0 $ 1,274,258.26
Total............ $1,046,468.15 $ 2,670,946.49 $ 3,898,243.64
William G. von Glahn........ 5.83% $ 73,234.13 $ 443,131.30 $ 434,503.80
William G. von Glahn........ 5.91% $ 6,240.96 $ 37,280.31 $ 36,545.08
William G. von Glahn........ 6.23% $ 23,624.16 $ 134,274.72 $ 131,491.60
William G. von Glahn........ 5.54% $ 56,063.91 $ 353,746.50 $ 349,411.18
William G. von Glahn........ 5.59% $ 39,174.72 $ 182,954.39 $ 181,532.35
William G. von Glahn........ 5.39% $ 11,670.00 $ 102,499.38 $ 101,729.94
William G. von Glahn........ 5.48% $ 76,281.60 $ 474,170.89 $ 480,440.60
William G. von Glahn........ 5.57% $ 55,700.00 $ 203,845.60 $ 207,202.85
William G. von Glahn........ 5.54% $ 113,547.84 $ 417,448.38 $ 424,603.45
William G. von Glahn........ 5.28% $ 36,960.00 $ 0 $ 178,569.42
William G. von Glahn........ 5.82% $ 200,208.00 $ 0 $ 692,717.23
Total............ $ 692,705.32 $ 2,349,351.47 $ 3,218,747.50
Delwin L. Bothof............ 5.42% $ 241,045.04 $ 1,507,316.76 $ 1,534,393.05
Delwin L. Bothof............ 4.67% $ 70,049.95 $ 0 $ 612,436.27
Total............ $ 311,094.99 $ 1,507,316.76 $ 2,146,829.32
Gerald L. Carson............ 5.59% $ 183,874.33 $ 686,281.13 $ 681,646.52
Total............ $ 183,874.33 $ 686,281.13 $ 681,646.52
Lawrence C. Littlefield,
Jr........................ 5.54% $ 109,692.00 $ 691,254.73 $ 683,641.38
Total............ $ 109,692.00 $ 691,254.73 $ 683,641.38
Frank M. Semple............. 5.42% $ 180,664.33 $ 1,131,060.57 $ 1,150,034.43
Total............ $ 180,664.33 $ 1,131,060.57 $ 1,150,034.43
Grand Total................. $7,467,291.96 $28,095,553.22 $32,318,113.58
</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.
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<PAGE> 127
Garry McGuire, formerly 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.
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 98% of the combined voting power of all of our outstanding capital
stock and approximately 86% 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
of the equity offering. 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. Other
than as indicated for a particular agreement or unless terminated by both us and
Williams, these agreements would remain in place regardless of the level of
Williams' continued ownership interest in our company.
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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. We and Williams may, however, acquire or invest in an
entity engaged in activities reserved to the other provided such activities
represent no more than 30% of its consolidated revenues or net income. In the
event Williams acquires telecommunications activities reserved to us or we
acquire energy activities reserved to Williams pursuant to this exception, the
other has a right of first offer to acquire the activities should any be
disposed of prior to five years following the consummation of the offerings.
Under the separation agreement, if a party decides not to pursue a business
opportunity that it has the right to pursue to the exclusion of the other party,
it must promptly inform the other party of this decision. The other party would
then be free to pursue the opportunity.
Our restated certificate of incorporation provides that we may not bring
any claim against Williams or any of its officers, directors or other
affiliates, for breach of any duty, including, but not limited to, the duty of
loyalty or fair dealing on account of a diversion of a corporate business
opportunity to Williams, unless that opportunity relates solely to a business
that we have the right to elect to pursue to the exclusion of Williams pursuant
to the separation agreement. Notwithstanding the above, no claim may be made in
any event if our directors who are not employees of Williams disclaim the
opportunity by a unanimous vote.
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.
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<PAGE> 129
Under the separation agreement, we have agreed to reimburse the risk management
subsidiary for our portion of the costs.
ALGAR TELECOM CALL OPTION
We have entered into an agreement with Williams granting us the option to
acquire Williams' equity and debt interests in Algar Telecom. For more
information, see the section of this prospectus entitled "Business -- Our
strategic investments unit -- International -- Algar Telecom."
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 concurrent investments, it
is expected that we will continue to be included in the Williams federal
consolidated income tax group. In this case, our federal income tax liability
would be included in the consolidated federal income tax liability of Williams
and its subsidiaries. We also expect to be included with Williams and/or certain
of its subsidiaries in combined, consolidated or unitary income tax groups for
state income tax purposes. We have entered into a tax sharing agreement with
Williams under which we and Williams will make payments such that, for any
period, the amount of federal income taxes we will pay will, subject to certain
adjustments, generally be determined as though we were filing separate federal
income tax returns (including amounts determined to be due under such agreement
as a result of an audit or otherwise). Under the tax sharing agreement, our
losses or other similar tax attributes realized for periods prior to the equity
offering will be utilized or retained by the Williams group and thus will not be
available to us in order to reduce our hypothetical separate tax liability. We
will be responsible for any increases in federal income tax liabilities
resulting to Williams and its subsidiaries if these losses or attributes are
reduced by 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
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- representing us with respect to any tax audit or tax contest, including,
without limitation, settling or compromising any tax controversy
- engaging outside counsel and accountants with respect to tax matters
regarding us
- performing other acts and duties with respect to our tax returns as
Williams determines to be appropriate
- interpreting and applying the tax sharing agreement and determining any
disputes that arise under it
The general principles of the tax sharing agreement will also apply to
state income taxes (and, in the sole and absolute discretion of Williams, may
also apply to foreign, local, other state and other federal taxes) with respect
to which we are included with Williams and/or certain of its subsidiaries in
consolidated, combined or unitary groups. Thus, we will be responsible for any
foreign tax liability arising from our business activities.
To the extent permitted by applicable state laws, Williams will continue to
have all the rights of a parent of a combined, consolidated or unitary income
tax group. The tax sharing agreement will remain in effect so long as and to the
extent that we are included with Williams and/or any of its subsidiaries in any
combined, consolidated or unitary income tax group in any taxing jurisdiction
and the statute of limitations for these returns remains open.
Under the administrative services agreement, the amounts that we will pay
Williams will encompass reimbursement to Williams for all direct and indirect
costs and expenses incurred with respect to our share of the overall costs and
expenses incurred by Williams with respect to tax-related services.
In general, we will be included in Williams' consolidated group for federal
income tax purposes for so long as Williams beneficially owns at least 80% of
the total voting power and 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.
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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 interim credit
facility and the asset defeasance program, each of which we describe in the
section of this prospectus entitled "Description of Other Indebtedness and Other
Financing Arrangements." Williams' guarantee of our obligations under the asset
defeasance program will continue following the offerings. Williams' guarantee of
the interim credit facility will continue until this agreement is replaced by
our new permanent credit and short term loan facilities. Williams will also
guarantee our obligations under the short term loan facility and the permanent
credit facility. Williams' guarantee of the permanent credit facility will
terminate upon the completion of the offerings provided certain conditions are
met. Williams also has guaranteed and entered into other contingent obligations
in connection with financings by ATL in total amount of approximately $67
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
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or us. The administrative services agreement would be automatically renewed for
additional terms of two years unless either party gives at least six months'
written notice prior to a scheduled termination date. The administrative
services agreement can be terminated upon a material breach by either party and
will be terminated upon a change of control of our company. A change of control
shall be deemed to have occurred if:
(a) Williams or the companies controlled by Williams should own shares
representing less than the majority of the voting power of our
then-outstanding common stock;
(b) the majority of the seats of our board of directors shall be occupied
by persons who are neither nominated by Williams or by our board of
directors, nor appointed by our directors so nominated; or
(c) any person or group other than Williams and the companies controlled by
Williams shall directly or indirectly have the power to exercise a
controlling influence over us.
Upon a change of control, we will enter into good faith negotiations with
Williams concerning an acceptable form of transition agreement providing for
Williams to make available, at cost, necessary services to us until a time when
we can provide these services for ourselves or obtain them from some other
source.
Williams and its affiliates incur certain costs on our behalf, primarily
insurance coverage and related risk management services provided by
non-affiliates, benefits provided to our employees under Williams' benefit
plans, payroll administration, bank fees, certain utility costs, employee
relocation and other costs. Williams and its affiliates either directly charge
these costs to us or, for a shared service or cost, allocate a portion of these
costs to us based for insurance coverage on various risk exposure factors and
otherwise primarily on actual usage.
The amount paid by us during the year ended December 31, 1998 for all of
the services provided during that year that in the future will be provided under
the administrative services agreement was approximately $25 million.
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, 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 $4,760,000.
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 $3,664,000. 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.
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CROSS-LICENSE AGREEMENT
The cross-license agreement addresses Williams' and our respective rights
and obligations after the equity offering with respect to intellectual property,
inventions and trademarks and trade names as well as the use of proprietary
information by employees of Williams and us. Williams and WISC license at no
cost to us certain intellectual property to us, effective as of the equity
offering. Similarly we will cross license at no cost to Williams certain
intellectual property to Williams on the same terms as their license to us.
Among other things, for so long as Williams shall beneficially own at least 50%
of the voting power of our outstanding common stock, we are permitted to
continue our use of the Williams trademark and brand names.
TECHNICAL, MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
The technical, management and administrative services agreement provides
for Williams to continue to provide to us the same management services relating
to our international operations and investments after the offerings as it has in
the past. Under the terms of the management agreement, all of the services will
be rendered by Williams or subsidiaries of Williams subject to our oversight,
supervision and approval through our board of directors.
The management costs we will pay to Williams and its subsidiaries pursuant
to the management agreement are allocated pursuant to an established formula
based on actual costs and is believed to be equal to or less than the fees that
would be paid if these services were to be provided by an independent third
party.
CONFLICTS OF INTEREST
Conflicts of interest may arise between us and Williams in a number of
areas relating to our past and ongoing relationships with Williams, including
potential acquisitions of businesses or properties or other corporate
opportunities, potential competitive business activities, the election of new or
additional directors, payment of dividends, incurrence or repayment of 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
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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.
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DESCRIPTION OF THE NOTES
GENERAL
The notes will be issued under an indenture between WCG and The Bank of New
York, as trustee. We have filed a copy of the indenture as an exhibit to the
registration statement which includes this prospectus. In this description of
the notes, the term "WCG" refers to Williams Communications Group, Inc. and does
not include its subsidiaries, except for purposes of financial data determined
on a consolidated basis. You can find the definitions of capitalized terms used
in this section in the section below entitled "-- Certain definitions."
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the notes. The terms of the notes also include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act.
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are senior unsecured obligations of WCG;
- rank equally with all existing and future senior unsecured indebtedness
of WCG;
- rank senior to all existing and future indebtedness of WCG expressly
subordinated in right of payment to the notes;
- are subordinated to all existing and future indebtedness and other
liabilities, including trade payables, of WCG's subsidiaries as described
below under "-- Ranking";
- accrue interest from the date they are issued at a rate of ___%, which is
payable semi-annually; and
- mature on __________, 200_.
WCG has agreed that it will offer to repurchase the notes under the
circumstances described in the indenture upon:
- a Change of Control Triggering Event; or
- Asset Dispositions by WCG or any of its Restricted Subsidiaries.
The indenture also contains the following covenants:
- limitation on consolidated Debt;
- limitation on Debt of Restricted Subsidiaries;
- limitation on Restricted Payments;
- limitation on dividend and other payment restrictions affecting
Restricted Subsidiaries;
- limitation on Liens;
- limitation on Sale and Leaseback Transactions;
- limitation on Asset Dispositions;
- limitation on issuance and sales of Capital Stock of Restricted
Subsidiaries;
- limitation on transactions with Affiliates;
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- reports;
- limitation on designations of Unrestricted Subsidiaries; and
- limitation on mergers, consolidations and certain sales of assets.
RANKING
Substantially all the operations of WCG are conducted through its
subsidiaries and, therefore, WCG is dependent upon cash flow from those entities
to meet its obligations. The payment of dividends and the making of loans and
advances to WCG by its subsidiaries are subject to various restrictions. Future
debt of certain of the subsidiaries may prohibit the payment of dividends or the
making of loans or advances to WCG. In addition, the ability of subsidiaries of
WCG to make such payments, loans or advances to WCG is limited by the laws of
the relevant jurisdictions in which such subsidiaries are organized or located.
In some cases, the prior or subsequent approval of such payments, loans or
advances by such subsidiaries to WCG may be required from applicable regulatory
bodies or other governmental entities.
WCG's subsidiaries will have no direct obligation to pay amounts due on the
notes unless they become Guarantors. The notes effectively will be subordinated
to all existing and future indebtedness and other liabilities of WCG's
subsidiaries that are not Guarantors, including trade payables and indebtedness
under the Williams note, the permanent credit facility and our asset defeasance
program. As of the date of the indenture, none of WCG's subsidiaries will be
Guarantors. As of March 31, 1999, after giving pro forma effect to the
offerings, the concurrent investments, the recharacterization of $200 million of
paid-in-capital to amounts due to Williams and the application of the net
proceeds from these transactions, WCG's subsidiaries would have had $3.0 billion
of liabilities outstanding, including $1.0 billion under the Williams note. The
indenture permits WCG and its subsidiaries to incur substantial amounts of
additional indebtedness and other liabilities. Any rights of WCG and its
creditors, including the holders of notes, to participate in the assets of any
of WCG's subsidiaries upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's creditors,
including trade creditors. See the section of this prospectus entitled "Risk
Factors -- Risks relating to our notes -- Your right to receive payment on the
notes is effectively junior to existing and future debt of our
subsidiaries -- the rights of holders of notes to participate in the assets of
any of our subsidiaries upon liquidation or reorganization of any subsidiary
will be subject to the prior claims of that subsidiary's creditors" for more
information.
PRINCIPAL, MATURITY AND INTEREST
WCG will issue notes in this offering with a maximum aggregate principal
amount of $____ billion. The notes will mature on ____, 200_. The notes will
bear interest at the rate of ____% per annum from ____ or from the most recent
date to which interest has been paid. Interest will be payable in cash
semiannually in arrears on ____ and ____, commencing ____. WCG will make each
interest payment to the persons who are registered holders of the notes at the
close of business on the preceding ____ or ____. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency of WCG,
which, unless otherwise provided by WCG, will be the offices of the trustee. At
the option of WCG, interest may be paid by check mailed to the registered
holders at their registered addresses. The notes will be issued without coupons
and in fully registered form only, in minimum denominations of $1,000 and
integral multiples thereof. The notes will be issued only against payment in
immediately available funds. No service charge will be made for any registration
of transfer or exchange of
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the notes, but WCG may require payment of a sum sufficient to cover any transfer
tax or other similar governmental charge payable in connection with the
registration, transfer or exchange of the notes.
BOOK-ENTRY SYSTEM
The notes will initially be issued in the form of global securities held in
book-entry form. The notes will be deposited with the trustee as custodian for
The Depository Trust Company (DTC), and DTC or its nominee will initially be the
sole registered holder of the notes for all purposes under the indenture. Except
as set forth below, a global security may not be transferred except as a whole
by DTC to a nominee of DTC or by a nominee of DTC to DTC.
Upon the issuance of a global security, DTC or its nominee will credit, on
its internal system, the accounts of persons holding through it with the
respective principal amounts of the individual beneficial interest represented
by such global security purchased by such persons in this offering. Ownership of
beneficial interests in a global security will be limited to participants, who
are persons that have accounts with DTC, or persons that may hold interests
through participants. Ownership of beneficial interests by participants in a
global security will be shown on, and the transfer of that ownership interest
will be effected only through, records maintained by DTC or its nominee for such
global security. Ownership of beneficial interests in such global security by
persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a global security.
Payment of principal, premium, if any, and interest on notes represented by
any such global security will be made to DTC or its nominee, as the case may be,
as the sole registered owner and the sole holder of the notes represented
thereby for all purposes under the indenture. None of WCG, the trustee or any
agent of WCG will have any responsibility or liability for any aspect of DTC's
reports relating to or payments made on account of beneficial ownership
interests in a global security representing any notes or for maintaining,
supervising or reviewing any of DTC's records relating to such beneficial
ownership interests.
WCG has been advised by DTC that, upon receipt of any payment of principal
of, premium, if any, or interest on any global security, DTC will immediately
credit, on its book-entry registration and transfer system, the accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the principal or face amount of such global security, as
shown on the records of DTC. WCG expects that payments by participants to owners
of beneficial interests in a global security held through such participants will
be governed by standing instructions and customary practices as is now the case
with securities held for customer accounts registered in "street name" and will
be the sole responsibility of such participants.
So long as DTC or its nominee is the registered owner or holder of such
global security, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by such global security for the
purposes of receiving payment on the notes, receiving notices and for all other
purposes under the indenture and the notes. Beneficial interests in the notes
will be evidenced only by, and transfers thereof will be effected only through,
records maintained by DTC and its participants. Except as provided above, owners
of beneficial interests in a global security will not be entitled to receive
physical delivery of certificated notes in definitive form and will not be
considered the holders of such global security for any purposes under the
indenture. Accordingly, each person owning a beneficial interest in a
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global security must rely on the procedures of DTC and, if such person is not a
participant, on the procedures of the participant through which such person owns
its interest, to exercise any rights of a holder under the indenture. WCG
understands that under existing industry practices, if WCG requests any action
of holders or that an owner of a beneficial interest in a global security
desires to give or take any action that a holder is entitled to give or take
under the indenture, DTC would authorize the participants holding the relevant
beneficial interest to give or take such action, and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised WCG that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account with DTC interests in the global security are credited and only in
respect of such portion of the aggregate principal amount of the notes as to
which such participant or participants has or have given such direction.
Although DTC has agreed to these procedures in order to facilitate
transfers of interests in global securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of WCG, the trustee or any
agent of WCG will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
DTC has advised WCG that DTC is a limited-purpose trust company organized
under the Banking Law of the State of New York, a "banking organization" within
the meaning of New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered under the Exchange Act. DTC was created
to hold the securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thus
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, some of whom, and/or
their representatives, own DTC. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
CERTIFICATED NOTES
Notes represented by a global security are exchangeable for certificated
notes only if:
- DTC notifies WCG that it is unwilling or unable to continue as a
depository for such global security or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act, and a successor
depository is not appointed by WCG within 90 days; or
- there shall have occurred and be continuing an Event of Default or an
event which, with the giving of notice or lapse of time, or both, would
constitute an Event of Default with respect to the notes represented by
such global security.
Any global security that is exchangeable for certificated notes pursuant to
the preceding sentence will be transferred to, and registered and exchanged for,
certificated notes in authorized denominations and registered in such names as
DTC or its nominee holding such global security may direct. Subject to the
above, a global security is not exchangeable, except for a global
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security of like denomination to be registered in the name of DTC or its
nominee. If a global security becomes exchangeable for certificated notes:
- certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
- payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will be
registrable, at the office or agency of WCG maintained for such purposes;
and
- no service charge will be made for any issuance of the certificated
notes, although WCG may require payment of a sum sufficient to cover any
tax or governmental charge imposed in connection with the issuance of the
certificated notes.
OPTIONAL REDEMPTION
Prior to ____________, 200_, we may redeem all or part of the notes at any
time upon not less than 30 nor more than 60 days' notice at the Make-Whole
Price, plus accrued and unpaid interest on the notes, if any, to the redemption
date.
On or after ____, 200_, WCG may redeem all or part of the notes upon not
less than 30 nor more than 60 days' prior notice, at the redemption prices set
forth below, plus accrued and unpaid interest on the notes, if any, to the
redemption date, subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date, if
redeemed during the twelve months beginning ____, of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
200_.......................................... __%
200_.......................................... __%
200_.......................................... __%
200_ and thereafter........................... 100%
</TABLE>
In addition, at any time or from time to time prior to ____, 2002, WCG may
redeem up to 35% of the original aggregate principal amount of the notes at a
redemption price equal to ____% of the principal amount of the notes so
redeemed, plus accrued and unpaid interest on the notes, if any, to the
redemption date, subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date, with
the net cash proceeds of one or more private placements to Persons other than
Affiliates of WCG or public offerings of common stock of WCG, in each case
resulting in gross proceeds to WCG of at least $100 million in the aggregate;
provided that
- at least 65% of the original aggregate principal amount of the notes
would remain outstanding immediately after giving effect to such
redemption;
- any such redemption shall be made within 90 days of such private
placement or public offering upon not less than 30 nor more than 60 days'
prior notice; and
- any such redemption may not occur with or after a Change of Control.
In the case of any partial redemption, the trustee will make the selection
of notes on a pro rata basis, by lot or by such other method as the trustee in
its sole discretion shall deem to be fair and appropriate, but no note of $1,000
in principal amount or less shall be redeemed in part. If any note is to be
redeemed in part, the notice of redemption relating to such note shall state the
portion of the principal amount to be redeemed. A new note in principal amount
equal to the unredeemed portion will be issued in the name of the holder upon
cancellation of the original note.
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MANDATORY REDEMPTION
Except as set forth below under the sections entitled "-- Certain
covenants -- Change of control triggering event" and "-- Limitation on asset
dispositions," WCG is not required to make mandatory redemption payments or
sinking fund payments with respect to the notes.
CERTAIN COVENANTS
Set forth below are the material covenants contained in the indenture.
Limitation on consolidated debt. (a) WCG may not, and may not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Debt, unless, after
giving pro forma effect to such Incurrence and the receipt and application of
the net proceeds of such Incurrence, no Default or Event of Default would occur
as a consequence of such Incurrence or be continuing following such Incurrence
and either:
(1) the ratio of (A) the aggregate consolidated principal amount, or,
in the case of Debt issued at a discount, the then Accreted Value, of Debt
of WCG outstanding as of the most recent available quarterly or annual
balance sheet, after giving pro forma effect to
- the Incurrence of such Debt and any other Debt Incurred and that
remains outstanding on the date as of which the Debt to be Incurred is
to be Incurred (the "incurrence date") since such balance sheet date
and the receipt and application of the net proceeds thereof, in each
case as if such Incurrence, receipt and application had occurred on
such balance sheet date, and
- the repayment, repurchase, retirement or extinguishment of any Debt
since such balance sheet date, as if such repayment, repurchase,
retirement or extinguishment had occurred on such balance sheet date,
to
(B) Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters next preceding the Incurrence of such Debt for which
consolidated financial statements are available, determined on a pro forma
basis as if any such Debt had been Incurred and the proceeds of such Debt
had been applied, and any material Investment in, or acquisition or
disposition of, any material asset outside the ordinary course of business
consummated during, or since the end of, such period of four fiscal
quarters had occurred at the beginning of such four fiscal quarters,
would be less than 5.0 to 1.0; or
(2) WCG's Consolidated Capital Ratio is less than 2.25 to 1.0 as of
the most recent available quarterly or annual balance sheet, after giving
pro forma effect to
- the Incurrence of such Debt and any other Debt Incurred and that
remains outstanding on the incurrence date since such balance sheet
date as if such Incurrence had occurred on such balance sheet date,
- the repayment, repurchase, retirement or extinguishment of any Debt
since such balance sheet date, as if such repayment, repurchase or
extinguishment had occurred on such balance sheet date,
- the issuance of any Capital Stock, other than Disqualified Stock, of
WCG since such balance sheet date, including the issuance of any
Capital Stock to be issued concurrently with the Incurrence of such
Debt, as of such Incurrence had occurred on such balance sheet date,
and
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- the receipt and application of the net proceeds of such Debt or
Capital Stock, as the case may be, as if such receipt and application
of the proceeds therefrom had occurred on the balance sheet date.
(b) The restrictions in paragraph (a) do not prevent WCG or any Restricted
Subsidiary from Incurring any and all of the following, each of which shall be
given independent effect:
(1) Debt under the notes, the indenture or any Domestic Restricted
Subsidiary Guarantee;
(2) Debt under Credit Facilities in an aggregate principal amount
outstanding or available (together with all refinancing Debt outstanding or
available pursuant to clause (8) below in respect of Debt previously
Incurred pursuant to this clause (2)) at any one time not to exceed the
greater of
(x) $2.0 billion, less
- the amount of all mandatory principal payments actually made by
WCG or any Restricted Subsidiary in respect of term loans
thereunder (excluding any such payments to the extent refinanced
at the time of payment under a new Credit Facility) and
- in the case of a revolving facility, reduced by any required
permanent repayments actually made (which are accompanied by a
corresponding permanent commitment reduction) under the revolving
facility (excluding any such repayments and commitment reductions
to the extent refinanced and replaced at the time under a new
Credit Facility), and
(y) 85% of the Eligible Receivables;
(3) Purchase Money Debt; provided that the amount of such Purchase
Money Debt does not exceed 100% of the cost of the construction,
installation, acquisition, lease, development or improvement of the
applicable Telecommunications Assets;
(4) Subordinated Debt of WCG; provided, however, that the aggregate
principal amount of such Debt, together with any other outstanding Debt
Incurred pursuant to this clause (4), shall not exceed $500 million at any
one time (which amount shall be permanently reduced by the amount of Net
Available Proceeds used to repay Subordinated Debt of WCG, and not
reinvested in Telecommunications Assets or used to purchase notes or repay
other Debt, pursuant to the covenant described in the section below
entitled "-- Limitation on asset dispositions"), except to the extent such
Debt in excess of $500 million
(A) is subordinated to all other Debt of WCG other than Debt
Incurred pursuant to this clause (4) in excess of such $500
million limitation,
(B) does not provide for the payment of cash interest on such Debt
prior to the Stated Maturity of the notes, and
(C) does not
- provide for payments of principal of such Debt at stated maturity
or by way of a sinking fund applicable to the payment of such Debt
or by way of any mandatory redemption, defeasance, retirement or
repurchase thereof by WCG (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of the acceleration of
any payment with respect to such Debt upon any event of default
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under such Debt), in each case on or prior to the Stated Maturity
of the notes, and
- permit redemption or other retirement, including pursuant to an
offer to purchase made by WCG, of such Debt at the option of the
holder of such Debt on or prior to the Stated Maturity of the
notes,
other than, in the case of each of these points under (C), a
redemption or retirement at the option of the holder of such Debt,
including pursuant to an offer to purchase made by WCG, which is
conditioned upon a change of control or asset disposition pursuant
to provisions substantially similar to those described in the
sections below entitled "-- Change of control triggering event" and
"-- Limitation on asset dispositions";
(5) Debt outstanding on the date of the indenture;
(6) Debt owed by WCG to any Restricted Subsidiary of WCG or Debt owed
by a Restricted Subsidiary of WCG to WCG or a Restricted Subsidiary of WCG;
provided, however, that
- upon any subsequent transfer, conveyance or other disposition by any
such Restricted Subsidiary or WCG of any Debt so permitted to a Person
other than WCG or another Restricted Subsidiary of WCG or
- if for any reason such Restricted Subsidiary ceases to be a Restricted
Subsidiary,
the provisions of this clause (6) shall no longer be applicable to such
Debt and such Debt shall be deemed to have been Incurred by the issuer
thereof at the time of such transfer, conveyance or other disposition or
when such Restricted Subsidiary ceases to be a Restricted Subsidiary;
(7) Debt Incurred by a Person prior to the time
(A) such Person became a Restricted Subsidiary,
(B) such Person merges into or consolidates with a Restricted
Subsidiary or
(C) another Restricted Subsidiary merges into or consolidates with
such Person, in a transaction in which such Person becomes a Restricted
Subsidiary, which Debt was not Incurred with, or in anticipation of,
such transaction or such Person becoming a Restricted Subsidiary.
(8) Debt Incurred to renew, extend, refinance, defease, repay,
replace, prepay, repurchase, redeem, retire, exchange or refund (each, a
"refinancing") Debt Incurred pursuant to clause (1), (2), (3), (5), (7),
(12) or (13) of this paragraph (b) or this clause (8), in an aggregate
principal amount, or if issued at a discount, the then Accreted Value, not
to exceed the aggregate principal amount, or if issued at a discount, the
then Accreted Value, of and accrued interest on the Debt so refinanced plus
the amount of any premium, accrued interest, prepayment penalties, fees and
expenses required to be paid with such refinancing pursuant to the terms of
the Debt so refinanced or the amount of any premium or accrued interest
reasonably determined by the board of directors of WCG as necessary to
accomplish such refinancing by means of a redemption, tender offer or
privately negotiated repurchase plus the amount of fees and expenses
incurred with such redemption, tender offer or privately negotiated
repurchase; provided, however, that
- the refinancing Debt shall not be senior in right of payment to the
Debt that is being refinanced and
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- in the case of any refinancing of Debt Incurred pursuant to clause
(1), (5), (7) or (12), or, if such Debt previously refinanced Debt
Incurred pursuant to any such clause, this clause (8), the
refinancing Debt by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt is issued,
(x) does not provide for payments of principal of such Debt at stated
maturity or by way of a sinking fund applicable to the payment of such Debt
or by way of any mandatory redemption, defeasance, retirement or repurchase
thereof by WCG, including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of the acceleration of any payment with respect to such
Debt upon any event of default under such Debt, in each case prior to the
time the same are required by the terms of the Debt being refinanced and
(y) does not permit redemption or other retirement, including pursuant
to an offer to purchase made by WCG, of such Debt at the option of the
holder of such Debt prior to the time the same are required by the terms of
the Debt being refinanced,
other than, in the case of clause (x) or (y), any such payment, redemption
or other retirement, including pursuant to an offer to purchase made by
WCG, which is conditioned upon a change of control or asset sale pursuant
to provisions substantially similar to those described in the sections
below entitled "-- Change of control triggering event" and "-- Limitation
on asset dispositions";
provided further that the above clauses (x) and (y) and the limitation on
the aggregate principal amount referred to above in this clause (8) shall
not apply to any refinancing of all of the notes then outstanding;
(9) Debt
(A) in respect of performance, surety or appeal bonds, Guarantees,
letters of credit or reimbursement obligations Incurred or provided in
the ordinary course of business securing the performance of contractual,
franchise, lease, self-insurance or license obligations and not in
connection with the Incurrence of Debt or
(B) in respect of customary agreements providing for
indemnification, adjustment of purchase price after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any such obligations of WCG or any of its
Restricted Subsidiaries pursuant to such agreements, Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of WCG (other than Guarantees of Debt Incurred by any Person
acquiring all or any portion of such business, assets or Restricted
Subsidiary of WCG for the purpose of financing such acquisition) and in
an aggregate principal amount not to exceed the gross proceeds actually
received by WCG or any Restricted Subsidiary in connection with such
disposition;
(10) Debt consisting of Permitted Interest Rate or Currency Protection
Agreements;
(11) Debt secured by Receivables originated by WCG or any Restricted
Subsidiary and related assets; provided that such Debt is nonrecourse to
WCG and any of its other Restricted Subsidiaries; provided further, that
Receivables shall not be available at any time to secure Debt under this
clause (11) to the extent that they are used as the basis for the
Incurrence of Debt pursuant to clause (2)(y) of this paragraph (b);
(12) Debt Incurred after the date of the indenture pursuant to the
Williams note, including Debt Incurred in lieu of payments under the
Williams Intercompany Arrangements and any accrual of interest that is
capitalized under, or added to the principal amount
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of, the Williams note; provided that the aggregate amount of such Debt
Incurred in lieu of payments under the Williams Intercompany Arrangements,
other than in respect of any such accrual of interest, in reliance on this
clause (12) does not exceed $25 million in any 12-month period;
(13) Debt Incurred pursuant to the lease, dated as of September 2,
1998, between 1998 WCI Trust, as lessor, and Williams Communications, Inc.,
as lessee, in an aggregate principal amount not to exceed $750 million at
any one time outstanding; and
(14) Debt not otherwise permitted to be Incurred pursuant to clauses
(1) through (13) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (14), has an aggregate principal amount
not in excess of $50 million at any time outstanding.
Notwithstanding any other provision of this "-- Limitation on consolidated
debt" covenant, the maximum amount of Debt that WCG or a Restricted Subsidiary
may Incur pursuant to this "-- Limitation on consolidated debt" covenant will
not be exceeded solely as a result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Debt under this
"-- Limitation on consolidated debt" covenant:
- Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of such
particular amount shall not be included; and
- any Liens granted for the benefit of the notes pursuant to the equal and
ratable provisions referred to in the covenant described in the section
below entitled "-- Limitation on liens" shall not be treated as Debt.
For purposes of determining compliance with this "-- Limitation on
consolidated debt" covenant, if an item of Debt meets the criteria of more than
one of the types of Debt described in the above clauses, WCG, in its sole
discretion, may classify such item of Debt and only be required to include the
amount and type of such Debt in one of such clauses, but also may classify a
portion of such item of Debt in more than one of such clauses and in any order
WCG so chooses.
Limitation on debt of restricted subsidiaries. WCG may not permit any
Restricted Subsidiary that is not a Guarantor to Incur any Debt except any and
all of the following, each of which shall be given independent effect:
(1) Domestic Restricted Subsidiary Guarantees;
(2) Debt outstanding on the date of the indenture;
(3) Debt of Restricted Subsidiaries under Credit Facilities permitted
to be Incurred pursuant to clause (2) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt";
(4) Purchase Money Debt of Restricted Subsidiaries permitted to be
Incurred pursuant to clause (3) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt";
(5) Debt owed by a Restricted Subsidiary to WCG or a Restricted
Subsidiary of WCG permitted to be Incurred pursuant to clause (6) of
paragraph (b) of the section above entitled "-- Limitation on consolidated
debt";
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(6) Debt of Restricted Subsidiaries consisting of Permitted Interest
Rate or Currency Protection Agreements permitted to be Incurred pursuant to
clause (10) of paragraph (b) of the section above entitled "-- Limitation
on consolidated debt";
(7) Debt of Restricted Subsidiaries permitted to be Incurred under
clause (7) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt";
(8) Debt of Restricted Subsidiaries permitted to be Incurred under
clause (9) or (14) of paragraph (b) of the section above entitled
"-- Limitation on consolidated debt";
(9) Debt of Restricted Subsidiaries secured by Receivables originated
by WCG or any Restricted Subsidiary and related assets permitted to be
Incurred under clause (11) of paragraph (b) of the section above entitled
"-- Limitation on consolidated debt";
(10) Debt permitted to be Incurred pursuant to clause (12) of
paragraph (b) of the section above entitled "-- Limitation on consolidated
debt";
(11) Debt Incurred pursuant to the lease, dated as of September 2,
1998, between 1998 WCI Trust, as lessor, and Williams Communications, Inc.,
as lessee, in an aggregate principal amount not to exceed $750 million at
any one time outstanding; and
(12) Debt which is Incurred to refinance any Debt of a Restricted
Subsidiary permitted to be Incurred pursuant to clauses (1), (2), (3), (4),
(7), (10) or (11) of this paragraph or this clause (12), in an aggregate
principal amount (or if issued at a discount, the then Accreted Value) not
to exceed the aggregate principal amount (or if issued at a discount, the
then Accreted Value) of the Debt so refinanced, plus the amount of any
premium, prepayment penalties, accrued interest, fees and expenses required
to be paid for such refinancing pursuant to the terms of the Debt so
refinanced or the amount of any premium or accrued interest reasonably
determined by the board of directors of WCG as necessary to accomplish such
refinancing by means of a redemption, tender offer or privately negotiated
repurchase, plus the amount of fees and expenses of WCG and the applicable
Restricted Subsidiary Incurred with such refinancing; provided, however,
that, in the case of any refinancing of Debt Incurred pursuant to clause
(1), (2) or (7) or, if such Debt previously refinanced Debt Incurred
pursuant to any such clause, this clause (12), the refinancing Debt by its
terms, or by the terms of any agreement or instrument pursuant to which
such Debt is issued,
(x) does not provide for payments of principal at the stated
maturity of such Debt or by way of a sinking fund applicable to such
Debt or by way of any mandatory redemption, defeasance, retirement or
repurchase of such Debt by WCG or any Restricted Subsidiary, including
any redemption, retirement or repurchase which is contingent upon events
or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder, in each
case prior to the time the same are required by the terms of the Debt
being refinanced and
(y) does not permit redemption or other retirement, including
pursuant to an offer to purchase made by WCG or a Restricted Subsidiary,
of such Debt at the option of the holder of such Debt prior to the
stated maturity of the Debt being refinanced,
other than, in the case of clause (x) or (y), any such payment, redemption
or other retirement, including pursuant to an offer to purchase made by WCG
or a Restricted Subsidiary, which is conditioned upon the change of control
or asset sale of WCG pursuant to provisions substantially similar to those
contained in the indenture which are described in the sections below
entitled "-- Change of control triggering event" and "-- Limitation on
asset dispositions";
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provided further that the above clauses (x) and (y) and the limitation
on the aggregate principal amount referred to above in this clause (12)
shall not apply to any refinancing of all of the notes then outstanding.
Notwithstanding any other provision of this "-- Limitation on debt of
restricted subsidiaries" covenant, the maximum amount of Debt that a Restricted
Subsidiary may Incur pursuant to this "-- Limitation on debt of restricted
subsidiaries" covenant will not be exceeded solely as a result of fluctuations
in the exchange rates of currencies.
For purposes of determining any particular amount of Debt under this
"-- Limitation on debt of restricted subsidiaries" covenant, Guarantees, Liens
or obligations with respect to letters of credit supporting Debt otherwise
included in the determination of such particular amount shall not be included.
For purposes of determining compliance with this "-- Limitation on debt of
restricted subsidiaries" covenant, if an item of Debt meets the criteria of more
than one of the types of Debt described in the above clauses, WCG, in its sole
discretion, may classify such item of Debt and only be required to include the
amount and type of such Debt in one of such clauses, but also may classify a
portion of such item of Debt in more than one of such clauses and in any order
WCG so chooses.
Limitation on issuances of guarantees by, and debt securities of, domestic
restricted subsidiaries. WCG will not permit any of its Domestic Restricted
Subsidiaries, directly or indirectly, to issue or Guarantee any Debt Securities,
unless such Domestic Restricted Subsidiary simultaneously executes and delivers
a supplemental indenture to the indenture providing for the Guarantee of the
payment of the notes by such Domestic Restricted Subsidiary, which Guarantee
shall be senior to or rank equally with such Debt Securities.
Any such Guarantee by a Domestic Restricted Subsidiary of the notes shall
provide by its terms that it shall be automatically and unconditionally released
and discharged upon a sale or other disposition, by way of merger or otherwise,
to any Person not an Affiliate of WCG, of WCG's equity interest in, or the
assets of, such Domestic Restricted Subsidiary, which sale or other disposition
results in such Domestic Restricted Subsidiary ceasing to be a Domestic
Restricted Subsidiary and such sale or other disposition is made in compliance
with, and the Net Available Proceeds therefrom are applied in accordance with,
the applicable provisions of the indenture.
The foregoing provisions will not be applicable to:
- Guarantees of Debt Securities of a Person by its subsidiaries in effect
prior to the time such Person is merged with or into or became a Domestic
Restricted Subsidiary; provided that such Guarantees do not extend to any
other Debt Securities of such Person or any other Person; and
- any one or more Guarantees of up to $100 million in aggregate principal
amount of Debt Securities of WCG or any Domestic Restricted Subsidiary at
any time outstanding.
Limitation on restricted payments. (a) WCG:
(1) may not, and may not permit any Restricted Subsidiary to, directly
or indirectly, declare or pay any dividend, or make any distribution, in
respect of its Capital Stock or to the holders of its Capital Stock,
excluding any dividends or distributions which are made solely to WCG or a
Restricted Subsidiary (and, if such Restricted Subsidiary declaring, paying
or making any such dividend or distribution is not a Wholly Owned
Subsidiary, to the other stockholders or equity owners of such Restricted
Subsidiary on a pro rata basis or on a basis that results in the receipt by
WCG or a Restricted Subsidiary of dividends or distributions of greater
value than it would receive on a pro rata basis) or any dividends or
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distributions payable solely in shares of Capital Stock of WCG, other than
Disqualified Stock, or in options, warrants or other rights to acquire
Capital Stock of WCG, other than Disqualified Stock;
(2) may not, and may not permit any Restricted Subsidiary to,
purchase, redeem, or otherwise retire or acquire for value
- any Capital Stock of WCG or any Restricted Subsidiary of WCG or
- any options, warrants or rights to purchase or acquire shares of
Capital Stock of WCG or any Restricted Subsidiary or any securities
convertible or exchangeable into shares of Capital Stock of WCG or any
Restricted Subsidiary,
except, in any such case, any such purchase, redemption or retirement or
acquisition for value
- paid to WCG or a Restricted Subsidiary (or, in the case of any such
purchase, redemption or other retirement or acquisition for value with
respect to a Restricted Subsidiary that is not a Wholly Owned
Subsidiary, to the other stockholders or equity owners of such
Restricted Subsidiary on a pro rata basis or on a basis that results
in the receipt by WCG or a Restricted Subsidiary of payments of
greater value than it would receive on a pro rata basis) or
- paid solely in shares of Capital Stock, other than Disqualified Stock,
of WCG;
(3) may not make, or permit any Restricted Subsidiary to make, any
Investment, other than an Investment in WCG or a Restricted Subsidiary or a
Permitted Investment, in any other Person, including the Designation of any
Restricted Subsidiary as an Unrestricted Subsidiary, or the Revocation of
any such Designation, according to the covenant described in the section
below entitled "-- Limitation on designations of unrestricted
subsidiaries";
(4) may not, and may not permit any Restricted Subsidiary to, redeem,
defease, repurchase, retire or otherwise acquire or retire for value, prior
to any scheduled maturity, repayment or sinking fund payment, Debt of WCG
which is subordinate in right of payment to the notes (other than any
redemption, defeasance, repurchase, retirement or other acquisition or
retirement for value made in anticipation of satisfying a scheduled
maturity, repayment or sinking fund obligation due within one year
thereof); and
(5) may not, and may not permit any Restricted Subsidiary to, issue,
transfer, convey, sell or otherwise dispose of Capital Stock of any
Restricted Subsidiary to a Person other than WCG or another Restricted
Subsidiary if the result thereof is that such Restricted Subsidiary shall
cease to be a Restricted Subsidiary, in which event the amount of such
"Restricted Payment" shall be the Fair Market Value of the remaining
interest, if any, in such former Restricted Subsidiary held by WCG and the
other Restricted Subsidiaries;
each of clauses (1) through (5) being a "Restricted Payment," if:
(A) an Event of Default, or an event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default,
shall have occurred and be continuing; or
(B) upon giving effect to such Restricted Payment, WCG could not
Incur at least $1.00 of additional Debt pursuant to the terms of the
indenture described in paragraph (a) of the section above entitled
"-- Limitation on consolidated debt"; or
(C) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments made on or after the date of the indenture, plus
Permitted Investments made
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on or after the date of the indenture pursuant to clause (i) or (n) of
the definition thereof, other than any such Permitted Investments that
are Permitted Investments in WCG or any Restricted Subsidiary (the
amount of any such Restricted Payment or Permitted Investment, if made
other than in cash, to be based upon Fair Market Value), exceeds the sum
of:
- 50% of cumulative Consolidated Net Income (or, in the case
that Consolidated Net Income shall be negative, 100% of such
negative amount) since June 30, 1999 through the last day of the
last full fiscal quarter for which consolidated financial statements
are available;
- in the case of any Revocation made after the date of the
indenture, an amount equal to the lesser of the portion
(proportionate to WCG's direct or indirect equity interest in the
Subsidiary to which such Revocation relates) of the Fair Market
Value of the net assets of such Subsidiary at the time of Revocation
and the amount of Investments previously made (and treated as a
Restricted Payment) by WCG or any Restricted Subsidiary in such
Subsidiary; and
- the aggregate amount of Returned Investments since the date
of the indenture and on or prior to the date of such Restricted
Payment;
provided, however, that WCG or a Restricted Subsidiary of WCG may,
without regard to the limitations in clause (C) but subject to clauses
(A) and (B), make Restricted Payments in an aggregate amount not to
exceed the sum of $50 million and the aggregate net cash proceeds
received after the date of the indenture
(1) as capital contributions to WCG, or proceeds from the
issuance, other than to a Subsidiary, of Capital Stock, other than
Disqualified Stock, of WCG and options, warrants or rights to
purchase or acquire shares of Capital Stock, other than Disqualified
Stock, of WCG, and
(2) from the issuance or sale of Debt of WCG or any Restricted
Subsidiary, other than to a Subsidiary, WCG or a Plan, that after
the date of the indenture has been converted into or exchanged for
Capital Stock, other than Disqualified Stock, of WCG;
provided, further, that in the case of the issuance of Capital
Stock of WCG to any Plan, if such Plan Incurs any Debt for the purpose
of purchasing such Capital Stock, the aggregate net cash proceeds from
such issuance shall be included for purposes of the above proviso only
to the extent of any increase in the Consolidated Net Worth of WCG
resulting from principal repayments made with respect to the Debt
Incurred to finance the purchase of such Capital Stock.
The aggregate net cash proceeds referred to in the immediately
preceding clauses (1) and (2) shall not be utilized to make Restricted
Payments pursuant to such clauses to the extent such proceeds have been
utilized to make Permitted Investments under clause (i) of the
definition of "Permitted Investments."
(b) The restrictions in paragraph (a) do not prevent the following:
(1) WCG or any Restricted Subsidiary may pay any dividend on Capital
Stock of any class of WCG within 60 days after the declaration of such
dividend if, on the date when the dividend was declared, WCG or such
Restricted Subsidiary, as the case may be, could have paid such dividend in
accordance with the above provisions; provided, however, that at the
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time of such payment of such dividend, no other Event of Default shall have
occurred and be continuing, or result from, the payment of such dividend;
(2) WCG or any Restricted Subsidiary may repurchase, redeem, acquire,
cancel or otherwise retire for value any shares of its Common Stock or
options to acquire its Common Stock from Persons who are currently or were
formerly directors, officers or employees of WCG or any of its Subsidiaries
or other Affiliates, or their estates or beneficiaries under their estates,
or from any Plan, upon death, disability, retirement or termination of
employment in an amount not to exceed $3 million in any 12-month period;
(3) WCG and any Restricted Subsidiary may refinance any Debt otherwise
permitted by clause (8) of paragraph (b) in the section above entitled
"-- Limitation on consolidated debt" or clause (12) in the section above
entitled "-- Limitation on debt of restricted subsidiaries";
(4) WCG and any Restricted Subsidiary may retire or repurchase any
Capital Stock of WCG or of any Restricted Subsidiary or any Subordinated
Debt of WCG in exchange for, or out of the proceeds of the substantially
concurrent sale, other than to a Subsidiary of WCG or any Plan, of, Capital
Stock, other than Disqualified Stock, of WCG; provided that the proceeds
from any such exchange or sale of Capital Stock shall be excluded from any
calculation pursuant to clause (b) of the definition of "Invested Capital";
(5) WCG or any Restricted Subsidiary may purchase shares of Capital
Stock of WCG or any Restricted Subsidiary of WCG for the purpose of
contributing such shares to any Plan; provided that all such purchases
referred to in this clause (5) may not exceed $10 million in any 12-month
period;
(6) WCG or any Restricted Subsidiary may purchase all, but not less
than all, excluding directors' qualifying shares, of the Capital Stock or
other ownership interests in a Subsidiary of WCG which Capital Stock or
other ownership interests were not until that time owned by WCG or a
Subsidiary of WCG such that after giving effect to such purchase such
Subsidiary becomes a Wholly Owned Subsidiary of WCG;
(7) WCG or any Restricted Subsidiary may redeem, defease, repurchase,
retire or acquire for value any Subordinated Debt upon a Change of Control
or Asset Disposition to the extent required by the indenture or other
agreement pursuant to which such Subordinated Debt was issued, but only if
WCG has first complied with its obligations under the sections below
entitled "-- Change of control triggering event" and "-- Limitation on
asset dispositions"; and
(8) WCG or any Restricted Subsidiary may make distributions to the
stockholders or equity owners of Restricted Subsidiaries that are
partnerships, limited liability companies that are treated as partnerships
for U.S. tax purposes or other similar pass-through entities in order to
reimburse or compensate such other stockholders or equity owners for income
taxes attributable to the operations of such Restricted Subsidiaries as
required by the formation agreement, operating agreement or partnership
agreement or similar governing document of the Restricted Subsidiary.
The Restricted Payments described in the foregoing clauses (1), (2), (5),
(6), and (7) shall be included in the calculation of Restricted Payments; the
Restricted Payments described in clauses (3), (4) and (8) shall be excluded in
the calculation of Restricted Payments.
Limitation on dividend and other payment restrictions affecting restricted
subsidiaries. (a) WCG may not, and may not permit any Restricted Subsidiary to,
directly or indirectly,
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create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction, other than pursuant to law or regulation, on the
ability of any Restricted Subsidiary:
(1) to pay dividends in cash or otherwise, or make any other
distributions in respect of its Capital Stock owned by WCG or any other
Restricted Subsidiary or pay any Debt or other obligation owed to WCG or
any other Restricted Subsidiary;
(2) to make loans or advances to WCG or any other Restricted
Subsidiary; or
(3) to transfer any of its Property to WCG or any other Restricted
Subsidiary.
(b) Despite the above limitation, WCG may, and may permit any Restricted
Subsidiary to, create or otherwise cause or suffer to exist:
(1) any encumbrance or restriction pursuant to any agreement in effect
on the date of the indenture and pursuant to the permanent credit facility,
or, in each case, encumbrances or restrictions that are substantially
similar taken as a whole;
(2) any customary (as conclusively determined in good faith by the
Chief Financial Officer of WCG) encumbrance or restriction applicable to a
Restricted Subsidiary that is contained in an agreement or instrument
governing or relating to Debt contained in any Credit Facilities or
Purchase Money Debt; provided that such encumbrances and restrictions do
not prohibit the distribution of funds to WCG in an amount sufficient for
WCG to make the timely payment of interest, premium, if any, and principal
(whether at stated maturity, by way of a sinking fund applicable thereto,
by way of any mandatory redemption, defeasance, retirement or repurchase
thereof, including upon the occurrence of designated events or
circumstances or by virtue of acceleration upon an event of default, or by
way of redemption or retirement at the option of the holder of the Debt,
including pursuant to offers to purchase) according to the terms of the
indenture and the notes and other Debt that is solely an obligation of WCG,
but provided further that such agreement may nevertheless contain customary
(as so determined) net worth, restricted payment, leverage, interest
coverage invested capital and other financial covenants, customary (as so
determined) covenants regarding the merger of or sale of all or any
substantial part of the assets of WCG or any Restricted Subsidiary,
customary (as so determined) restrictions on transactions with affiliates
and customary (as so determined) subordination provisions governing Debt
owed to WCG or any Restricted Subsidiary;
(3) any encumbrance or restriction pursuant to an agreement relating
to any Acquired Debt, which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the
Person so acquired;
(4) any encumbrance or restriction pursuant to an agreement effecting
a refinancing of Debt Incurred pursuant to an agreement referred to in
clause (1), (2) or (3) of this paragraph (b); provided, however, that the
provisions contained in such agreement relating to such encumbrance or
restriction are no more restrictive (as so determined) in any material
respect than the provisions contained in the agreement governing the Debt
being refinanced;
(5) in the case of clause (3) of paragraph (a) above, any encumbrance
or restriction contained in any security agreement (including a Capital
Lease Obligation) securing Debt of WCG or a Restricted Subsidiary otherwise
permitted under the indenture, but only to the extent such restrictions
restrict the transfer of the Property subject to such security agreement;
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(6) in the case of clause (3) of paragraph (a) above, customary
provisions
- that restrict the subletting, assignment or transfer of any
Property that is a lease, license, conveyance or similar contract,
- contained in asset sale or other asset disposition agreements
limiting the transfer of the Property being sold or disposed of pending
the closing of such sale or disposition or
- arising or agreed to in the ordinary course of business, not
relating to any Debt, and that do not, individually or in the aggregate,
detract from the value of Property of WCG or any Restricted Subsidiary
in any manner material to WCG or any Restricted Subsidiary;
(7) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
Property of such Restricted Subsidiary; provided that the consummation of
such transaction would not result in a Default or an Event of Default, that
such restriction terminates if such transaction is abandoned and that the
consummation or abandonment of such transaction occurs within one year of
the date such agreement was entered into;
(8) any encumbrance or restriction pursuant to the indenture and the
notes (or encumbrances or restrictions that are substantially similar taken
as a whole); and
(9) Permitted Liens.
Limitation on liens. WCG may not, and may not permit any Restricted
Subsidiary to, directly or indirectly, Incur or suffer to exist any Lien on or
with respect to any Property now owned or acquired after the date of the
indenture to secure any Debt without making, or causing such Restricted
Subsidiary to make, effective provision for securing the notes
- equally and ratably with such Debt as to such Property for so long as
such Debt will be so secured or
- in the event such Debt is Debt of WCG or a Guarantor which is subordinate
in right of payment to the notes or the applicable Domestic Restricted
Subsidiary Guarantee, prior to such Debt as to such Property for so long
as such Debt will be so secured.
These restrictions shall not apply to:
(1) Liens existing on the date of the indenture;
(2) Liens Incurred on or after the date of the indenture pursuant to
any Credit Facility to secure Debt permitted to be Incurred pursuant to
clause (2) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt";
(3) Liens securing Debt in an amount which, together with the
aggregate amount of Debt then outstanding or available under all Credit
Facilities (together with all refinancing Debt then outstanding or
available pursuant to clause (8) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt" in respect of Debt previously
Incurred under Credit Facilities), does not exceed 1.5 times WCG's
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters preceding the Incurrence of such Lien for which WCG's consolidated
financial statements are available, determined on a pro forma basis as if
such Debt had been Incurred and the proceeds thereof had been applied at
the beginning of such four fiscal quarters;
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(4) Liens in favor of WCG or any Restricted Subsidiary; provided,
however, that any subsequent issue or transfer of Capital Stock or other
event that results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of the Debt secured by any
such Lien, except to WCG or a Restricted Subsidiary, shall be deemed, in
each case, to constitute the Incurrence of such Lien by the issuer thereof;
(5) Liens to secure Purchase Money Debt permitted to be Incurred
pursuant to clause (3) of paragraph (b) of the section above entitled
"-- Limitation on consolidated debt;" provided that any such Lien may not
extend to any Property other than the Telecommunications Assets installed,
constructed, acquired, leased, developed or improved with the proceeds of
such Purchase Money Debt and any improvements or accessions thereto (it
being understood that all Debt to any single lender or group of related
lenders or outstanding under any single credit facility, and in any case
relating to the same group or collection of Telecommunications Assets
financed thereby, shall be considered a single Purchase Money Debt, whether
drawn at one time or from time to time);
(6) Liens to secure Acquired Debt; provided that
- such Lien attaches to the acquired Property prior to the time of the
acquisition of such Property and
- such Lien does not extend to or cover any other Property;
(7) Liens to secure Debt permitted to be Incurred pursuant to clause
(13) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt";
(8) Liens to secure Debt Incurred to refinance, in whole or in part,
Debt secured by any Lien referred to in the foregoing clauses (1), (2),
(5), (6) and (7) or this clause (8) so long as such Lien does not extend to
any other Property (other than improvements and accessions to the original
Property) and the principal amount of Debt so secured is not increased
except as otherwise permitted under clause (8) of paragraph (b) of the
section above entitled "-- Limitation on consolidated debt" or clause (12)
of the section above entitled "-- Limitation on debt of restricted
subsidiaries";
(9) Liens to secure Debt consisting of Permitted Interest Rate and
Currency Protection Agreements permitted to be Incurred pursuant to clause
(10) of paragraph (b) of the section above entitled "-- Limitation on
consolidated debt";
(10) Liens to secure Debt secured by Receivables permitted to be
Incurred pursuant to clause (11) of paragraph (b) of the section above
entitled "-- Limitation on consolidated debt";
(11) Liens granted after the date of the indenture to secure the
notes;
(12) Permitted Liens; and
(13) Liens not otherwise permitted by the foregoing clauses (1)
through (12) that, at the time of Incurrence thereof, taken together with
all other Liens Incurred after the date of the indenture in reliance on
this clause (13) and which remain in existence, secure Debt in an aggregate
principal amount not to exceed 5% of WCG's Consolidated Tangible Assets as
of the most recent balance sheet date as of which WCG's consolidated
balance sheet is available;
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Limitation on sale and leaseback transactions. WCG may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, enter into, assume,
Guarantee or otherwise become liable with respect to any Sale and Leaseback
Transaction, unless:
(1) WCG or such Restricted Subsidiary would be entitled to Incur
- Debt in an amount equal to the Attributable Value of the Sale and
Leaseback Transaction pursuant to the covenant described in the
section above entitled "-- Limitation on consolidated debt" and
- a Lien pursuant to the covenant described in the section above
entitled "-- Limitation on liens," equal in amount to the
Attributable Value of the Sale and Leaseback Transaction, without
also securing the notes; and
(2) the Sale and Leaseback Transaction is treated as an Asset
Disposition and all of the conditions of the indenture described in the
section below entitled "-- Limitation on asset dispositions" (including the
provisions concerning the application of Net Available Proceeds) are
satisfied with respect to such Sale and Leaseback Transaction, treating all
of the consideration received in such Sale and Leaseback Transaction as Net
Available Proceeds for purposes of such covenant.
Limitation on asset dispositions. WCG may not, and may not permit any
Restricted Subsidiary to, make any Asset Disposition unless:
(1) WCG or the Restricted Subsidiary, as the case may be, receives
consideration for such disposition at least equal to the Fair Market Value
for the Property sold or disposed of; and
(2) at least 75% of the consideration for such disposition consists of
cash or Cash Equivalents or the assumption of Debt of WCG or any Restricted
Subsidiary (other than Debt that is subordinated to the notes or any
Domestic Restricted Subsidiary Guarantee) and release of WCG and all
Restricted Subsidiaries from all liability on the Debt assumed (or if less
than 75%, the remainder of such consideration consists of
Telecommunications Assets).
The Net Available Proceeds or any portion thereof from Asset Dispositions
may be applied by WCG or a Restricted Subsidiary, to the extent WCG or such
Restricted Subsidiary elects or is required by the terms of any Debt:
- to the permanent repayment or reduction of Debt then outstanding under
any Credit Facility, to the extent such Credit Facility would require
such application or prohibit payments pursuant to the offer to purchase
the notes in accordance with the indenture described in the following
paragraph (other than Debt owed to WCG or any Affiliate of WCG); or
- to reinvest in Telecommunications Assets (including by means of an
Investment in Telecommunications Assets by a Restricted Subsidiary with
Net Available Proceeds received by WCG or another Restricted Subsidiary).
Any Net Available Proceeds from an Asset Disposition not applied in
accordance with the preceding paragraph within 360 days from the date of the
receipt of such Net Available Proceeds shall constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $10 million, WCG will be
required to make an offer to purchase in accordance with the indenture with such
Excess Proceeds on a pro rata basis according to principal amount, or, in the
case of Debt issued at a discount, the then Accreted Value, for
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(x) outstanding notes at a price in cash equal to 100% of the
principal amount of the notes on the purchase date plus accrued and unpaid
interest, if any, on the notes, subject to the right of holders of record
on the relevant record date to receive interest due on the relevant
interest payment date, and
(y) any other Debt of WCG or any Guarantor that ranks equally with the
notes, or any Debt of a Restricted Subsidiary that is not a Guarantor, at a
price no greater than 100% of the principal amount of such Debt plus
accrued and unpaid interest, if any, to the purchase date, or 100% of the
then Accreted Value plus accrued and unpaid interest, if any, to the
purchase date in the case of original issue discount Debt, to the extent,
in the case of this clause (y), required under the terms of such Debt
(other than Debt owed to WCG or any Affiliate of WCG).
To the extent there are any remaining Excess Proceeds following the
completion of the offer to purchase the notes in accordance with the indenture,
WCG shall apply such Excess Proceeds to the repayment of other Debt of WCG or
any Restricted Subsidiary, to the extent permitted or required under the terms
of such other Debt. Any other remaining Excess Proceeds may be applied to any
use as determined by WCG which is not otherwise prohibited by the indenture, and
the amount of Excess Proceeds shall be reset to zero.
Limitation on issuance and sales of capital stock of restricted
subsidiaries. WCG may not, and may not permit any Restricted Subsidiary to,
issue, transfer, convey, sell or otherwise dispose of any shares of Capital
Stock of a Restricted Subsidiary or securities convertible or exchangeable into,
or options, warrants, rights or any other interest with respect to, Capital
Stock of a Restricted Subsidiary to any Person other than WCG or a Restricted
Subsidiary except:
(1) a sale of all of the Capital Stock of such Restricted Subsidiary
owned by WCG and any Restricted Subsidiary that complies with the
provisions described in the section above entitled "-- Limitation on asset
dispositions" to the extent such provisions apply;
(2) in a transaction that results in such Restricted Subsidiary
becoming a Joint Venture; provided
- such transaction complies with the provisions described in the
section above entitled "-- Limitation on asset dispositions" to the
extent such provisions apply and
- the remaining interest of WCG or any other Restricted Subsidiary in
such Joint Venture would have been permitted as a new Restricted
Payment or Permitted Investment under the provisions of the section
above entitled "-- Limitation on restricted payments";
(3) the issuance, transfer, conveyance, sale or other disposition of
shares of such Restricted Subsidiary so long as after giving effect to such
transaction such Restricted Subsidiary remains a Restricted Subsidiary and
such transaction complies with the provisions described in the section
above entitled "-- Limitation on asset dispositions" to the extent such
provisions apply;
(4) the transfer, conveyance, sale or other disposition of shares
required by applicable law or regulation;
(5) if required, the issuance, transfer, conveyance, sale or other
disposition of directors' qualifying shares;
(6) Disqualified Stock issued in exchange for, or upon conversion of,
or the proceeds of the issuance of which are used to redeem, replace,
refund or refinance, shares of Disqualified Stock of such Restricted
Subsidiary; provided that the amounts of the redemption obligations of such
Disqualified Stock shall not exceed the amounts of the
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redemption obligations of, and such Disqualified Stock shall have
redemption obligations no earlier than those required by, the Disqualified
Stock being exchanged, converted, redeemed, replaced, refunded or
refinanced;
(7) in a transaction where WCG or a Restricted Subsidiary acquires at
the same time not less than its Proportionate Interest in such issuance of
Capital Stock;
(8) Capital Stock issued and outstanding on the date of the indenture;
(9) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by WCG; and
(10) an issuance of Preferred Stock of a Restricted Subsidiary (other
than Preferred Stock convertible or exchangeable into Common Stock of any
Restricted Subsidiary) otherwise permitted by the indenture.
Transactions with affiliates. WCG will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, sell, lease, transfer, or
otherwise dispose of any of its Property to, or purchase any Property from, or
enter into any contract, agreement, understanding, loan, advance, Guarantee or
transaction, including the rendering of services, with or for the benefit of,
any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions is
in the best interest of WCG or such Restricted Subsidiary and on terms that
are fair and reasonable to, and in the best interests of, WCG or the
Restricted Subsidiary, as the case may be; and
(b) WCG delivers to the trustee
- with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate payments in excess of $10
million but less than $15 million, a certificate of the chief executive,
operating or financial officer of WCG evidencing such officer's
determination that such Affiliate Transaction or series of Affiliate
Transactions complies with clause (a) above and
- with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate payments equal to or in excess
of $15 million, a board resolution certifying that such Affiliate
Transaction or series of Affiliate Transactions complies with clause (a)
above and that such Affiliate Transaction or series of Affiliate
Transactions has been approved by the board of directors of WCG, including
a majority of the disinterested members of the board of directors of WCG,
provided that, if there shall not be at least two disinterested members of
the board of directors of WCG with respect to the Affiliate Transaction,
WCG shall, in addition to such board resolution, file with the trustee a
written opinion from an investment banking firm of national standing in the
United States which, in the good faith judgment of the board of directors
of WCG, is independent with respect to WCG and its Affiliates and qualified
to perform such task, which opinion shall be to the effect that the
consideration to be paid or received in connection with such Affiliate
Transaction is fair, from a financial point of view, to WCG or such
Restricted Subsidiary.
Despite (a) and (b) above, the following shall not be deemed Affiliate
Transactions:
(1) any employment agreement entered into by WCG or any of its
Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice;
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(2) any agreement or arrangement with respect to the compensation of a
director or officer of WCG or any Restricted Subsidiary approved by a
majority of the board of directors of WCG and consistent with industry
practice;
(3) transactions between or among WCG and its Restricted Subsidiaries;
provided that no more than 10% of the Voting Stock on a fully diluted basis
of any such Restricted Subsidiary is owned by an Affiliate of WCG (other
than a Restricted Subsidiary);
(4) Restricted Payments and Permitted Investments permitted by the
covenant described in the section above entitled "-- Limitation on
restricted payments" (other than Investments in Affiliates that are not WCG
or Restricted Subsidiaries);
(5) transactions pursuant to the terms of or performance of any
agreement or arrangement as in effect on the date of the indenture;
(6) transactions pursuant to and any payments under, compliance with,
or performance of obligations under, the Williams Intercompany
Arrangements;
(7) transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiber optic lines,
equipment, rights-of-way or other access rights, between WCG, or any
Restricted Subsidiary, and any other Person; provided that, in the case of
this clause (7), such transaction complies with clause (a) in the
immediately preceding paragraph;
(8) loans, advances or extensions of credit to employees, officers and
directors of WCG or any Restricted Subsidiary made in the ordinary course
of business and consistent with past practice or in connection with
employee benefits agreements or arrangements approved by the board of
directors of WCG; provided, however, that if WCG or any Restricted
Subsidiary makes loans, advances or extensions of credit to employees,
officers and directors in excess of $3 million in the aggregate at any one
time outstanding, the board of directors of WCG must determine that such
loans, advances or extensions of credit in excess of $3 million are fair
and reasonable to, and in the best interests of, WCG or the Restricted
Subsidiary, as the case may be;
(9) the granting or performance of registration rights under any
written registration rights agreement approved by the board of directors of
WCG;
(10) transactions with Persons solely in their capacity as holders of
Debt or Capital Stock of WCG or any of its Subsidiaries, where such Persons
are treated no more favorably than holders of Debt or Capital Stock of WCG
generally;
(11) sales or issuances of Capital Stock, other than Disqualified
Stock, in exchange for cash, securities or Property; provided that such
transactions comply with clause (a) in the immediately preceding paragraph;
and
(12) any agreement to do any of the foregoing.
Change of control triggering event. Within 30 days of both a Change of
Control and a Rating Decline with respect to the notes (a "Change of Control
Triggering Event"), WCG will be required to make an offer to purchase all
outstanding notes in accordance with the indenture at a price in cash equal to
101% of the principal amount of the notes on the purchase date plus any accrued
and unpaid interest, if any, to such purchase date, subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date.
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A "Change of Control" means the occurrence of any of the following events:
(A) if any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act or any successor provisions to either
of the foregoing), including any group acting for the purpose of acquiring,
holding, voting or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, other than any one or more of the
Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, except that a person will be deemed to have
"beneficial ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of 35% or more of the total
voting power of the Voting Stock of WCG at a time when the Permitted
Holders are the "beneficial owners" (as defined in Rule 13d-3 under the
Exchange Act, except that a person will be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, in the aggregate of a lesser percentage of
the total voting power of the Voting Stock of WCG than such other person or
group (for purposes of this clause (A), such person or group shall be
deemed to beneficially own any Voting Stock of a corporation held by any
other corporation so long as such person or group beneficially owns,
directly or indirectly, in the aggregate a majority of the total voting
power of the Voting Stock of such other corporation); or
(B) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all the assets
of WCG and the Restricted Subsidiaries, considered as a whole (other than a
disposition of such assets as an entirety or virtually as an entirety to
one or more Permitted Holders) shall have occurred; or
(C) during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors of WCG
(together with any new directors whose election or appointment by such
board or whose nomination for election by the shareholders of WCG was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of directors of WCG then in office; or
(D) the shareholders of WCG shall have approved any plan of
liquidation or dissolution of WCG.
If WCG makes an offer to purchase the notes in accordance with the
indenture, WCG intends to comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act. To the extent that the provisions of any
applicable securities laws or regulations conflict with the provisions relating
to the offer to purchase, WCG will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations
described above by virtue thereof.
The existence of the holders' right to require, subject to certain
conditions, WCG to repurchase notes upon a Change of Control Triggering Event
may deter a third party from acquiring WCG in a transaction that constitutes a
Change of Control. If an offer to purchase the notes in accordance with the
indenture is made, there can be no assurance that WCG will have sufficient funds
to pay the purchase price for all notes tendered by holders seeking to accept
the offer to purchase. In addition, instruments governing other Debt of WCG may
prohibit WCG from purchasing any notes prior to their Stated Maturity, including
pursuant to an offer to purchase the notes in accordance with the indenture, or
require that such Debt be repurchased upon a Change of Control.
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If an offer to purchase the notes in accordance with the indenture occurs
at a time when WCG does not have sufficient available funds to pay the purchase
price for all notes tendered pursuant to such offer to purchase or a time when
WCG is prohibited from purchasing the notes, and WCG is unable either to obtain
the consent of the holders of the relevant Debt or to repay such Debt, an Event
of Default would occur under the indenture. In addition, one of the events that
constitutes a Change of Control under the indenture is a sale, transfer,
assignment, lease, conveyance or other disposition of all or substantially all
of the assets of WCG. The indenture will be governed by New York law, and there
is no established definition under New York law of "substantially all" of the
assets of a corporation. Accordingly, if WCG were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether WCG was required to make an offer to purchase the notes in
accordance with the indenture.
Except as described herein with respect to a Change of Control, the
indenture does not contain any other provisions that permit holders of notes to
require that WCG repurchase or redeem notes in the event of a takeover,
recapitalization or similar restructuring.
Reports. Whether or not WCG is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, WCG shall file with the SEC,
unless the SEC will not accept such filing, the annual reports, quarterly
reports and other documents which WCG would have been required to file with the
SEC pursuant to such Section 13(a) or 15(d) or any successor provision thereto
if WCG were subject to such successor provision, such documents to be filed with
the SEC on or prior to the respective dates by which WCG would have been
required to file them.
WCG shall also in any event:
(a) within 15 days of each required filing date:
- transmit by mail to all holders, as their names and addresses appear in
the security register, without cost to such holders; and
- file with the trustee copies of the annual reports, quarterly reports and
other documents, without exhibits, which WCG would have been required to
file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act
or any successor provisions thereto if WCG were subject to such successor
provisions and
(b) if filing such documents by WCG with the SEC is not permitted under the
Exchange Act, promptly upon written request, supply copies of such documents,
without exhibits, to any prospective holder.
Limitation on designations of unrestricted subsidiaries. The indenture
will provide that WCG will not designate any Subsidiary of WCG, other than a
newly created Subsidiary in which no Investment has previously been made, as an
"Unrestricted Subsidiary" under the indenture (a "Designation") unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(b) immediately after giving effect to such Designation, WCG would be
able to Incur $1.00 of Debt under paragraph (a) of the section above
entitled "-- Limitation on consolidated debt"; and
(c) WCG would not be prohibited under the indenture from making an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the portion
(proportionate to WCG's equity interest in
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such Restricted Subsidiary) of the Fair Market Value of the net assets of
such Restricted Subsidiary on such date.
In the event of any such Designation, WCG shall be deemed to have made an
Investment constituting a Restricted Payment pursuant to the covenant
"-- Limitation on restricted payments" for all purposes of the indenture in the
Designation Amount; provided, however, that, upon a Revocation of any such
Designation of a Subsidiary, WCG shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary of an amount (if positive) equal to
(1) WCG's "Investment" in such Subsidiary at the time of such
Revocation less
(2) the portion (proportionate to WCG's equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such Subsidiary
at the time of such Revocation less
(3) any Returned Investment.
At the time of any Designation of any Subsidiary as an Unrestricted
Subsidiary, such Subsidiary shall not own any Capital Stock of WCG or any
Restricted Subsidiary.
The indenture will further provide that neither WCG nor any Restricted
Subsidiary shall at any time
(x) provide credit support for, or a Guarantee of, any Debt of any
Unrestricted Subsidiary (including any undertaking, agreement or instrument
evidencing such Debt); provided that WCG or a Restricted Subsidiary may
pledge Capital Stock or Debt of any Unrestricted Subsidiary on a
nonrecourse basis such that the pledgee has no claim whatsoever against WCG
other than to obtain such pledged Capital Stock or Debt,
(y) be directly or indirectly liable for any Debt of any Unrestricted
Subsidiary or
(z) be directly or indirectly liable for any Debt which provides that
the holder of such Debt may (upon notice, lapse of time or both) declare a
default thereon or cause the payment thereof to be accelerated or payable
prior to its final scheduled maturity upon the occurrence of a default with
respect to any Debt, Lien or other obligation of any Unrestricted
Subsidiary (including any right to take enforcement action against such
Unrestricted Subsidiary),
except in the case of clause (x) or (y) to the extent permitted under the
sections above entitled "-- Limitation on restricted payments" and
"-- Transactions with affiliates."
Unless Designated as an Unrestricted Subsidiary, any Person that becomes a
Subsidiary of WCG will be classified as a Restricted Subsidiary; provided,
however, that such Subsidiary shall not be designated as a Restricted Subsidiary
and shall be automatically classified as an Unrestricted Subsidiary if either of
the requirements set forth in clauses (a) and (b)of the immediately following
paragraph will not be satisfied immediately following such classification.
Except as provided in the first sentence of this "-- Limitation on designations
of unrestricted subsidiaries," no Restricted Subsidiary may be redesignated as
an Unrestricted Subsidiary.
The indenture will further provide that a Designation may be revoked (a
"Revocation") by a resolution of the board of directors of WCG; provided that
WCG will not make any Revocation unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation; and
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(b) all Liens and Debt of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time, have
been permitted to be Incurred at such time for all purposes of the
indenture.
All Designations and Revocations must be evidenced by resolutions of the
board of directors of WCG delivered to the trustee
- certifying compliance with the foregoing provisions and
- giving the effective date of such Designation or Revocation, such
delivery to the trustee to occur within 45 days after the end of the
fiscal quarter of WCG in which such Designation or Revocation is made
(or, in the case of a Designation or Revocation made during the last
fiscal quarter of WCG's fiscal year, within 90 days after the end of such
fiscal year).
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
WCG may not, in a single transaction or a series of related transactions,
(1) consolidate with or merge into any other Person or Persons or
permit any other Person to consolidate with or merge into WCG or
(2) directly or indirectly, transfer, sell, lease, convey or otherwise
dispose of all or substantially all its assets to any other Person or
Persons unless:
(a) in a transaction in which WCG is not the resulting, surviving
or transferee Person or in which WCG transfers, sells, leases, conveys
or otherwise disposes of all or substantially all of its assets to any
other Person, the resulting, surviving or transferee Person is organized
under the laws of the United States of America or any State thereof or
the District of Columbia and shall expressly assume, by a supplemental
indenture executed and delivered to the trustee in form satisfactory to
the trustee, all of WCG's obligations under the indenture;
(b) immediately before and after giving effect to such transaction
and treating any Debt which becomes an obligation of WCG or a Restricted
Subsidiary as a result of such transaction as having been Incurred by
WCG or such Restricted Subsidiary at the time of the transaction, no
Default or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction and
treating any Debt which becomes an obligation of WCG or a Restricted
Subsidiary as a result of such transaction as having been Incurred by
WCG, or the successor entity to WCG, or such Restricted Subsidiary at
the time of the transaction, WCG, or the successor entity to WCG, could
Incur at least $1.00 of additional Debt pursuant to the provisions of
the indenture described in paragraph (a) of the section above entitled
"Certain covenants -- Limitation on consolidated debt";
(d) if, as a result of any such transaction, Property of WCG or any
Restricted Subsidiary would become subject to a Lien prohibited by the
provisions of the indenture described in the section above entitled
"Certain covenants -- Limitation on liens," WCG or the successor entity
to WCG shall have secured the notes as required by said covenant; and
(e) in the case of a transfer, sale, lease, conveyance or other
disposition of all or substantially all of the assets of WCG, such
assets shall have been transferred as an
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entirety or virtually as an entirety to one Person and such Person shall
have complied with all the provisions of this paragraph.
The resulting, surviving or transferee Person shall succeed to, and be
substituted for, and may exercise every right and power of WCG under the
indenture, and the predecessor company, except in the case of a lease, shall be
released from all its obligations under the indenture. However,
(1) a consolidation or merger by WCG with or into or
(2) the sale, assignment, transfer, lease, conveyance or other
disposition by WCG or all or substantially all of its property or assets
to, one or more of its Subsidiaries shall not relieve WCG from its
obligations under the indenture or the notes.
In addition, WCG may merge or consolidate with or into any Restricted
Subsidiary so long as the merger or consolidation complies with clauses (a) and
(b) above.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture.
"Accreted Value" of any Debt issued at a price less than the principal
amount at stated maturity, means, as of any date of determination, an amount
equal to the sum of (a) the issue price of such Debt as determined in accordance
with Section 1273 of the Code or any successor provisions plus (b) the aggregate
of the portions of the original issue discount (the excess of the amounts
considered as part of the "stated redemption price at maturity" of such Debt
within the meaning of Section 1273(a)(2) of the Code or any successor
provisions, whether denominated as principal or interest, over the issue price
of such Debt) that shall until that time have accrued pursuant to Section 1272
of the Code (without regard to Section 1272(a)(7) of the Code) from the date of
issue of such Debt to the date of determination, minus all amounts until that
time paid in respect of such Debt, which amounts are considered as part of the
"stated redemption price at maturity" of such Debt within the meaning of Section
1273(a)(2) of the Code or any successor provisions (whether such amounts paid
were denominated principal or interest).
"Acquired Debt" means, with respect to any specified Person,
- Debt of any other Person existing at the time such Person merges with or
into or consolidates with or becomes a Subsidiary of such specified
Person and
- Debt secured by a Lien encumbering any Property acquired by such
specified Person,
which Debt was not incurred in connection with, or in anticipation of, such
merger, consolidation or acquisition or such Person becoming a Subsidiary of
such specified Person.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
covenants described in the sections above entitled "-- Certain
covenants -- Transactions with affiliates" and "-- Limitation on asset
dispositions" and the definition of "Telecommunications Assets" only,
"Affiliate" shall also mean any beneficial owner of shares representing more
than 10% or more of the total voting power of the Voting Stock on a fully
diluted basis of WCG or of rights or warrants to purchase such Voting Stock,
whether or not currently exercisable, and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
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"Asset Disposition" means any transfer, conveyance, sale, lease, issuance
or other disposition by WCG or any Restricted Subsidiary in one or more related
transactions (including a consolidation or merger or other sale of any such
Restricted Subsidiary with, into or to another Person in a transaction in which
such Restricted Subsidiary ceases to be a Restricted Subsidiary of WCG, but
excluding a disposition by a Restricted Subsidiary to WCG or a Restricted
Subsidiary or by WCG to a Restricted Subsidiary) of:
(1) shares of Capital Stock or other ownership interests of a
Restricted Subsidiary (other than as permitted by clause (5), (6), (7) or
(9) of the covenant described in the section above entitled "-- Certain
covenants -- Limitation on issuance and sales of capital stock of
restricted subsidiaries" and other than any transaction in which WCG or
such Restricted Subsidiary receives therefor one or more properties with a
Fair Market Value equal to the Fair Market Value of the Capital Stock
issued, sold or disposed of by WCG or the Restricted Subsidiary);
(2) real property;
(3) all or substantially all of the assets of WCG or any Restricted
Subsidiary representing a division or line of business; or
(4) other Property of WCG or any Restricted Subsidiary outside of the
ordinary course of business, excluding
- any transfer, conveyance, sale, lease or the disposition of Property
by WCG or any Restricted Subsidiary for which WCG or any Restricted
Subsidiary receives capacity and
- any transfer, conveyance, sale, lease or other disposition of
equipment that in the good faith judgment of WCG is obsolete, damaged,
worn out or no longer used by or useful to WCG;
provided, in each case, that the aggregate consideration for such
transfer, conveyance, sale, lease or other disposition is equal to $5
million or more in any 12-month period.
The following shall not be Asset Dispositions:
(1) Permitted Telecommunications Asset Dispositions that comply with
clause (1) of the first paragraph in the section above entitled "-- Certain
covenants -- Limitation on asset dispositions";
(2) when used with respect to WCG, any Asset Disposition permitted
pursuant to "-- Mergers, consolidations and certain sales of assets" which
constitutes a disposition of all or substantially all of the assets of WCG
and the Restricted Subsidiaries taken as a whole;
(3) Receivables sales constituting Debt under Qualified Receivable
Facilities permitted to be Incurred pursuant to the section above entitled
"-- Certain covenants -- Limitation on consolidated debt";
(4) sales, leases, conveyances, transfers or other dispositions to WCG
or to a Restricted Subsidiary or to any other person if, after giving
effect to such sale, lease, conveyance, transfer or other disposition, such
other Person becomes a Restricted Subsidiary; and
(5) any disposition that results in a Permitted Investment (other than
pursuant to clause (f) or (i) of the definition of "Permitted Investment")
or a Restricted Payment permitted by the covenant described in the section
above entitled "-- Certain covenants -- Limitation on restricted payments."
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"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount owed under such lease is to be determined, the total
net amount of rent required to be paid by such Person under such lease during
the remaining term of such lease, including any period for which such lease has
been extended, as determined in accordance with generally accepted accounting
principles, discounted from the last date of such remaining term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of a penalty, such net amount shall
also include the lesser of the amount of such penalty (in which case no rent
shall be considered as required to be paid under such lease subsequent to the
first date upon which it may be so terminated) or the rent which would otherwise
be required to be paid if such lease is not so terminated. "Attributable Value"
means, as to a Capital Lease Obligation, the principal amount of such Capital
Lease Obligation.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) Property of such Person which is required to be classified and
accounted for as a capital lease or a liability on the face of a balance sheet
of such Person in accordance with generally accepted accounting principles (a
"Capital Lease"). The stated maturity of such obligation shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without payment
of a penalty. The principal amount of such obligation shall be the capitalized
amount thereof that would appear on the face of a balance sheet of such Person
in accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents however designated of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person and any rights (other than debt securities convertible
or exchangeable into an equity interest), warrants or options to acquire an
equity interest in such Person.
"Cash Equivalents" means:
(1) Government Securities maturing, or subject to tender at the option
of the holder thereof, within two years after the date of acquisition
thereof;
(2) time deposits and certificates of deposit of any commercial bank
organized in the United States having capital and surplus in excess of $500
million or a commercial bank organized under the law of any other country
that is a member of the Organization for Economic Cooperation and
Development having total assets in excess of $500 million, or its foreign
currency equivalent at the time, with a maturity date not more than one
year from the date of acquisition;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with
- any bank meeting the qualifications specified in clause (2) above or
- any primary government securities dealer reporting to the Market
Reports Division of the Federal Reserve Bank of New York;
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(4) direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder of such obligation, within one year after the date of acquisition
thereof; provided that, at the time of acquisition, the long-term debt of
such state, political subdivision or public instrumentality has a rating of
A or higher from S&P or A-2 or higher from Moody's, or, if at any time
neither S&P nor Moody's shall be rating such obligations, then an
equivalent rating from such other nationally recognized rating service
acceptable to the trustee;
(5) commercial paper issued by the parent corporation of any
commercial bank organized in the United States having capital and surplus
in excess of $500 million or a commercial bank organized under the laws of
any other country that is a member of the Organization for Economic
Cooperation and Development having total assets in excess of $500 million
or its foreign currency equivalent at the time, and money market
instruments and commercial paper issued by others having one of the three
highest ratings obtainable from either S&P or Moody's, or, if at any time
neither S&P nor Moody's shall be rating such obligations, then from such
other nationally recognized rating service acceptable to the trustee, and
in each case maturing within one year after the date of acquisition;
(6) overnight bank deposits and bankers' acceptances at any commercial
bank organized in the United States having capital and surplus in excess of
$500 million or a commercial bank organized under the laws of any other
country that is a member of the Organization for Economic Cooperation and
Development having total assets in excess of $500 million or its foreign
currency equivalent at the time;
(7) deposits available for withdrawal on demand with a commercial bank
organized in the United States having capital and surplus in excess of $500
million or a commercial bank organized under the laws of any other country
that is a member of the Organization for Economic Cooperation and
Development having total assets in excess of $500 million or its foreign
currency equivalent at the time; and
(8) investments in money market funds substantially all of whose
assets comprise securities of the types described in clauses (1) through
(7).
"Change of Control" has the meaning set forth in the section above entitled
"-- Certain covenants -- Change of control triggering event."
"Change of Control Triggering Event" has the meaning set forth in the
section above entitled "-- Certain covenants -- Change of control triggering
event."
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Capital Ratio" means as of the date of determination the
ratio of (1) the aggregate amount of Debt of WCG and its Restricted Subsidiaries
on a consolidated basis as at the date of determination to (2) the sum of:
(a) WCG's capital in excess of par value on the date of the indenture
determined on a consolidated basis in accordance with generally accepted
accounting principles;
(b) the aggregate Net Proceeds to WCG from the issuance or sale of any
Capital Stock, including Preferred Stock, of WCG other than Disqualified
Stock subsequent to the date of the indenture; and
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(c) the aggregate Net Proceeds from the issuance or sale of Debt of
WCG or any Restricted Subsidiary subsequent to the date of the indenture
convertible or exchangeable into Capital Stock of WCG other than
Disqualified Stock, in each case upon conversion or exchange thereof into
Capital Stock of WCG subsequent to the date of the indenture;
provided, however, that, for purposes of calculation of the
Consolidated Capital Ratio, the Net Proceeds from the issuance or sale of
Capital Stock or Debt described in clause (b) or (c) above shall not be
included to the extent
- such proceeds have been utilized to make a Permitted Investment
under clause (i) of the definition thereof or a Restricted Payment
or
- such Capital Stock or Debt shall have been issued or sold to WCG, a
Subsidiary of WCG or a Plan.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of WCG and its Restricted Subsidiaries for such
period increased by the sum of, to the extent reducing Consolidated Net Income
for such period;
(1) Consolidated Interest Expense of WCG and its Restricted
Subsidiaries for such period; plus
(2) Consolidated Income Tax Expense of WCG and its Restricted
Subsidiaries for such period; plus
(3) consolidated depreciation and amortization expense and any other
non-cash items (other than any such non-cash item to the extent that it
represents an accrual of or reserve for cash expenditures in any future
period) for such period; plus
(4) any penalty paid in such period in connection with redeeming or
retiring any Debt prior to its stated maturity; plus
(5) any change in Deferred Revenue during such period;
provided, however, that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges, if positive, of any
Restricted Subsidiary (calculated separately for such Restricted Subsidiary
in the same manner as provided above for WCG) that is subject to a
restriction which prevents the payment of dividends or the making of
distributions to WCG or another Restricted Subsidiary to the extent of such
restrictions.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of WCG and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with generally accepted accounting principles.
"Consolidated Interest Expense" for any period means the interest expense
included in a consolidated income statement, excluding interest income, of WCG
and its Restricted Subsidiaries for such period in accordance with generally
accepted accounting principles, including without limitation or duplication (or,
to the extent not so included, with the addition of (but in no event adding any
amount that would be eliminated in consolidation in accordance with generally
accepted accounting principles)):
(1) the amortization of Debt discounts and issuance costs, including
commitment fees;
(2) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities;
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(3) net costs with respect to interest rate swap or similar agreements
or foreign currency hedge, exchange or similar agreements, including fees;
(4) Preferred Stock Dividends other than dividends paid in shares of
Preferred Stock that is not Disqualified Stock declared and paid or
payable;
(5) accrued Disqualified Stock Dividends, whether or not declared or
paid;
(6) interest on Debt guaranteed by WCG and its Restricted
Subsidiaries;
(7) the portion of any Capital Lease Obligation or Sale and Leaseback
Transaction paid during such period that is allocable to interest expense
in accordance with generally accepted accounting principles; and
(8) the cash contributions to any Plan to the extent such
contributions are used by such Plan to pay interest or fees to any Person,
other than WCG or a Restricted Subsidiary, in connection with Debt Incurred
by such Plan.
"Consolidated Net Income" for any period means the net income (or loss) of
WCG and its Restricted Subsidiaries for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided that
there shall be excluded from such net income (or loss):
(a) for purposes of the covenant described in the section above
entitled "-- Certain covenants -- Limitation on restricted payments" only,
the net income (or loss) of any Person acquired by WCG or a Restricted
Subsidiary in a pooling-of-interests transaction for any period prior to
the date of such transaction;
(b) the net income (or loss) of any Person that is not a Restricted
Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to WCG or a Restricted Subsidiary by such
Person during such period (except, for purposes of the covenant described
under "-- Certain covenants -- Limitation on restricted payments" only, to
the extent such dividends or distributions have been subtracted from the
calculation of the amount of Investments to support the actual making of
Investments);
(c) gains or losses realized upon the sale or other disposition of any
Property of WCG or its Restricted Subsidiaries that is not sold or disposed
of in the ordinary course of business (it being understood that Permitted
Telecommunications Asset Dispositions shall be considered to be in the
ordinary course of business);
(d) all extraordinary gains and extraordinary losses, determined in
accordance with generally accepted accounting principles;
(e) the cumulative effect of changes in accounting principles;
(f) non-cash gains or losses resulting from fluctuations in currency
exchange rates;
(g) any non-cash expense related to the issuance to employees or
directors of WCG or any Restricted Subsidiary of (1) options to purchase
Capital Stock of WCG or such Restricted Subsidiary or (2) other
compensatory rights; and
(h) with respect to a Restricted Subsidiary that is not a Wholly Owned
Subsidiary any aggregate net income (or loss) in excess of WCG's or any
Restricted Subsidiary's pro rata share of the net income (or loss) of such
Restricted Subsidiary that is not a Wholly Owned Subsidiary, but such
excess shall be excluded only to the extent that such minority interest in
net income (or loss) is not otherwise excluded in determining consolidated
net income in accordance with generally accepted accounting principles;
provided further that there shall
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further be excluded therefrom the net income (but not net loss) of any
Restricted Subsidiary that is subject to a restriction which prevents the
payment of dividends or the making of distributions to WCG or another
Restricted Subsidiary to the extent of such restriction; provided further,
that at the time any restriction referred to in the immediately preceding
proviso ceases to be effective, all of such net income previously excluded
from Consolidated Net Income by reason of such proviso shall be included
cumulatively in Consolidated Net Income in the accounting period during
which such restriction ceases to be effective.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person, determined on a consolidated basis in accordance with generally
accepted accounting principles, less (to the extent not otherwise accounted for
as a liability) amounts attributable to Disqualified Stock of such Person.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Subsidiaries after deducting
from such total amount of assets all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, which in each
case under generally accepted accounting principles would be included on such
consolidated balance sheet.
"Credit Facilities" means one or more credit agreements, loan agreements,
fiscal agency agreements (other than fiscal agency agreements relating to Debt
Securities) or similar facilities, secured or unsecured, providing for working
capital advances, revolving credit loans, term loans and/or letters of credit,
including any Qualified Receivable Facility, entered into from time to time by
WCG and its Restricted Subsidiaries, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed with such
credit facilities, as the same may be amended, supplemented, modified, restated
or replaced from time to time.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent:
(1) every obligation of such Person for money borrowed;
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of Property;
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person or for which such Person is otherwise obligated
to make payment;
(4) every obligation of such Person issued or assumed as the deferred
purchase price of Property or services, including securities repurchase
agreements;
(5) every Capital Lease Obligation of such Person;
(6) all obligations to redeem or repurchase Disqualified Stock issued
by such Person and all Attributable Value in respect of Sale and Leaseback
Transactions entered into by such Person;
(7) the liquidation preference of any Preferred Stock, other than
Disqualified Stock, which is covered by the preceding clause (6), issued by
any Restricted Subsidiary of such Person;
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(8) every obligation under Interest Rate or Currency Protection
Agreements of such Person; and
(9) every obligation of the type referred to in clauses (1) through
(8) of another Person and all dividends of another Person the payment of
which, in either case, such Person has Guaranteed.
The "amount" or "principal amount" of Debt at any time of determination as
used here represented by (a) any Debt issued at a price that is less than the
principal amount at maturity thereof, shall be, except as otherwise set forth
here, the Accreted Value of such Debt at such time or (b) in the case of any
Receivables sale constituting Debt, the amount of the unrecovered purchase price
paid (that is, the amount paid for Receivables that has not been actually
recovered from the collection of such Receivables) by the purchaser (other than
WCG or a Wholly Owned Restricted Subsidiary of WCG) thereof.
The amount of Debt represented by an obligation under an Interest Rate or
Currency Protection Agreement shall be equal to
(x) zero if such obligation has been Incurred pursuant to clause (10)
of paragraph (b) of the covenant described in the section above entitled
"-- Certain covenants -- Limitation on consolidated debt" or
(y) the notional amount of such obligation if not Incurred pursuant to
such clause.
Despite the above, "Debt" does not include trade accounts payable or
accrued liabilities arising in the ordinary course of business.
"Debt Securities" means any debt securities, including any Guarantee of
such securities, issued by WCG or any Domestic Restricted Subsidiary in
connection with an underwritten public offering or an underwritten private
placement for resale in accordance with Rule 144A and/or Regulation S, in each
case, not rated or rated below Baa3 by Moody's or BBB- by S&P, or an equivalent
below investment grade rating by any successor Rating Agency.
"Default" means any event, act or condition the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Deferred Revenue" means amounts appearing as a liability on the financial
statements of WCG prepared in accordance with generally accepted accounting
principles as deferred revenue, provided that, in the case of any increase in
deferred revenue, only to the extent of cash received in connection therewith.
"Designation" has the meaning set forth in the section above entitled
"-- Certain covenants -- Limitations on designations of unrestricted
subsidiaries."
"Designation Amount" has the meaning set forth in the section above
entitled "-- Certain covenants -- Limitations on designations of unrestricted
subsidiaries."
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms, or by the terms of any security into which it is
convertible or for which it is exchangeable, or upon the happening of any event,
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof, in whole or in
part, on or prior to the final Stated Maturity of the notes; provided, however,
that any Preferred Stock which would not constitute Disqualified Stock but for
provisions of such Preferred Stock giving holders thereof the right to require
WCG to repurchase or redeem such Preferred Stock upon the occurrence of a change
of control or asset disposition occurring prior to the final Stated Maturity of
the notes shall not constitute Disqualified Stock if the change of control or
asset
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disposition provisions applicable to such Preferred Stock are no more favorable
to the holders of such Preferred Stock than the provisions applicable to the
notes contained in the covenant described in the sections above entitled
"-- Certain covenants -- Change of control triggering event" and "-- Limitations
on asset dispositions" and such Preferred Stock specifically provides that WCG
will not repurchase or redeem any such stock pursuant to such provisions prior
to WCG's repurchase of such notes as are required to be repurchased pursuant to
the covenant described in the sections above entitled "-- Certain
covenants -- Change of control triggering event" and "-- Limitations on asset
dispositions"; provided further, that such Preferred Stock will not be deemed
Disqualified Stock if it is redeemable by exchange for or through the issuance
of Capital Stock (other than Disqualified Stock).
"Disqualified Stock Dividends" means all dividends with respect to
Disqualified Stock of WCG held by Persons other than a Wholly Owned Restricted
Subsidiary. The amount of any such dividend shall be equal to the quotient of
such dividend divided by the difference between one and the maximum statutory
federal income tax rate (expressed as a decimal number between 1 and 0)
applicable to WCG for the period during which such dividends were paid.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of WCG
- that was formed under the laws of the United States of America or any
state, district or territory thereof or the District of Columbia or
- 50% or more of the assets of which are located in the United States or
any territory thereof.
"Domestic Restricted Subsidiary Guarantee" means a supplemental indenture
to the indenture in form satisfactory to the trustee, providing for an
unconditional Guarantee by a Domestic Restricted Subsidiary of payment in full
of the principal of, premium, if any, and interest on the notes. Any such
Domestic Restricted Subsidiary Guarantee shall not be subordinate to any Debt of
the Domestic Restricted Subsidiary providing the Domestic Restricted Subsidiary
Guarantee.
"Eligible Receivables" means, at any time, Receivables of WCG and its
Restricted Subsidiaries, as evidenced on the most recent quarterly consolidated
balance sheet of WCG as at a date at least 45 days prior to such time, arising
in the ordinary course of business of WCG or any Restricted Subsidiary.
"Event of Default" has the meaning set forth in the section below entitled
"-- Events of default."
"Excess Proceeds" has the meaning set forth in the section above entitled
"-- Certain covenants -- Limitation on asset dispositions."
"Existing International Joint Ventures" means ATL, PowerTel, MetroCom and
Algar.
"Fair Market Value" means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
indenture, and except in the case of Permitted Telecommunications Asset
Dispositions in the ordinary course of business, Fair Market Value shall be
determined by the board of directors of WCG acting in good faith and shall be
evidenced by a resolution of the board of directors of WCG.
"Government Securities" means direct obligations of, or obligations fully
and unconditionally guaranteed or insured by, the United States of America or
any agency or instrumentality thereof for the payment of which obligations or
guarantee the full faith and credit of the United States is
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pledged and which are not callable or redeemable at the issuer's option (unless,
for purposes of the definition of "Cash Equivalents" only, the obligations are
redeemable or callable at a price less than the purchase price paid by WCG or
the applicable Restricted Subsidiary, together with all accrued and unpaid
interest, if any, on such Government Securities).
"Guarantee" by any Person means any obligation, direct or indirect,
contingent or otherwise, of such Person guaranteeing, or having the economic
effect of guaranteeing, any Debt of any other Person in any manner, whether
directly or indirectly.
"Guarantor" means a Domestic Restricted Subsidiary of WCG that has executed
a Domestic Restricted Subsidiary Guarantee.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred," "Incurrable" and "Incurring"
shall have meanings correlative to the foregoing); provided, however, that
- a change in generally accepted accounting principles that results in an
obligation of such Person that exists at such time becoming Debt shall
not be deemed an Incurrence of such Debt and
- neither the accrual of interest nor the amortization or accretion of
original issue discount
shall be deemed an Incurrence of Debt.
Debt otherwise incurred by a Person before it becomes a Subsidiary of WCG
shall be deemed to have been Incurred at the time at which it becomes a
Restricted Subsidiary.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Invested Capital" means the sum of:
(a) $625 million;
(b) the aggregate Net Proceeds received by WCG from the issuance or
sale of any Capital Stock, including Preferred Stock, of WCG, but excluding
Disqualified Stock, subsequent to the date of the indenture and from the
over-allotment option; and
(c) the aggregate Net Proceeds from the issuance or sale of Debt of
WCG or any Restricted Subsidiary subsequent to the date of the indenture
convertible or exchangeable into Capital Stock of WCG other than
Disqualified Stock, in each case upon conversion or exchange thereof into
Capital Stock of WCG subsequent to the date of the indenture;
provided, however, that the Net Proceeds from the issuance or sale of
Capital Stock or Debt described in clause (b) or (c) shall be excluded from
any computation of Invested Capital to the extent (1) utilized to make a
Restricted Payment or (2) such Capital Stock or Debt shall have been issued
or sold to WCG, a Subsidiary of WCG or a Plan.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other Property to others or payments for Property or services for the account
or use of others, or otherwise) to, purchase, redemption, retirement or
acquisition of Capital Stock, bonds, notes, debentures or other
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securities or evidence of Debt issued by, or Incurrence of, or payment on, a
Guarantee of any obligation of, any other Person; provided that Investments
shall exclude
- commercially reasonable extensions of trade credit,
- trade receivables arising in the ordinary course of business; provided,
that such receivables would be recorded as assets of such Person in
accordance with generally accepted accounting principles,
- Investments received in connection with the bankruptcy or reorganization
of suppliers and customers or in good faith bona fide settlement of
delinquent ordinary course of business trade receivables of customers,
- endorsements for collection or deposit in the ordinary course of business
by such Person of bank drafts and similar negotiable instruments of such
other Person received as payment for ordinary course of business trade
receivables, and
- any Investment that is less than $100,000.
The amount, as of any date of determination, of any Investment shall be the
original cost of such Investment, plus the cost of all additions, as of such
date, thereto and minus the amount, as of such date, of any portion of such
Investment repaid to such Person in cash as a repayment of principal or a return
of capital, as the case may be (except to the extent such repaid amount has been
included in Consolidated Net Income to support the actual making of Restricted
Payments), but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
In determining the amount of any Investment involving a transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"Joint Venture" means a Person in which WCG or a Restricted Subsidiary
holds, directly or indirectly, not more than 50% of the shares of Voting Stock.
"Lien" means, with respect to any Property, any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest, lien,
charge, easement (other than any easement not materially impairing usefulness),
encumbrance, preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect to such Property
(including any Capital Lease Obligation, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing and any Sale and Leaseback Transaction). For purposes of this
definition the sale, lease, conveyance or other transfer by WCG or any of its
Subsidiaries of, including the grant of indefeasible rights of use or equivalent
arrangements with respect to, dark or lit communications fiber capacity or
communications conduit shall not constitute a Lien.
"Make-Whole Amount" means, with respect to any note, an amount equal to the
excess, if any, of:
(1) the present value of the remaining principal, premium and interest
payments that would be payable with respect to such note if such note were
redeemed on ________, 200_, computed using a discount rate equal to the
Treasury Rate plus 50 basis points; over
(2) the outstanding principal amount of such note.
"Make-Whole Average Life" means, with respect to any date of redemption of
notes, the number of years (calculated to the nearest one-twelfth) from such
redemption date to ________, 200_.
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"Make-Whole Price" means, with respect to any note, the greater of (1) the
sum of the principal amount of such note and the Make-Whole Amount with respect
to such note and (2) the redemption price of such note on ________, 200_.
"Moody's" means Moody's Investors Service, Inc. or, if Moody's Investors
Service, Inc. shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if there is no successor Person, then "Moody's" shall mean any other
national recognized rating agency, other than S&P, that rates debt securities
having a maturity at original issuance of at least one year and that shall have
been designated by WCG.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or cash equivalents received (including amounts received by way of sale or
discounting of any note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Debt or other obligations relating to such Property) therefrom by
such Person, net of:
(1) all legal, title and recording taxes, expenses and commissions and
other fees and expenses (including appraisals, brokerage commissions and
investment banking fees) Incurred and all federal, state, provincial,
foreign and local taxes required to be accrued as a liability as a
consequence of such Asset Disposition;
(2) all payments made by such Person or its Subsidiaries on any Debt
which is secured by such Property in accordance with the terms of any Lien
upon or with respect to such Property or which must by the terms of such
Lien, or in order to obtain a necessary consent to such Asset Disposition
or by applicable law, be repaid out of the proceeds from such Asset
Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or Joint Ventures of such Person
as a result of such Asset Disposition; and
(4) appropriate amounts to be provided by such Person or any
Subsidiary of such Person, as the case may be, as a reserve in accordance
with generally accepted accounting principles against any liabilities
associated with such Property and retained by such Person or any Subsidiary
of such Person, as the case may be, after such Asset Disposition, including
liabilities under any indemnification obligations and severance and other
employee termination costs associated with such Asset Disposition, in each
case as determined by the board of directors of such Person, in its
reasonable good faith judgment evidenced by a resolution of the board of
directors of such Person filed with the trustee; provided, however, that
any reduction in such reserve within twelve months following the
consummation of such Asset Disposition will be, for all purposes of the
indenture and the notes, treated as a new Asset Disposition at the time of
such reduction with Net Available Proceeds equal to the amount of such
reduction; provided further, however, that, if any consideration for a
transaction, which would otherwise constitute Net Available Proceeds, is
required to be held in escrow pending determination of whether a purchase
price adjustment will be made, at such time as such portion of the
consideration is released to such Person or its Restricted Subsidiary from
escrow, such portion shall be treated for all purposes of the indenture and
the notes as a new Asset Disposition at the time of, but not before, such
release from escrow with Net Available Proceeds equal to the amount of such
portion of consideration released from escrow.
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"Net Proceeds" means the aggregate net proceeds (including the Fair Market
Value of non-cash proceeds constituting Capital Stock in or of a person engaged
in a Telecommunications Business or assets of a type generally used in a
Telecommunications Business) received by a Person from the sale of Capital Stock
or Debt after payment of out-of-pocket expenses, commissions and discounts
incurred and net of taxes paid or payable in connection with the sale of such
Capital Stock or Debt.
"Permitted Holders" means
- The Williams Companies, Inc. and any of its Subsidiaries,
- any corporation the outstanding voting power of the Capital Stock of
which is beneficially owned, directly or indirectly, by the stockholders
of WCG in substantially the same proportions as their ownership of the
voting power of the Capital Stock of WCG,
- any underwriter during the period engaged in a firm commitment
underwriting on behalf of WCG with respect to the shares of Capital Stock
being underwritten or
- WCG or any Subsidiary of WCG.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and not for purposes of
speculation and which, in the case of an interest rate agreement, shall have a
notional amount no greater than the principal amount at maturity due with
respect to the Debt being hedged thereby.
"Permitted Investments" means:
(a) Cash Equivalents;
(b) investments in prepaid expenses;
(c) negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits;
(d) loans, advances or extensions of credit to employees, officers and
directors of WCG or any Restricted Subsidiary made in the ordinary course
of business and consistent with past practice or in connection with
employee benefits agreements or arrangements approved by the board of
directors of WCG;
(e) obligations under Permitted Interest Rate or Currency Protection
Agreements;
(f) Investments received as consideration for, or customary
indemnities given in connection with, Asset Dispositions pursuant to and in
compliance with the covenant described above under "-- Certain
covenants -- Limitation on asset dispositions," and for Permitted
Telecommunication Asset Dispositions;
(g) Investments in WCG or any Restricted Subsidiary, or in any Person
as a result of which such Person becomes a Restricted Subsidiary;
(h) Investments made prior to the date of the indenture;
(i) Investments made after the date of the indenture in Persons
engaged in the Telecommunications Business in an aggregate amount as of the
date of determination not to exceed Invested Capital as of the date of
determination;
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(j) Investments deemed to have been made as a result of the
acquisition of a Person that at the time of such acquisition held
instruments constituting Investments that were not acquired in
contemplation of the acquisition of such Person;
(k) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers or in good faith bona fide
settlement of delinquent ordinary course of business trade receivables of
customers;
(l) Investments where all or a portion of the consideration provided
is Capital Stock of WCG, other than Disqualified Stock, but the same shall
constitute a Permitted Investment only to the extent of such consideration
provided in the form of such Capital Stock;
(m) Investments in Existing International Joint Ventures; provided
that the aggregate amount of such Investments made after the date of the
indenture does not exceed $100 million as of the date of determination; and
(n) additional Investments in an aggregate amount not to exceed $200
million.
"Permitted Liens" means:
(a) Liens for taxes, assessments, governmental charges, levies or
claims which are not yet delinquent or which are being contested in good
faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with generally
accepted accounting principles shall have been made for such Liens;
(b) other Liens incidental to the conduct of WCG's and its Restricted
Subsidiaries' businesses or the ownership of its Property not securing any
Debt, and which do not in the aggregate materially detract from the value
of WCG's and its Restricted Subsidiaries' Property when taken as a whole,
or materially impair the use thereof in the operation of its business;
(c) Liens, pledges and deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of statutory obligations;
(d) Liens, pledges or deposits made to secure the performance of
tenders, bids, leases, public or statutory obligations, sureties, stays,
appeals, indemnities, performance or other similar bonds and other
obligations of like nature incurred in the ordinary course of business
,exclusive of obligations for the payment of borrowed money, the obtaining
of advances or credit or the payment of the deferred purchase price of
Property and which do not in the aggregate materially impair the use of
Property in the operation of the business of WCG and the Restricted
Subsidiaries taken as a whole;
(e) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially
detract from the value of the Property subject thereto or materially
interfere with the ordinary conduct of the business of WCG or its
Restricted Subsidiaries;
(f) any interest or title of a lessor in the Property subject to any
lease other than a Capital Lease;
(g) Liens with respect to assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to WCG to secure Debt owing to WCG;
(h) Liens arising out of judgments or awards against WCG or any
Restricted Subsidiary of WCG with respect to which WCG or such Restricted
Subsidiary is
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prosecuting an appeal or proceeding for review and WCG or such Restricted
Subsidiary is maintaining adequate reserves in accordance with generally
accepted accounting principles;
(i) Liens arising by operation of law in connection with judgments,
only to the extent, for an amount and for a period not resulting in an
Event of Default with respect thereto;
(j) Liens securing Permitted Interest Rate or Currency Protection
Agreement; and
(k) Liens in favor of the trustee arising under the indenture.
"Permitted Telecommunications Asset Disposition" means the transfer,
conveyance, sale, lease or other disposition of an interest in or capacity on
optical fiber and/or conduit and any related equipment used in a Segment of
WCG's communications network, whether or not in the ordinary course of business;
provided that after giving effect to such disposition, WCG would retain at least
(1) with respect to any Segment constructed by, for or on behalf of
WCG or any of its subsidiaries or affiliates,
- 24 optical fibers per route mile on such Segment as deployed at the
time of such disposition; or
- 12 optical fibers and one empty conduit per route mile on such
Segment as deployed at such time; and
(2) with respect to any Segment purchased or leased from third
parties, the lesser of
- 50% of the optical fibers per route mile originally purchased on
such Segment;
- 24 optical fibers per route mile on such Segment as deployed at the
time of such disposition; or
- 12 optical fibers and one empty conduit per route mile on such
Segment as deployed at the time of such disposition.
"Person" means any individual, corporation, company, partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"Plan" means any employee benefit plan, retirement plan, deferred
compensation plan, restricted stock plan, health, life, disability or other
insurance plan or program, employee stock purchase plan, employee stock
ownership plan, pension plan, stock option plan or similar plan or arrangement
of WCG or any Restricted Subsidiary of WCG, or any successor plan thereof, and
"Plans" shall have a correlative meaning.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding-up of such Person, to shares of Capital
Stock of any other class of such Person.
"Preferred Stock Dividends" means all dividends with respect to Preferred
Stock of Restricted Subsidiaries held by Persons other than WCG or a Wholly
Owned Restricted Subsidiary. The amount of any such dividend shall be equal to
the quotient of such dividend divided by the difference between one and the
maximum statutory federal income rate (expressed as a decimal number between 1
and 0 and determined in accordance with generally accepted accounting
principles) applicable to the issuer of such Preferred Stock for the period
during which such dividends were paid.
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"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the indenture, the
value of any Property shall be its Fair Market Value.
"Proportionate Interest" in any issuance of Capital Stock of a Restricted
Subsidiary means a ratio (1) the numerator of which is the aggregate amount of
Capital Stock of such Restricted Subsidiary beneficially owned by WCG and the
Restricted Subsidiaries and (2) the denominator of which is the aggregate amount
of Capital Stock of such Restricted Subsidiary beneficially owned by all
Persons, excluding, in the case of this clause (2), any Investment made in
connection with such issuance.
"Purchase Money Debt" means Debt (including Acquired Debt and Capital Lease
Obligations, mortgage financings and purchase money obligations) incurred for
the purpose of financing all or any part of the cost of construction,
installation, acquisition, lease, development or improvement by WCG or any
Restricted Subsidiary of any Telecommunications Assets of WCG or any Restricted
Subsidiary and including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
"Qualified Receivable Facility" means Debt of WCG or any Subsidiary
Incurred from time to time pursuant to either
- credit facilities secured by Receivables or
- Receivables purchase facilities
in each case, including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
"Rating Agencies" mean Moody's and S&P.
"Rating Date" means the earlier of the date of public notice of the
occurrence of a Change of Control or of the intention of WCG to effect a Change
of Control.
"Rating Decline" shall be deemed to have occurred if, no later than 90 days
after the Rating Date (which period shall be extended so long as the rating of
the notes is under publicly announced consideration for possible downgrade by
any of the Rating Agencies), either of the Rating Agencies assigns or reaffirms
a rating to the notes that is lower than the applicable rating of the notes on
the date of the indenture or the equivalent thereof. If, prior to the Rating
Date, either of the ratings assigned to the notes by the Rating Agencies is
lower than the applicable rating of the notes on the date of the indenture, then
a Rating Decline will be deemed to have occurred if such rating is not changed
by the 90th day following the Rating Date. A downgrade within rating categories,
as well as between rating categories, will be considered a Rating Decline.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money and proceeds
and products thereof in each case generated in the ordinary course of business.
"Restricted Subsidiary" means
- a Subsidiary of WCG or of a Restricted Subsidiary that has not been
designated or classified as an Unrestricted Subsidiary pursuant to and in
compliance with the section above entitled "-- Certain
covenants -- Limitation on designations of unrestricted subsidiaries" and
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- an Unrestricted Subsidiary that is redesignated as a Restricted
Subsidiary pursuant to such covenant.
"Returned Investments" mean, with respect to all Investments made in
Unrestricted Subsidiaries, the aggregate amount of all payments made in respect
of such Investments, other than interest, dividends or other distributions not
in the nature of a return or repurchase of capital or a repayment of principal,
that have been paid or returned, without restriction, to WCG or any Restricted
Subsidiary.
"Revocation" has the meaning set forth in the section above entitled
"-- Certain covenants -- limitations on designations of unrestricted
subsidiaries."
"S&P" means Standard & Poor's Ratings Service or, if Standard & Poor's
Ratings Service shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if there is no successor Person, then "S&P" shall mean any other national
recognized rating agency, other than Moody's, that rates debt securities having
a maturity at original issuance of at least one year and that shall have been
designated by WCG.
"Sale and Leaseback Transaction" of any Person means any direct or indirect
arrangement pursuant to which any Property is sold or transferred by such Person
or a Restricted Subsidiary of such person and is thereafter leased back from the
purchaser or transferee thereof by such Person or one of its Restricted
Subsidiaries. The stated maturity of such arrangement shall be the date of the
last payment of rent or any other amount due under such arrangement prior to the
first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Segment" means
- with respect to WCG's intercity network, the through-portion of such
network between two local networks and
- with respect to a local network of WCG, the entire through-portion of
such network, excluding the spurs which branch off the through-portion.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of WCG within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
"Stated Maturity" when used with respect to a note or any installment of
interest on such note, means the date specified in such note as the fixed date
on which the principal of such note or such installment of interest is due and
payable, including pursuant to any mandatory redemption provision, but excluding
any provision providing for the repurchase of such note at the option of the
holder of such note upon the happening of any contingency beyond the control of
WCG unless such contingency has occurred.
"Subordinated Debt" means Debt of WCG (a) that is not secured by any Lien
on or with respect to any Property now owned or acquired after the date of the
indenture and (b) as to which the payment of principal of, and premium, if any,
and interest and other payment obligations in respect of such Debt shall be
subordinate to the prior payment in full in cash of the notes to at least the
following extent:
(1) no payments of principal of, or premium, if any, or interest on or
otherwise due, including by acceleration or for additional amounts, in
respect of, or repurchases, redemptions or other retirements of, such Debt
may be permitted for so long as any default, after giving effect to any
applicable grace periods, in the payment of principal, or premium, if any,
or interest on the notes exists, including as a result of acceleration;
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(2) if any other Default exists with respect to the notes, upon notice
by holders of 25% or more in aggregate principal amount of the notes to the
trustee, the trustee shall have the right to give notice to WCG and the
holders of such Debt, or trustees or agents therefor, of a payment
blockage, and thereafter no payments of such Debt may be made for a period
of 179 days from the date of such notice; provided that not more than one
such payment blockage notice may be given in any consecutive 360-day
period, irrespective of the number of defaults with respect to the notes
during such period;
(3) if payment of such Debt is accelerated when any notes are
outstanding, no payments of such Debt may be made until three Business Days
after the trustee receives notice of such acceleration and, thereafter,
such payments may only be made to the extent the terms of such Debt permit
payment at that time; and
(4) such Debt may not
(x) provide for payments of principal of such Debt at the stated
maturity of such Debt or by way of a sinking fund applicable to such
Debt or by way of any mandatory redemption, defeasance, retirement or
repurchase of such Debt by WCG, including any redemption, retirement or
repurchase which is contingent upon events or circumstances but
excluding any retirement required by virtue of acceleration of such Debt
upon an event of default thereunder, in each case prior to the final
Stated Maturity of the notes or
(y) permit redemption or other retirement, including pursuant to an
offer to purchase made by WCG, of such Debt at the option of the holder
of such Debt prior to the final Stated Maturity of the notes,
other than, in the case of clause (x) or (y), any such payment,
redemption or other retirement, including pursuant to an offer to
purchase made by WCG, which is conditioned upon
- a change of control of WCG pursuant to provisions substantially
similar to those described in the section above entitled
"-- Certain covenants -- Change of control triggering event" (and
which shall provide that such Debt will not be repurchased
pursuant to such provisions prior to WCG's repurchase of the notes
required to be repurchased by WCG pursuant to the provisions
described in the section above entitled "-- Certain
covenants -- Change of control triggering event") or
- a sale or other disposition of assets pursuant to provisions
substantially similar to those described in the section above
entitled "-- Certain covenants -- Limitation on asset
dispositions" (and which shall provide that such Debt will not be
repurchased pursuant to such provisions prior to WCG's repurchase
of the notes required to be repurchased by WCG pursuant to the
provision described in the section above entitled "-- Certain
covenants -- Limitation on asset dispositions").
"Subsidiary" of any Person means:
- a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly,
by such Person or by one or more other Subsidiaries of such Person
or by such Person and one or more Subsidiaries of such Person; or
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- any other Person, other than a corporation, in which such Person, or
one or more other Subsidiaries of such Person or such Person and one
or more other Subsidiaries of such Person, directly or indirectly,
has at least a majority ownership and power to direct the policies,
management and affairs thereof.
"Telecommunications Assets" means:
(a) any Property, other than cash, cash equivalents and securities, to
be owned or used by WCG or any Restricted Subsidiary and used in the
Telecommunications Business;
(b) for purposes of the covenants described in the sections above
entitled "-- Certain covenants -- Limitation on consolidated debt" and
"-- Limitation on liens" only, Capital Stock of any Person; or
(c) for all other purposes of the indenture, Capital Stock of a Person
that becomes a Restricted Subsidiary as a result of the acquisition of such
Capital Stock by WCG or another Restricted Subsidiary from any Person other
than an Affiliate of WCG;
provided, however, that, in the case of clause (b) or (c), such Person
is primarily engaged in the Telecommunications Business.
"Telecommunications Business" means the business of:
(1) transmitting, or providing services relating to the transmission
of, voice, video, data through owned or leased transmission facilities or
the right to use such facilities;
(2) constructing, creating, developing, operating, managing or
marketing communications networks, related network transmission equipment,
software and other devices for use in a communications business;
(3) computer outsourcing, data center management, computer systems
integration, reengineering of computer software for any purpose, including,
without limitation, for the purposes of porting computer software from one
operating environment or computer platform to another or to address issues
commonly referred to as "Year 2000 issues";
(4) constructing, managing or operating fiber optic telecommunications
networks and leasing capacity on those networks to third parties;
(5) the sale, resale, installation or maintenance of communications
systems and equipment; or
(6) evaluating, participating or pursuing any other activity or
opportunity that is primarily related to those identified in (1), (2), (3),
(4) or (5) above;
provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the board of
directors of WCG.
"Treasury Rate" means, at any date of determination, the yield to maturity
as of such date (as compiled by and published in the most recent Federal Reserve
Statistical Release H.15(519), which has become publicly available at least two
business days prior to the date of the redemption notice for which such
computation is being made, or if such Statistical Release is no longer
published, as reported in any publicly available source of similar market data)
of United States Treasury securities with a constant maturity most nearly equal
to the Make-Whole Average Life; provided however, that if the Make-Whole Average
Life is not equal to the constant maturity of the United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-
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twelfth of a year) from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the Make-Whole
Average Life is less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant maturity of one year
shall be used.
"Unrestricted Subsidiary" means
- any Subsidiary of an Unrestricted Subsidiary and
- any Subsidiary of WCG designated as such pursuant to and in
compliance with the section above entitled "-- Certain
covenants -- Limitation on designations of unrestricted
subsidiaries" and not thereafter redesignated as a Restricted
Subsidiary as permitted pursuant to such section.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors, or persons performing
similar functions, of such Person, whether at all times or only for so long as
no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person,
all of the outstanding Voting Stock or other ownership interests, other than
directors' qualifying shares, of which shall at the time be owned by such Person
or by one or more Wholly Owned Subsidiaries of such Person or by such Person and
one or more Wholly Owned Subsidiaries of such Person.
"Williams Intercompany Arrangements" means the Williams note and any other
documents, instruments, agreements and arrangements between WCG and any
Restricted Subsidiaries, between any Restricted Subsidiaries or between WCG or
any Restricted Subsidiary, on the one hand, and The Williams Companies, Inc. or
any of its Subsidiaries, on the other hand, in effect on the date of the
indenture, as such documents, instruments, agreements and arrangements may be
amended, modified or supplemented, but only to the extent any such amendments,
modifications or supplements are approved by a majority of the members of the
board of directors of WCG who are disinterested with respect to such amendment,
modification or supplement.
EVENTS OF DEFAULT
The following will be Events of Default under the indenture:
(a) failure to pay principal of, or premium, if any, on, any note when
due;
(b) failure to pay any interest on any note when due, continued for 30
days;
(c) default in the payment of principal of and interest on notes
required to be purchased pursuant to an offer to purchase the notes in
accordance with the indenture as described in the section above entitled
"-- Certain covenants -- Change of control triggering event" when due and
payable;
(d) failure to perform or comply with the provisions described in the
section above entitled "-- Mergers, consolidations and certain sales of
assets";
(e) failure to perform any other covenant or agreement of WCG under
the indenture or the notes continued for 60 days after written notice to
WCG by the trustee or holders of at least 25% in aggregate principal amount
of the outstanding notes;
(f) default under the terms of any instrument evidencing or securing
Debt of WCG or any Restricted Subsidiary having an outstanding principal
amount of $25 million or its foreign currency equivalent at the time
individually or in the aggregate which default results
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in the acceleration of the payment of such indebtedness or constitutes the
failure to pay such indebtedness when due (after expiration of any
applicable grace period);
(g) the rendering of a final judgment or judgments, not subject to
appeal or covered by insurance, against WCG or any Restricted Subsidiary in
an aggregate amount in excess of $25 million or its foreign currency
equivalent at the time and which shall not be waived, satisfied or
discharged for any period of 45 consecutive days after the date on which
the right to appeal has expired;
(h) any Domestic Restricted Subsidiary Guarantee ceases to be in full
force and effect, other than in accordance with the terms of such Domestic
Restricted Subsidiary Guarantee, or any Guarantor denies or disaffirms its
obligations under its Domestic Restricted Subsidiary Guarantee; and
(i) certain events of bankruptcy, insolvency or reorganization
affecting WCG or any Significant Subsidiary.
If an Event of Default has occurred, which has not been cured or waived,
the trustee will exercise its rights and powers under the indenture, and use the
same degree of care and skill in its exercise, as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs. At
all other times, the trustee will not be under any obligation to exercise any of
its rights or powers under the indenture at the request or direction of any of
the holders of notes, unless such holders shall have offered to the trustee
reasonable indemnity. Subject to this indemnification, the holders of a majority
in aggregate principal amount of the outstanding notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee.
If any Event of Default (other than an Event of Default described in clause
(i) above) shall occur and be continuing, either the trustee or the holders of
at least 25% in aggregate principal amount of the outstanding notes may
accelerate the maturity of all notes. After such acceleration, but before a
judgment or decree based on acceleration, the holders of a majority in aggregate
principal amount of the outstanding notes may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal, have been cured or waived. If an Event of
Default specified in clause (i) above occurs, the outstanding notes will
automatically become immediately due and payable without any declaration or
other act on the part of the trustee or any holder. For information as to waiver
of defaults, see the section below entitled "-- Amendment, supplement and
waiver."
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy under the indenture, unless such
holder shall have previously given to the trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding notes shall have made written request and
offered indemnity satisfactory to the trustee to institute such proceeding as
trustee, and the trustee shall not have received from the holders of a majority
in aggregate principal amount of the outstanding notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a holder of
a note for enforcement of payment of the principal of and premium, if any, or
interest on such note on or after the respective due dates expressed in such
note.
WCG shall deliver to the trustee written notice in the form of an officers'
certificate, within 30 days after the occurrence, of any event which with the
giving of notice and the lapse of time would become an Event of Default, its
status and what action WCG is taking or proposes to take with respect to such
event. WCG also will be required to deliver to the trustee annually a
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statement as to the performance by WCG of certain of its obligations under the
indenture and as to any default in such performance. In the event that WCG shall
fail to timely notify the trustee of a default or Event of Default, this failure
will be deemed to be cured if the default or Event of Default is cured.
AMENDMENT, SUPPLEMENT AND WAIVER
WCG, the Guarantors, if any, and the trustee may, at any time and from time
to time, without notice to or consent of any holders of notes, enter into one or
more indentures supplemental to the indenture:
(1) to evidence the succession of another Person to WCG and the
assumption by such successor of the covenants of WCG in the indenture and
the notes;
(2) to add to the covenants of WCG, for the benefit of the holders, or
to surrender any right or power conferred upon WCG by the indenture;
(3) to add any additional Events of Default;
(4) to provide for uncertificated notes in addition to or in place of
certificated notes;
(5) to evidence and provide for the acceptance of appointment under
the indenture of a successor trustee;
(6) to secure the notes;
(7) to comply with the Trust Indenture Act;
(8) to add additional Guarantees with respect to the notes or to
release Guarantors from Domestic Restricted Subsidiary Guarantees as
provided by the terms of the indenture; or
(9) to cure any ambiguity in the indenture, to correct or supplement
any provision in the indenture which may be inconsistent with any other
provision therein or to add any other provision with respect to matters or
questions arising under the indenture;
provided such actions shall not adversely affect the interests of the
holders in any material respect.
With the consent of the holders of at least a majority in principal amount
of the outstanding notes, WCG, the Guarantors, if any, and the trustee may enter
into one or more supplemental indentures for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the indenture or modifying in any manner the rights of the holders; except that
no such supplemental indenture shall, without the consent of the holder of each
outstanding note:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any note, or reduce the principal amount of any note or the
interest on any note that would be due and payable upon the Stated Maturity
of any note, or change the place of payment where, or the coin or currency
in which, any note or any premium or interest on any note is payable, or
impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity of any note;
(2) reduce the percentage in principal amount of the outstanding
notes, the consent of whose holders is necessary for any such supplemental
indenture or required for any waiver of compliance with certain provisions
of the indenture or certain Defaults thereunder;
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(3) subordinate in right of payment, or otherwise subordinate, the
notes to any other Debt;
(4) except as otherwise required by the indenture, release any
security interest that may have been granted in favor of the holders of the
notes;
(5) reduce the premium payable upon the redemption of any note or
change the time at which any note may be redeemed, as described in the
section above entitled "-- Optional redemption;"
(6) reduce the premium payable upon a Change of Control Triggering
Event;
(7) make any change in any Domestic Restricted Subsidiary Guarantee
that would adversely affect the holders of the notes; or
(8) modify any provision of this paragraph, except to increase any
percentage set forth herein.
The holders of at least a majority in principal amount of the outstanding
notes may, by written notice to WCG and the trustee on behalf of the holders of
all the notes, waive any past Default under the indenture and its consequences,
except Default
- in the payment of the principal of, or premium, if any, or interest on
any note, or
- in respect of a covenant or provision hereof which under the proviso to
the prior paragraph cannot be modified or amended without the consent of
the holder of each outstanding note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
WCG, at its election, shall:
(a) be deemed to have paid and discharged its debt on the notes and the
indenture shall cease to be of further effect as to all outstanding notes,
except as to
- rights of registration of transfer, substitution and exchange of notes
and WCG's right of optional redemption,
- rights of holders to receive payment of principal of, premium, if any,
and interest on such notes (but not the purchase price referred to in the
section above entitled "-- Certain covenants -- Change of control
triggering event" or in the section above entitled "-- Limitation on
asset dispositions") and any rights of the holders with respect to such
amount,
- the rights, obligations and immunities of the trustee under the indenture
and
- certain other specified provisions in the indenture; or
(b) cease to be under any obligation to comply with certain restrictive
covenants, including those described in the section above entitled "-- Certain
covenants," and terminate the operation of certain Events of Default, after the
irrevocable deposit by WCG with the trustee, in trust for the benefit of the
holders of notes, at any time prior to the maturity of the notes, of
- money in an amount,
- Government Securities which through the payment of interest and principal
will provide, not later than one day before the due date of payment in
respect of the notes, money in an amount, or
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- a combination thereof,
sufficient to pay and discharge the principal of, premium, if any, on, and
interest on, the notes then outstanding on the dates on which any such payments
are due in accordance with the terms of the indenture and of the notes.
Such defeasance or covenant defeasance shall be deemed to occur only if
certain conditions are satisfied, including among other things, delivery by WCG
to the trustee of an opinion of counsel acceptable to the trustee to the effect
that
- such deposit, defeasance and discharge will not be deemed, or result in,
a taxable event for federal income tax purposes with respect to the
holders; and
- WCG's deposit will not result in the trust relating thereto or the
trustee being subject to regulation under the Investment Company Act of
1940, as amended.
GOVERNING LAW
The indenture and the notes are governed by the laws of the State of New
York, without reference to principles of conflicts of law.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of WCG, as
such, shall have any liability for any obligations of WCG under the notes or the
indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its status as director,
officer, employee, incorporator or stockholder of WCG. By accepting a note each
holder waives and releases all such liability, but only such liability. The
waiver and release are part of the consideration for issuance of the notes.
Nevertheless, such waiver may not be effective to waive liabilities under the
federal securities laws and it has been the view of the Commission that such a
waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the indenture.
WCG, the registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and WCG may require a
holder to pay any taxes and fees required by law or permitted by the indenture.
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DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS
The following are summaries of the material provisions of our debt
agreements, copies of which we have filed as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable law. See the section of this prospectus entitled "Where You Can Find
Additional Information" for more information.
INTERIM CREDIT FACILITY
In April 1999, we entered into a $1.4 billion unsecured revolving interim
credit facility with four banks which terminates on September 30, 1999. Our
interim credit obligations are guaranteed by Williams. Borrowings under this
interim credit facility are generally for 30- to 90-day terms and bear interest
at LIBOR plus 87.5 basis points. At the date of this prospectus, we have
approximately $750 million in borrowings outstanding under this credit facility.
We intend to repay all of the then-outstanding borrowings under this facility by
borrowing the full $500 million available under the revolving credit portion of
our permanent credit facility and borrowing the remaining amount necessary under
our short term loan facility described below. The interim credit facility
terminates once the permanent credit facility is in place.
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 in September 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 & Poor's
and Moody's. 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 ratably prepay the term loans and reduce our revolving
loan commitments 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
Prepayment of the term loans and reduction of the revolving loan
commitments are 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 & Poor's 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
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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 & Poor's 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 & Poor's is less than BB- or by
Moody's is less than Ba3, we must, if requested by the lenders, 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
- creation of liens
- guarantees
- sales of assets
- mergers, consolidations, liquidations and dissolutions
- investments, loans, advances and acquisitions
- dividends and other payments with respect to our capital stock and common
stock of our subsidiaries and voluntary prepayments of debt, including
the notes
- material changes to our charter, the indenture for the notes, the
Williams note, or certain other agreements
- sale and leaseback transactions
- material changes in our lines of business
- transactions with affiliates
- agreements not to pledge assets or pay dividends
Financial maintenance covenants will include:
- a total debt to contributed capital requirement
- a minimum adjusted EBITDA 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 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
- negotiation, execution and delivery of definitive loan documentation on
or before September 30, 1999
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- 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 facilities will be guaranteed by us, all of our direct
and indirect domestic restricted subsidiaries, and, in the event the gross
proceeds from the equity offering and concurrent investments are less than $1
billion, or the gross proceeds from the notes offering are less than $1.3
billion, the facilities will continue to be guaranteed by Williams.
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 a portion of the interim credit facility and as and when
needed for our capital investment plan and for working capital and general
corporate purposes. At the time of the offerings we anticipate that we will have
approximately $500 million in borrowings outstanding under the permanent credit
facility that we plan to repay with proceeds from the offerings.
At any time within two years after we enter into the facility, we may
request one or more additional credit facilities from the permanent credit
facility lenders. These facilities would be in an aggregate amount of not less
than $100 million or more than $500 million. The terms and conditions of any
additional facilities have not been agreed to and would have to be negotiated.
The average life to maturity of any additional facilities could not be less than
the remaining average life to maturity of the permanent term or revolving credit
facilities. We are not required to request or enter into any additional
facilities and, if we request additional facilities, no lender is obligated to
participate.
SHORT TERM LOAN FACILITY
We expect to enter into a $750 million short term loan facility with
affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated (with a 50%
commitment), Lehman Brothers Inc. (with a 25% commitment) and Salomon Smith
Barney Inc. (with a 25% commitment) which will terminate on the earlier to occur
of December 31, 1999 and the completion of the equity offering. We intend to
make our initial borrowing under this short term loan facility at the time that
we make our initial borrowing under our permanent credit facility. Obligations
under this short term loan facility will be guaranteed by Williams and will bear
interest at the same rate of interest borne by borrowings under our permanent
credit facility. We intend to repay all of the then-outstanding borrowings under
this short term loan facility with the proceeds of the concurrent investments
and the offerings.
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 June 30, 1999, Williams' total capital contributions to
us were approximately $1.4 billion and our borrowings provided by Williams were
$794.2 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
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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%. The permanent
credit facility will prohibit principal payments on the Williams note prior to
June 30, 2000. For so long as no default or event of default exists under the
permanent credit facility, principal will be paid quarterly beginning June 30,
2000, with no less than $25 million payable in any fiscal year. Additional
principal payments will be permitted under the permanent credit facility and
will be made to the extent, after giving effect to such payment, the ratio of
total debt to adjusted EBITDA, as defined in the permanent credit facility, is
less than 5.0 to 1.0. Additional principal payments may also be made with
additional capital as defined in the permanent credit facility. 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 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 30, 1999,
approximately $495 million of the $750 million of availability had been used
under this program.
IMPORTANT UNITED STATES FEDERAL TAX CONSIDERATIONS
OF THE NOTES TO NON-U.S. HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our notes by a
holder that, for U.S. federal income tax purposes, is not a U.S. person as we
define that term below. A holder of our notes who is not a U.S. person is a
non-U.S. holder. We assume in this discussion that you will hold our notes
issued pursuant to the offering as a capital asset (generally, property held for
investment). We do not discuss all aspects of U.S. federal taxation that may be
important to you in light of your individual investment circumstances, such as
special tax rules that would apply to you, for example, if you are a dealer in
securities, financial institution, bank, insurance company, tax-exempt
organization or partnership. Our discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended, Treasury regulations, judicial
opinions, published positions of the U.S. Internal Revenue Service and other
applicable authorities, all as in effect on the date of this prospectus and all
of which are subject to differing interpretations or change, possibly with
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retroactive effect. We have not sought, and will not seek, any ruling from the
IRS with respect to the tax consequences discussed in this prospectus, and there
can be no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained. We urge you to consult your tax advisor about the U.S. federal tax
consequences of acquiring, holding, and disposing of our notes, as well as any
tax consequences that may arise under the laws of any foreign, state, local, or
other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
- a citizen or resident of the U.S.
- a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source
- a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust
INTEREST
Interest paid to a non-U.S. holder will generally not be subject to
withholding of U.S. federal income tax provided that all of the following are
true:
- the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all our classes of stock entitled
to vote
- the non-U.S. holder is not a controlled foreign corporation to which we
are a related person for U.S. federal income tax purposes
- the non-U.S. holder certifies, under penalties of perjury, that it is a
non-U.S. holder and provides its name and address
Interest paid to a non-U.S. holder that does not qualify for the above
exception from withholding tax would generally be subject to withholding of U.S.
federal income tax at the rate of 30% unless the non-U.S. holder of the note
provides us or our paying agent, as the case may be, with a properly executed
(1) IRS Form 1001 (or successor form) claiming an exemption from (or reduction
in) withholding under the benefit of an applicable tax treaty or (2) IRS Form
4224 (or successor form) stating that the interest paid on the note is not
subject to withholding tax because it is effectively connected with the non-U.S.
holder's conduct of a trade or business in the U.S. If, however, the interest is
effectively connected with the conduct of a trade or business in the U.S. by the
non-U.S. holder, the interest will be subject to U.S. federal income tax imposed
on net income on the same basis that applies to U.S. persons generally, and, for
corporate holders and under certain circumstances, the branch profits tax.
Non-U.S. holders should consult any applicable income tax treaties that may
provide for a reduction of, or exemption from, withholding taxes.
GAIN ON DISPOSITION
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our notes unless any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder
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- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain United States expatriates
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders and under certain circumstances, the
branch profits tax, but will generally not be subject to withholding. Non-U.S.
holders should consult any applicable income tax treaties that may provide for
different rules.
UNITED STATES FEDERAL ESTATE TAXES
A note that is owned or treated as owned by an individual who is not a
citizen or resident of the U.S., as specially defined for U.S. federal estate
tax purposes, on the date of that person's death will not be included in his or
her estate for U.S. federal estate tax purposes, provided that both of the
following are true:
- the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all of our classes of stock
entitled to vote on the date of that person's death
- the interest on the note would not have been effectively connected with
the conduct of trade or business in the U.S. if it had been received by
that person on the date of that person's death
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of interest that we paid to that holder, and the amount of tax that
we withheld on the interest. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides.
Under current U.S. Treasury regulations, U.S. information reporting
requirements and backup withholding tax at a rate of 31% will generally apply to
interest and gross proceeds received with respect to a note. Backup withholding
tax will generally not apply to interest and gross proceeds received by a
non-U.S. holder who furnishes a certificate of foreign status and makes any
other required certification, or who is otherwise exempt from backup
withholding. Generally, a non-U.S. holder will provide this certification on IRS
Form W-8 (Certificate of Foreign Status). Payments to or through a U.S. office
of a broker of the proceeds of a sale, exchange or other disposition of a note
are subject to both backup withholding at a rate of 31% and information
reporting, unless the holder certifies as to its non-U.S. holder status under
penalties of perjury or otherwise establishes an exemption. Information
reporting requirements, but not backup withholding tax, will also apply to
payments of the proceeds of a sale of a note by foreign offices of U.S. brokers,
or foreign brokers with certain types of relationships to the U.S., unless the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholdings and
information reporting requirements but unify current
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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.
UNDERWRITING
GENERAL
We intend to offer our notes through a number of underwriters. Subject to
the terms and conditions set forth in a purchase agreement among our company and
each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.
and Salomon Smith Barney Inc., who are acting as representatives of the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
aggregate principal amount of the notes set forth opposite its name below.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as sole
book-running manager for the notes offering and Lehman Brothers Inc. and Salomon
Smith Barney Inc. are the co-lead managers for the notes offering.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................. $
Lehman Brothers Inc. .......................................
Salomon Smith Barney Inc. ..................................
Banc of America Securities LLC..............................
Chase Securities Inc. ......................................
BNY Capital Markets, Inc. ..................................
Nesbitt Burns Securities Inc. ..............................
Wasserstein Perella Securities, Inc. .......................
ABN AMRO Incorporated.......................................
BancBoston Robertson Stephens Inc. .........................
CIBC World Markets Corp. ...................................
Credit Lyonnais Securities (USA) Inc. ......................
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
RBC Dominion Securities Corporation.........................
--------------
Total......................................... $1,300,000,000
==============
</TABLE>
The several underwriters have agreed, subject to the terms and conditions
included in the purchase agreement, to purchase all of the notes being sold
pursuant to such agreement if any of the notes being sold pursuant to such
agreement are purchased.
In the event of a default by an underwriter, the purchase agreement
provides that, in some circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The notes are being offered by the several underwriters, subject to prior
sale, when, as if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the underwriters and certain other conditions,
including the closing of the equity offering and the
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initial SBC investment. The underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part.
CONCESSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price set forth on the cover page of
this prospectus, and to certain dealers at such price less a concession not in
excess of ____% of the principal amount of the notes. The underwriters may
allow, and such dealers may reallow, a discount not in excess of ____% of the
principal amount of the notes to certain other dealers. After the public
offering, the public offering price, concession and discount may be changed.
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1,400,000 and are payable by us.
NO SALES OF SIMILAR SECURITIES
We have agreed, subject to exceptions, not to directly or indirectly offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, lend or otherwise dispose of or transfer any debt securities, or
any securities convertible into or exercisable or exchangeable for debt
securities, or file a registration statement under the Securities Act with
respect to the foregoing, without the prior written consent of Merrill Lynch on
behalf of the underwriters for a period of 180 days after the date of this
prospectus.
NEW ISSUE OF NOTES
The notes are a new issue of securities with no established trading market.
We do not intend to apply for listing of the notes on any national securities
exchange or for quotation of the notes on any automated dealer quotation system.
We have been advised by the underwriters that they presently intend to make a
market in the notes after the consummation of the notes offering, although they
are under no obligation to do so and may discontinue any market-making
activities at any time without any notice. No assurance can be given as to the
liquidity of the trading market for the notes or that an active public market
for the notes will develop. If an active public trading market for the notes
does not develop, the market price and liquidity of the notes may be adversely
affected.
PRICE STABILIZATION AND SHORT POSITIONS
In connection with the notes offering, the underwriters are permitted to
engage in transactions that stabilize the market price of the notes. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the notes. If the underwriters create a short position
in the notes in connection with the notes offering, i.e., if they sell more
notes than are set forth on the cover page of this prospectus, the underwriters
may reduce that short position by purchasing notes in the open market. In
general, purchases of a security for the purpose of stabilization or to reduce a
short position could cause the price of the security to be higher than it might
in the absence of such purchases.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the notes. In addition, neither we nor
any of the underwriters make any representation that the underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
189
<PAGE> 193
OTHER RELATIONSHIPS
Certain of the underwriters of the notes offering and their affiliates
engage in transactions with, and perform services for, our company in the
ordinary course of business and have engaged and may in the future engage in
commercial banking and investment banking transactions with us and with
Williams, for which they receive customary compensation. In addition, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc., Salomon
Brothers Inc., Banc of America Securities LLC, CIBC World Markets Corp. and
Credit Suisse First Boston Corporation will also act as underwriters for the
equity offering. Furthermore, affiliates of Banc of America Securities LLC,
Chase Securities Inc., BNY Capital Markets, Inc. and Nesbitt Burns Securities
Inc. are lenders under our interim credit facility, and affiliates of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and Salomon
Smith Barney Inc. will be lenders under the short term loan facility. We expect
that affiliates of some of the underwriters will be lenders under the permanent
credit facility.
LEGAL MATTERS
The validity of the notes offered in this prospectus and certain legal
matters in connection with the offerings will be passed upon for us by our
Senior Vice President, Law, William von Glahn. Certain legal matters in
connection with the offerings will be passed upon by 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, 196,416
shares of common stock of Williams and has the right to exercise options to
receive an additional 90,504 shares. At the time of completion of the offerings,
our company will grant to Mr. von Glahn options to purchase 50,000 shares of our
common stock at an exercise price equal to the initial public offering price.
EXPERTS
The consolidated financial statements and schedule of Williams
Communications Group, Inc. at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, appearing in this prospectus
and registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein
which, as to the year 1998, are based in part on the report of Arthur Andersen
S/C, independent public accountants. The financial statements and schedule
referred to above are included in reliance upon such reports given on the
authority of such firms as experts in accounting and auditing.
The combined financial statements of the Direct Sales Subsidiary, NCS
(including BA Meridian) and TTS of the Enterprise Network's division of Nortel
Networks Corporation, formerly Northern Telecom Limited, for the year ended
December 31, 1996 and the four-month period ended April 30, 1997 appearing in
this prospectus and registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as set forth thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
190
<PAGE> 194
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the notes
offered in this prospectus. This prospectus does not contain all the information
which is in the registration statement. Certain parts of the registration
statement are omitted as allowed by the rules and regulations of the Commission.
We refer you to the registration statement for further information about our
company and the securities offered in this prospectus. Statements contained in
this prospectus concerning the provisions of documents are not necessarily
summaries of the material provisions of those documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. You can inspect and copy the registration statement
and the reports and other information we file with the Commission under the
Exchange Act at the public reference room maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain information on the operation of the public reference room by calling the
Commission at 1-800-SEC-0330. The same information will be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of this material from the public reference room of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a Web site which provides online access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. In addition, Williams is subject to the information requirements of
the Exchange Act and files reports and other information under the Exchange Act
with the Commission. You can inspect and copy these reports and other
information of our company and Williams at the locations set forth above or
download these reports from the Commission's web site.
191
<PAGE> 195
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 six months
ended June 30, 1999 and 1998 (unaudited)............... F-4
Consolidated Balance Sheets as of December 31, 1998 and
1997 and June 30, 1999 (unaudited)..................... F-5
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 1998, 1997 and 1996 and the
six months ended June 30, 1999 and 1998 (unaudited).... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 and the six months
ended June 30, 1999 and 1998 (unaudited)............... F-7
Notes to Consolidated Financial Statements (Information as
of June 30, 1999 and for the six months ended June 30,
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> 196
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 27, 1999
F-2
<PAGE> 197
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> 198
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (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).............. $ 1,001,139 $ 801,726 $ 1,733,469 $ 1,428,513 $ 705,187
Operating expenses:
Cost of sales................ 765,742 587,238 1,294,583 1,043,932 517,222
Selling, general and
administrative............ 264,852 206,996 489,173 329,513 152,484
Provision for doubtful
accounts.................. 11,810 2,696 21,591 7,837 2,694
Depreciation and
amortization.............. 62,112 40,759 87,081 71,863 32,378
Other (Note 4)............... 26,913 1,033 34,245 32,269 500
----------- ----------- ----------- ----------- -----------
Total operating
expenses.......... 1,131,429 838,722 1,926,673 1,485,414 705,278
----------- ----------- ----------- ----------- -----------
Loss from operations (Note
3)........................... (130,290) (36,996) (193,204) (56,901) (91)
Interest accrued............... (29,033) (6,250) (18,650) (8,714) (17,367)
Interest capitalized........... 8,798 4,556 11,182 7,781 --
Equity losses (Note 3)......... (18,682) (2,739) (7,908) (2,383) (1,601)
Investing income............... 4,762 1,267 1,931 670 296
Minority interest in (income)
loss of subsidiaries......... 11,272 (4,904) 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....... (758) (44) 178 508 (108)
----------- ----------- ----------- ----------- -----------
Loss before income taxes....... (153,931) (45,110) (190,826) (28,005) (3,146)
(Provision) benefit for income
taxes (Note 5)............... (45,834) 1,183 5,097 (2,038) (368)
----------- ----------- ----------- ----------- -----------
Net loss....................... $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514)
=========== =========== =========== =========== ===========
Basic loss per share:
Net loss..................... $ (199,765) $ (43,927) $ (185,729) $ (30,043) $ (3,514)
Weighted average shares
outstanding............... 1,000 1,000 1,000 1,000 1,000
Pro-forma loss per share
(unaudited):
Net loss..................... $ (.43) $ (.10) $ (.40) $ (.07) $ (.01)
Weighted average shares
outstanding............... 460,000,000 460,000,000 460,000,000 460,000,000 460,000,000
</TABLE>
See accompanying notes.
F-4
<PAGE> 199
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ---------------------------
1999 (UNAUDITED) 1998 1997
---------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 73,706 $ 42,004 $ 11,290
Receivables less allowance of $34,098,000 (unaudited)
($23,576,000 in 1998 and $12,787,000 in 1997)..... 513,330 491,871 291,100
Due from affiliates (Note 14)........................ -- 3,881 --
Costs and estimated earnings in excess of billings... 188,405 185,922 144,575
Inventories.......................................... 81,493 67,699 63,484
Deferred income taxes (Note 5)....................... 27,918 23,829 20,090
Other (Note 4)....................................... 72,988 26,198 29,640
---------- ---------- ----------
Total current assets................................... 957,840 841,404 560,179
Investments (Note 7)................................... 657,631 265,217 28,170
Property, plant and equipment -- net (Note 8).......... 1,060,635 712,404 413,452
Goodwill and other intangibles, net of accumulated
amortization of $87,304,000 (unaudited) ($81,882,000
in 1998 and $55,136,000 in 1997)..................... 365,902 430,557 403,319
Due from affiliate (Note 14)........................... -- -- 97,097
Other assets and deferred charges (Note 15)............ 129,430 88,964 9,617
---------- ---------- ----------
Total assets........................................... $3,171,438 $2,338,546 $1,511,834
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable (Note 9)............................ $ 142,931 $ 269,736 $ 59,402
Due to affiliates (Note 14).......................... 55,722 38,510 123,584
Accrued liabilities (Note 9)......................... 270,761 198,676 176,979
Billings in excess of costs and estimated earnings... 63,876 49,434 48,054
Long-term debt due within one year (Note 10)......... 372 690 1,195
---------- ---------- ----------
Total current liabilities.............................. 533,662 557,046 409,214
Long-term debt:
Affiliates (Note 14)................................. 800,956 620,710 --
Other (Note 10)...................................... 613,275 3,020 125,746
Deferred income taxes (Note 5)......................... 127,135 29,417 20,090
Other liabilities...................................... 23,040 10,595 5,126
Minority interest in subsidiaries...................... 121,504 110,076 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....................... 1,391,160 1,299,871 1,000,348
Accumulated deficit.................................. (516,924) (316,896) (128,368)
Accumulated other comprehensive income (loss) (Note
11)............................................... 77,629 24,706 (3,479)
---------- ---------- ----------
Total stockholder's equity............................. 951,866 1,007,682 868,502
---------- ---------- ----------
Total liabilities and stockholder's equity............. $3,171,438 $2,338,546 $1,511,834
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 200
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................................ -- -- (30,043) -- (30,043)
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...................... (33,522)
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 (128,368) (3,479) 868,502
Net loss................................ -- -- (185,729) -- (185,729)
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...................... (157,544)
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 (316,896) 24,706 1,007,682
Net loss*............................... -- -- (199,765) -- (199,765)
Other comprehensive income (loss) (Note
11):
Unrealized appreciation on marketable
equity securities*................ -- -- -- 74,492 74,492
Foreign currency translation
adjustments*...................... -- -- -- (21,569) (21,569)
----------
Comprehensive loss*..................... (146,842)
Capital contributions from parent*...... -- 91,289 -- -- 91,289
Other*.................................. -- -- (263) -- (263)
-- ---------- --------- -------- ----------
Balance, June 30, 1999*................... $1 $1,391,160 $(516,924) $ 77,629 $ 951,866
== ========== ========= ======== ==========
</TABLE>
- ---------------
* Amounts for the six months ended June 30, 1999 are unaudited.
See accompanying notes.
F-6
<PAGE> 201
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED) YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $(199,765) $ (43,927) $(185,729) $ (30,043) $ (3,514)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation.................................... 45,593 27,280 58,924 48,266 22,453
Amortization of goodwill and other
intangibles.................................. 16,519 13,479 28,157 23,597 9,925
Provision (benefit) for deferred income taxes... 43,033 (1,808) (7,781) (1,777) (1,600)
Provision for loss on property.................. 26,654 -- -- 29,043 --
Provision for loss on investment................ -- -- 23,150 2,500 --
Provision for doubtful accounts................. 11,810 2,696 21,591 7,837 2,694
Equity losses................................... 18,682 2,739 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................................. (11,272) 4,904 (15,645) 13,506 --
Cash provided (used) by changes in:
Receivables sold............................. (33,767) 345 8,103 25,664 --
Receivables.................................. (11,009) (61,340) (213,148) (34,127) (15,420)
Costs and estimated earnings in excess of
billings................................... (2,483) 12,979 (41,298) (66,454) (8,753)
Inventories.................................. (13,056) 4,637 (2,347) (6,613) (1,896)
Other current assets......................... 1,234 (10,279) (10,640) 210 (17,484)
Accounts payable............................. (41,513) 49,622 108,770 (24,349) 13,851
Accrued liabilities.......................... 60,688 (17,643) 18,226 42,480 11,715
Billings in excess of costs and estimated
earnings................................... 14,442 (41,038) 1,380 38,239 5,214
Due to/from affiliates....................... 21,093 (12,738) (89,870) 127,378 7,320
Other........................................ 16,185 (6,370) (10,561) (5,342) (12,156)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities...................................... (36,932) (76,462) (300,810) 147,858 (1,775)
FINANCING ACTIVITIES
Proceeds from long-term debt...................... 940,963 -- -- 150,890 126
Payments on long-term debt........................ (330,933) (125,809) (126,677) (187,534) (1,353)
Capital contributions from parent................. 91,289 123,627 299,493 366,130 439,000
Contribution to subsidiary from minority interest
shareholders.................................... 17,361 -- -- -- --
Changes due to/from affiliates.................... 180,246 326,304 717,807 (96,974) (209,004)
Dividends to parent............................... -- -- -- (6,559) (2,760)
--------- --------- --------- --------- ---------
Net cash provided by financing activities......... 898,926 324,122 890,623 225,953 226,009
INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures............................ (572,387) (253,971) (401,004) (276,249) (66,900)
Proceeds from sales and dark fiber
transactions................................. 48,894 628 40,012 15,292 23,010
Purchase of investments........................... (306,799) (7,002) (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............. (830,292) (251,425) (559,099) (363,494) (224,186)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents..................................... 31,702 (3,765) 30,714 10,317 48
Cash and cash equivalents at beginning of
period.......................................... 42,004 11,290 11,290 973 925
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period........ $ 73,706 $ 7,525 $ 42,004 $ 11,290 $ 973
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE> 202
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 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 network, comprised of a single fiber
strand and associated equipment on the nationwide 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 single-fiber 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 single fiber network can only
be used to transmit video and multimedia services, including Internet services,
until July 1, 2001. After July 1, 2001, the single fiber 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 single fiber 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
F-8
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WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transferred to Network. For comparative purposes, the 1996 and 1997 consulting,
outsourcing and internal telephone management activities previously performed in
Strategic Investments that were transferred to Network have been reflected in
Network's segment results. See Note 3 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 June
30, 1999 (unaudited) and December 31, 1998 and 1997 and the consolidated results
of operations and cash flows for the six months ended June 30, 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 June 30, 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 June
30, 1999 and results of operations and cash flows for the six months ended June
30, 1999 and 1998. Williams Communications Group, Inc. and Williams
International Company are both wholly owned subsidiaries 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 or parent, the reference
includes Williams, either alone or together with its consolidated subsidiaries
as the context requires, except for WCG. Prior to the completion of the equity
offering, the existing outstanding common stock of WCG, all of which is owned by
Williams, will be reclassified into shares of Class B common stock.
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 June 30, 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 as WCG holds
four of the seven PowerTel board seats and can control the ultimate decisions
relating to the operations of PowerTel.
F-9
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WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
Grants of indefeasible rights of use, or IRUs, of constructed but unlit
fiber, or dark fiber, in exchange for cash, are accounted for as leases. IRUs
are evaluated for sales-type lease accounting which resulted in certain lease
transactions being accounted for as sales at the time of acceptance of the fiber
by the customer. IRUs that do not meet the criteria for a sales-type lease are
accounted for as an operating lease, and the cash received is recognized as
revenue over the term of the IRU. IRUs exchanged for cash entered into after
June 30, 1999 are accounted for as operating leases. See "Recent Accounting
Standards" below.
New systems sales and upgrades revenues are recognized under the percentage
of completion method. Revenues on these contracts are initially recognized upon
delivery of equipment with the remaining revenues under the contracts being
recognized over the installation period based on the relationship of incurred
labor to total estimated labor. 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.
F-10
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WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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> 206
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 460,000,000. 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.
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement
No. 66." The interpretation is effective for sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. Under this
interpretation, dark fiber is considered integral equipment and accordingly
title must transfer to a lessee in order for a lease transaction to be accounted
for as a sales-type lease. After June 30, 1999, the effective date of FASB
Interpretation No. 43, sales-type lease accounting will no longer be appropriate
for dark fiber leases and, therefore, these transactions will be accounted for
as operating leases unless title to the fibers under lease transfers to the
lessee or the agreement was entered into prior to June 30, 1999.
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.
F-12
<PAGE> 207
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-13
<PAGE> 208
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-14
<PAGE> 209
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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> 210
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>
JUNE 30, 1999 (UNAUDITED)
Revenues:
External customers:
Dark fiber............................................. $ 71,927 $ -- $ -- $ -- $ 71,927
Capacity and other..................................... 96,855 -- 133,205 -- 230,060
New systems sales and upgrades......................... -- 403,818 -- -- 403,818
Maintenance and customer service orders................ -- 271,431 -- -- 271,431
Other.................................................. -- 15,148 -- -- 15,148
---------- -------- ---------- -------- ----------
Total external customers.................................. 168,782 690,397 133,205 -- 992,384
Affiliates................................................ 6,660 2,095 -- -- 8,755
Intercompany.............................................. 21,947 -- 264 (22,211) --
---------- -------- ---------- -------- ----------
Total segment revenues...................................... $ 197,389 $692,492 $ 133,469 $(22,211) $1,001,139
========== ======== ========== ======== ==========
Costs of sales:
Dark fiber................................................ $ 54,189 $ -- $ -- $ -- $ 54,189
Capacity and other........................................ 131,669 -- 83,543 -- 215,212
New systems sales and upgrades............................ -- 294,239 -- -- 294,239
Maintenance and customer service orders................... -- 143,505 -- -- 143,505
Indirect operating and maintenance........................ -- 58,597 -- 58,597
Intercompany.............................................. -- 5,356 16,855 (22,211) --
---------- -------- ---------- -------- ----------
Total cost of sales......................................... $ 185,858 $501,697 $ 100,398 $(22,211) $ 765,742
========== ======== ========== ======== ==========
Segment loss:
Loss from operations...................................... $ (45,376) $(20,947) $ (63,967) $ -- $ (130,290)
Equity losses............................................. -- -- (18,682) -- (18,682)
Add back -- allocated charges from parent................. 1,863 4,137 624 -- 6,624
---------- -------- ---------- -------- ----------
Total segment loss.......................................... $ (43,513) $(16,810) $ (82,025) $ -- $ (142,348)
========== ======== ========== ======== ==========
Total assets................................................ $1,082,071 $974,423 $1,114,944 $ -- $3,171,438
Depreciation and amortization............................... $ 13,481 $ 22,686 $ 25,945 $ -- $ 62,112
</TABLE>
F-16
<PAGE> 211
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>
JUNE 30, 1998 (UNAUDITED)
Revenues:
External customers:
Capacity and other..................................... $ 23,282 $ -- $ 100,218 $ -- $123,500
New systems sales and upgrades......................... -- 376,339 -- -- 376,339
Maintenance and customer service orders................ -- 289,378 -- -- 289,378
Other.................................................. -- 4,739 -- -- 4,739
-------- -------- --------- -------- --------
Total external customers.................................. 23,282 670,456 100,218 -- 793,956
Affiliates................................................ 4,010 1,640 2,120 -- 7,770
Intercompany.............................................. 24,750 -- 274 (25,024) --
-------- -------- --------- -------- --------
Total segment revenues...................................... $ 52,042 $672,096 $ 102,612 $(25,024) $801,726
======== ======== ========= ======== ========
Costs of sales:
Capacity and other........................................ $ 40,829 $ -- $ 63,824 $ -- $104,653
New systems sales and upgrades............................ -- 266,735 -- -- 266,735
Maintenance and customer service orders................... -- 161,993 -- -- 161,993
Indirect operating and maintenance........................ -- 53,857 -- -- 53,857
Intercompany.............................................. 139 4,450 20,435 (25,024) --
-------- -------- --------- -------- --------
Total cost of sales......................................... $ 40,968 $487,035 $ 84,259 $(25,024) $587,238
======== ======== ========= ======== ========
Segment income (loss):
Income (loss) from operations............................. $(15,147) $ 12,647 $ (34,496) $ -- $(36,996)
Equity losses............................................. -- -- (2,739) -- (2,739)
Add back -- allocated charges from parent................. 786 5,166 895 -- 6,847
-------- -------- --------- -------- --------
Total segment loss.......................................... $(14,361) $ 17,813 $ (36,340) $ -- $(32,888)
======== ======== ========= ======== ========
Depreciation and amortization............................... $ 5,135 $ 18,702 $ 16,922 $ -- $ 40,759
</TABLE>
F-17
<PAGE> 212
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OUR SOLUTIONS STRATEGIC
NETWORK UNIT INVESTMENTS ELIMINATIONS TOTAL
-------- ------------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Revenues:
External customers:
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:
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) $ (106,522) $ -- $ (193,204)
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) $ (112,620) $ -- $ (189,458)
======== ========== =========== ========== ==========
Total assets.............................................. $727,119 $ 967,948 $ 643,479 $ -- $2,338,546
Equity method investments................................. $ -- $ -- $ 48,710 $ -- $ 48,710
Additions to long-lived assets............................ $350,249 $ 57,504 $ 95,724 $ -- $ 503,477
Depreciation and amortization............................. $ 13,230 $ 36,637 $ 37,214 $ -- $ 87,081
</TABLE>
F-18
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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 $ (97,231) $ -- $ (56,901)
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 $ (97,074) $ -- $ (50,054)
======== ========== =========== ========== ==========
Total assets.............................................. $246,317 $ 922,823 $ 342,694 $ -- $1,511,834
Equity method investments................................. $ 2,317 $ -- $ 3,815 $ -- $ 6,132
Additions to long-lived assets............................ $175,861 $ 236,000 $ 108,457 $ -- $ 520,348
Depreciation and amortization............................. $ 4,012 $ 30,142 $ 37,709 $ -- $ 71,863
</TABLE>
F-19
<PAGE> 214
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OUR SOLUTIONS STRATEGIC
NETWORK UNIT 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.............................................. $228,455 $ 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> 215
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
During the second quarter of 1999, 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,
WCG signed an agreement, which closed effective July 31, 1999, with Genesys,
S.A. to sell its business which provides audio and video conferencing services.
In addition, on July 31, 1999, WCG signed and closed an agreement with Cyberstar
L.P. to sell its business which provides closed-circuit video broadcasting
services for businesses. The proceeds from these transactions total
approximately $50 million. WCG recognized a pre-tax loss of $26.7 million
consisting of a $22.8 million impairment of the assets to fair value based on
the expected net sales proceeds and exit costs of $3.9 million consisting of
$2.8 million of contractual obligations and $1.1 million of employee-related
costs related to the sales of these businesses. These transactions resulted in
an income tax provision of approximately $7.9 million, which reflects the impact
of certain differences between the book and tax basis in the assets. Loss from
operations related to these assets for the six months ended June 30, 1999 and
1998 were $9.3 million and $9.9 million, respectively. At June 30, 1999, the
asset basis of $50.0 million was classified as held for sale in other current
assets and, accordingly, depreciation and amortization were suspended on these
assets at June 30, 1999.
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.
F-21
<PAGE> 216
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in 1997 other operating expenses and Strategic Investments'
segment loss are impairments and other charges totaling $29,043,000. 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. Additionally,
WCG made the decision and committed to a plan 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 WCG's 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.
F-22
<PAGE> 217
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes for the six months ended June 30,
1999 and 1998 (unaudited) and the years ended December 31, 1998, 1997 and 1996
includes:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED) YEARS ENDED DECEMBER 31,
-------------------- ---------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current:
Federal................. $ -- $ -- $ -- $ -- $ 1,810
State................... 10 39 162 2,081 158
Foreign................. 2,791 586 2,522 1,734 --
------- ------- ------- ------- -------
2,801 625 2,684 3,815 1,968
Deferred:
Federal................. 32,318 (1,313) (5,652) (2,761) (1,761)
State................... 10,715 (495) (2,129) 984 161
------- ------- ------- ------- -------
43,033 (1,808) (7,781) (1,777) (1,600)
------- ------- ------- ------- -------
Total provision
(benefit)............... $45,834 $(1,183) $(5,097) $ 2,038 $ 368
======= ======= ======= ======= =======
</TABLE>
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................................ $(187,874) $(27,880) $(2,184)
Foreign...................................... (2,952) 125 (962)
--------- -------- -------
Total loss before taxes...................... $(190,826) $(28,005) $(3,146)
========= ======== =======
</TABLE>
F-23
<PAGE> 218
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations from the benefit for income taxes at the federal statutory
rate to the provision (benefit) for income taxes for the six months ended June
30, 1999 and 1998 (unaudited) and the years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED) YEARS ENDED DECEMBER 31,
--------------------- -----------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Benefit at statutory
rate................... $(53,875) $(15,789) $(66,789) $ (9,802) $(1,101)
Increases (reductions) in
taxes resulting from:
State income taxes..... 6,804 (297) (1,279) 1,992 207
Goodwill
amortization........ 3,566 1,195 5,286 2,675 1,469
Asset sales............ 16,765 -- -- -- --
Non-taxable gain from
the sale of interest
in subsidiary....... -- -- -- (15,605) --
Change in valuation
allowance........... -- (1,727) (7,639) 10,827 --
Tax benefits allocated
to Williams......... 71,204 14,693 60,519 10,731 --
Other -- net........... 1,370 742 4,805 1,220 (207)
-------- -------- -------- -------- -------
Provision (benefit) for
income taxes........... $ 45,834 $ (1,183) $ (5,097) $ 2,038 $ 368
======== ======== ======== ======== =======
</TABLE>
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.......................... -- 12,891
Other................................................. 12,789 3,392
------- --------
27,110 31,707
Valuation allowance..................................... (3,188) (10,827)
------- --------
Total deferred tax assets............................... 23,922 20,880
Deferred tax liabilities:
Property, plant and equipment......................... 13,418 21,339
Securities available for sale......................... 13,763 (1,565)
Other................................................. 2,329 1,106
------- --------
Total deferred tax liabilities.......................... 29,510 20,880
------- --------
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
F-24
<PAGE> 219
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
------- -------
</TABLE>
F-25
<PAGE> 220
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
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> 221
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS
Investments as of June 30, 1999 (unaudited) and December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------
1999 (UNAUDITED) 1998 1997
---------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity method:
ATL -- common stock.................. $ 55,603 $ 48,256 $ --
Others............................... -- 454 6,132
-------- -------- -------
55,603 48,710 6,132
Cost method:
ATL -- preferred stock............... 317,621 100,573 --
Others............................... 68,100 28,001 3,332
-------- -------- -------
385,721 128,574 3,332
Advances to investees................... 4,997 4,997 7,619
Marketable equity securities............ 211,310 82,936 11,087
-------- -------- -------
$657,631 $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 June 30, 1999
(unaudited) and December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------
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 $208,598 $41,543 $82,936 $15,000 $11,087
Other................ 2,700 2,712 -- -- -- --
------- -------- ------- ------- ------- -------
$44,243 $211,310 $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.
F-27
<PAGE> 222
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 1999, the Concentric Network Corporation investment has
depreciated since June 30, 1999, to a fair value of $115.1 million based upon
the August 31, 1999 stock price of $21 15/16.
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 33% from December 31, 1998 to June 30, 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 Telecom 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, Williams, WCG's predecessor in interest, owned 30% of
the preferred shares in ATL and through participation in a limited liability
company owned 30% of the common stock. In March 1999, Williams, WCG's
predecessor in interest, purchased from Algar Telecom for $265 million an
additional 35% economic interest, representing a 19% voting interest, in ATL.
In March, 1999, Williams, WCG's predecessor in interest, 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 Telecom 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.
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> 223
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 1999 (unaudited) and December
31 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
DEPRECIABLE JUNE 30, -----------------------
LIVES 1999 1998 1997
-------------- ----------- ----------- ---------
(IN YEARS) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiber........................ 25-30 $ 116,589 $ 116,439 $ 23,712
Optronics.................... 7-10 209,830 167,997 144,191
Right-of-way................. 20-40 135,165 135,113 5,291
Computer equipment........... 3 69,274 70,026 36,835
Customer premise equipment... 3 32,805 30,616 30,736
General office furniture and
fixtures................... 3-5 40,514 61,300 32,935
Buildings and leasehold 30 or life of
improvements............... lease 47,917 41,154 10,961
Construction in progress..... Not applicable 530,010 195,186 218,752
Other........................ Various 89,260 78,442 37,642
---------- --------- ---------
1,271,364 896,273 541,055
Less accumulated
depreciation and
amortization............ (210,729) (183,869) (127,603)
---------- --------- ---------
$1,060,635 $ 712,404 $ 413,452
========== ========= =========
</TABLE>
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.
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.
F-29
<PAGE> 224
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued liabilities as of June 30, 1999 (unaudited) and December 31 consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1999 (UNAUDITED) 1998 1997
---------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Employee costs........................... $ 66,181 $ 68,025 $ 49,276
Deferred revenue......................... 124,280 67,228 45,601
Job costs and customer deposits.......... 16,421 19,161 19,258
Warranty................................. 10,586 10,967 13,232
Other.................................... 53,293 33,295 49,612
-------- -------- --------
$270,761 $198,676 $176,979
======== ======== ========
</TABLE>
10. LONG-TERM DEBT
Long-term debt (excluding amounts due affiliates as disclosed in Note 14)
as of June 30, 1999 (unaudited) and December 31 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1999 (UNAUDITED) 1998 1997
---------------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Credit agreements........................ $610,000 $ -- $125,000
Other.................................... 3,647 3,710 1,941
-------- ------ --------
613,647 3,710 126,941
Current maturities....................... 372 690 1,195
-------- ------ --------
Long-term debt........................... $613,275 $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. In
March, 1999, WCG borrowed $265 million under the credit agreement for the
additional investment in ATL described in Note 7.
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 June 30, 1999, WCG has borrowed $610 million on this
facility, of which the proceeds were used to pay off the outstanding amount of
$315 million under the July 1997 unsecured credit agreement. Interest is payable
monthly and accrues at rates which vary with current market conditions. At June
30, 1999, the weighted average interest rate was 6.0%.
Cash payments for interest were $2,427,000, $5,467,000 and $205,000 in
1998, 1997 and 1996, respectively.
F-30
<PAGE> 225
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)........ 125,674 (21,569) 104,105
Income tax expense (unaudited)........... (51,182) -- (51,182)
-------- -------- --------
74,492 (21,569) 52,923
-------- -------- --------
Balance as of June 30, 1999 (unaudited).... $102,121 $(24,492) $ 77,629
======== ======== ========
</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 to 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-31
<PAGE> 226
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)............... (195,129) (185,729) (34,743) (30,043) (4,014) (3,514)
Loss per share..................... (195,129) (185,729) (34,743) (30,043) (4,014) (3,514)
</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 provides information on stock options in Williams
common stock granted to WCG employees:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------- ------------------ ------------------
WCG PLAN WILLIAMS PLANS WILLIAMS PLANS WILLIAMS PLANS
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- --------
(OPTIONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -- Beginning of
year...................... -- -- 4,911 $19.39 3,230 $14.19 1,657 $10.21
Granted..................... 490 $30.55 1,729 31.87 2,303 25.57 2,113 16.66
Exercised................... -- -- (1,093) 15.58 (450) 13.90 (430) 10.46
Canceled.................... (20) 31.94 (169) 29.13 (172) 18.81 (110) 16.45
--- ------ ------ ------ ----- ------ ----- ------
Outstanding -- end of
year...................... 470 $30.50 5,378 $23.87 4,911 $19.39 3,230 $14.19
--- ------ ------ ------ ----- ------ ----- ------
Exercisable at end of
year...................... -- 3,754 $20.41 2,663 $14.13 1,161 $10.18
--- ------ ------ ------ ----- ------ ----- ------
Weighted-average grant date
fair value of options
granted during the year... $ 8.19 $ 8.19 $ 5.98 $ 3.92
</TABLE>
F-32
<PAGE> 227
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summary provides information on stock options in Williams
common stock issued to WCG employees outstanding and exercisable at December 31,
1998:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES: OPTIONS PRICE LIFE OPTIONS PRICE
- ------------------------- -------------- -------- ----------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
WCG PLAN:
$23.00 to $31.94.................. 470 $30.50 9.5 years -- --
WILLIAMS PLANS:
$4.62 to $27.37................... 3,753 $20.41 8.0 years 3,753 $20.41
$28.75 to $41.02.................. 1,625 $31.85 9.6 years 1 $40.99
----- -----
Total..................... 5,378 $23.87 8.5 years 3,754 $20.41
</TABLE>
The following summary provides information on deferred shares of Williams
common stock granted to WCG employees:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------- --------
WILLIAMS WILLIAMS WILLIAMS
WCG PLAN PLANS PLANS PLANS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Deferred shares granted............................... 165,000 109,565 14,232 209,410
Weighted-average grant date fair value of shares
granted............................................. $ 31.59 $ 31.59 $19.94 $ 16.24
</TABLE>
Approximately $1,197,000, $727,000, and $352,000 were recognized as expense
for deferred shares in 1998, 1997 and 1996, respectively.
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.
13. LEASES
LESSEE:
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>
F-33
<PAGE> 228
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, WCG entered into an operating lease agreement covering a
portion of its fiber optic network. The total estimated cost of the network
assets to be covered by the lease agreement is $750 million. The lease term will
include an interim term, during which the covered network assets will be
constructed, that is anticipated to end no later than December 31, 1999, and a
base term. The interim and base terms are expected to total five years, and if
renewed, could total seven years. Under the terms of the lease agreement, WCG
cannot sublease the assets without the prior written consent of the lessor.
Through June 30, 1999, WCG has not requested nor has the lessor granted such
consent.
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 June 30, 1999 (unaudited) and December 31,
1998, approximately $495 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.
LESSOR:
WCG has granted IRUs for dark fiber to third parties that are accounted for
as sales-type leases. The lease term is typically for 20 to 25 years and the
lessee can renew the leases at no cost for an additional period of 10 to 20
years. At December 31, 1998, all cash from sales-type leases has been received,
except for $27 million, which will be collected in 1999. Due to the initial term
of the IRUs and lessee renewal options, WCG has not recorded any residual value
for these leases.
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> 229
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocable to Solutions LLC. Details of such charges for the six months ended
June 30, 1999 and 1998 (unaudited) and the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- ---------------------------
1999 1998 1998 1997 1996
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Direct costs, charged from:
Williams.................. $11,125 $ 5,825 $13,364 $ 8,418 $ 6,370
Nortel.................... 1,173 6,278 10,727 15,260 --
Allocated charges from
Williams.................. 6,624 6,828 11,654 9,230 6,643
------- ------- ------- ------- -------
$18,922 $18,931 $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 $4,526,000,
$4,010,000, $7,710,000, $5,217,000 and $4,918,000 for the six months ended June
30, 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 $2,134,000, $2,120,000,
$4,254,000, $3,754,000 and $1,381,000 for the six months ended June 30, 1999 and
1998 (unaudited) and the years ended December 31, 1998, 1997 and 1996,
respectively.
As of June 30, 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. 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
5.9%, 5.8% and 6.2% for June 30, 1999 (unaudited) and December 31, 1998 and
1997, respectively. In addition, the net amount due to or from affiliates
consists of normal course receivables and payables resulting
F-35
<PAGE> 230
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the use of each others services. A summary of these payables and
receivables as of June 30, 1999 (unaudited) and December 31 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1999 (UNAUDITED) 1998 1997
---------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Due from Williams...................... $ -- $ 3,881 $ --
======== ======== ========
Due to affiliates:
Williams............................... $ 30,357 $ -- $ 24,636
Nortel................................. 23,465 37,187 98,948
Other.................................. 1,900 1,323 --
-------- -------- --------
Total due to affiliates.................. $ 55,722 $ 38,510 $123,584
======== ======== ========
Noncurrent:
Due from Williams...................... $ -- $ -- $ 97,097
======== ======== ========
Due to affiliates:
Williams............................ $794,175 $614,343 $ --
Other............................... 6,781 6,367 --
-------- -------- --------
Total due to affiliates.................. $800,956 $620,710 $ --
======== ======== ========
</TABLE>
Interest expense to Williams was $16,902,000, $4,157,000, $16,933,000,
$2,657,000 and $16,776,000 for the six months ended June 30, 1999 and 1998
(unaudited) and the years ended December 31, 1998, 1997 and 1996, respectively.
No amounts, net of interest capitalized, were paid to Williams for interest in
the six months ended June 30, 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 six months ended June 30, 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> 231
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.
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. The $644 million will be
allocated between dark fiber, services related to colocation, maintenance and
capacity according to the relative fair value of each component. As of June 30,
1999, WinStar has paid WCG approximately $44.1 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 for a period of 25 years. WCG will pay WinStar
the $400 million over the next four years as WinStar completes construction of
the hubs. WCG will amortize the $400 million to be capitalized on a
straight-line basis over the 25-year usage term. As of June 30, 1999, WCG has
paid WinStar approximately $120 million.
Shrier v. Williams was filed on August 4, 1999, in the U.S. District Court
for the Northern District of Oklahoma. The plaintiff seeks to bring a nationwide
class action on behalf of all landowners on whose property we have installed
fiber optic cable without the permission of the landowner. The plaintiff is
seeking a declaratory ruling that we are trespassing, damages resulting from the
alleged trespass, damages based on our profits from use of the property and
damages from alleged fraud. Relief requested by the plaintiff includes
injunction against further trespass, actual and punitive damages and attorneys'
fees.
The plaintiff is an owner of property on which a pipeline right of way used
for the single-fiber network is located. We believe that we have all requisite
permission for our right of way over the plaintiff's land. We also do not
believe that the plaintiff has sufficient basis for certification of a class
action.
Other communications carriers have been successfully challenged with
respect to their rights over railroad rights of way, which are also challenged
by the plaintiff. Approximately 15% of the Williams network is installed on
railroad rights of way. In many areas, the railroad granting us the license
holds full ownership of the land, in which case its license should be sufficient
to give us valid rights to cross the property. In some states where the railroad
is not the property owner but has an easement over the property the law is
unsettled as to whether a landowner's approval is required. We did not generally
obtain landowner approval where our right of way was located on railroad
easements. In most states, we have eminent domain rights which we believe would
limit our liability for any trespass damages. It is likely that we will be
subject to other purported class action suits challenging our railroad or
pipeline rights of way but we cannot quantify the impact of such claims at this
time. Thus, we cannot be certain that the plaintiff's purported
F-37
<PAGE> 232
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
class action or other purported class actions, if successful, will not have a
material adverse effect on us.
WCG is a party to various other 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 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
F-38
<PAGE> 233
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 public 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 the equity offering the number of shares
of common stock equal to $200 million divided by the initial public offering
price less the underwriting discount. The parties' obligations under the
securities purchase agreement are subject to closing conditions, including that
the alliance agreement is in full effect and that at least $500 million is
raised in the equity offering and that necessary governmental approvals have
been obtained.
In connection with its purchase of common stock, Intel has agreed not to
transfer any of its shares of common stock to anyone except affiliates for a
period of eighteen months, but this
F-39
<PAGE> 234
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-40
<PAGE> 235
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> 236
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> 237
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> 238
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> 239
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> 240
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> 241
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> 242
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> 243
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> 244
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> 245
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> 246
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$
[WILLIAMS COMMUNICATIONS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
% SENIOR NOTES DUE 200
-----------------------
PROSPECTUS
-----------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 247
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............... $ 361,400
NASD filing fee............................................. 30,500
Blue sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses..................................... 500,000
Printing and engraving fees................................. 250,000
Miscellaneous............................................... 48,100
----------
Total.................................................. $1,400,000
==========
</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.
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
II-1
<PAGE> 248
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office. The Restated Certificate of
Incorporation contains a provision eliminating, to the fullest extent permitted
by the DGCL as it exists or may in the future be amended, the liability of a
director to the Company and its stockholders for monetary damages for breaches
of fiduciary or other duty as a director. However, the DGCL does not currently
allow such provision to limit the liability of a director for: (i) any breach of
the director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of laws; (iii) payment of dividends, stock purchases or redemptions
that violate the DGCL; or (iv) any transaction from which the director derived
an improper personal benefit. Such limitation of liability also does not affect
the availability of equitable remedies such as injunctive relief or rescission.
The Restated Certificate of Incorporation and the By-Laws also provide
that, to the fullest extent permitted by the DGCL as it exists or may in the
future be amended, the Company will indemnify and hold harmless any director who
is or was made a party or is threatened to be made a party to or is involved in
any manner in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Company or its
subsidiaries, and any person serving at the request of the Company as an
officer, director, partner, member, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust, employee benefit
plan or other enterprise and may indemnify any officer, employee or agent of the
Company; provided, however, that the Company will indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by the Restated
Certificate of Incorporation or By-Laws. In addition, the Company will pay the
expenses incurred by directors, and may pay the expenses incurred by other
persons that may be indemnified pursuant to the Restated Certificate and the
By-Laws, in defending any such proceeding in advance of its final disposition
upon receipt (unless the Company upon authorization of the Board of Directors
waives such requirement to the extent permitted by applicable law) of an
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
Company as authorized in the Restated Certificate of Incorporation or By-Laws or
otherwise. The Restated Certificate and the By-Laws also state that such
indemnification is not exclusive of any other rights of the indemnified party,
including rights under any indemnification agreements or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Purchase Agreement.
3.1 Form of Restated Certificate of Incorporation of the
Company.(a)
3.2 Form of Restated By-laws of the Company.(a)
4.1 Specimen certificate of common stock.(a)
4.2 Specimen certificate of Class B common stock.(a)
</TABLE>
II-2
<PAGE> 249
<TABLE>
<C> <S>
4.3 Form of certificate of designation of Series A Junior
Participating Preferred Stock.(a)
4.4 Form of indenture governing notes.
4.5 Form of note (contained in form of indenture filed as
Exhibit 4.4).
5.1 Form of 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.(a)
10.2 Amended and Restated Alliance Agreement Between Telefonos de
Mexico, S.A. de C.V. and Williams Communications, Inc.,
dated May 25, 1999.(a)*
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.(a)
10.4 Master Alliance Agreement Between Intel Internet Data
Services and Williams Communications, Inc., dated as of May
24, 1999.(a)*
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.(a)*
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.(a)*
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.(a)
10.8 Shareholders Agreement by and among Metrogas S.A., Williams
International Telecom (Chile) Limited, and Metrocom S.A.,
dated March 30, 1999 and Letter Agreement dated March 30,
1999.(a)*
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.(a)
10.10 Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8,
1999.(a)*
10.11 Transport Services Agreement dated February 8, 1999, between
Southwestern Bell Communication Services, Inc. and Williams
Communications, Inc.(a)*
10.12 Securities Purchase Agreement dated February 8, 1999,
between SBC Communications Inc. and Williams Communications
Group, Inc.(a)
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.(a)
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.(a)
10.15 Lease as of January 1, 1999, for Williams Technology Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.(a)
</TABLE>
II-3
<PAGE> 250
<TABLE>
<C> <S>
10.16 Lease as of January 1, 1999, for Williams Resource Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.(a)
10.17 Wireless Fiber IRU Agreement by and between WinStar
Wireless, Inc. and Williams Communications, Inc., effective
as of December 17, 1998.(a)
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.(a)*
10.19 UtiliCom Networks, Inc. Note and Warrant Purchase Agreement
dated December 15, 1998.(a)
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.(a)*
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.(a)
10.22 Preferred Stock Purchase by and among UniDial Holdings, Inc.
and Williams Communications, Inc., dated October 2,
1998.(a)*
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.(a)
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.(a)*
10.25 Capacity Purchase Agreement between Williams Communications,
Inc. and Intermedia Communications, Inc., dated January 5,
1998 and Amendment dated August 5, 1998.(a)*
10.26 Settlement and Release Agreement by and between WorldCom
Network Services, Inc. and Williams Communications, Inc.,
dated July 1, 1998.(a)*
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.(a)
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.(a)*
10.29 Distributorship Agreement by and between Northern Telecom
Limited and WilTel Communications, L.L.C., dated January 1,
1998.(a)*
10.30 Common Stock and Warrant Purchase Agreement by and among
Concentric Network Corporation and Williams Communications
Group, Inc., dated July 25, 1997.(a)
10.31 Note and Warrant Purchase Agreement by and among Concentric
Network Corporation and Williams Communications Group, Inc.,
dated June 19, 1997.(a)
</TABLE>
II-4
<PAGE> 251
<TABLE>
<C> <S>
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.(a)
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.(a)*
10.34 Formation Agreement by and between Northern Telecom, Inc.
and Williams Communications Group, Inc., dated April 1,
1997.(a)*
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.(a)
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.(a)
10.37 Sublease Agreement as of June 1, 1996, by and between
Transcontinental Gas Pipeline Company and Williams
Telecommunications Systems, Inc.(a)
10.38 System Use and Service Agreement between WilTel, Inc. and
Vyvx, Inc. effective as of January 1, 1994.(a)*
10.39 Form of administrative services agreement.(a)
10.40 Form of service agreement.(a)
10.41 Form of tax sharing agreement.(a)
10.42 Form of indemnification agreement.(a)
10.43 Form of rights agreement.(a)
10.44 Form of registration rights agreement.(a)
10.45 Form of separation agreement.(a)
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.(a)
10.47 Form of cross-license agreement.(a)
10.48 Form of technical, management and administrative services
agreement.(a)
10.49 The Williams Companies, Inc. 1996 Stock Plan.(a)
10.50 The Williams Companies, Inc. Stock Plan for Nonofficer
Employees.(a)
10.51 Williams Communications Stock Plan.(a)
10.52 Williams Communications Group, Inc. 1999 Stock Plan.(a)
10.53 Williams Pension Plan.(a)
10.54 Solutions LLC Pension Plan.(a)
10.55 Williams Communications Change in Control Severance Plan.(a)
10.56 Stock Purchase Agreement by and between Williams
Communications, Inc. Conferencing Acquisition Corporation
and Genesys S.A., dated as of June 30, 1999.(a)
10.57 Form of loan agreement and promissory note between Williams
Communications, Inc. and The Williams Companies, Inc.(a)
10.58 Williams Communications, Inc. Senior Credit Facilities
Commitment Letter, dated June 2, 1999.(a)
12.1 Statement re: Computation of Ratios.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen S/C.
</TABLE>
II-5
<PAGE> 252
<TABLE>
<C> <S>
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of William G. von Glahn, Esq. (contained in opinion
filed as Exhibit 5.1).
23.5 Consent of H. Brian Thompson.(a)
23.6 Consent of Roy A. Wilkens.(a)
24. Power of Attorney.+
24.1 Power of Attorney of Michael P. Johnson, Sr. and Scott E.
Schubert.+
25 Form T-1 Statement of Eligibility of The Bank of New York to
act as trustee under the Indenture.
27.1 Financial Data Schedule -- Six Months Ended June 30, 1999.
27.2 Financial Data Schedule -- Six Months Ended June 30, 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>
- -------------------------
(a) Incorporated by reference to the Registration Statement on Form S-1 relating
to the equity offering (File No. 333-76007).
+ Previously filed.
(*) 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.
(3) it will provide to the underwriters at the closing specified in the
purchase agreement certificates in such denominations and registered in
such names as required by the underwriters to permit delivery to each
purchaser.
II-6
<PAGE> 253
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 6 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Tulsa, Oklahoma on the 2nd day of September, 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. 6 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 September 2, 1999
- --------------------------------------------------- President (Principal
Howard E. Janzen Executive Officer)
/s/ * Chief Financial Officer September 2, 1999
- --------------------------------------------------- (Principal Accounting and
Scott E. Schubert Financial Officer)
/s/ * Director September 2, 1999
- ---------------------------------------------------
Keith E. Bailey
/s/ * Director September 2, 1999
- ---------------------------------------------------
John C. Bumgarner, Jr.
/s/ * Director September 2, 1999
- ---------------------------------------------------
Brian E. O'Neill
/s/ * Director September 2, 1999
- ---------------------------------------------------
James R. Herbster
/s/ * Director September 2, 1999
- ---------------------------------------------------
Michael P. Johnson, Sr.
/s/ * Director September 2, 1999
- ---------------------------------------------------
Steven J. Malcolm
/s/ * Director September 2, 1999
- ---------------------------------------------------
Jack D. McCarthy
</TABLE>
* Pursuant to a power of attorney.
II-7
<PAGE> 254
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 27, 1999
(included elsewhere in this Registration Statement). The financial statements of
ATL-Algar Telecom Leste S.A., (an entity in which the Company has a 30%
interest, at December 31, 1998), have been audited by other auditors whose
report has been furnished to us; insofar as our opinion on the consolidated
financial statements relates to data included for ATL-Algar Telecom Leste S.A.,
it is based solely on their report. Our audits also included the financial
statement schedule listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
July 27, 1999
S-1
<PAGE> 255
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> 256
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Purchase Agreement.
3.1 Form of Restated Certificate of Incorporation of the
Company.(a)
3.2 Form of Restated By-laws of the Company.(a)
4.1 Specimen certificate of common stock.(a)
4.2 Specimen certificate of Class B common stock.(a)
4.3 Form of certificate of designation of Series A Junior
Participating Preferred Stock.(a)
4.4 Form of indenture governing notes.
4.5 Form of note (contained in form of indenture filed as
Exhibit 4.4).
5.1 Form of 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.(a)
10.2 Amended and Restated Alliance Agreement Between Telefonos de
Mexico, S.A. de C.V. and Williams Communications, Inc.,
dated May 25, 1999.(a)*
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.(a)
10.4 Master Alliance Agreement Between Intel Internet Data
Services and Williams Communications, Inc., dated as of May
24, 1999.(a)*
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.(a)*
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.(a)*
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.(a)
10.8 Shareholders Agreement by and among Metrogas S.A., Williams
International Telecom (Chile) Limited, and Metrocom S.A.,
dated March 30, 1999, and Letter Agreement dated March 30,
1999.(a)*
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.(a)
10.10 Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8,
1999.(a)*
10.11 Transport Services Agreement dated February 8, 1999, between
Southwestern Bell Communication Services, Inc. and Williams
Communications, Inc.(a)*
10.12 Securities Purchase Agreement dated February 8, 1999,
between SBC Communications Inc. and Williams Communications
Group, Inc.(a)
</TABLE>
<PAGE> 257
<TABLE>
<C> <S>
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.(a)
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.(a)
10.15 Lease as of January 1, 1999, for Williams Technology Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.(a)
10.16 Lease as of January 1, 1999, for Williams Resource Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.(a)
10.17 Wireless Fiber IRU Agreement by and between WinStar
Wireless, Inc. and Williams Communications, Inc., effective
as of December 17, 1998.(a)
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.(a)*
10.19 UtiliCom Networks, Inc. Note and Warrant Purchase Agreement
dated December 15, 1998.(a)
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.(a)*
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.(a)
10.22 Preferred Stock Purchase by and among UniDial Holdings, Inc.
and Williams Communications, Inc., dated October 2,
1998.(a)*
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.(a)
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.(a)*
10.25 Capacity Purchase Agreement between Williams Communications,
Inc. and Intermedia Communications, Inc., dated January 5,
1998 and Amendment dated August 5, 1998.(a)*
10.26 Settlement and Release Agreement by and between WorldCom
Network Services, Inc. and Williams Communications, Inc.,
dated July 1, 1998.(a)*
</TABLE>
<PAGE> 258
<TABLE>
<C> <S>
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.(a)
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.(a)*
10.29 Distributorship Agreement by and between Northern Telecom
Limited and WilTel Communications, L.L.C., dated January 1,
1998.(a)*
10.30 Common Stock and Warrant Purchase Agreement by and among
Concentric Network Corporation and Williams Communications
Group, Inc., dated July 25, 1997.(a)
10.31 Note and Warrant Purchase Agreement by and among Concentric
Network Corporation and Williams Communications Group, Inc.,
dated June 19, 1997.(a)
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.(a)
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.(a)*
10.34 Formation Agreement by and between Northern Telecom, Inc.
and Williams Communications Group, Inc., dated April 1,
1997.(a)*
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.(a)
10.36 Subscription and Shareholders Agreement among Lightel S.A.
Technologia da Informacao, Algar S.A.-Empreendimentos e
Participacoes and Williams International Telecom Limited,
dated January 21, 1997.(a)
10.37 Sublease Agreement as of June 1, 1996, by and between
Transcontinental Gas Pipeline Company and Williams
Telecommunications Systems, Inc.(a)
10.38 System Use and Service Agreement between WilTel, Inc. and
Vyvx, Inc. effective as of January 1, 1994.(a)*
10.39 Form of administrative services agreement.(a)
10.40 Form of service agreement.(a)
10.41 Form of tax sharing agreement.(a)
10.42 Form of indemnification agreement.(a)
10.43 Form of rights agreement.(a)
10.44 Form of registration rights agreement.(a)
10.45 Form of separation agreement.(a)
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.(a)
10.47 Form of cross-license agreement.(a)
10.48 Form of technical, management and administrative services
agreement.(a)
10.49 The Williams Companies, Inc. 1996 Stock Plan.(a)
10.50 The Williams Companies, Inc. Stock Plan for Nonofficer
Employees.(a)
</TABLE>
<PAGE> 259
<TABLE>
<C> <S>
10.51 Williams Communications Stock Plan.(a)
10.52 Williams Communications Group, Inc. 1999 Stock Plan.(a)
10.53 Williams Pension Plan.(a)
10.54 Solutions LLC Pension Plan.(a)
10.55 Williams Communications Change in Control Severance Plan.(a)
10.56 Stock Purchase Agreement by and between Williams
Communications, Inc. Conferencing Acquisition Corporation
and Genesys S.A., dated as of June 30, 1999.(a)
10.57 Form of loan agreement and promissory note between Williams
Communications, Inc. and The Williams Companies, Inc.(a)
10.58 Williams Communications, Inc. Senior Credit Facilities
Commitment Letter, dated June 2, 1999.(a)
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.(a)
23.6 Consent of Roy A. Wilkens.(a)
24. Power of Attorney.+
24.1 Power of Attorney of Michael P. Johnson, Sr. and Scott E.
Schubert.+
25 Form T-1 Statement of Eligibility of The Bank of New York to
act as trustee under the Indenture.
27.1 Financial Data Schedule -- Six Months Ended June 30, 1999.
27.2 Financial Data Schedule -- Six Months Ended June 30, 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>
- -------------------------
(a) Incorporated by reference to the Registration Statement on Form S-1 relating
to the equity offering (File No. 333-76007).
+ Previously filed.
(*) 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 1.1
================================================================================
WILLIAMS COMMUNICATIONS GROUP, INC.
(a Delaware corporation)
[ ]% Senior Notes due 200_
PURCHASE AGREEMENT
Dated: [ ], 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
PURCHASE AGREEMENT
<S> <C>
SECTION 1. Representations and Warranties by the Company.....................................2
(a) Compliance with Registration Requirements.....................................2
(b) Good Standing of the Company and Significant
Subsidiaries..................................................................3
(c) Capitalization................................................................4
(d) Authorization of the Notes....................................................4
(e) Authorization of the Indenture................................................4
(f) Description of the Notes and the Indenture....................................4
(g) Authorization of Agreement....................................................5
(h) Absence of Defaults and Conflicts.............................................5
(i) Registration Rights...........................................................5
(j) No Material Adverse Change in Business........................................6
(k) Financial Statements..........................................................6
(l) Independent Accountants.......................................................6
(m) Title to Property.............................................................6
(n) Insurance.....................................................................7
(o) Possession of Intellectual Property...........................................7
(p) Absence of Proceedings........................................................7
(q) Absence of Further Requirements...............................................7
(r) Absence of Further Required Disclosure........................................7
(s) Employee Benefits Matters.....................................................7
(t) Possession of Licenses and Permits............................................8
(u) Absence of Further Transactions...............................................8
(v) Accurate Books and Records....................................................8
(w) Compliance with Agreements and Law............................................9
(x) Environmental Laws............................................................9
(y) Investment Company Act.......................................................10
(z) Transactions.................................................................10
SECTION 2. Sale and Delivery to Underwriters; Closing.......................................10
(a) Notes........................................................................10
(b) Payment......................................................................10
(c) Denominations; Registration..................................................11
SECTION 3. Covenants of the Company.........................................................11
(a) Compliance with Securities Regulations and Commission
Requests.....................................................................11
(b) Filing of Amendments.........................................................12
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(c) Delivery of Registration Statements..........................................12
(d) Delivery of Prospectuses.....................................................12
(e) Continued Compliance with Securities Laws....................................12
(f) Blue Sky Qualifications......................................................13
(g) Rule 158.....................................................................13
(h) Use of Proceeds..............................................................13
(i) Restriction on Sale of Securities............................................13
SECTION 4. Payment of Expenses..............................................................14
(a) Expenses.........................................................................14
(b) Termination of Agreement.....................................................14
SECTION 5. Conditions of Underwriters' Obligations..........................................15
(a) Effectiveness of Registration Statement......................................15
(b) Opinion of Skadden, Arps, Slate, Meagher & Flom..............................15
(c) Opinion of William von Glahn.................................................19
(d) Opinion of Counsel for Underwriters..........................................21
(e) Officers' Certificate........................................................22
(f) Accountant's Comfort Letter..................................................23
(g) Bring-down Comfort Letter....................................................23
(h) Maintenance of Rating........................................................23
(i) Additional Documents.........................................................24
(j) Termination of Agreement.....................................................24
SECTION 6. Indemnification..................................................................24
(a) Indemnification of Underwriters..............................................24
(b) Indemnification of Company, Directors, Officers and
Employees....................................................................26
(c) Actions against Parties; Notification........................................26
SECTION 7. Contribution.....................................................................28
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery..............................................................................29
SECTION 9. Termination of Agreement.........................................................29
(a) Termination; General.........................................................29
(b) Liabilities..................................................................30
SECTION 10. Default by One or More of the Underwriters......................................30
SECTION 11. Notices.........................................................................31
SECTION 12. Parties.........................................................................31
SECTION 13. Governing Law and Time..........................................................31
SECTION 14. Effect of Headings..............................................................31
</TABLE>
ii
<PAGE> 4
WILLIAMS COMMUNICATIONS GROUP, INC.
(a Delaware corporation)
$[ ]
[ ]% Senior Notes due 200_
PURCHASE AGREEMENT
[ ], 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Lehman Brothers Inc.
Salomon Smith Barney Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Williams Communications Group, Inc., a Delaware corporation (the
"COMPANY"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MERRILL LYNCH") and each of the other
Underwriters named in Schedule A hereto (collectively, the "UNDERWRITERS",
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch, Lehman Brothers Inc.
and Salomon Smith Barney Inc. are acting as representatives (in such capacity,
the "REPRESENTATIVES"), with respect to the issue and sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective principal amounts set forth in said Schedule A of $[ ]
aggregate principal amount of the Company's [ ]% Senior Notes due 200_ (the
"NOTES").
<PAGE> 5
The Notes are to be issued pursuant to an indenture dated as of [ ], 1999 (the
"INDENTURE") between the Company and [ ], as trustee (the "TRUSTEE").
The Company understands that the Underwriters propose to make a public
offering of the Notes as soon as the Representatives deem advisable after this
Agreement has been executed and delivered and the Indenture has been qualified
under the Trust Indenture Act of 1939, as amended (the "1939 ACT").
It is understood that as of the Closing Date (as defined below), the
Company will consummate a series of transactions pursuant to which (i) the
Company will sell and issue [ ] shares of the Company's Class A Common Stock,
par value $0.01 per share (the "COMMON STOCK," and together with the [ ] shares
of the Company's Common Stock subject to an option granted to certain
underwriters pursuant to the Equity Underwriting Agreement (as defined below),
the "STOCK") pursuant to an underwriting agreement (the "EQUITY UNDERWRITING
AGREEMENT") of even date herewith, (ii) the Company will have issued a $[ ]
million intercompany note to The Williams Companies, Inc. and (iii) the Company
will have entered into a strategic alliance (the "STRATEGIC ALLIANCE") with SBC
Communications Inc. ("SBC") and in connection therewith will sell shares of the
Common Stock to SBC pursuant to a Securities Purchase Agreement dated February
8, 1999 ( the "SECURITIES PURCHASE AGREEMENT") (all such transactions, as more
fully described in the Prospectus (as defined below), shall collectively be
referred to herein as the "TRANSACTIONS"). The Transactions shall be deemed to
take place simultaneously on the Closing Date and are contingent upon the
consummation of one another.
SECTION 1. Representations and Warranties by the Company. The Company
represents, warrants and agrees that:
(a) Compliance with Registration Requirements. A registration
statement on Form S-1 with respect to the Notes has (i) been prepared by the
Company in conformity in all material respects with the requirements of the
Securities Act of 1933, as amended (the "1933 ACT"), and the rules and
regulations (the "1933 ACT RULES AND REGULATIONS") of the Securities and
Exchange Commission (the "COMMISSION") thereunder, (ii) been filed with the
Commission under the 1933 Act and (iii) become effective under the 1933 Act.
Copies of such registration statement and each of the amendments thereto have
been delivered by the Company to you. As used in this Agreement, "EFFECTIVE
TIME" means the date and the time as of which such registration statement, or
the most recent post-effective amendment thereto, if any, was declared
effective by the Commission; "EFFECTIVE DATE" means the date of the Effective
Time; "PRELIMINARY PROSPECTUS" means each prospectus included in such
registration statement, or
2
<PAGE> 6
amendments thereof, before it became effective under the 1933 Act and any
prospectus filed with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the 1933 Act Rules and Regulations;
"REGISTRATION STATEMENT" means such registration statement, as amended at the
Effective Time, including all information contained in the final prospectus, if
any, filed with the Commission pursuant to Rule 424(b) of the 1933 Act Rules and
Regulations and deemed to be a part of the registration statement as of the
Effective Time pursuant to Rule 430A of the 1933 Act Rules and Regulations
("RULE 430A"); and "PROSPECTUS" means the prospectus used to confirm sales of
the Notes. If the Company has filed an abbreviated registration statement to
register additional Notes pursuant to Rule 462(b) under the 1933 Act (the "RULE
462 REGISTRATION STATEMENT"), then any reference herein to the term
"REGISTRATION STATEMENT" shall be deemed to include such Rule 462 Registration
Statement. To the best of the Company's knowledge, the Commission has not issued
any order preventing or suspending the use of any Preliminary Prospectus.
The Registration Statement conforms in all material respects, and the
Prospectus and any further amendments or supplements to the Registration
Statement or the Prospectus will, when they become effective or are filed with
the Commission, as the case may be, conform in all material respects to the
requirements of the 1933 Act and the 1933 Act Rules and Regulations as well as
with the 1939 Act and the rules and regulations of the Commission under the
1939 Act (the "1939 ACT REGULATIONS") and do not and will not, as of the
applicable effective date (as to the Registration Statement and any amendment
thereto) and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided that no representation or
warranty is made as to information contained in or omitted from the
Registration Statement or the Prospectus in reliance upon and in conformity
with written information furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein.
(b) Good Standing of the Company and Significant Subsidiaries. The
Company and each of its significant subsidiaries (as defined in Rule 1-02 of
Regulation S-X under the 1933 Act) (each, a "SIGNIFICANT SUBSIDIARY" and
collectively, "SIGNIFICANT SUBSIDIARIES"), which are listed on Schedule C
hereto, have been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good standing as
foreign corporations in each jurisdiction in which their respective ownership
or lease of property or the conduct of their respective businesses requires
such qualification, except where failure to have such qualifications would not,
singly or in the aggregate, have a material
3
<PAGE> 7
adverse effect on the consolidated financial position, results of operation,
business or prospects of the Company and its subsidiaries, taken as a whole,
and have all power and authority necessary to own or hold their respective
properties and to conduct the businesses in which they are engaged.
(c) Capitalization. The Company has an authorized capitalization as
set forth in the Prospectus and all of the issued shares of capital stock of
the Company have been duly authorized and validly issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each Significant
Subsidiary have been duly authorized and validly issued and are fully paid and
non-assessable and (except for directors' qualifying shares) are owned directly
or indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(d) Authorization of the Notes. The Notes have been duly authorized
and, at the Closing Time (defined below), will have been duly executed by the
Company and, when authenticated and issued in the manner provided for in the
Indenture and delivered to the Trustee against payment of the purchase price
therefor as provided in this Agreement, will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency (including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or similar laws affecting enforcement of
creditors' rights generally or except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law), and will be in the form contemplated by,
and entitled to the benefits of, the Indenture.
(e) Authorization of the Indenture. The Indenture has been duly
authorized by the Company and duly qualified under the 1939 Act and, when duly
executed and delivered by the Company and the Trustee, will constitute a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
enforcement of creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(f) Description of the Notes and the Indenture. The Notes and the
Indenture will conform in all material respects to the respective statements
relating thereto contained in the Prospectus and will be in substantially the
respective forms filed as exhibits to the Registration Statement.
4
<PAGE> 8
(g) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(h) Absence of Defaults and Conflicts. The execution, delivery and
performance of this Agreement, the Indenture, the Notes and each of the other
documents to be entered into in connection with the Transactions by the Company
and the consummation of the transactions contemplated hereby and thereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its Significant Subsidiaries is a party or by which the Company or any
of its Significant Subsidiaries is bound or to which any of the property or
assets of the Company or any of its Significant Subsidiaries is subject, other
than such conflicts, agreements, breaches, violations or defaults which, singly
or in the aggregate, would not have a material adverse effect on the
consolidated financial position, results of operations, business or prospects
of the Company and its subsidiaries, taken as a whole, nor will such actions
result in any violation of the provisions of the charter or by-laws of the
Company or any of its Significant Subsidiaries or any statute or any order,
rule or regulation known to the Company of any court or governmental agency or
body having jurisdiction over the Company or any of its Significant
Subsidiaries or any of their properties or assets; and except for the
registration of the Stock and the Notes under the 1933 Act and such consents,
approvals, authorizations, registrations or qualifications as may be required
under the Securities Exchange Act of 1934, as amended (the "1934 ACT"), the
1933 Act, the 1939 Act, applicable state securities laws and securities laws of
foreign jurisdictions in connection with the purchase and distribution of the
Notes by the Underwriters and the purchase and distribution of the Stock by the
underwriters named in the Equity Underwriting Agreement, no consent, approval,
authorization or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby.
(i) Registration Rights. Except as described in the Prospectus, there
are no contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the 1933 Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include any securities of the Company in the securities registered pursuant to
the Registration Statement.
5
<PAGE> 9
(j) No Material Adverse Change in Business. Neither the Company nor
any of its Significant Subsidiaries has sustained, since the respective dates
as of which information is given in the Prospectus, any loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree that has resulted in, or is reasonably likely to result
in, a material adverse change in the consolidated financial position, results
of operations, business or prospects of the Company and its subsidiaries, taken
as a whole, otherwise than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any material change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any material
adverse change, or any development involving a prospective material adverse
change, in or affecting the consolidated financial position, results of
operations, business or prospects of the Company and its subsidiaries, taken as
a whole, otherwise than as set forth or contemplated in the Prospectus.
(k) Financial Statements. The financial statements (including the
related notes and supporting schedules) filed as part of the Registration
Statement or included in the Prospectus present fairly, in all material
respects, the financial condition and results of operations of the entities
purported to be shown thereby, at the dates and for the periods indicated, and
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved, except as may be
indicated in the notes thereto.
(l) Independent Accountants. Ernst & Young, who have certified certain
financial statements of the Company, whose report appears in the Prospectus and
who have delivered one of the initial letters referred to in Section 5(f)
hereof, are independent public accountants as required by the 1933 Act and the
1933 Act Rules and Regulations; and Deloitte & Touche, whose report appears in
the Prospectus and who have delivered one of the initial letters referred to in
Section 5(f) hereof, were independent accountants as required by the 1933 Act
and the 1933 Act Rules and Regulations during the periods covered by the
financial statements on which they reported.
(m) Title to Property. The Company and each of its Significant
Subsidiaries have good title to all real property and good title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects, except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
materially interfere with the conduct of business of the Company and its
subsidiaries, taken as a whole; and all assets held under lease by the Company
and its Significant Subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not
6
<PAGE> 10
material and do not interfere with the conduct of business of the Company and
its subsidiaries, taken as a whole.
(n) Insurance. The Company and each of its Significant Subsidiaries
carry, or are covered by, insurance in such amounts and covering such risks as
the Company believes is adequate for the conduct of their respective businesses
and the value of their respective properties and as the Company believes is
customary for companies engaged in similar businesses in similar industries.
(o) Possession of Intellectual Property. The Company and each of its
Significant Subsidiaries own or possess, or can acquire on reasonable terms,
adequate rights to use all material patents, patent applications, trademarks,
service marks, trade names, copyrights and licenses necessary for the conduct
of their respective businesses and have no reason to believe that the conduct
of their respective businesses will conflict with, and have not received any
notice of any claim of conflict with, any such rights of others which, singly
or in the aggregate, in the judgment of the Company, is reasonably likely to
result in any material adverse change in the consolidated financial position,
results of operations, business or prospects of the Company and its
subsidiaries, taken as a whole.
(p) Absence of Proceedings. Except as described in the Prospectus,
there are no legal or governmental proceedings pending to which the Company or
any of its Significant Subsidiaries is a party or of which any property or
assets of the Company or any of its Significant Subsidiaries is the subject
which, if determined adversely to the Company or any of its Significant
Subsidiaries, might have a material adverse effect on the consolidated
financial position, results of operations, business or prospects of the Company
and its subsidiaries, taken as a whole; and to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(q) Absence of Further Requirements. There are no contracts or other
documents which are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Rules
and Regulations which have not been described in the Prospectus or filed as
exhibits to the Registration Statement.
(r) Absence of Further Required Disclosure. No business or related
party transaction exists which is required by Item 404 of Regulation S-K to be
described in the Prospectus which is not so described.
(s) Employee Benefits Matters. The Company is in compliance in all
material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
7
<PAGE> 11
and published interpretations thereunder ("ERISA"); no "REPORTABLE EVENT" (as
defined in ERISA) has occurred with respect to any "PENSION PLAN" (as defined
in ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "PENSION PLAN" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"CODE"); and each "PENSION PLAN" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by action
or by failure to act, which would cause the loss of such qualification.
(t) Possession of Licenses and Permits. The Company has filed all
material federal, state and local income and franchise tax returns required to
be filed through the date hereof and has paid all taxes due thereon, other than
those filings or payments being contested in good faith, and the Company has
not received notice that any tax deficiency has been determined adversely to
the Company or any of its Significant Subsidiaries which has had or is
reasonably likely to have a material adverse effect on the consolidated
financial position, results of operations, business or prospects of the Company
and its subsidiaries, taken as a whole.
(u) Absence of Further Transactions. Since the date as of which
information is given in the Prospectus through the date hereof, and except as
may otherwise be disclosed in the Prospectus or with respect to the subsequent
issuance of shares of Common Stock, if any, pursuant to employee or director
benefit plans, the Company has not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business, except, in case of (ii) and (iii), for such liabilities, obligations
or transactions that have not had or are not reasonably expected to have, a
material adverse effect on the consolidated financial conditions, results of
operations, business or prospects of the Company and its subsidiaries, taken as
a whole or (iv) declared or paid any dividend on its capital stock.
(v) Accurate Books and Records. The Company (i) makes and keeps
accurate books and records and (ii) maintains internal accounting controls
which provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only in
accordance with management's
8
<PAGE> 12
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
(w) Compliance with Agreements and Law. Neither the Company nor any of
its Significant Subsidiaries (i) is in violation of its charter or by-laws,
(ii) is in default in any material respect, and no event has occurred which,
with notice or lapse of time or both, would constitute such a default, in the
due performance or observance of any term, covenant or condition contained in
any material indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which it is a party or by which it is bound or to
which any of its properties or assets is subject or (iii) is in violation in
any material respect of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject or has failed
to obtain any material license, permit, certificate, franchise or other
governmental authorization or permit necessary to the ownership of its property
or to the conduct of its business except, in case of (ii) and (iii), for such
defaults, violations, or failures to obtain such authorizations or permits that
have not had or are not reasonably expected to have, a material adverse effect
on the consolidated financial condition, results or operations, business or
prospects of the Company and its subsidiaries, taken as a whole.
(x) Environmental Laws. There has been no storage, disposal,
generation, manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous substances by the
Company or any of its Significant Subsidiaries (or, to the knowledge of the
Company, any of their predecessors in interest) at, upon or from any of the
property now or previously owned or leased by the Company or its Significant
Subsidiaries in violation of any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit or which would require remedial action under
any applicable law, ordinance, rule, regulation, order, judgment, decree or
permit, except for any violation or remedial action which would not have, or
could not be reasonably likely to have, singularly or in the aggregate with all
such violations and remedial actions, a material adverse effect on the
consolidated financial position, results of operations, business or prospects
of the Company and its subsidiaries, taken as a whole; there has been no
material spill, discharge, leak, emission, injection, escape, dumping or
release of any kind onto such property or into the environment surrounding such
property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or
hazardous substances due to or caused by the Company or any of its Significant
Subsidiaries or with respect to which the Company or any of its Significant
Subsidiaries have knowledge, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a material adverse effect on the consolidated financial
9
<PAGE> 13
position, results of operations, business or prospects of the Company and its
subsidiaries, taken as a whole; and the terms "HAZARDOUS WASTES", "TOXIC
WASTES", "HAZARDOUS SUBSTANCES" and "MEDICAL WASTES" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(y) Investment Company Act. Neither the Company nor any subsidiary is,
or, as of the Closing Date after giving effect to the Transactions and the
application of the net proceeds therefrom as described in the Prospectus, will
be, an "investment company" as defined in the Investment Company Act of 1940,
as amended.
(z) Transactions. On or prior to the Closing Date, each of the
documents to be entered into in connection with the Transactions (other than
this Agreement) will have been duly authorized, executed and delivered by the
Company in substantially the form previously provided to the Underwriters and
will conform to the descriptions thereof in the Prospectus.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Notes. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price set forth in Schedule B, the aggregate principal amount of Notes set
forth in Schedule A opposite the name of such Underwriter, plus any additional
principal amount of Notes which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 10 hereof.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Notes shall be made at the offices of Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017, or at such other
place as shall be agreed upon by the Representatives and the Company, at 10:00
A.M. (Eastern time) on the fourth full business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time as shall be agreed upon by the Representatives and the Company (such
time and date of payment and delivery being herein called "CLOSING TIME").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Representatives for the respective accounts of the Underwriters of
certificates for the Notes to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for,
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and make payment of the purchase price for, the Notes which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Notes to be purchased by any Underwriter whose funds have not
been received by the Closing Time, but such payment shall not relieve such
Underwriter from its obligations hereunder.
(c) Denominations; Registration. Certificates for the Notes shall be
in such denominations ($1,000 or integral multiples thereof) and registered in
such names as the Representatives may request in writing at least one full
business day before the Closing Time. The Notes, which may be in temporary
form, will be made available for examination and packaging by the
Representatives in the City of New York not later than 10:00 A.M. (Eastern
time) on the business day prior to the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of Rule
430A and will notify the Representatives immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed and (ii) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary prospectus, or of
the suspension of the qualification of the Notes for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary, if any,
pursuant to Rule 424(b) and will take such steps as it deems necessary to
ascertain promptly whether the form of any such prospectus was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. If any stop order is issued, the Company will make every
reasonable effort to obtain the lifting thereof.
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<PAGE> 15
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)) or any amendment, supplement
or revision to either the prospectus included in the Registration Statement at
the time it became effective or to the Prospectus, will furnish the
Representatives with copies of any such documents and will obtain the consent
of the Representatives to the filing, which consent shall not be unreasonably
withheld.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, conformed copies of the Registration Statement as originally filed and
of each amendment thereto (including exhibits filed therewith), and will also
deliver to the Representatives, without charge, a conformed copy of the
Registration Statement as originally filed and of each amendment thereto
(without exhibits) for each of the Underwriters. The copies of the Registration
Statement and each amendment thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to the Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR"), except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 ACT"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Rules and Regulations and the 1939 Act and the
1939 Act Regulations so as to permit the completion of the distribution of the
Notes as contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act to be delivered in connection
with sales of the Notes, any event shall occur or condition shall exist as a
result of which it is necessary, in the opinion of counsel for the Underwriters
or for the Company, to amend the Registration Statement or amend or supplement
the Prospectus in order that the Prospectus will not include any untrue
statements of a
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<PAGE> 16
material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances existing at
the time they were made, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Rules and Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements, and the
Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Notes for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Representatives may reasonably designate and to maintain such
qualifications in effect for such period of time that is necessary to complete
the distribution of the Notes; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject.
(g) Rule 158. The Company will make generally available to its
securityholders as soon as practicable an earnings statement (which need not be
audited) for the purposes of, and to provide the benefits contemplated by, the
last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Notes in the manner specified in the Prospectus under
"USE OF PROCEEDS".
(i) Restriction on Sale of Securities. During a period of 180 days
from the date of the Prospectus, the Company will not, without the prior
written consent of Merrill Lynch on behalf of the Underwriters, directly or
indirectly, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, lend or otherwise dispose of or transfer, any debt
securities, or any securities convertible into or exercisable or exchangeable
for debt securities, or file a registration statement under the 1933 Act with
respect to the foregoing.
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SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters, the Indenture and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Notes, (iii) the preparation, issuance and delivery of the certificates for the
Notes to the Underwriters, (iv) the fees and disbursements of the Company's
counsel and accountants (v) the qualification of the Notes under securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the reasonable fees (not in excess in the aggregate of $10,000) and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Memorandum and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, the Prospectus and any amendments or supplements
thereto, (vii) the costs and expenses of the Company relating to investor
presentations on any "ROAD SHOW" undertaken in connection with the marketing of
the offering of the Notes, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered (with the approval of the Company) in connection
with the road show, (viii) the fees and expenses of the Trustee, including the
fees and disbursements of counsel for the Trustee in connection with the
Indenture and the Notes, (ix) any fees payable in connection with the rating of
the Notes, and (x) the filing fees incident to the review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale
of the Notes; provided that, except as provided in this Section 4, the
Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on the Notes which they may sell,
and the expenses of advertising the offering of the Notes made by the
Underwriters.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters. If this Agreement is terminated
pursuant to Section 10 by reason of the default of one or more of the
Underwriters, the Company shall not be obligated to reimburse any defaulting
Underwriter on account of those expenses.
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SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof, to
the performance by the Company of its covenants and other obligations
hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with. If
applicable, a prospectus containing the information required by Rule 430A shall
have been filed with the Commission in accordance with Rule 424(b), or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A.
(b) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP. At Closing
Time, Skadden, Arps, Slate, Meagher & Flom LLP shall have furnished to the
Representatives their written opinion, as counsel to the Company, addressed to
the Underwriters and dated the Closing Time, in form and substance reasonably
satisfactory to the Representatives, to the effect that:
(i) The Company has an authorized capitalization as set forth
in the Prospectus under the "Actual" column under the caption
"Capitalization", and all of the issued shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid
and non-assessable and conform in all material respects to the
description thereof contained in the Prospectus; provided, however,
that in rendering the preceding opinion, counsel may rely on a review
of the Restated Certificate of Incorporation and By-Laws of the
Company, minutes of the Company's Board of Directors, and officer's
certificate regarding the outstanding capital stock and a certificate
of the transfer agent for the capital stock.
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(ii) At the time the Registration Statement became effective
the Registration Statement, and the Prospectus as of its date appeared
on their face to be appropriately responsive in all material respects
to the requirements of the 1933 Act and the 1933 Act Rules and
Regulations, except in each case counsel need express no opinion as to
the financial statements, schedules and other financial data included
therein or excluded therefrom or the exhibits to the Registration
Statement, including the Form T-1, and counsel need not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus
(other than as set forth in clause (iii) below).
(iii) The statements contained in the Prospectus under the
captions "Description of the Notes," insofar as they constitute
summaries of matters of law or summaries of provisions of the Notes,
fairly summarize such laws or such provisions in all material respects;
the statements contained in the Prospectus under the captions
"Regulation-General regulatory environment"; "-Federal regulation";
"-State regulation" (with the exception of the sentence "We are
currently authorized to provide intrastate services in 37 states.");
and "-Local regulation" (with the exception of the sentence "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."), insofar
as they constitute summaries of matters of law, fairly summarize such
laws or such provisions in all material respects; and the statements
contained in the Prospectus under the caption "Important United States
Federal Tax Consequences of Our Common Stock to Non-U.S. Holders,"
insofar as they purport to constitute statements of law or legal
conclusions, have been reviewed by counsel and fairly present the
information disclosed therein in all material respects.
(iv) To the best of such counsel's knowledge based solely on
discussion with officers of the Company responsible for such matters
and review by counsel of documents furnished by them, there are no
contracts or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the
1933 Act or by the 1933 Act Rules and Regulations which have not been
described or filed as exhibits to the Registration Statement.
(v) This Agreement has been duly authorized, executed and
delivered by the Company; and each of the other documents listed on
Schedule ____ to counsel's opinion as a "Transaction Document" has been
duly authorized, executed and delivered by the Company.
(vi) To the best of such counsel's knowledge the issue and
sale of the Notes by the Company pursuant to this Agreement and the
execution, delivery and compliance by the Company with all of the
provisions of this Agreement, the Indenture, the Notes and each of the
Transaction Documents and the consummation of the transactions
contemplated hereby and thereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any Applicable Contract,
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<PAGE> 20
except to the extent such conflict, breach, violation or default has
not had or would not reasonably be expected to have, a material adverse
change in the consolidated financial condition, results of operations,
business or prospects of the Company and its subsidiaries, taken as a
whole, nor will such actions result in any violation of the provisions
of the charter or by-laws of the Company or any of its Significant
Subsidiaries or any Applicable Law or Applicable Order; and, except for
the registration of the Stock and the Notes under the 1933 Act and such
consents, approvals, filings, authorizations, registrations or
qualifications as may be required under the 1934 Act and applicable
state securities laws, as to which counsel need express no opinion, in
connection with the purchase and distribution of the Notes by the
Underwriters and the purchase and distribution of the Stock by the
underwriters named in the Equity Underwriting Agreement, no
Governmental Approval is required for the execution, delivery and
performance of this Agreement, the Indenture, the Notes or any of the
Transaction Documents by the Company and the consummation of the
transactions contemplated hereby and thereby, except for such
Governmental Approvals, as have been obtained or made.
(vii) The Company is not an "investment company" as defined
in the Investment Company Act of 1940, as amended.
(viii) The Indenture has been duly authorized, executed and
delivered by the Company and (assuming the due authorization, execution
and delivery thereof by the Trustee) constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or
similar laws affecting enforcement of creditors' rights generally and
except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a proceeding
in equity or at law) and the waiver contained in Section 3.24 of the
Indenture may be deemed unenforceable.
(ix) The issuance and sale of the Notes have been duly
authorized by the Company, and the Notes, when executed and
authenticated in accordance with the terms of the Indenture and
delivered to and paid for by the Underwriters in accordance with the
terms of the Purchase Agreement, will be valid and binding obligations
of the company entitled to the benefits of the Indenture and
enforceable against the Company in accordance with their terms, except
to the extent that (a) enforcement thereof may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally
and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity) and
(b) the waiver contained in Section 3.24 of the Indenture may be deemed
unenforceable.
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(x) The Indenture has been duly qualified under the 1939
Act.
(xi) The Notes and the Indenture conform as to legal matters
in all material respects to the descriptions thereof contained in the
Prospectus.
The term "Applicable Contracts" means those agreements which are
specifically identified to counsel by the Company and listed on a Schedule to
counsel's opinion and "Applicable Laws" means the Delaware General Corporation
Law and those laws, rules and regulations of the State of New York and the
federal laws of the United States of America which, in counsel's experience, are
normally applicable to transactions of the type contemplated by this Agreement
but without counsel's having made any special investigation concerning any other
laws, rules or regulations; provided that the term "Applicable Laws" does not
include the securities or antifraud laws of any jurisdiction or the rules and
regulations of the National Association of Securities Dealers, Inc. The term
"Applicable Orders" means those orders or decrees of governmental authorities
specifically identified to counsel by the Company and listed on a Schedule to
counsel's opinion. The term "Transaction Documents" means those agreements which
are listed on Schedule ___ to counsel's opinion. The term "Governmental
Approvals" means any consent, approval, license, authorization or validation of,
or notice to, or filing, recording or registration with, any New York or federal
executive, legislative, judicial, administrative or regulatory body pursuant to
Applicable Laws.
In rendering the opinion set forth in clause (vi) with respect to
conflicts with, defaults under, and breaches or violations of, Applicable
Contracts, counsel need not express any opinion with respect to compliance with
any covenant, restriction or provision of any Applicable Contract that requires
satisfaction of a financial ratio or test or any aspect of the financial
condition, results of operations, business or prospects of the Company or any of
its subsidiaries.
We have been advised that the Registration Statement was declared
effective under the 1933 Act as of the date and time specified in such opinion,
the Prospectus was filed with the Commission pursuant to the subparagraph of
Rule 424(b) of the 1933 Act Rules and Regulations specified in such opinion on
the date specified therein and, to the knowledge of counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued and,
to the knowledge of such counsel, no proceeding for that purpose is pending or
threatened by the Commission.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of America,
to the extent specifically referred therein, the laws of the State of New York
and the General Corporation Law of the State of Delaware. Such opinion shall
also be to the effect that (x) such counsel has acted as special counsel to the
Company in connection with the preparation of the Registration Statement and (y)
based on the foregoing, no facts have come to the attention of such counsel
which lead them to believe that the Registration Statement (except for the
financial statements and financial schedules and other financial data included
therein and the Trustee's Statement of Eligibility on Form T-1, as to which such
counsel need express no belief) as of the Effective Date, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, or that the Prospectus (except as stated above), as of its date and
as of the Closing Date contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The foregoing opinion
and statement may be qualified by a statement to the effect that such counsel is
not passing upon and is not assuming any responsibility for the accuracy,
completeness, or fairness of the states contained in the Registration Statement
or the Prospectus and has not made any independent check or verification thereof
(other than as set forth in clause (iii) above).
(c) Opinion of William von Glahn. At Closing Time, William von Glahn,
Senior Vice President of Law of the Company, shall have furnished to the
Representatives his written opinion, addressed to the Underwriters and dated
the Closing Time, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
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<PAGE> 22
(i) The Company and each of its Significant Subsidiaries have
been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good
standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, except to the
extent such failure to be qualified or in good standing would not have
a material adverse effect on the consolidated financial position,
results of operations, business or prospects of the Company and its
subsidiaries, taken as a whole, and have all corporate power and
authority necessary to own or hold their respective properties and
conduct the businesses in which they are engaged as described in or
contemplated by the Registration Statement.
(ii) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its Significant
Subsidiaries is a party or of which any property or assets of the
Company or any of its Significant Subsidiaries is the subject which,
if determined adversely to the Company or any of its Significant
Subsidiaries, could reasonably be expected to have a material adverse
effect on the consolidated financial position, results of operations,
business or prospects of the Company and its subsidiaries, taken as a
whole; and, to the best of such counsel's knowledge, no such
proceedings are threatened or pending by governmental authorities or
threatened by others.
(iii) Except as described in the Prospectus, to the best of
such counsel's knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement
under the 1933 Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement.
(iv) The Company is in compliance in all material respects
with all presently applicable provisions of ERISA; no "reportable
event" (as defined in ERISA) has occurred with respect to any "PENSION
PLAN" (as defined in ERISA) for which the Company would have any
liability; the Company has not incurred and does not expect to incur
liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any "PENSION PLAN" or (ii) Sections 412 or 4971 of
the Code; and each "PENSION PLAN" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the
Code is so qualified in
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all material respects and nothing has occurred, whether by action or
by failure to act, which would cause the loss of such qualification.
(v) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous substances
by the Company or any of its Significant Subsidiaries (or, to the
knowledge of the Company, any of their predecessors in interest) at,
upon or from any of the property now or previously owned or leased
(but not including property on which the Company had or has easements
or similar rights) by the Company or its Significant Subsidiaries in
violation of any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit or which would require remedial action
under any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit, except for any violation or remedial
action which would not have, or could not be reasonably likely to
have, singularly or in the aggregate with all such violations and
remedial actions, a material adverse effect on the consolidated
financial position, results of operations, business or prospects of
the Company and its subsidiaries, taken as a whole; there has been no
material spill, discharge, leak, emission, injection, escape, dumping
or release of any kind onto such property or into the environment
surrounding such property of any toxic wastes, medical wastes, solid
wastes, hazardous wastes or hazardous substances due to or caused by
the Company or any of its Significant Subsidiaries or with respect to
which the Company or any of its Significant Subsidiaries have
knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singularly or in the aggregate with
all such spills, discharges, leaks, emissions, injections, escapes,
dumpings and releases, a material adverse effect on the consolidated
financial position, results of operations, business or prospects of
the Company and its subsidiaries, taken as a whole.
(vi) The statements contained in the Prospectus under the
captions "Regulation," "Relationships and Related Party Transactions,"
"Relationship Between our Company and Williams" and "Description of
Other Indebtedness and Other Financing Arrangements," insofar as they
constitute summaries of legal matters, documents, proceedings, federal
statutes, rules and regulations, fairly summarize such legal matters,
documents, proceedings, federal statutes, rules and regulations in all
material respects.
In rendering such opinion, such counsel may state that his opinion is
limited to matters governed by the Federal laws of the United States of
America, the laws of the [State of New York] and the General Corporation Law of
the State of Delaware.
(d) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received from Davis Polk & Wardwell, counsel for the
Underwriters (and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to pass
upon such matters) such opinion or opinions, dated the Closing Time, to the
effect that:
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(i) This Agreement has been duly authorized, executed and
delivered by the Company.
(ii) The Indenture has been duly authorized, executed and
delivered by the Company and (assuming the due authorization,
execution and delivery thereof by the Trustee) constitutes a valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be
limited by bankruptcy, insolvency (including, without limitation, all
laws relating to fraudulent transfers), reorganization, moratorium or
similar laws affecting enforcement of creditors' rights generally and
except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a
proceeding in equity or at law).
(iii) The Notes are in the form contemplated by the
Indenture, have been duly authorized by the Company and, assuming that
the Notes have been duly authenticated by the Trustee in the manner
described in its certificate delivered to you today (which fact such
counsel need not determine by an inspection of the Notes), the Notes
have been duly executed, issued and delivered by the Company and
constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or similar laws affecting
enforcement of creditors' rights generally and except as enforcement
thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at
law), and will be entitled to the benefits of the Indenture.
(iv) The Indenture has been duly qualified under the 1939
Act.
(v) The Notes and the Indenture conform as to legal matters
in all material respects to the descriptions thereof contained in the
Prospectus.
(vi) The statements contained in the Prospectus under the
captions "Description of the Notes" and "Underwriting," insofar as
such statements constitute summaries of legal matters, documents,
proceedings, federal statutes, rules and regulations, fairly summarize
in all material respects such legal matters, documents, proceedings,
federal statutes, rules and regulations.
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(vii) The Registration Statement was declared effective under
the 1933 Act as of the date and time specified in such opinion.
(viii) Nothing has come to such counsel's attention that
causes such counsel to believe that the Registration Statement and the
Prospectus and any further amendments or supplements thereto made by
the Company prior to such Delivery Date (except for the financial
statements and financial schedules and other financial data included
therein and the Trustee's Statement of Eligibility on Form T-1, as to
which such counsel need express no belief) do not comply as to form in
all material respects with the requirements of the 1933 Act and the
1933 Act Rules and Regulations.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of
America, the laws of the State of New York and the General Corporation Law of
the State of Delaware. Such opinion shall also be to the effect that (x) such
counsel has acted as counsel to the Underwriters in connection with the
preparation of the Registration Statement and (y) based on the foregoing, no
facts have come to the attention of such counsel which lead them to believe
that the Registration Statement (except for the financial statements and
financial schedules and other financial data included therein and the Trustee's
Statement of Eligibility on Form T-1, as to which such counsel need express no
belief) as of the Effective Date, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or that the
Prospectus (except as stated above) contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The foregoing opinion
and statement may be qualified by a statement to the effect that such counsel
does not assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or the Prospectus
(other than as set forth in clause (vi) above).
(e) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the Chairman of the Board,
its President, a Vice President or the chief financial officer of the Company,
dated the Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and
22
<PAGE> 26
warranties in Section 1 hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Company
has complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission.
(f) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Ernst & Young and
Deloitte and Touche a letter or letters dated such date, in form and substance
satisfactory to the Representatives, together with signed or reproduced copies
of such letter for each of the other Underwriters containing statements and
information of the type ordinarily included in accountants' "COMFORT LETTERS"
to underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(g) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Ernst & Young and Deloitte and Touche a letter or
letters, dated the Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (f) of this
Section, except that the specified date referred to shall be a date not more
than three business days prior to Closing Time.
(h) Maintenance of Rating. At Closing Time, the Notes shall be rated at
least [ ] by Moody's Investor's Service Inc. and [ ] by Standard & Poor's
Ratings Group, a division of McGraw-Hill, Inc., and the Company shall have
delivered to the Representatives a letter dated the Closing Time, from each such
rating agency, or other evidence satisfactory to the Representatives, confirming
that the Notes have such ratings; and since the date of this Agreement, there
shall not have occurred a downgrading in the rating assigned to the Notes or any
of the Company's other debt securities by any "NATIONALLY RECOGNIZED STATISTICAL
RATING AGENCY", as that term is defined by the Commission for purposes of Rule
436(g)(2) under the 1933 Act, and no such organization shall have publicly
announced that it has under surveillance or review its rating of the Notes or
any of the Company's other debt securities.
(i) Additional Documents. At Closing Time, counsel for the
Underwriters shall have been furnished with such documents and opinions as they
may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Notes as herein contemplated, or in order to evidence
the accuracy of any of the representations or warranties, or the fulfillment of
any of the conditions, herein contained; and all corporate proceedings taken by
the Company
23
<PAGE> 27
in connection with the issuance and sale of the Notes as herein contemplated
shall be satisfactory in form and substance to the Representatives and counsel
for the Underwriters.
(j) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement may be terminated by the Representatives by notice to the
Company at any time at or prior to Closing Time, and such termination shall be
without liability of any party to any other party except as provided in Section
4 and except that Sections 6 and 7 shall survive any such termination and
remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the
information required by Rule 430A or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and
(ii) against any and all expense whatsoever, as incurred,
reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter
24
<PAGE> 28
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto), including the information required by Rule 430A or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and, provided further, that the Company will not be liable to any
Underwriter with respect to any Preliminary Prospectus to the extent the
Company shall sustain the burden of proving that any such loss, liability,
claim, damage or expense resulted from the fact that such Underwriter, in
contravention of a requirement of applicable law, sold Notes to a person to
whom such Underwriter failed to send or give, at or prior to the Closing Time,
a copy of the Prospectus, as then amended or supplemented, if: (i) the Company
has previously furnished copies thereof (sufficiently in advance of the Closing
Time to allow for distribution by the Closing Time) to the Underwriter and the
loss, liability, claim, damage or expense of such Underwriter resulted from an
untrue statement or omission of a material fact contained in or omitted from
the Preliminary Prospectus which was corrected in the Prospectus as, if
applicable, amended or supplemented prior to the Closing Time and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person and (ii) such failure to give or send such
Prospectus by the Closing Time to the party or parties asserting such loss,
liability, claim, damage or expense would have constituted the sole defense to
the claim asserted by such person. The foregoing indemnity agreement is in
addition to any liability which the Company may otherwise have to any
Underwriter or to any controlling person of that Underwriter.
(b) Indemnification of Company, Directors, Officers and Employees.
Each Underwriter severally agrees to indemnify and hold harmless the Company,
each of its directors, its officers and employees and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense, joint and several, described in the indemnity contained in
subsection (a) of this
25
<PAGE> 29
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the information required by Rule 430A or
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through Merrill Lynch expressly for use in
the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto). The
foregoing indemnity agreement is in addition to any liability which any
Underwriter may otherwise have to the Company or any such director, officer,
employee or controlling person of the Company.
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. If any such claim or action shall be brought against
an indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party may participate at its own expense in the defense of any
such action and, to the extent that it wishes, jointly with any other similarly
notified indemnifying party, assume the defense thereof with counsel reasonably
satisfactory to the indemnifying party. After notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
claim or action, the indemnifying party shall not be liable to the indemnified
party under this Section 6 for any legal or other expenses subsequently
incurred by the indemnified party in connection with the defense thereof other
than the reasonable costs of investigation; provided, however, that the
Representatives shall have the right to employ counsel to represent jointly the
Representatives and those other Underwriters and their controlling persons who
may be subject to liability arising out of any claim in respect of which
indemnity may be sought by the Underwriters against the Company under this
Section 6 if: (i) the employment of such counsel has been expressly authorized
in writing by the Company, (ii) the Company has not assumed the defense of and
employed counsel reasonably satisfactory to the Representatives within a
reasonable time after notice of the commencement of such action or (iii) the
named parties to any such action or proceeding (including impleaded parties)
include both an indemnified party and the Company and such indemnified party
shall have been advised in writing by counsel that there may be one or more
legal defenses available to such indemnified party, which are different from or
additional to those available to the Company, and such counsel's representation
of such indemnified party and the Company in such action or proceeding would
give rise to a conflict of interest which would
26
<PAGE> 30
make it improper for such counsel to represent both the indemnified party and
the Company (in which case the Company shall not have the right to assume the
defense of such action or proceeding on behalf of such indemnified party). In
no event shall the indemnifying parties be liable for reasonable fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances. No indemnifying
party shall, without the prior written consent of the indemnified parties, which
consent shall not be unreasonably withheld, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party; and no indemnifying party shall be liable for any settlement
of any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with the consent of the indemnifying
party or if there is a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such settlement or judgment.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate
27
<PAGE> 31
amount of such losses, liabilities, claims, damages and expenses incurred by
such indemnified party, as incurred, (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and
the Underwriters on the other hand from the offering of the Notes pursuant to
this Agreement or (ii) if the allocation provided by clause (i) is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Notes
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Notes pursuant
to this Agreement (before deducting expenses) received by the Company and the
total underwriting discount received by the Underwriters, in each case as set
forth on the cover of the Prospectus, bear to the aggregate initial public
offering price of the Notes as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding commenced by any governmental agency or body or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Notes underwritten by it and distributed to the public were
offered to
28
<PAGE> 32
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of any such untrue or alleged untrue
statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter,
and each director, officer and employee of the Company, and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act shall have the same rights to contribution as the
Company. The Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the principal amount of Notes set
forth opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Notes to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Notes or to enforce contracts for
the sale of the Notes, or (iii) if trading in any securities of the Company has
been suspended or materially limited by the Commission, or if
29
<PAGE> 33
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the National Association of Securities Dealers, Inc.
or any other governmental authority, or (iv) if a banking moratorium has been
declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 6 and 7 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time to purchase the Notes which it
or they are obligated to purchase under this Agreement (the "DEFAULTED NOTES"),
then:
(a) if the number of Defaulted Notes does not exceed 10% of
the aggregate principal amount of the Notes to be purchased hereunder,
each of the non-defaulting Underwriters shall be obligated, severally
and not jointly, to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder
bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Notes exceeds 10% of the
aggregate principal amount of the Notes to be purchased hereunder,
this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Company shall
have the right to postpone Closing Time for a period not exceeding seven days
in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"UNDERWRITER" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
30
<PAGE> 34
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of [ ]; and notices
to the Company shall be directed to it at the address of the Company set forth
in the Registration Statement, Attention: General Counsel (Fax: (918) 573-
4503).
SECTION 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the
controlling persons and officers, employees and directors referred to in
Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the
Underwriters and the Company and their respective successors, and said
controlling persons and officers, employees and directors and their heirs and
legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Notes from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
SECTION 13. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
31
<PAGE> 35
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its
terms.
Very truly yours,
WILLIAMS COMMUNICATIONS
GROUP, INC.
By
----------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
LEHMAN BROTHERS INC.
SALOMON SMITH BARNEY INC.
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
---------------------------------
Authorized Signatory
32
<PAGE> 36
SCHEDULE A
<TABLE>
<CAPTION>
Principal
Amount of
Name of Underwriter Notes
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................................
Lehman Brothers Inc.............................................................
Salomon Smith Barney Inc.
Banc of America Securities LLC..................................................
Chase Securities Inc............................................................
BNY Capital Markets, Inc........................................................
Nesbitt Burns Securities Inc....................................................
Wasserstein Perella Securities, Inc.............................................
ABN AMRO Incorporated...........................................................
BancBoston Robertson Stephens Inc...............................................
CIBC World Markets Corp. .......................................................
Credit Lyonnais Securities (USA) Inc............................................
Credit Suisse First Boston Corporation..........................................
Deutsche Bank Securities Inc....................................................
RBC Dominion Securities Corporation.............................................
Total........................................................................... $[ ]
=========
</TABLE>
Sch A-1
<PAGE> 37
SCHEDULE B
WILLIAMS COMMUNICATIONS GROUP, INC.
$[ ] of [ ]% Senior Notes due 200_
1. The initial public offering price of the Notes shall be __% of the
principal amount thereof, plus accrued interest, if any, from the date of
issuance.
2. The purchase price to be paid by the Underwriters for the Notes
shall be __% of the principal amount thereof.
3. The interest rate on the Notes shall be __% per annum.
Sch B-1
<PAGE> 38
SCHEDULE C
Significant Subsidiaries
Sch C-1
<PAGE> 1
EXHIBIT 4.4
================================================================================
WILLIAMS COMMUNICATIONS GROUP, INC.
AND
The Bank of New York, Trustee
Indenture
Dated as of [ ], 1999
----------
$[ ]
[ ]% Senior Notes Due 200_
================================================================================
<PAGE> 2
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
DEFINITIONS
SECTION 1.01. Certain Terms Defined...........................................................11
SECTION 1.02. Other Definitions...............................................................45
ARTICLE 2
ISSUE, EXECUTION, FORM AND REGISTRATION OF NOTES
SECTION 2.01. Authentication and Delivery of Notes............................................46
SECTION 2.02. Execution of Notes..............................................................46
SECTION 2.03. Certificate of Authentication...................................................47
SECTION 2.04. Form, Denomination and Date of Notes; Payments of Interest......................47
SECTION 2.05. Global Note Legends.............................................................48
SECTION 2.06. Registration, Transfer and Exchange.............................................48
SECTION 2.07. Book-Entry Provisions for Global Notes..........................................50
SECTION 2.08. Mutilated, Defaced, Destroyed, Lost and Stolen Notes............................51
SECTION 2.09. Cancellation of Notes...........................................................52
SECTION 2.10. Temporary Notes.................................................................52
SECTION 2.11. CUSIP Numbers...................................................................52
ARTICLE 3
COVENANTS OF THE COMPANY AND THE TRUSTEE
SECTION 3.01. Payment of Principal and Interest...............................................53
SECTION 3.02. Offices for Payments, etc.......................................................53
SECTION 3.03. Appointment to Fill a Vacancy in Office of Trustee..............................53
SECTION 3.04. Paying Agents...................................................................53
SECTION 3.05. Certificates to Trustee.........................................................54
SECTION 3.06. Noteholders' Lists..............................................................55
SECTION 3.07. Reports by the Trustee..........................................................55
SECTION 3.08. Limitation on Consolidated Debt.................................................56
SECTION 3.09. Limitation on Debt of Restricted Subsidiaries...................................63
SECTION 3.10. Limitation on Issuances of Guarantees by, and Debt
Securities of, Domestic Restricted Subsidiaries.......................................65
SECTION 3.11. Limitation on Restricted Payments...............................................66
SECTION 3.12. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.....................................................71
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 3.13. Limitation on Liens.............................................................73
SECTION 3.14. Limitation on Sale and Leaseback Transactions...................................75
SECTION 3.15. Limitation on Asset Dispositions................................................76
SECTION 3.16. Limitation on Issuance and Sale of Capital Stock of
Restricted Subsidiaries...............................................................77
SECTION 3.17. Limitation on Transactions with Affiliates......................................79
SECTION 3.18. Repurchase of Notes Upon Change of Control Triggering
Event.................................................................................81
SECTION 3.19. Reports.........................................................................83
SECTION 3.20. Limitation on Designations of Unrestricted Subsidiaries.........................84
SECTION 3.21. Existence.......................................................................86
SECTION 3.22. Payment of Taxes and Other Claims...............................................86
SECTION 3.23. Maintenance of Properties and Insurance.........................................87
SECTION 3.24. Waiver of Stay, Extension or Usury Laws.........................................87
ARTICLE 4
REMEDIES OF THE TRUSTEE AND HOLDERS ON EVENT OF DEFAULT
SECTION 4.01. Events of Default...............................................................88
SECTION 4.02. Acceleration....................................................................89
SECTION 4.03. Other Remedies..................................................................90
SECTION 4.04. Waiver of Past Defaults.........................................................90
SECTION 4.05. Control by Majority.............................................................90
SECTION 4.06. Limitation on Suits.............................................................91
SECTION 4.07. Rights of Holders to Receive Payment............................................91
SECTION 4.08. Collection Suit by Trustee......................................................91
SECTION 4.09. Trustee May File Proofs of Claim................................................92
SECTION 4.10. Priorities......................................................................92
SECTION 4.11. Undertaking for Costs...........................................................93
ARTICLE 5
CONCERNING THE TRUSTEE
SECTION 5.01. Duties and Responsibilities of the Trustee; During Default;
Prior to Default......................................................................93
SECTION 5.02. Certain Rights of the Trustee...................................................94
SECTION 5.03. Trustee Not Responsible for Recitals, Disposition of Notes
or Application of Proceeds Thereof....................................................95
SECTION 5.04. Trustee and Agents May Hold Notes; Collections, etc.............................95
SECTION 5.05. Moneys Held by Trustee..........................................................96
SECTION 5.06. Notice of Default...............................................................96
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 5.07. Compensation and Indemnification of Trustee and Its Prior Claim.................96
SECTION 5.08. Right of Trustee to Rely on Officers' Certificate, etc..........................97
SECTION 5.09. Persons Eligible for Appointment as Trustee.....................................97
SECTION 5.10. Resignation and Removal; Appointment of Successor Trustee......................97
SECTION 5.11. Acceptance of Appointment by Successor Trustee..................................99
SECTION 5.12. Merger, Conversion, Consolidation or Succession to Business of Trustee..........99
SECTION 5.13. Preferential Collection of Claims..............................................100
ARTICLE 6
CONCERNING THE HOLDERS
SECTION 6.01. Evidence of Action Taken by Holders............................................101
SECTION 6.02. Proof of Execution of Instruments and of Holding of Notes; Record Date.........101
SECTION 6.03. Notes Owned by Company Deemed Not Outstanding..................................101
SECTION 6.04. Right of Revocation of Action Taken............................................102
ARTICLE 7
SUPPLEMENTAL INDENTURES
SECTION 7.01. Supplemental Indentures Without Consent of Holders.............................102
SECTION 7.02. Supplemental Indentures With Consent of Holders................................104
SECTION 7.03. Effect of Supplemental Indenture...............................................105
SECTION 7.04. Documents to Be Given to Trustee; Compliance with TIA..........................106
SECTION 7.05. Notation on Notes in Respect of Supplemental Indentures........................106
ARTICLE 8
CONSOLIDATION, MERGER OR SALE OF ASSETS
SECTION 8.01. Consolidation, Merger or Sale of Assets........................................106
SECTION 8.02. Successor Corporation Substituted..............................................107
SECTION 8.03. Opinion of Counsel to Trustee..................................................108
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
ARTICLE 9
REDEMPTION OF NOTES
<S> <C>
SECTION 9.01. Right of Optional Redemption; Prices...........................................108
SECTION 9.02. Notice of Redemption; Partial Redemptions......................................109
SECTION 9.03. Payment of Notes Called for Redemption.........................................110
SECTION 9.04. Exclusion of Certain Notes from Eligibility for Selection
for Redemption.......................................................................111
ARTICLE 10
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 10.01. Company's Option to Effect Defeasance or Covenant
Defeasance...........................................................................111
SECTION 10.02. Legal Defeasance and Discharge................................................111
SECTION 10.03. Covenant Defeasance...........................................................112
SECTION 10.04. Conditions to Legal or Covenant Defeasance....................................112
SECTION 10.05. Deposited Money and Government Securities to Be Held
in Trust; Other Miscellaneous Provisions.............................................114
SECTION 10.06. Repayment to Company..........................................................114
SECTION 10.07. Reinstatement.................................................................115
ARTICLE 11
MISCELLANEOUS PROVISIONS
SECTION 11.01. Incorporators, Stockholders, Officers, Directors,
Employees and Controlling Persons of Company Exempt from
Individual Liability.................................................................115
SECTION 11.02. Provisions of Indenture for the Sole Benefit of Parties and
Holders..............................................................................116
SECTION 11.03. Successors and Assigns of Company Bound by Indenture..........................116
SECTION 11.04. Notices and Demands on Company, Trustee and Holders...........................116
SECTION 11.05. Officers' Certificates and Opinions of Counsel;
Statements to Be Contained Therein...................................................117
SECTION 11.06. Payments Due on Saturdays, Sundays and Holidays...............................118
SECTION 11.07. Conflict of Any Provision of Indenture with Trust
Indenture Act of 1939................................................................118
SECTION 11.08. New York Law to Govern........................................................118
SECTION 11.09. Counterparts..................................................................118
SECTION 11.10. Effect of Headings............................................................118
</TABLE>
iv
<PAGE> 6
INDENTURE, dated as of [ ] between Williams Communications Group,
Inc., a Delaware corporation (the "COMPANY"), and The Bank of New York, a New
York banking corporation (the "TRUSTEE"),
W I T N E S S E T H :
WHEREAS, the Company has duly authorized the issuance of its [ ]%
Senior Notes Due 200_ (the "NOTES") and, to provide, among other things, for the
authentication, delivery and administration thereof, the Company has duly
authorized the execution and delivery of this Indenture; and
WHEREAS, the Notes and the Trustee's certificate of authentication
shall be in substantially the following form:
[FORM OF FACE OF NOTE]
No. $
[CUSIP]
Williams Communications Group, Inc.
[ ]% Senior Note Due 200_
Williams Communications Group, Inc., a Delaware corporation (the
"COMPANY"), for value received hereby promises to pay to [ ] or registered
assigns the principal sum of [ ] Dollars at the Company's office or agency
for said purpose in The City of New York, on [ ], 200_, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts, and to pay interest,
semi-annually on[ ] and [ ] (each an "INTEREST PAYMENT DATE") of
each year, commencing with [ ], on said principal sum in like coin or
currency at the rate per annum set forth above at said office or agency from
the most recent Interest Payment Date to which interest on the Notes has been
paid or duly provided for, unless the date hereof is a date to which interest
on the Notes has been paid or duly provided for, in which case from the date of
this Note, or, if no interest on the Notes has been paid or duly provided for,
from [ ], 1999. Notwithstanding the foregoing, if the date hereof is
after [ ] or [ ] (each a "REGULAR RECORD DATE"), as the case may
be, and before the immediately following Interest Payment Date, this Note shall
bear interest from such Interest Payment Date; provided, that if the Company
shall default in the payment of interest due on such Interest Payment Date then
this Note shall bear interest from the next preceding Interest Payment Date to
which
<PAGE> 7
interest on the Notes has been paid or duly provided for. The interest so
payable on any Interest Payment Date will, except as otherwise provided in the
Indenture referred to on the reverse hereof, be paid to the person in whose name
this Note is registered at the close of business on the Regular Record Date
preceding such Interest Payment Date whether or not such day is a business day;
provided that interest may be paid, at the option of the Company, by mailing a
check therefor payable to the registered Holder entitled thereto at such
Holder's last address as it appears on the Note register or by wire transfer, in
immediately available funds, to such bank or other entity in the continental
United States as shall be designated in writing by such Holder prior to the
relevant Regular Record Date and shall have appropriate facilities for such
purpose, or in accordance with the standard operating procedures of the
Depositary (as defined in the Indenture).
Interest, other than default interest, on the Notes will be computed on
the basis of a 360-day year consisting of twelve 30-day months.
Reference is made to the further provisions set forth on the reverse
hereof. Such further provisions shall for all purposes have the same effect as
though fully set forth at this place.
This Note shall not be valid or obligatory until the certificate of
authentication hereon shall have been duly signed by the Trustee acting under
the Indenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
WILLIAMS COMMUNICATIONS GROUP, INC.
By:
----------------------------------------
Name:
Title:
2
<PAGE> 8
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
Dated:
------------------------------------
This is one of the Notes described in the within-mentioned Indenture.
THE BANK OF NEW YORK,
as Trustee
By:
------------------------------------
Authorized Signatory
3
<PAGE> 9
[FORM OF REVERSE OF NOTE]
Williams Communications Group, Inc.
[ ]% Senior Note Due 200_
This Note is one of a duly authorized issue of debt securities of the
Company, limited to the aggregate principal amount of $[ ], issued or to be
issued pursuant to an indenture dated as of [ ], 1999 (the "INDENTURE"), duly
executed and delivered by the Company to The Bank of New York, as Trustee
(herein called the "TRUSTEE"). Reference is hereby made to the Indenture and all
indentures supplemental thereto for a description of the rights, limitations of
rights, obligations, duties and immunities thereunder of the Trustee, the
Company and the holders (the words "HOLDERS" or "HOLDER" meaning the registered
holders or registered holder) of the Notes.
This Note will bear interest until final maturity at a rate per annum
shown above. The Company will pay interest on overdue principal of, premium, if
any, and to the extent lawful, interest on overdue installments of interest, at
an [ ]% rate per annum based on a 360-day year consisting of twelve 30-day
months.
In case an Event of Default (as defined in the Indenture) shall have
occurred and be continuing, the principal of all the Notes may be declared due
and payable, in the manner and with the effect, and subject to the conditions,
provided in the Indenture. The Indenture provides that in certain events such
declaration and its consequences may be waived by the Holders of a majority in
aggregate principal amount of the Notes then outstanding and that, prior to any
such declaration, such Holders may waive any past default under the Indenture
and its consequences except a default in the payment of principal of, premium,
if any, or interest on any of the Notes or in respect of a covenant or provision
of the Indenture that cannot be modified or amended without the consent of the
holder of each outstanding Note affected. Any such consent or waiver by the
Holder of this Note (unless revoked as provided in the Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Note and any Note which may be issued in exchange or substitution
herefor, whether or not any notation thereof is made upon this Note or such
other Notes.
The Indenture permits the Company and the Trustee, with the consent of
the Holders of not less than a majority in principal amount of the Notes at the
time outstanding, evidenced as in the Indenture provided, to enter into one or
more indentures supplemental to the Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the Holders; provided
that no such
4
<PAGE> 10
supplemental indenture shall, without the consent of the Holder of each
outstanding Note: (1) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount thereof or
the interest thereon that would be due and payable upon the Stated Maturity
thereof, or change the place of payment where, or the coin or currency in which,
any Note or any premium or interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof; (2) reduce the percentage in principal amount of the
outstanding Notes, the consent of whose Holders is necessary for any such
supplemental indenture or required for any waiver of compliance with certain
provisions of the Indenture or certain Defaults thereunder; (3) subordinate in
right of payment, or otherwise subordinate, the Notes to any other Debt; (4)
except as otherwise required by the Indenture, release any security interest
that may have been granted in favor of the Holders of the Notes; (5) reduce the
premium payable upon the redemption of any Note nor change the time at which any
Note may be redeemed, as described in the Indenture; (6) reduce the premium
payable upon a Change of Control Triggering Event; (7) make any change in any
Domestic Restricted Subsidiary Guarantee that would adversely affect the Holders
of the Notes; or (8) modify any provision of this paragraph (except to increase
any percentage set forth herein).
Notwithstanding the foregoing, without the consent of any Holder of
Notes, the Company and the Trustee may, at any time and from time to time,
without notice to or consent of any Holders of Notes, enter into one or more
indentures supplemental to the Indenture: (1) to evidence the succession of
another Person to the Company and the assumption by such successor of the
covenants of the Company in the Indenture and the Notes; (2) to add to the
covenants of the Company, for the benefit of the Holders, or to surrender any
right or power conferred upon the Company by the Indenture; (3) to add any
additional Events of Default; (4) to provide for uncertificated Notes in
addition to or in place of certificated Notes; (5) to evidence and provide for
the acceptance of appointment under the Indenture of a successor trustee; (6) to
secure the Notes; (7) to comply with the Trust Indenture Act of 1939; (8) to add
additional Guarantees with respect to the Notes or to release Guarantors from
Domestic Restricted Subsidiary Guarantees as provided by the terms of the
Indenture; or (9) to cure any ambiguity in the Indenture, to correct or
supplement any provision in the Indenture which may be inconsistent with any
other provision therein or to add any other provision with respect to matters or
questions arising under the Indenture; provided such actions shall not adversely
affect the interests of the Holders in any material respect.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute
5
<PAGE> 11
and unconditional, to pay the principal of, premium, if any, and interest on
this Note at the place, times, and rate, and in the currency, herein prescribed.
The Notes are issuable only as registered Notes without coupons in
denominations of $1,000 and any multiple of $1,000.
At the office or agency of the Company referred to on the face hereof
and in the manner and subject to the limitations provided in the Indenture,
Notes may be exchanged for a like aggregate principal amount of Notes of other
authorized denominations.
Upon due presentment for registration of transfer of this Note at the
above-mentioned office or agency of the Company, a new Note or Notes of
authorized denominations, for a like aggregate principal amount, will be issued
to the transferee as provided in the Indenture. No service charge shall be made
for any such transfer, but the Company may require payment of a sum sufficient
to cover any tax or other similar governmental charge that may be imposed in
connection therewith.
Prior to ____, 200_, the Company may redeem all or part of the Notes at
any time upon not less than 30 nor more than 60 days' notice at the Make-Whole
Price (as defined in the Indenture), plus accrued and unpaid interest on the
Notes, if any, to the redemption date. The Notes may be redeemed at the option
of the Company as a whole, or from time to time in part, on any date on or after
[ ], 200_, upon mailing a notice of such redemption not less than 30 nor more
than 60 days prior to the date fixed for redemption to the Holders of Notes to
be redeemed, all as provided in the Indenture, at the following redemption
prices (expressed in percentages of principal amount) together in each case with
accrued and unpaid interest to the date fixed for redemption (subject to the
right of Holders of record on the relevant Regular Record Date to receive
interest on an Interest Payment Date that is on or prior to the redemption
date):
If redeemed during the twelve-month period beginning [ ],
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
200_............................................................ [ ]%
200_............................................................ [ ]%
200_............................................................ [ ]%
200_ and thereafter............................................. 100.000%
</TABLE>
In addition, at any time or from time to time prior to ____, 2002, the
Company may redeem up to 35% of the original aggregate principal amount of
the
6
<PAGE> 12
Notes at a redemption price equal to ____% of the principal amount of the Notes
so redeemed, plus accrued and unpaid interest thereon (if any) to the redemption
date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), with the net cash
proceeds of one or more private placements to Persons other than Affiliates of
the Company or public offerings of common stock of the Company, in each case
resulting in gross proceeds to the Company of at least $100 million in the
aggregate; provided that
o at least 65% of the original aggregate principal amount of the
Notes would remain outstanding immediately after giving effect to
such redemption;
o any such redemption shall be made within 90 days of such private
placement or public offering upon not less than 30 nor more than
60 days' prior notice; and
o any such redemption may not occur in connection with or after the
occurrence of a Change of Control.
Subject to payment by the Company of a sum sufficient to pay the amount
due on redemption, interest on this Note (or portion hereof if this Note is
redeemed in part) shall cease to accrue upon the date duly fixed for redemption
of this Note (or portion hereof if this Note is redeemed in part).
Upon the occurrence of a Change of Control Triggering Event (as defined
in the Indenture), any Holder of Notes will have the right to cause the Company
to purchase the Notes of such Holder, in whole or in part in integral multiples
of aggregate principal amount of $1,000, at a purchase price in cash equal to
101% of the principal amount of the Notes on the purchase date plus accrued and
unpaid interest, if any, to such purchase date (subject to the right of Holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), as provided in, and subject to, the terms of the
Indenture.
The Company, the Trustee, and any authorized agent of the Company or
the Trustee, may deem and treat the registered Holder hereof as the absolute
owner of this Note (whether or not this Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon made by anyone
other than the Company or the Trustee or any authorized agent of the Company or
the Trustee), for the purpose of receiving payment of, or on account of, the
principal hereof and premium, if any, and, subject to the provisions on the face
hereof, interest hereon and for all other purposes, and neither the Company nor
the Trustee nor any
7
<PAGE> 13
authorized agent of the Company or the Trustee shall be affected by any notice
to the contrary.
No recourse shall be had for the payment of the principal of, premium,
if any, or the interest on this Note, for any claim based thereon, or otherwise
in respect thereof, and no recourse under or upon any obligation, covenant or
agreement of the Company in the Indenture, or in any of the Notes or because of
the creation of any Debt (as defined in the Indenture) represented thereby,
against any incorporator, shareholder, officer, director, employee or
controlling person of the Company or of any successor Person thereof, either
directly or through the Company or any successor Person, whether by virtue of
any constitution, statute or rule of law or by the enforcement of any assessment
or penalty or otherwise, all such liability being, by the acceptance hereof and
as part of the consideration for the issue hereof, expressly waived and
released.
The Indenture is hereby incorporated by the reference and to the extent
of any variance between the provisions hereof and the Indenture, the Indenture
shall control.
This Note shall be deemed to be a contract under the laws of the State
of New York, and for all purposes shall be construed in accordance with the laws
of said State, except as may otherwise be required by mandatory provisions of
law.
8
<PAGE> 14
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered Holder hereby sell(s),
assign(s) and transfer(s) unto Insert Taxpayer Identification No.
- --------------------------------------------------------------------------------
Please print or typewrite name and address including zip code of assignee
- --------------------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing ____________________ attorney to transfer said Note on the books of
the Company with full power of substitution in the premises.
Date:
------------ -----------------------------------------
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the within-mentioned
instrument in every particular, without
alteration or any change whatsoever.
Signature Guarantee:
--------------------
9
<PAGE> 15
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 3.15 or Section 3.18 of the Indenture, check the Box: [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 3.15 or Section 3.18 of the Indenture, state the amount (in
principal amount): $_______________.
Date:
----------------
Your Signature:
-----------------------------------------------------------------
(Sign exactly as your name appears on
the other side of this Note)
Signature Guarantee:
-----------------------
10
<PAGE> 16
AND WHEREAS, all things necessary to make the Notes, when executed by
the Company and authenticated and delivered by the Trustee as in the Indenture
provided, the valid, binding and legal obligations of the Company, and to
constitute these presents a valid indenture and agreement according to its
terms, have been done;
NOW, THEREFORE:
In consideration of the premises and the purchases of the Notes by the
Holders thereof, the Company and the Trustee mutually covenant and agree for the
equal and proportionate benefit of the respective Holders from time to time of
the Notes as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Certain Terms Defined. The following terms (except as
otherwise expressly provided or unless the context otherwise clearly requires)
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this Section. All other terms
used in this Indenture which are defined in the Trust Indenture Act of 1939 or
the definitions of which in the Securities Act of 1933 are referred to in the
Trust Indenture Act of 1939 (except as herein otherwise expressly provided or
unless the context otherwise clearly requires), shall have the meanings assigned
to such terms in said Trust Indenture Act and in said Securities Act as in force
at the date of this Indenture. All accounting terms used herein and not
expressly defined shall have the meanings given to them in accordance with GAAP
(whether or not such is indicated herein). The words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Indenture as a whole
and not to any particular Article, Section or other subdivision. The terms
defined in this Article include the plural as well as the singular.
"ACCRETED VALUE" of any Debt issued at a price less than the principal
amount at stated maturity, means, as of any date of determination, an amount
equal to the sum of (a) the issue price of such Debt as determined in accordance
with Section 1273 of the Code or any successor provisions plus (b) the aggregate
of the portions of the original issue discount (the excess of the amounts
considered as part of the "stated redemption price" of such Debt within the
meaning of Section 1273(a)(2) of the Code or any successor provisions, whether
denominated as principal or interest, over the issue price of such Debt) that
shall until that time have accrued pursuant to Section 1272 of the Code (without
regard to Section
11
<PAGE> 17
1272(a)(7) of the Code) from the date of issue of such Debt to the date of
determination, minus all amounts until that time paid in respect of such Debt,
which amounts are considered as part of the "stated redemption price" of such
Debt within the meaning of Section 1273(a)(2) of the Code or any successor
provisions (whether such amounts paid were denominated principal or interest).
"ACQUIRED DEBT" means, with respect to any specified Person,
o Debt of any other Person existing at the time such Person
merges with or into or consolidates with or becomes a
Subsidiary of such specified Person and
o Debt secured by a Lien encumbering any Property acquired by
such specified Person,
which Debt was not incurred in connection with, or in anticipation of,
such merger, consolidation or acquisition or such Person becoming a
Subsidiary of such specified Person.
"AFFILIATE" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
covenants described in Section 3.15 and Section 3.17 the definition of
"Telecommunications Assets" only, "Affiliate" shall also mean any beneficial
owner of shares representing more than 10% or more of the total voting power of
the Voting Stock on a fully diluted basis of the Company or of rights or
warrants to purchase such Voting Stock, whether or not currently exercisable,
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof.
"ASSET DISPOSITION" means any transfer, conveyance, sale, lease,
issuance or other disposition by the Company or any Restricted Subsidiary in one
or more related transactions (including a consolidation or merger or other sale
of any such Restricted Subsidiary with, into or to another Person in a
transaction in which such Restricted Subsidiary ceases to be a Restricted
Subsidiary of the Company, but excluding a disposition by a Restricted
Subsidiary to the Company or a Restricted Subsidiary or by the Company to a
Restricted Subsidiary) of:
(1) shares of Capital Stock or other ownership interests of a
Restricted Subsidiary (other than as permitted by clause (5), (6), (7)
or (9)
12
<PAGE> 18
of the covenant described in Section 3.16 and other than any
transaction in which the Company or such Restricted Subsidiary receives
therefor one or more properties with a Fair Market Value equal to the
Fair Market Value of the Capital Stock issued, sold or disposed of by
the Company or the Restricted Subsidiary);
(2) real property;
(3) all or substantially all of the assets of the Company or
any Restricted Subsidiary representing a division or line of business;
or
(4) other Property of the Company or any Restricted Subsidiary
outside of the ordinary course of business, excluding
o any transfer, conveyance, sale, lease or the disposition of
Property by the Company or any Restricted Subsidiary for which
the Company or any Restricted Subsidiary receives capacity and
o any transfer, conveyance, sale, lease or other disposition of
equipment that in the good faith judgment of the Company is
obsolete, damaged, worn out or no longer used by or useful to
the Company;
provided, in each case, that the aggregate consideration for such transfer,
conveyance, sale, lease or other disposition is equal to $5 million or more in
any 12-month period.
The following shall not be Asset Dispositions:
(1) Permitted Telecommunications Asset Dispositions that
comply with clause (1) of the first paragraph in Section 3.15;
(2) when used with respect to the Company, any Asset
Disposition permitted pursuant to Article Eight which constitutes a
disposition of all or substantially all of the assets of the Company
and the Restricted Subsidiaries taken as a whole;
(3) Receivables sales constituting Debt under Qualified
Receivable Facilities permitted to be Incurred pursuant to Section
3.08;
(4) sales, leases, conveyances, transfers or other
dispositions to the Company or to a Restricted Subsidiary or to any
other person if, after
13
<PAGE> 19
giving effect to such sale, lease, conveyance, transfer or other
disposition, such other Person becomes a Restricted Subsidiary; and
(5) any disposition that results in a Permitted Investment
(other than pursuant to clause (f) or (i) of the definition of
"Permitted Investment") or a Restricted Payment permitted by Section
3.11.
"ATTRIBUTABLE VALUE" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount owed under such lease is to be determined, the total
net amount of rent required to be paid by such Person under such lease during
the remaining term of such lease, including any period for which such lease has
been extended, as determined in accordance with GAAP, discounted from the last
date of such remaining term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capital Lease
Obligation with like term in accordance with GAAP. The net amount of rent
required to be paid under any such lease for any such period shall be the
aggregate amount of rent payable by the lessee with respect to such period after
excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the case
of any lease which is terminable by the lessee upon the payment of a penalty,
such net amount shall also include the lesser of the amount of such penalty (in
which case no rent shall be considered as required to be paid under such lease
subsequent to the first date upon which it may be so terminated) or the rent
which would otherwise be required to be paid if such lease is not so terminated.
"ATTRIBUTABLE VALUE" means, as to a Capital Lease Obligation, the principal
amount of such Capital Lease Obligation.
"BOARD OF DIRECTORS" means, with respect to any Person, the Board of
Directors (or similar governing body) of such person or any committee of the
Board of Directors (or similar governing body) of such Person authorized, with
respect to any particular matter, to exercise the power of the Board of
Directors (or similar governing body) of such Person.
"BOARD RESOLUTION" means a copy of a resolution, certified by the
Secretary of the Company to have been duly adopted by the Board of Directors and
to be in full force and effect on the date of such certification, and delivered
to the Trustee.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized by law to close.
"CAPITAL LEASE OBLIGATION" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Debt arrangements
14
<PAGE> 20
conveying the right to use) Property of such Person which is required to be
classified and accounted for as a capital lease or a liability on the face of a
balance sheet of such Person in accordance with GAAP (a "CAPITAL LEASE"). The
stated maturity of such obligation shall be the date of the last payment of rent
or any other amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty. The
principal amount of such obligation shall be the capitalized amount thereof that
would appear on the face of a balance sheet of such Person in accordance with
GAAP.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations or other equivalents however designated of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person and any rights (other than debt securities convertible
or exchangeable into an equity interest), warrants or options to acquire an
equity interest in such Person.
"CASH EQUIVALENTS" means:
(1) Government Securities maturing, or subject to tender at
the option of the holder thereof, within two years after the date of
acquisition thereof;
(2) time deposits and certificates of deposit of any
commercial bank organized in the United States having capital and
surplus in excess of $500 million or a commercial bank organized under
the law of any other country that is a member of the Organization for
Economic Cooperation and Development having total assets in excess of
$500 million, or its foreign currency equivalent at the time, with a
maturity date not more than one year from the date of acquisition;
(3) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (1)
above entered into with
o any bank meeting the qualifications specified in clause (2)
above or
o any primary government securities dealer reporting to the
Market Reports Division of the Federal Reserve Bank of New
York;
(4) direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing, or subject to tender at the
option of the holder of such obligation, within one year after the date
of acquisition
15
<PAGE> 21
thereof; provided that, at the time of acquisition, the long-term debt
of such state, political subdivision or public instrumentality has a
rating of A, or higher, from S&P or A-2 or higher from Moody's or, if
at any time neither S&P nor Moody's shaft be rating such obligations,
then an equivalent rating from such other nationally recognized rating
service;
(5) commercial paper issued by the parent corporation of any
commercial bank organized in the United States having capital and
surplus in excess of $500 million or a commercial bank organized under
the laws of any other country that is a member of the Organization for
Economic Cooperation and Development having total assets in excess of
$500 million or its foreign currency equivalent at the time, and money
market instruments and commercial paper issued by others having one of
the three highest ratings obtainable from either S&P or Moody's, or, if
at any time neither S&P nor Moody's shall be rating such obligations,
then from such other nationally recognized rating service and in each
case maturing within one year after the date of acquisition;
(6) overnight bank deposits and bankers' acceptances at any
commercial bank organized in the United States having capital and
surplus in excess of $500 million or a commercial bank organized under
the laws of any other country that is a member of the Organization for
Economic Cooperation and Development having total assets in excess of
$500 million or its foreign currency equivalent at the time;
(7) deposits available for withdrawal on demand with a
commercial bank organized in the United States having capital and
surplus in excess of $500 million or a commercial bank organized under
the laws of any other country that is a member of the Organization for
Economic Cooperation and Development having total assets in excess of
$500 million or its foreign currency equivalent at the time; and
(8) investments in money market funds substantially all of
whose assets comprise securities of the types described in clauses (1)
through (7).
"CERTIFICATED SECURITIES" means securities issued in the form of
permanent certificated securities in registered form in substantially the form
hereinabove recited.
"CHANGE OF CONTROL" has the meaning set forth in Section 3.18.
"CHANGE OF CONTROL TRIGGERING EVENT" has the meaning set forth in
Section 3.18.
16
<PAGE> 22
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" of any Person means Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"CONSOLIDATED CAPITAL RATIO" means as of the date of determination the
ratio of (1) the aggregate amount of Debt of the Company and its Restricted
Subsidiaries on a consolidated basis as at the date of determination to (2) the
sum of:
(a) the Company's capital in excess of par value on the date
of this Indenture determined on a consolidated basis in accordance with
GAAP;
(b) the aggregate Net Proceeds to the Company from the
issuance or sale of any Capital Stock, including Preferred Stock, of
the Company other than Disqualified Stock subsequent to the date of
this Indenture; and
(c) the aggregate Net Proceeds from the issuance or sale of
Debt of the Company or any Restricted Subsidiary subsequent to the date
of this Indenture convertible or exchangeable into Capital Stock of the
Company other than Disqualified Stock, in each case upon conversion or
exchange thereof into Capital Stock of the Company subsequent to the
date of this Indenture;
provided, however, that, for purposes of calculation of the Consolidated Capital
Ratio, the Net Proceeds from the issuance or sale of Capital Stock or Debt
described in clause (b) or (c) above shall not be included to the extent
o such proceeds have been utilized to make a Permitted Investment
under clause (i) of the definition thereof or a Restricted Payment
or
o such Capital Stock or Debt shall have been issued or sold to the
Company, a Subsidiary of the Company or a Plan.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" for any period
means the Consolidated Net Income of the Company and its Restricted Subsidiaries
for such period increased by the sum of, to the extent reducing Consolidated Net
Income for such period;
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(1) Consolidated Interest Expense of the Company and its
Restricted Subsidiaries for such period; plus
(2) Consolidated Income Tax Expense of the Company and its
Restricted Subsidiaries for such period; plus
(3) consolidated depreciation and amortization expense and any
other non-cash items (other than any such non-cash item to the extent
that it represents an accrual of or reserve for cash expenditures in
any future period) for such period; plus
(4) any penalty paid in such period in connection with
redeeming or retiring any Debt prior to its stated maturity; plus
(5) any change in Deferred Revenue during such period;
provided, however, that there shall be excluded therefrom the Consolidated Cash
Flow Available for Fixed Charges, if positive, of any Restricted Subsidiary
(calculated separately for such Restricted Subsidiary in the same manner as
provided above for the Company) that is subject to a restriction which prevents
the payment of dividends or the making of distributions to the Company or
another Restricted Subsidiary to the extent of such restrictions.
"CONSOLIDATED INCOME TAX EXPENSE" for any period means the aggregate
amounts of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"CONSOLIDATED INTEREST EXPENSE" for any period means the interest
expense included in a consolidated income statement, excluding interest income,
of the Company and its Restricted Subsidiaries for such period in accordance
with GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of (but in no event adding any amount that would be
eliminated in consolidation in accordance with GAAP)):
(1) the amortization of Debt discounts and issuance costs,
including commitment fees;
(2) any payments or fees with respect to letters of credit,
bankers' acceptances or similar facilities;
(3) net costs with respect to interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements,
including fees;
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<PAGE> 24
(4) Preferred Stock Dividends other than dividends paid in
shares of Preferred Stock that is not Disqualified Stock declared and
paid or payable;
(5) accrued Disqualified Stock Dividends, whether or not
declared or paid;
(6) interest on Debt guaranteed by the Company and its
Restricted Subsidiaries;
(7) the portion of any Capital Lease Obligation or Sale and
Leaseback Transaction paid during such period that is allocable to
interest expense in accordance with GAAP; and
(8) the cash contributions to any Plan to the extent such
contributions are used by such Plan to pay interest or fees to any
Person, other than the Company or a Restricted Subsidiary, in
connection with Debt Incurred by such Plan.
"CONSOLIDATED NET INCOME" for any period means the net income (or loss)
of the Company and its Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP; provided that there shall be
excluded from such net income (or loss):
(a) for purposes of Section 3.11 only, the net income (or
loss) of any Person acquired by the Company or a Restricted Subsidiary
in a pooling-of-interests transaction for any period prior to the date
of such transaction;
(b) the net income (or loss) of any Person that is not a
Restricted Subsidiary except to the extent of the amount of dividends
or other distributions actually paid to the Company or a Restricted
Subsidiary by such Person during such period (except, for purposes of
Section 3.11 only, to the extent such dividends or distributions have
been subtracted from the calculation of the amount of Investments to
support the actual making of Investments);
(c) gains or losses realized upon the sale or other
disposition of any Property of the Company or its Restricted
Subsidiaries that is not sold or disposed of in the ordinary course of
business (it being understood that Permitted Telecommunications Asset
Dispositions shall be considered to be in the ordinary course of
business);
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(d) all extraordinary gains and extraordinary losses,
determined in accordance with GAAP;
(e) the cumulative effect of changes in accounting principles;
(f) non-cash gains or losses resulting from fluctuations in
currency exchange rates;
(g) any non-cash expense related to the issuance to employees
or directors of the Company or any Restricted Subsidiary of (1) options
to purchase Capital Stock of the Company or such Restricted Subsidiary
or (2) other compensatory rights; and
(h) with respect to a Restricted Subsidiary that is not a
Wholly Owned Subsidiary any aggregate net income (or loss) in excess of
the Company's or any Restricted Subsidiary's pro rata share of the net
income (or loss) of such Restricted Subsidiary that is not a Wholly
Owned Subsidiary, but such excess shall be excluded only to the extent
that such minority interest in net income (or loss) is not otherwise
excluded in determining consolidated net income in accordance with
GAAP; provided further that there shall further be excluded therefrom
the net income (but not net loss) of any Restricted Subsidiary that is
subject to a restriction which prevents the payment of dividends or the
making of distributions to the Company or another Restricted Subsidiary
to the extent of such restriction; provided further, that at the time
any restriction referred to in the immediately preceding proviso ceases
to be effective, all of such net income previously excluded from
Consolidated Net Income by reason of such proviso shall be included
cumulatively in Consolidated Net Income in the accounting period during
which such restriction ceases to be effective.
"CONSOLIDATED NET WORTH" of any Person means the stockholders' equity
of such Person, determined on a consolidated basis in accordance with GAAP, less
(to the extent not otherwise accounted for as a liability) amounts attributable
to Disqualified Stock of such Person.
"CONSOLIDATED TANGIBLE ASSETS" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person and
its Subsidiaries after deducting from such total amount of assets all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
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"CORPORATE TRUST OFFICE" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date as of which this
Indenture is dated, located at 101 Barclay Street, Floor 21 West, New York, New
York 10286.
"CREDIT FACILITIES" means one or more credit agreements, including
without limitation, the Permanent Credit Facility, loan agreements, fiscal
agency agreements (other than fiscal agency agreements relating to Debt
Securities) or similar facilities, secured or unsecured, providing for working
capital advances, revolving credit loans, term loans and/or letters of credit,
including any Qualified Receivable Facility, entered into from time to time by
the Company and its Restricted Subsidiaries, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed with such
credit facilities, as the same may be amended, supplemented, modified, restated
or replaced from time to time.
"DEBT" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent:
(1) every obligation of such Person for money borrowed;
(2) every obligation of such Person evidenced by bonds,
debentures, notes or other similar instruments, including obligations
incurred in connection with the acquisition of Property;
(3) every reimbursement obligation of such Person with respect
to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person or for which such Person is otherwise
obligated to make payment;
(4) every obligation of such Person issued or assumed as the
deferred purchase price of Property or services, including securities
repurchase agreements;
(5) every Capital Lease Obligation of such Person;
(6) all obligations to redeem or repurchase Disqualified Stock
issued by such Person and all Attributable Value in respect of Sale and
Leaseback Transactions entered into by such Person;
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<PAGE> 27
(7) the liquidation preference of any Preferred Stock, other
than Disqualified Stock, which is covered by the preceding clause (6),
issued by any Restricted Subsidiary of such Person;
(8) every obligation under Interest Rate or Currency
Protection Agreements of such Person; and
(9) every obligation of the type referred to in clauses (1)
through (8) of another Person and all dividends of another Person the
payment of which, in either case, such Person has Guaranteed.
The "amount" or "principal amount" of Debt at any time of determination
as used herein represented by (a) any Debt issued at a price that is less than
the principal amount thereof, shall be, except as otherwise set forth here, the
Accreted Value at maturity such Debt at such time or (b) in the case of any
Receivables sale constituting Debt, the amount of the unrecovered purchase price
paid (that is, the amount paid for Receivables that has not been actually
recovered from the collection of such Receivables) by the purchaser (other than
the Company or a Wholly Owned Restricted Subsidiary of the Company) thereof.
The amount of Debt represented by an obligation under an Interest Rate
or Currency Protection Agreement shall be equal to
(x) zero if such obligation has been Incurred pursuant to clause (10)
of paragraph (b) of Section 3.08 or
(y) the notional amount of such obligation if not Incurred pursuant
to such clause.
Despite the above,"Debt" does not include trade accounts payable or
accrued liabilities arising in the ordinary course of business.
"DEBT SECURITIES" means any debt securities, including any Guarantee of
such securities, issued by the Company or any Domestic Restricted Subsidiary in
connection with an underwritten public offering or an underwritten private
placement for resale in accordance with Rule 144A and/or Regulation S, in each
case, not rated or rated below Baa3 by Moody's or BBB- by S&P, or an equivalent
below investment grade rating by any successor Rating Agency.
"DEFAULT" means any event, act or condition the occurrence of which is,
or after notice or the passage of time or both would be, an Event of Default.
"DEFERRED REVENUE" means amounts appearing as a liability on the
financial statements of WCG prepared in accordance with generally accepted
accounting principles as deferred revenue, provided that, in the case of any
increase in deferred revenue, only to the extent of cash received in connection
therewith.
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"DEPOSITARY" means The Depository Trust Company, its nominees, and
their respective successors.
"DISQUALIFIED STOCK" of any Person means any Capital Stock of such
Person which, by its terms, or by the terms of any security into which it is
convertible or for which it is exchangeable, or upon the happening of any event,
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof, in whole or in
part, on or prior to the final Stated Maturity of the Notes; provided, however,
that any Preferred Stock which would not constitute Disqualified Stock but for
provisions of such Preferred Stock giving holders thereof the right to require
the Company to repurchase or redeem such Preferred Stock upon the occurrence of
a change of control or asset disposition occurring prior to the final Stated
Maturity of the Notes shall not constitute Disqualified Stock if the change of
control or asset disposition provisions applicable to such Preferred Stock are
no more favorable to the holders of such Preferred Stock than the provisions
applicable to the Notes contained in Section 3.15 and Section 3.18 and such
Preferred Stock specifically provides that the Company will not repurchase or
redeem any such stock pursuant to such provisions prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Section
3.15 and Section 3.18; and provided further, that such Preferred Stock will not
be deemed Disqualified Stock if it is redeemable by exchange for or through the
issuance of Capital Stock (other than Disqualified Stock).
"DISQUALIFIED STOCK DIVIDENDS" means all dividends with respect to
Disqualified Stock of the Company held by Persons other than a Wholly Owned
Restricted Subsidiary. The amount of any such dividend shall be equal to the
quotient of such dividend divided by the difference between one and the maximum
statutory federal income tax rate (expressed as a decimal number between 1 and
0) applicable to the Company for the period during which such dividends were
paid.
"DOMESTIC RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of
the Company
o that was formed under the laws of the United States of America or
any state, district or territory thereof or the District of
Columbia or
o 50% or more of the assets of which are located in the United
States or any territory thereof.
"DOMESTIC RESTRICTED SUBSIDIARY GUARANTEE" means a supplemental
indenture to the Indenture in form satisfactory to the Trustee, providing for an
unconditional Guarantee by a Domestic Restricted Subsidiary of payment in full
of
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<PAGE> 29
the principal of, premium, if any, and interest on the Notes. Any such Domestic
Restricted Subsidiary Guarantee shall not be subordinate to any Debt of the
Domestic Restricted Subsidiary providing the Domestic Restricted Subsidiary
Guarantee.
"ELIGIBLE RECEIVABLES" means, at any time, Receivables of the Company
and its Restricted Subsidiaries, as evidenced on the most recent quarterly
consolidated balance sheet of the Company as at a date at least 45 days prior to
such time, arising in the ordinary course of business of the Company or any
Restricted Subsidiary.
"EVENT OF DEFAULT" means any event or condition specified as such in
Section 4.01 which shall have continued for the period of time, if any, therein
designated.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
(or any successor act), and the rules and regulations thereunder (or respective
successors thereto).
"EXISTING INTERNATIONAL JOINT VENTURES" means ATL, PowerTel,
MetroCom and Algar.
"FAIR MARKET VALUE" means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, and except in the case of Permitted Telecommunications Asset
Dispositions in the ordinary course of business Fair Market Value shall be
determined by the Board of Directors of the Company acting in good faith and
shall be evidenced by a resolution of the Board of Directors of the Company.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect on the date of the Indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
fully and unconditionally guaranteed or insured by, the United States of America
or any agency or instrumentality thereof for the payment of which obligations or
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<PAGE> 30
guarantee the full faith and credit of the United States is pledged and which
are not callable or redeemable at the issuer's option (unless, for purposes of
the definition of "Cash Equivalents" only, the obligations are redeemable or
callable at a price less than the purchase price paid by the Company or the
applicable Restricted Subsidiary, together with all accrued and unpaid interest,
if any, on such Government Securities).
"GUARANTEE" by any Person means any obligation, direct or indirect,
contingent or otherwise, of such Person guaranteeing, or having the economic
effect of guaranteeing, any Debt of any other Person in any manner, whether
directly or indirectly.
"GUARANTOR" means a Domestic Restricted Subsidiary of the Company that
has executed a Domestic Restricted Subsidiary Guarantee.
"HOLDERS", "HOLDER OF NOTES", "NOTEHOLDER" or other similar terms means
a person in whose name a Note is registered.
"INCUR" means, with respect to any Debt or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including the recording, as required pursuant to GAAP or otherwise, of any such
Debt or other obligation on the balance sheet of such Person (and "Incurrence,"
"Incurred, "Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided, however, that
o a change in GAAP that results in an obligation of such Person that
exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt and
o neither the accrual of interest nor the amortization or accretion
of original issue discount
shall be deemed an Incurrence of Debt.
Debt otherwise incurred by a Person before it becomes a Subsidiary of
the Company shall be deemed to have been Incurred at the time at which it
becomes a Restricted Subsidiary.
"INDENTURE" means this instrument as originally executed and delivered
or, if amended or supplemented as herein provided, as so amended or
supplemented.
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"INTEREST PAYMENT DATE" means each semiannual interest payment date on
[ ] and [ ] of each year, commencing [ ].
"INTEREST RATE OR CURRENCY PROTECTION AGREEMENT" of any Person means
any forward contract, futures contract, swap, option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"INVESTED CAPITAL" means the sum of:
(a) $625 million;
(b) the aggregate Net Proceeds received by the Company from
the issuance or sale of any Capital Stock, including Preferred Stock,
of the Company, but excluding Disqualified Stock, subsequent to the
date of the Indenture and from the Over-allotment Option; and
(c) the aggregate Net Proceeds from the issuance or sale of
Debt of the Company or any Restricted Subsidiary subsequent to the date
of the Indenture convertible or exchangeable into Capital Stock of the
Company other than Disqualified Stock, in each case upon conversion or
exchange thereof into Capital Stock of the Company subsequent to the
date of the Indenture;
provided, however, that the Net Proceeds from the issuance or sale of Capital
Stock or Debt described in clause (b) or (c) shall be excluded from any
computation of Invested Capital to the extent (1) utilized to make a Restricted
Payment or (2) such Capital Stock or Debt shall have been issued or sold to the
Company, a Subsidiary of the Company or a Plan.
"INVESTMENT" by any Person means any direct or indirect loan, advance
or other extension of credit or capital contribution (by means of transfers of
cash or other Property to others or payments for Property or services for the
account or use of others, or otherwise) to, purchase, redemption, retirement or
acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidence of Debt issued by, or Incurrence of, or payment on, a Guarantee of any
obligation of, any other Person; provided that Investments shall exclude
o commercially reasonable extensions of trade credit,
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<PAGE> 32
o trade receivables arising in the ordinary course of business;
provided, that such receivables would be recorded as assets of
such Person in accordance with GAAP,
o Investments received in connection with the bankruptcy or
reorganization of suppliers and customers or in good faith bona
fide settlement of delinquent ordinary course of business trade
receivables of customers,
o endorsements for collection or deposit in the ordinary course of
business by such Person of bank drafts and similar negotiable
instruments of such other Person received as payment for ordinary
course of business trade receivables, and
o any Investment that is less than $100,000.
The amount, as of any date of determination, of any Investment shall be
the original cost of such Investment, plus the cost of all additions, as of such
date, thereto and minus the amount, as of such date, of any portion of such
Investment repaid to such Person in cash as a repayment of principal or a return
of capital, as the case may be (except to the extent such repaid amount has been
included in Consolidated Net Income to support the actual making of Restricted
Payments), but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
In determining the amount of any Investment involving a transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"JOINT VENTURE" means a Person in which the Company or a Restricted
Subsidiary holds, directly or indirectly, not more than 50% of the shares of
Voting Stock.
"LIEN" means, with respect to any Property, any mortgage or deed of
trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness), encumbrance, preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever on or
with respect to such Property (including any Capital Lease Obligation,
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing and any Sale and Leaseback
Transaction). For purposes of this definition the sale, lease, conveyance or
other transfer by the Company or any of its Subsidiaries of, including the grant
of indefeasible rights of use or equivalent arrangements with respect to, dark
or lit communications fiber capacity or communications conduit shall not
constitute a Lien.
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<PAGE> 33
"MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to
the excess, if any, of:
(1) the present value of the remaining principal, premium and
interest payments that would be payable with respect to such Note if
such Note were redeemed on ______, 200_, computed using a discount rate
equal to the Treasury Rate plus 50 basis points; over
(2) the outstanding principal amount of such Note.
"MAKE-WHOLE AVERAGE LIFE" means, with respect to any date of redemption
of Notes, the number of years (calculated to the nearest one-twelfth) from such
redemption date to ______, 200_.
"MAKE-WHOLE PRICE" means, with respect to any Note, the greater of (1)
the sum of the principal amount of such Note and the Make-Whole Amount with
respect to such Note and (2) the redemption price of such Note on _______, 200_.
"MOODY'S" means Moody's Investors Service, Inc. or, if Moody's
Investors Service, Inc. shall cease rating debt securities having a maturity at
original issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if there is no successor Person, then "Moody's" shall mean any other
national recognized rating agency, other than S&P, that rates debt securities
having a maturity at original issuance of at least one year and that shall have
been designated by the Company.
"NET AVAILABLE PROCEEDS" from any Asset Disposition by any Person means
cash or cash equivalents received (including amounts received by way of sale or
discounting of any note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Debt or other obligations relating to such Property) therefrom by
such Person, net of:
(1) all legal, title and recording taxes, expenses and
commissions and other fees and expenses (including appraisals,
brokerage commissions and investment banking fees) Incurred and all
federal, state, provincial, foreign and local taxes required to be
accrued as a liability as a consequence of such Asset Disposition;
(2) all payments made by such Person or its Subsidiaries on
any Debt which is secured by such Property in accordance with the terms
of any Lien upon or with respect to such Property or which must by the
terms
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<PAGE> 34
of such Lien, or in order to obtain a necessary consent to such Asset
Disposition or by applicable law, be repaid out of the proceeds from
such Asset Disposition;
(3) all distributions and other payments required to be made
to minority interest holders in Subsidiaries or Joint Ventures of such
Person as a result of such Asset Disposition; and
(4) appropriate amounts to be provided by such Person or any
Subsidiary of such Person, as the case may be, as a reserve in
accordance with GAAP against any liabilities associated with such
Property and retained by such Person or any Subsidiary of such Person,
as the case may be, after such Asset Disposition, including liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, in each case
as determined by the Board of Directors of such Person, in its
reasonable good faith judgment evidenced by a resolution of the Board
of Directors filed with the Trustee; provided, however, that any
reduction in such reserve within twelve months following the
consummation of such Asset Disposition will be, for all purposes of the
Indenture and the Notes, treated as a new Asset Disposition at the time
of such reduction with Net Available Proceeds equal to the amount of
such reduction; provided further, however, that, if any consideration
for a transaction, which would otherwise constitute Net Available
Proceeds, is required to be held in escrow pending determination of
whether a purchase price adjustment will be made, at such time as such
portion of the consideration is released to such Person or its
Restricted Subsidiary from escrow, such portion shall be treated for
all purposes of the Indenture and the Notes as a new Asset Disposition
at the time of, but not before, such release from escrow with Net
Available Proceeds equal to the amount of such portion of consideration
released from escrow.
"NET PROCEEDS" means the aggregate net proceeds (including the Fair
Market Value of non-cash proceeds constituting Capital Stock in or of a person
engaged in a Telecommunications Business or assets of a type generally used in a
Telecommunications Business) received by a Person from the sale of Capital Stock
or Debt after payment of out-of-pocket expenses, commissions and discounts
incurred and net of taxes paid or payable in connection with the sale of such
Capital Stock or Debt.
"NOTE" or "NOTES" means any note or notes, as the case may be,
authenticated and delivered under this Indenture.
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<PAGE> 35
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"OFFER TO PURCHASE" means a written offer sent by the Company by
first-class mail, postage prepaid, to each Holder of Notes at its address
appearing in the Note Register on the date of the offer offering to purchase up
to the principal amount of Notes specified in such offer at the purchase price
specified in such offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the offer shall specify an expiration date
of the Offer to Purchase which shall be, subject to any contrary requirements of
applicable law, not less than 30 days or more than 60 days after the date of
such offer and a settlement date (the "PURCHASE DATE") for purchase of Notes
within five business days after the expiration date. The Company shall notify
the Trustee at least 15 business days (or such shorter period as is acceptable
to the Trustee) prior to the mailing of the offer of the Company's obligation to
make an Offer to Purchase, and the offer shall be mailed by the Company or, at
the Company's request, by the Trustee in the name and at the expense of the
Company. The offer shall contain information concerning the business of the
Company and its Subsidiaries which the Company in good faith believes will
enable such Holders to make an informed decision with respect to the Offer to
Purchase (which at a minimum will include) any information required by
applicable law to be included therein).
The offer shall contain all instructions and materials necessary to
enable such Holders to tender Notes pursuant to the Offer to Purchase. The offer
shall also state (to the extent not inconsistent with then applicable laws,
rules or regulations):
(a) the section of the Indenture pursuant to which the Offer
to Purchase is being made;
(b) the expiration date and the Purchase Date;
(c) the aggregate principal amount of the outstanding Notes
offered to be purchased by the Company pursuant to the Offer to
Purchase (including, if less than 100%, the manner by which such has
been determined pursuant to the section of the Indenture requiring the
Offer to Purchase) (the "PURCHASE AMOUNT");
(d) the purchase price to be paid by the Company for $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "PURCHASE PRICE");
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(e) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(f) the place or places where Notes are to be surrendered for
tender pursuant to the Offer to Purchase;
(g) that any Notes not tendered or tendered but not purchased
by the Company will continue to accrue interest;
(h) that on the Purchase Date the Purchase Price will become
due and payable upon each Note being accepted for payment pursuant to
the Offer to Purchase and that interest thereon, if any, shall cease to
accrue on and after the Purchase Date;
(i) that each Holder electing to tender a Note pursuant to the
Offer to Purchase will be required to surrender such Note at the place
or places specified in the offer prior to the close of business on the
expiration date (such Note being, if the Company or the Trustee so
requires, duty endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Trustee duly
executed by, the Holder thereof or his attorney duly authorized in
writing);
(j) that Holders will be entitled to withdraw all or any
portion of Notes tendered if the Company (or the paying agent)
receives, not later than the close of business on the expiration date,
a facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Note the Holder tendered, the
certificate number of the Note the Holder tendered and a statement that
such Holder is withdrawing all or a portion of his tender;
(k) that (1) if Notes in an aggregate principal amount less
than or equal to the Purchase Amount are duly tendered and not
withdrawn pursuant to the Offer to Purchase, the Company shall purchase
all such Notes and (2) if Notes in an aggregate principal amount in
excess of the Purchase Amount are tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase Notes having an
aggregate principal amount equal to the Purchase Amount on a pro rata
basis (with such adjustments as may be deemed appropriate so that only
Notes in denominations of $1,000 or integral multiples thereof shall be
purchased); and
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<PAGE> 37
(l) that in the case of any Holder whose Note is purchased
only in part, the Company shall execute, and the Trustee shall
authenticate and deliver to the Holder of such Note without service
charge, a new Note or Notes, of any authorized denomination as
requested by such Holder, in an aggregate principal amount equal to and
in exchange for the unpurchased portion of the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance
with the offer for such Offer to Purchase.
"OFFICER" means, with respect to the Company, (1) the Chairman of the
Board of Directors, the President, any Vice President, the Chief Financial
Officer, and (2) the Treasurer or any Assistant Treasurer, or the Secretary or
any Assistant Secretary.
"OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of
the Board of Directors or the President or any Vice President (whether or not
designated by a number or numbers or a word or words added before or after the
title "Vice President") and by the Chief Financial Officer, the Chief Accounting
Officer, the Treasurer, an Assistant Treasurer, the Controller, the Secretary or
an Assistant Secretary of the Company and delivered to the Trustee. Each such
certificate shall comply with Section 314 of the Trust Indenture Act of 1939 and
include the statements provided for in Section 11.05.
"OPINION OF COUNSEL" means an opinion in writing signed by legal
counsel who may be an employee of or counsel to the Company or who may be other
counsel satisfactory to the Trustee. Each such opinion shall comply with Section
314 of the Trust Indenture Act of 1939 and include the statements provided for
in Section 11.05, and such others as may reasonably be requested by the Trustee,
if and to the extent required hereby.
"OUTSTANDING", when used with reference to Notes, subject to the
provisions of Article Twelve, means, as of any particular time, all Notes
authenticated and delivered by the Trustee under this Indenture, except
(a) Notes theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Notes, or portions thereof, for the payment or redemption
of which moneys in the necessary amount shall have been deposited in
trust with the Trustee or with any paying agent (other than the
Company) or shall have been set aside, segregated and held in trust by
the Company (if the Company shall act as its own paying agent),
provided that if such Notes
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<PAGE> 38
are to be redeemed prior to the maturity thereof, notice of such
redemption shall have been given as herein provided, or provision
satisfactory to the Trustee shall have been made for giving such
notice; and
(c) Notes in substitution for which other Notes shall have
been authenticated and delivered, or which shall have been paid,
pursuant to the terms of Section 2.08 (unless proof satisfactory to the
Trustee and the Company is presented that any of such Notes is held by
a person in whose hands such Note is a legal, valid and binding
obligation of the Company).
"OVER-ALLOTMENT OPTION" means the over-allotment option granted to the
underwriters of the equity offering consummated on [ ], 1999.
"PERMANENT CREDIT FACILITY" means the senior credit facility to be
entered into by and among Williams Communications, Inc., WCG, as Guarantor, Bank
of America, N.A. (NationsBank, N.A. d/b/a Bank of America, N.A.), as
Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, Bank of
Montreal and The Bank of New York, as Co-Documentation Agents, and the Lenders
from time to time party thereto, including any related notes, Guarantees,
collateral documents, instruments, agreements and Incremental Facilities (as
defined therein) executed at any time in connection therewith, on terms
substantially similar to those disclosed in the registration statement relating
to the Notes dated _____, 1999, and in each case as may be amended,
supplemented, modified, restated or replaced from time to time (including
amendments, supplements, modifications, restatements, replacements or
Incremental Facilities which increase the principal amount of Debt permitted
thereunder; provided that any such increase will not increase the amount of Debt
which may be incurred at the time of such increase pursuant to clause (2) of
paragraph (b) in Section 3.08).
"PERMITTED HOLDERS" means
o The Williams Companies, Inc. and any of its Subsidiaries,
o any corporation the outstanding voting power of the Capital Stock
of which is beneficially owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions
as their ownership of the voting power of the Capital Stock of the
Company,
o any underwriter during the period engaged in a firm commitment
underwriting on behalf of the Company with respect to the shares
of Capital Stock being underwritten or
o the Company or any Subsidiary of the Company.
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<PAGE> 39
"PERMITTED INTEREST RATE OR CURRENCY PROTECTION AGREEMENT" of any
Person means any Interest Rate or Currency Protection Agreement entered into
with one or more financial institutions in the ordinary course of business that
is designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and not for purposes of
speculation and which, in the case of an interest rate agreement, shall have a
notional amount no greater than the principal amount at maturity due with
respect to the Debt being hedged thereby.
"PERMITTED INVESTMENTS" means:
(a) Cash Equivalents;
(b) investments in prepaid expenses;
(c) negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar
deposits;
(d) loans, advances or extensions of credit to employees,
officers and directors of the Company or any Restricted Subsidiary made
in the ordinary course of business and consistent with past practice or
in connection with employee benefits agreements or arrangements
approved by the Board of Directors of the Company;
(e) obligations under Permitted Interest Rate or Currency
Protection Agreements;
(f) Investments received as consideration for, or customary
indemnities given in connection with, Asset Dispositions pursuant to
and in compliance with Section 3.15 and for Permitted Telecommunication
Asset Dispositions;
(g) Investments in the Company or any Restricted Subsidiary,
or in any Person as a result of which such Person becomes a Restricted
Subsidiary;
(h) Investments made prior to the date of the Indenture;
(i) Investments made after the date of the Indenture in
Persons engaged in the Telecommunications Business in an aggregate
amount as of the date of determination not to exceed Invested Capital
as of the date of determination;
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<PAGE> 40
(j) Investments deemed to have been made as a result of the
acquisition of a Person that at the time of such acquisition held
instruments constituting Investments that were not acquired in
contemplation of the acquisition of such Person;
(k) Investments received in connection with the bankruptcy or
reorganization of suppliers and customers or in good faith bona fide
settlement of delinquent ordinary course of business trade receivables
of customers;
(l) Investments where all or a portion of the consideration
provided is Capital Stock of the Company, other than Disqualified
Stock, but the same shall constitute a Permitted Investment only to the
extent of such consideration provided in the form of such Capital
Stock;
(m) Investments in Existing International Joint Ventures;
provided that the aggregate amount of such Investments made after the
date of the Indenture does not exceed $100 million as of the date of
determination; and
(n) additional Investments in an aggregate amount not to
exceed $200 million.
"PERMITTED LIENS" means:
(a) Liens for taxes, assessments, governmental charges, levies
or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made for such Liens,
(b) other Liens incidental to the conduct of the Company's and
its Restricted Subsidiaries' businesses or the ownership of its
Property not securing any Debt, and which do not in the aggregate
materially detract from the value of the Company's and its Restricted
Subsidiaries' Property when taken as a whole, or materially impair the
use thereof in the operation of its business;
(c) Liens, pledges and deposits made in the ordinary course of
business in connection with workers' compensation, unemployment
insurance and other types of statutory obligations;
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<PAGE> 41
(d) Liens, pledges or deposits made to secure the performance
of tenders, bids, leases, public or statutory obligations, sureties,
stays, appeals, indemnities, performance or other similar bonds and
other obligations of like nature incurred in the ordinary course of
business, exclusive of obligations for the payment of borrowed money,
the obtaining of advances or credit or the payment of the deferred
purchase price of Property and which do not in the aggregate materially
impair the use of Property in the operation of the business of the
Company and the Restricted Subsidiaries taken as a whole;
(e) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially
detract from the value of the Property subject thereto or materially
interfere with the ordinary conduct of the business of the Company or
its Restricted Subsidiaries;
(f) any interest or title of a lessor in the Property subject
to any lease other than a Capital Lease;
(g) Liens with respect to assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company to secure Debt
owing to the Company;
(h) Liens arising out of judgments or awards against the
Company or any Restricted Subsidiary of the Company with respect to
which the Company or such Restricted Subsidiary is prosecuting an
appeal or proceeding for review and the Company or such Restricted
Subsidiary is maintaining adequate reserves in accordance with GAAP;
(i) Liens arising by operation of law in connection with
judgments, only to the extent, for an amount and for a period not
resulting in an Event of Default with respect thereto;
(j) Liens securing Permitted Interest Rate or Currency
Protection Agreement; and
(k) Liens in favor of the Trustee arising under the Indenture.
"PERMITTED TELECOMMUNICATIONS ASSET DISPOSITION" means the transfer,
conveyance, sale, lease or other disposition of an interest in or capacity on
optical fiber and/or conduit and any related equipment used in a Segment of the
Company's communications network, whether or not in the ordinary course of
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<PAGE> 42
business; provided that after giving effect to such disposition, the Company
would retain at least
(1) with respect to any Segment constructed by, for or on
behalf of the Company or any of its subsidiaries or affiliates,
o 24 optical fibers per route mile on such Segment as
deployed at the time of such disposition; or
o 12 optical fibers and one empty conduit per route
mile on such Segment as deployed at such time; and
(2) with respect to any Segment purchased or leased from third
parties, the lesser of
o 50% of the optical fibers per route mile originally
purchased on such Segment;
o 24 optical fibers per route mile on such Segment as
deployed at the time of such disposition; or
o 12 optical fibers and one empty conduit per route
mile on such Segment as deployed at the time of such
disposition.
"PERSON" means any individual, corporation, company, partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"PLAN" means any employee benefit plan, retirement plan, deferred
compensation plan, restricted stock plan, health, life, disability or other
insurance plan or program, employee stock purchase plan, employee stock
ownership plan, pension plan, stock option plan or similar plan or arrangement
of the Company or any Restricted Subsidiary of the Company, or any successor
plan thereof, and "Plans" shall have a correlative meaning.
"PREFERRED STOCK" of any Person means Capital Stock of such Person of
any class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding-up of such Person, to shares of Capital
Stock of any other class of such Person.
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"PREFERRED STOCK DIVIDENDS" means all dividends with respect to
Preferred Stock of Restricted Subsidiaries held by Persons other than the
Company or a Wholly Owned Restricted Subsidiary. The amount of any such dividend
shall be equal to the quotient of such dividend divided by the difference
between one and the maximum statutory federal income rate (expressed as a
decimal number between 1 and 0 and determined in accordance with GAAP)
applicable to the issuer of such Preferred Stock for the period during which
such dividends were paid.
"PRINCIPAL" wherever used with reference to the Notes or any Note or
any portion thereof, shall be deemed to include "and premium, if any".
"PROPERTY" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including Capital Stock in, and other securities of, any
other Person. For purposes of any calculation required pursuant to the
Indenture, the value of any Property shall be its Fair Market Value.
"PROPORTIONATE INTEREST" in any issuance of Capital Stock of a
Restricted Subsidiary means a ratio (1) the numerator of which is the aggregate
amount of Capital Stock of such Restricted Subsidiary beneficially owned by the
Company and the Restricted Subsidiaries and (2) the denominator of which is the
aggregate amount of Capital Stock of such Restricted Subsidiary beneficially
owned by all Persons, excluding, in the case of this clause (2), any Investment
made in connection with such issuance.
"PURCHASE MONEY DEBT" means Debt (including Acquired Debt and Capital
Lease Obligations, mortgage financings and purchase money obligations) incurred
for the purpose of financing all or any part of the cost of construction,
installation, acquisition, lease, development or improvement by the Company or
any Restricted Subsidiary of any Telecommunications Assets of the Company or any
Restricted Subsidiary and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"QUALIFIED RECEIVABLE FACILITY" means Debt of the Company or any
Subsidiary Incurred from time to time pursuant to either
o credit facilities secured by Receivables or
o Receivables purchase facilities
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<PAGE> 44
in each case, including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
"RATING AGENCIES" means Moody's and S&P.
"RATING DATE" means the earlier of the date of public notice of the
occurrence of a Change of Control or of the intention of the Company to effect a
Change of Control.
"RATING DECLINE" shall be deemed to have occurred if, no later than 90
days after the Rating Date (which period shall be extended so long as the rating
of the Notes is under publicly announced consideration for possible downgrade by
any of the Rating Agencies), either of the Rating Agencies assigns or reaffirms
a rating to the Notes that is lower than the applicable rating of the notes on
the date of the Indenture or the equivalent thereof. If, prior to the Rating
Date, either of the ratings assigned to the Notes by the Rating Agencies is
lower than the applicable rating of the notes on the date of the Indenture, then
a Rating Decline will be deemed to have occurred if such rating is not changed
by the 90th day following the Rating Date. A downgrade within rating categories,
as well as between rating categories, will be considered a Rating Decline.
"RECEIVABLES" means receivables, chattel paper, instruments, documents
or intangibles evidencing or relating to the right to payment of money and
proceeds and products thereof in each case generated in the ordinary course of
business.
"REGULAR RECORD DATE" for the Interest payable on any Interest Payment
Date (except a date for payment of defaulted interest) means the _________ or
___________ (whether or not a Business Day) as the case may be, next preceding
such Interest Payment Date.
"RESPONSIBLE OFFICER" when used with respect to the Trustee means any
vice president (whether or not designated by numbers or words added before or
after the title "vice president"), any assistant vice president, any assistant
secretary, any assistant treasurer, or any other officer or assistant officer of
the Trustee customarily performing functions similar to those performed by the
persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"RESTRICTED SUBSIDIARY" means
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o a Subsidiary of the Company or of a Restricted Subsidiary that has
not been designated or classified as an Unrestricted Subsidiary
pursuant to and in compliance with Section 3.20 and
o an Unrestricted Subsidiary that is redesignated as a Restricted
Subsidiary pursuant to such covenant.
"RETURNED INVESTMENTS" means, with respect to all Investments made in
Unrestricted Subsidiaries, the aggregate amount of all payments made in respect
of such Investments, other than interest, dividends or other distributions not
in the nature of a return or repurchase of capital or a repayment of principal,
that have been paid or returned, without restriction, to the Company or any
Restricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services or, if Standard & Poor's
Ratings Services shall cease rating debt securities having a maturity at
original issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if there is no successor Person, then "S&P" shall mean any other national
recognized rating agency, other than Moody's, that rates debt securities having
a maturity at original issuance of at least one year and that shall have been
designated by the Company.
"SALE AND LEASEBACK TRANSACTION" of any Person means any direct or
indirect arrangement pursuant to which any Property is sold or transferred by
such Person or a Restricted Subsidiary of such person and is thereafter leased
back from the purchaser or transferee thereof by such Person or one of its
Restricted Subsidiaries. The stated maturity of such arrangement shall be the
date of the last payment of rent or any other amount due under such arrangement
prior to the first date on which such arrangement may be terminated by the
lessee without payment of a penalty.
"SEGMENT" means
o with respect to the Company's intercity network, the
through-portion of such network between two local networks and
o with respect to a local network of the Company, the entire
through-portion of such network, excluding the spurs which branch
off the through-portion.
"STATED MATURITY" when used with respect to a Note or any installment
of interest on such note, means the date specified in such Note as the fixed
date on
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which the principal of such Note or such installment of interest is due and
payable, including pursuant to any mandatory redemption provision, but excluding
any provision providing for the repurchase of such Note at the option of the
Holder on such note upon the happening of any contingency beyond the control of
the Company unless such contingency has occurred.
"SUBORDINATED DEBT" means Debt of the Company (a) that is not secured
by any Lien on or with respect to any Property now owned or acquired after the
date of the Indenture and (b) as to which the payment of principal of, and
premium, if any, and interest and other payment obligations in respect of such
Debt shall be subordinate to the prior payment in full in cash of the Notes to
at least the following extent:
(1) no payments of principal of, or premium, if any, or interest
on or otherwise due, including by acceleration or for additional
amounts, in respect of, or repurchases, redemptions or other
retirements of, such Debt may be permitted for so long as any default,
after giving effect to any applicable grace periods, in the payment of
principal, or premium, if any, or interest on the Notes exists,
including as a result of acceleration;
(2) if any other Default exists with respect to the Notes, upon
notice by Holders of 25% or more in aggregate principal amount of the
Notes to the Trustee, the Trustee shall have the right to give notice
to the Company and the Holders of such Debt, or trustees or agents
therefor, of a payment blockage, and thereafter no payments of such
Debt may be made for a period of 179 days from the date of such notice;
provided that not more than one such payment blockage notice may be
given in any consecutive 360-day period, irrespective of the number of
defaults with respect to the Notes during such period;
(3) if payment of such Debt is accelerated when any Notes are
outstanding, no payments of such Debt may be made until three Business
Days after the Trustee receives notice of such acceleration and,
thereafter, such payments may only be made to the extent the terms of
such Debt permit payment at that time; and
(4) such Debt may not
(x) provide for payments of principal of such Debt at
the stated maturity of such Debt or by way of a sinking fund
applicable to such Debt or by way of any mandatory redemption,
defeasance, retirement or repurchase of such Debt by the
Company, including any redemption, retirement or repurchase
which is contingent upon
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<PAGE> 47
events or circumstances but excluding any retirement required
by virtue of acceleration of such Debt upon an event of
default thereunder, in each case prior to the final Stated
Maturity of the Notes or
(y) permit redemption or other retirement, including
pursuant to an offer to purchase made by the Company, of such
Debt at the option of the Holder of such Debt prior to the
final Stated Maturity of the Notes,
other than, in the case of clause (x) or (y), any such payment, redemption or
other retirement, including pursuant to an offer to purchase made by the
Company, which is conditioned upon
o a change of control of the Company pursuant to provisions
substantially similar to those described in Section 3.18 (and
which shall provide that such Debt will not be repurchased
pursuant to such provisions prior to the Company's repurchase of
the Notes required to be repurchased by the Company pursuant to
the provisions described in Section 3.18 or
o a sale or other disposition of assets pursuant to provisions
substantially similar to those described in Section 3.15 (and
which shall provide that such Debt will not be repurchased
pursuant to such provisions prior to the Company's repurchase of
the Notes required to be repurchased by the Company pursuant to
the provision described in Section 3.15.
"SUBSIDIARY" of any Person means:
o a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or
indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries of such
Person; or
o any other Person (other than a corporation) in which such Person,
or one or more other Subsidiaries of such Person or such Person
and one or more other Subsidiaries of such Person, directly or
indirectly, has at least a majority ownership and power to direct
the policies, management and affairs thereof.
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"TELECOMMUNICATIONS ASSETS" means:
(a) any Property, other than cash, cash equivalents and
securities, to be owned or used by the Company or any Restricted
Subsidiary and used in the Telecommunications Business;
(b) for purposes of the covenants described in Section 3.08 and
Section 3.13 only, Capital Stock of any Person; or
(c) for all other purposes of the Indenture, Capital Stock of a
Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary from any Person other than an Affiliate of the Company;
provided, however, that, in the case of clause (b) or (c), such Person is
primarily engaged in the Telecommunications Business.
"TELECOMMUNICATIONS BUSINESS" means the business of:
(1) transmitting, or providing services relating to the
transmission of, voice, video, data through owned or leased
transmission facilities or the right to use such facilities;
(2) constructing, creating, developing, operating, managing or
marketing communications networks, related network transmission
equipment, software and other devices for use in a communications
business;
(3) computer outsourcing, data center management, computer systems
integration, reengineering of computer software for any purpose,
including, without limitation, for the purposes of porting computer
software from one operating environment or computer platform to another
or to address issues commonly referred to as "YEAR 2000 ISSUES";
(4) constructing, managing or operating fiber optic
telecommunications networks and leasing capacity on those networks to
third parties;
(5) the sale, resale, installation or maintenance of
communications systems and equipment; or
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<PAGE> 49
(6) evaluating, participating or pursuing any other activity or
opportunity that is primarily related to those identified in (1), (2),
(3), (4) or (5) above;
provided that the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors of the Company.
"TREASURY RATE" means, at any date of determination, the yield to
maturity as of such date (as complied by and published in the most recent
Federal Reserve Statistical Release H.15 (519), which has become publicly
available at least two business days prior to the date of the redemption notice
for which such computation is being made, or if such Statistical Release is no
longer published, as reported in any publicly available source or similar market
data) of United States Treasury securities with a constant maturity most nearly
equal to the Make- Whole Average Life; provided however, that if the Make-Whole
Average Life is not equal to the constant maturity of the United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury securities for
which such yields are given, except that if the Make-Whole Average Life is less
than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"TRUST INDENTURE ACT OF 1939" means the Trust Indenture Act of 1939, as
amended, as in force at the date as of which this Indenture was originally
executed, and "TIA", when used in respect of an indenture supplemental hereto,
means such Act as in force at the time such indenture supplemental hereto
becomes effective.
"TRUSTEE" means the entity identified as "Trustee" in the first
paragraph hereof and, subject to the provisions of Article Five, shall also
include any successor trustee.
"UNRESTRICTED SUBSIDIARY" means
o any Subsidiary of an Unrestricted Subsidiary and
o any Subsidiary of the Company designated as such pursuant to and
in compliance with Section 3.20 and not thereafter redesignated as
a Restricted Subsidiary as permitted pursuant to such section.
"U.S. GOVERNMENT OBLIGATIONS" means securities issued or directly and
fully guaranteed or insured by the United States of America or any agent or
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<PAGE> 50
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof).
"VOTING STOCK" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors, or persons performing
similar functions, of such Person, whether at all times or only for so long as
no senior class of securities has such voting power by reason of any
contingency.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such
Person, all of the outstanding Voting Stock or other ownership interests, other
than directors' qualifying shares, of which shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
"WILLIAMS INTERCOMPANY ARRANGEMENTS" means the Williams Note and any
other documents, instruments, agreements and arrangements between the Company
and any Restricted Subsidiaries, between any Restricted Subsidiaries or between
the Company or any Restricted Subsidiary, on the one hand, and The Williams
Companies, Inc. or any of its Subsidiaries, on the other hand, in effect on the
date of the Indenture, as such documents, instruments, agreements and
arrangements may be amended, modified or supplemented, but only to the extent
any such amendments, modifications or supplements are approved by a majority of
the members of the Board of Directors of the Company who are disinterested with
respect to such amendment, modification or supplement.
"WILLIAMS NOTE" means the promissory note of ____________, a subsidiary
of the Company, dated as of ________, 1999, to The Williams Companies, Inc. in
the principal amount as of such date equal to $____ million.
SECTION 1.02. Other Definitions.
Defined in
Term Section
- ------- ------------
"Acceleration Notice"......................................... 4.02
"Affiliate Transaction"....................................... 3.17
"Agent Members"............................................... 2.07
"beneficial owner"............................................ 3.18
"cash transaction"............................................ 5.13
"Covenant Defeasance"......................................... 10.03
"Designation"................................................. 3.20
"Designation Amount........................................... 3.20
"Global Note"................................................. 2.04
"incorporated provision"...................................... 11.07
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Defined in
Term Section
- ------- ------------
"Incurrence Date"............................................. 3.08
"Legal Defeasance"............................................ 10.02
"Note Register"............................................... 2.06
"parent corporation".......................................... 3.18
"refinancing"................................................. 3.08
"Registrar"................................................... 2.06
"Required Filing Dates"....................................... 3.19
"Revocation".................................................. 3.20
"self-liquidating paper....................................... 5.13
ARTICLE 2
ISSUE, EXECUTION, FORM AND REGISTRATION OF NOTES
SECTION 2.01. Authentication and Delivery of Notes. Upon the execution
and delivery of this Indenture, or from time to time thereafter, Notes in an
aggregate principal amount not in excess of the amount specified in the form of
Note hereinabove recited (except as otherwise provided in Section 2.08) may be
executed by the Company and delivered to the Trustee for authentication, and the
Trustee shall thereupon authenticate and make available for delivery said Notes
to or upon the written order of the Company, signed by its Chairman of the Board
of Directors, or any Vice Chairman of the Board of Directors, or its President
or any Vice President (whether or not designated by a number or numbers or a
word or words added before or after the title "Vice President") without any
further action by the Company.
SECTION 2.02. Execution of Notes. The Notes shall be signed on behalf
of the Company by its Chairman of the Board of Directors or its President or any
Vice President (whether or not designated by a number or numbers or a word or
words added before or after the title "Vice President"). Such signature may be
the manual or facsimile signatures of the present or any future such officers.
In case any officer of the Company who shall have signed any of the
Notes shall cease to be such officer before the Note so signed shall be
authenticated and delivered by the Trustee or disposed of by the Company, such
Note nevertheless may be authenticated and delivered or disposed of as though
the person who signed such Note had not ceased to be such officer of the
Company; and any Note may be signed on behalf of the Company by such persons as,
at the actual date of the execution of such Note, shall be the proper officers
of the Company, although at the date of the execution and delivery of this
Indenture any such person was not such officer.
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SECTION 2.03. Certificate of Authentication. Only such Notes as shall
bear thereon a certificate of authentication substantially in the form
hereinabove recited, executed by the Trustee by manual signature of one of its
authorized signatories, shall be entitled to the benefits of this Indenture or
be valid or obligatory for any purpose. Such certificate by the Trustee upon any
Note executed by the Company shall be conclusive evidence that the Note so
authenticated has been duly authenticated and delivered hereunder and that the
Holder is entitled to the benefits of this Indenture.
SECTION 2.04. Form, Denomination and Date of Notes; Payments of
Interest. The Notes and the Trustee's certificates of authentication shall be
substantially in the form recited above. The Notes shall be issuable in
denominations provided for in the form of Note recited above. The Notes shall be
numbered, lettered, or otherwise distinguished in such manner or in accordance
with such plans as the officers of the Company executing the same may determine
with the approval of the Trustee.
Any of the Notes may be issued with appropriate insertions, omissions,
substitutions and variations, and may have imprinted or otherwise reproduced
thereon such legend or legends, not inconsistent with the provisions of this
Indenture, as may be required to comply with any law or with any rules or
regulations pursuant thereto, including those required by Section 2.05, or with
the rules of any securities market in which the Notes are admitted to trading,
or to conform to general usage.
Each Note shall be dated the date of its authentication, shall bear
interest from the applicable date and shall be payable on the dates specified on
the face of the form of Note recited above.
The Notes shall be issued initially in the form of one or more global
Notes (a "GLOBAL NOTE") deposited with the Trustee as custodian for the
Depositary.
The person in whose name any Note is registered at the close of
business on any Regular Record Date with respect to any Interest Payment Date
shall be entitled to receive the interest, if any, payable on such Interest
Payment Date notwithstanding any transfer or exchange of such Note subsequent to
the Regular Record Date and prior to such Interest Payment Date, except if and
to the extent the Company shall default in the payment of the interest due on
such Interest Payment Date, in which case such defaulted interest, plus (to the
extent lawful) any interest payable on the defaulted interest, shall be paid to
the persons in whose names outstanding Notes are registered at the close of
business on a subsequent record date (which shall be not less than five Business
Days prior to the date of such payment) established by notice given by mail by
or on behalf of the Company
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to the Holders of Notes not less than 15 days preceding such subsequent record
date.
SECTION 2.05. Global Note Legends. Each Global Note shall bear the
following legends on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE.
SECTION 2.06. Registration, Transfer and Exchange. The Notes are
issuable only in registered form. The Company will keep at each office or agency
to be maintained for the purpose as provided in Section 3.02 (the "REGISTRAR") a
register or registers (the "NOTE REGISTER(S)") in which, subject to such
reasonable regulations as it may prescribe, it will register, and will register
the transfer of, Notes as in this Article provided. Such Note Register shall be
in written form in the English language or in any other form capable of being
converted into such form within a reasonable time. At all reasonable times such
Note Register or Note Registers shall be open for inspection by the Trustee.
Upon due presentation for registration of transfer of any Note at each
such office or agency, the Company shall execute and the Trustee shall
authenticate in accordance with the procedures set forth herein and make
available for delivery in the name of the transferee or transferees a new Note
or Notes in authorized denominations for a like aggregate principal amount.
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A Holder may transfer a Note only by written application to the
Registrar stating the name of the proposed transferee and otherwise complying
with the terms of this Indenture. No such transfer shall be effected until, and
such transferee shall succeed to the rights of a Holder only upon, final
acceptance and registration of the transfer by the Registrar in the Note
Register. Prior to the registration of any transfer by a Holder as provided
herein, the Company, the Trustee, and any agent of the Company shall treat the
person in whose name the Note is registered as the owner thereof for all
purposes whether or not the Note shall be overdue, and neither the Company, the
Trustee, nor any such agent shall be affected by notice to the contrary.
Furthermore, any Holder of a Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Note may be
effected only through a book entry system maintained by the Holder of such
Global Note (or its agent) and that ownership of a beneficial interest in the
Note shall be required to be reflected in a book entry. When Notes are presented
to the Registrar or a co-Registrar with a request to register the transfer or to
exchange them for an equal principal amount of Notes of other authorized
denominations, the Registrar shall register the transfer or make the exchange as
requested if the requirements for such transactions set forth herein are met. To
permit registrations of transfers and exchanges, the Company shall execute and
the Trustee shall authenticate Notes at the Registrar's request.
The Company may require payment of a sum sufficient to cover any tax or
other similar governmental charge that may be imposed in connection with any
exchange or registration of transfer of Notes (other than any such transfer
taxes or other similar governmental charge payable upon exchanges pursuant to
Section 2.10, 7.05 or 9.03). No service charge to any Holder shall be made for
any such transaction.
The Company shall not be required to exchange or register a transfer of
(a) any Notes for a period of 15 days next preceding the first mailing of notice
of redemption of Notes to be redeemed, or (b) any Notes selected, called or
being called for redemption except, in the case of any Note where public notice
has been given that such Note is to be redeemed in part, the portion thereof not
so to be redeemed.
All Notes issued upon any transfer or exchange of Notes shall be valid
obligations of the Company, evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Notes surrendered upon such transfer or
exchange.
SECTION 2.07. Book-Entry Provisions for Global Notes. (a) Each Global
Note shall (1) be registered in the name of the Depositary for such Global Notes
or
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the nominee of such Depositary, (2) be delivered to the Trustee as custodian for
such Depositary and (3) bear legends as set forth in Section 2.05.
Members of, or participants in, the Depositary ("AGENT MEMBERS") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depositary, or the Trustee as its custodian, or under the
Global Note, and the Depositary may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of such Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee, from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or impair, as between the Depositary
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a Holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers of such
Global Note in whole, but not in part, to the Depositary, its successors or
their respective nominees. Interests of beneficial owners in a Global Note may
be transferred in accordance with the rules and procedures of the Depositary. In
addition, Certificated Securities shall be transferred to all beneficial owners
in exchange for their beneficial interests if (1) the Depositary notifies the
Company that it is unwilling or unable to continue as Depositary for the Global
Note or the Depository ceases to be a "clearing agency" registered under the
Exchange Act and a successor depositary is not appointed by the Company within
90 days of such notice or (2) an Event of Default of which a Responsible Officer
of the Trustee has actual notice has occurred and is continuing and the
Registrar has received a request from the Depositary to issue such Certificated
Securities.
(c) In connection with the transfer of the entire Global Note to
beneficial owners pursuant to paragraph (b) of this Section, such Global Note
shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depositary in exchange for its beneficial
interest in such Global Note an equal aggregate principal amount of Certificated
Securities of authorized denominations.
(d) The registered Holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
SECTION 2.08. Mutilated, Defaced, Destroyed, Lost and Stolen Notes. In
case any temporary or definitive Note shall become mutilated, defaced or be
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apparently destroyed, lost or stolen, the Company in its discretion may execute,
and upon the written request of any officer of the Company, the Trustee shall
authenticate and make available for delivery, a new Note, bearing a number not
contemporaneously outstanding, in exchange and substitution for the mutilated or
defaced Note, or in lieu of and substitution for the Note so apparently
destroyed, lost or stolen. In every case the applicant for a substitute Note
shall furnish to the Company and to the Trustee and any agent of the Company or
the Trustee such security or indemnity as may be required by them to indemnify
and defend and to save each of them harmless and, in every case of destruction,
loss or theft evidence to their satisfaction of the apparent destruction, loss
or theft of such Note and of the ownership thereof.
Upon the issuance of any substitute Note, the Company may require the
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
In case any Note which has matured or is about to mature, or has been called for
redemption in full, shall become mutilated or defaced or be apparently
destroyed, lost or stolen, the Company may, instead of issuing a substitute
Note, pay or authorize the payment of the same (without surrender thereof except
in the case of a mutilated or defaced Note), if the applicant for such payment
shall furnish to the Company and to the Trustee and any agent of the Company or
the Trustee such security or indemnity as any of them may require to save each
of them harmless from all risks, however remote, and, in every case of apparent
destruction, loss or theft, the applicant shall also furnish to the Company and
the Trustee and any agent of the Company or the Trustee evidence to their
satisfaction of the apparent destruction, loss or theft of such Note and of the
ownership thereof.
Every substitute Note issued pursuant to the provisions of this Section
by virtue of the fact that any Note is apparently destroyed, lost or stolen
shall constitute an additional contractual obligation of the Company, whether or
not the apparently destroyed, lost or stolen Note shall be at any time
enforceable by anyone and shall be entitled to all the benefits of (but shall be
subject to all the limitations of rights set forth in) this Indenture equally
and proportionately with any and all other Notes duly authenticated and
delivered hereunder. All Notes shall be held and owned upon the express
condition that, to the extent permitted by law, the foregoing provisions are
exclusive with respect to the replacement or payment of mutilated, defaced, or
apparently destroyed, lost or stolen Notes and shall preclude any and all other
rights or remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement or payment of negotiable
instruments or other securities without their surrender.
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SECTION 2.09. Cancellation of Notes. All Notes surrendered for payment,
redemption, registration of transfer or exchange, if surrendered to the Company
or any agent of the Company or the Trustee, shall be delivered to the Trustee
for cancellation or, if surrendered to the Trustee, shall be cancelled by it;
and no Notes shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Indenture. If the Company shall acquire any of the
Notes, such acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Notes unless and until the same are delivered
to the Trustee for cancellation.
SECTION 2.10. Temporary Notes. Pending the preparation of definitive
Notes, the Company may execute and, upon receipt of an order from the Company,
the Trustee shall authenticate and make available for delivery temporary Notes
(printed, lithographed, typewritten or otherwise reproduced, in each case in
form satisfactory to the Trustee). Temporary Notes shall be issuable as
registered Notes without coupons, of any authorized denomination, and
substantially in the form of the definitive Notes but with such omissions,
insertions and variations as may be appropriate for temporary Notes, all as may
be determined by the Company with the concurrence of the Trustee. Temporary
Notes may contain such reference to any provisions of this Indenture as may be
appropriate. Every temporary Note shall be executed by the Company and be
authenticated by the Trustee upon the same conditions and in substantially the
same manner, and with like effect, as the definitive Notes. Without unreasonable
delay the Company shall execute and shall furnish definitive Notes and thereupon
temporary Notes may be surrendered in exchange therefor without charge at each
office or agency to be maintained by the Company for the purpose pursuant to
Section 3.02, and the Trustee shall authenticate and make available for delivery
in exchange for such temporary Notes a like aggregate principal amount of
definitive Notes of authorized denominations. Until so exchanged the temporary
Notes shall be entitled to the same benefits under this Indenture as definitive
Notes.
SECTION 2.11. CUSIP Numbers. The Company in issuing the Notes may use a
"CUSIP" number (if then generally in use), and the Trustee shall use the CUSIP
number in notices of redemption or exchange as a convenience to Holders;
provided that any such notice shall state that no representation is made as to
the correctness of such number either as printed on the Notes or as contained in
any notice of redemption or exchange and that reliance may be placed only on the
other identification number printed on the Notes. The Company shall promptly
notify the Trustee of any change in the CUSIP number.
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ARTICLE 3
COVENANTS OF THE COMPANY AND THE TRUSTEE
SECTION 3.01. Payment of Principal and Interest. The Company covenants
and agrees that it will duly and punctually pay or cause to be paid the
principal of, and interest on, each of the Notes at the place or places, at the
respective times and in the manner provided in the Notes. Each installment of
interest on the Notes may be paid by mailing checks for such interest payable to
or upon the written order of the Holders of Notes entitled thereto as they shall
appear on the registry books of the Company, or by wire transfer to such Holders
in immediately available funds, to such bank or other entity in the continental
United States as shall be designated by such Holders and shall have appropriate
facilities for such purpose, or in accordance with the standard operating
procedures of the Depositary.
SECTION 3.02. Offices for Payments, etc. So long as any of the Notes
remain outstanding, the Company will maintain in the Borough of Manhattan, The
City of New York, the following: (a) an office or agency where the Notes may be
presented for payment, (b) an office or agency where the Notes may be presented
for registration of transfer and for exchange as in this Indenture provided and
(c) an office or agency where notices and demands to or upon the Company in
respect of the Notes or of this Indenture may be served. The Company will give
to the Trustee written notice of the location of any such office or agency and
of any change of location thereof. The Company hereby initially designates the
Corporate Trust Office of the Trustee as the office or agency for each such
purpose. In case the Company shall fail to maintain any such office or agency or
shall fail to give such notice of the location or of any change in the location
thereof, presentations and demands may be made and notices may be served at the
Corporate Trust Office.
SECTION 3.03. Appointment to Fill a Vacancy in Office of Trustee. The
Company, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section, a Trustee, so that there shall
at all times be a Trustee hereunder.
SECTION 3.04. Paying Agents. Whenever the Company shall appoint a
paying agent other than the Trustee, it will cause such paying agent to execute
and deliver to the Trustee an instrument in which such agent shall agree with
the Trustee, subject to the provisions of this Section,
(a) that it will hold all sums received by it as such agent for the
payment of the principal of or interest on the Notes (whether such sums have
been paid to it
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by the Company or by any other obligor on the Notes) in trust for the benefit of
the Holders of the Notes or of the Trustee,
(b) that it will give the Trustee notice of any failure by the Company
(or by any other obligor on the Notes) to make any payment of the principal of
or interest on the Notes when the same shall be due and payable, and
(c) that it will pay any such sums so held in trust by it to the
Trustee upon the Trustee's written request at any time during the continuance of
the failure referred to in clause (b) above.
The Company will, prior to each due date of the principal of or
interest on the Notes, deposit with the paying agent a sum sufficient to pay
such principal or interest, and (unless such paying agent is the Trustee) the
Company will promptly notify the Trustee of any failure to take such action.
If the Company shall act as its own paying agent, it will, on or before
each due date of the principal of or interest on the Notes, set aside, segregate
and hold in trust for the benefit of the Holders of the Notes a sum sufficient
to pay such principal or interest so becoming due. The Company will promptly
notify the Trustee of any failure to take such action.
Anything in the prior two paragraphs to the contrary notwithstanding,
in connection with any payment of principal and interest, the Company will, for
so long as the Depository is a Holder of the Notes, deposit sums with the paying
agent sufficient to pay such amounts not later than the time required by the
Depository's rules and regulations as in effect at the time such payment is due.
Anything in this Section to the contrary notwithstanding, the Company
may at any time, for the purpose of obtaining a satisfaction and discharge of
this Indenture or for any other reason, pay or cause to be paid to the Trustee
all sums held in trust by the Company or any paying agent hereunder, as required
by this Section, such sums to be held by the Trustee upon the trusts herein
contained.
Anything in this Section to the contrary notwithstanding, the agreement
to hold sums in trust as provided in this Section are subject to the provisions
of Section 10.05 and Section 10.06.
SECTION 3.05. Certificates to Trustee. (a) The Company will deliver to
the Trustee within 90 days after the end of each fiscal year of the Company a
certificate from the principal executive, financial or accounting officer of the
Company stating that such officer has conducted or supervised a review of the
activities of the Company and its Restricted Subsidiaries and the Company's and
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its Restricted Subsidiaries' performance under this Indenture and that, to the
best of such officer's knowledge, based upon such review, there has been no
Default that is continuing thereunder or, if there has been a Default in the
fulfillment of any such obligation, specifying each such Default and the nature
and status thereof.
(b) The Company will deliver to the Trustee, as soon as possible and
in any event within 30 days after the occurrence thereof, written notice in the
form of an Officers' Certificate of any event which with the giving of notice
and the lapse of time would become an Event of Default, setting forth the status
of such event and what action the Company is taking or proposes to take with
respect thereto.
(c) The Company will deliver to the Trustee within 120 days after the
end of each fiscal year of the Company a written statement by the Company's
independent public accountants stating (i) that their audit examination has
included a review of the terms of this Indenture and the Notes as they relate to
accounting matters, and (ii) whether, in connection with their audit
examination, any Default that is continuing has come to their attention and, if
such a Default has come to their attention, specifying the nature and period of
the existence thereof.
SECTION 3.06. Noteholders' Lists. If and so long as the Trustee shall
not be the Registrar, the Company will furnish or cause to be furnished to the
Trustee a list in such form as the Trustee may reasonably require of the names
and addresses of the Holders of the Notes pursuant to Section 312 of the Trust
Indenture Act of 1939 (a) semi-annually not more than 15 days after each Regular
Record Date as of such Regular Record Date, and (b) at such other times as the
Trustee may request in writing, within thirty days after receipt by the Company
of any such request as of a date not more than 15 days prior to the time such
information is furnished.
SECTION 3.07. Reports by the Trustee. (a) The Trustee shall transmit to
Holders such reports concerning the Trustee and its actions under this Indenture
as may be required pursuant to the Trust Indenture Act of 1939 at the times and
in the manner provided pursuant thereto. If required by Section 313(a) of the
Trust Indenture Act of 1939, the Trustee shall, within sixty days after each
August 15 following the date of this Indenture deliver to Holders a brief
report, dated as of such August 15, which complies with the provisions of such
Section 313(a).
(b) A copy of each such report shall, at the time of such transmission
to Holders, be filed by the Trustee with each stock exchange, if any, upon which
the Notes are listed, with the Commission and with the Company. The Company will
promptly notify the Trustee when the Notes are listed on any stock exchange or
of any delisting thereof.
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SECTION 3.08. Limitation on Consolidated Debt. (a) The Company may not,
and may not permit any Restricted Subsidiary to, directly or indirectly, Incur
any Debt, unless, after giving pro forma effect to such Incurrence and the
receipt and application of the net proceeds of such Incurrence, no Default or
Event of Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence and either
(1) the ratio of (A) the aggregate consolidated principal amount
(or, in the case of Debt issued at a discount, the then Accreted Value)
of Debt of the Company outstanding as of the most recent available
quarterly or annual balance sheet, after giving pro forma effect to
o the Incurrence of such Debt and any other Debt
Incurred and that remains outstanding on the date as
of which the Debt to be Incurred is to be Incurred
(the "INCURRENCE DATE") since such balance sheet date
and the receipt and application of the net proceeds
thereof, in each case as if such Incurrence, receipt
and application had occurred on such balance sheet
date, and
o the repayment, repurchase, retirement or
extinguishment of any Debt since such balance sheet
date, as if such repayment, repurchase, retirement or
extinguishment had occurred on such balance sheet
date, to
(B) Consolidated Cash Flow Available for Fixed Charges
for the four full fiscal quarters next preceding the
Incurrence of such Debt for which consolidated financial
statements are available, determined on a pro forma basis as
if any such Debt had been Incurred and the proceeds of such
Debt had been applied, and any material Investment in, or
acquisition or disposition of, any material asset outside the
ordinary course of business consummated during, or since the
end of, such period of four fiscal quarters had occurred at
the beginning of such four fiscal quarters,
would be less than 5.0 to 1.0; or
(2) The Company's Consolidated Capital Ratio is less than 2.25 to
1.0 as of the most recent available quarterly or annual balance sheet,
after giving pro forma effect to
o the Incurrence of such Debt and any other Debt
Incurred and that remains outstanding on the
Incurrence Date since
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such balance sheet date as if such Incurrence had
occurred on such balance sheet date,
o the repayment, repurchase, retirement or
extinguishment of any Debt since such balance sheet
date, as if such repayment, repurchase or
extinguishment had occurred on such balance sheet
date,
o the issuance of any Capital Stock (other than
Disqualified Stock) of the Company since such balance
sheet date, including the issuance of any Capital
Stock to be issued concurrently with the Incurrence
of such Debt, as of such Incurrence had occurred on
such balance sheet date, and
o the receipt and application of the net proceeds of
such Debt or Capital Stock, as the case may be, as if
such receipt and application of the proceeds
therefrom had occurred on the balance sheet date.
(b) The restrictions in paragraph (a) do not prevent the Company or
any Restricted Subsidiary from Incurring any and all of the following, each of
which shall be given independent effect:
(1) Debt under the Notes, the Indenture or any Domestic Restricted
Subsidiary Guarantee;
(2) Debt under Credit Facilities in an aggregate principal amount
outstanding or available (together with all refinancing Debt
outstanding or available pursuant to clause (8) below in respect of
Debt previously Incurred pursuant to this clause (2) at any one time
not to exceed the greater of
(x) $2.0 billion, less
o the amount of all mandatory principal
payments actually made by the Company or any
Restricted Subsidiary in respect of term
loans thereunder (excluding any such
payments to the extent refinanced at the
time of payment under a new Credit Facility)
and
o in the case of a revolving facility, reduced
by any required permanent repayments
actually made
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(which are accompanied by a corresponding
permanent commitment reduction) under the
revolving facility (excluding any such
repayments and commitment reductions to the
extent refinanced and replaced at the time
under a new Credit Facility), and
(y) 85% of the Eligible Receivables;
(3) Purchase Money Debt; provided that the amount of such Purchase
Money Debt does not exceed 100% of the cost of the construction,
installation, acquisition, lease, development or improvement of the
applicable Telecommunications Assets;
(4) Subordinated Debt of the Company; provided, however, that the
aggregate principal amount of such Debt, together with any other
outstanding Debt Incurred pursuant to this clause (4), shall not exceed
$500 million at any one time (which amount shall be permanently reduced
by the amount of Net Available Proceeds used to repay Subordinated Debt
of the Company, and not reinvested in Telecommunications Assets or used
to purchase Notes or repay other Debt, pursuant to the covenant
described in Section 3.15), except to the extent such Debt in excess of
$500 million
(A) is subordinated to all other Debt of the Company
other than Debt Incurred pursuant to this clause (4) in excess
of such $500 million limitation,
(B) does not provide for the payment of cash interest on
such Debt prior to the Stated Maturity of the Notes and
(C) does not
o provide for payments of principal of such
Debt at stated maturity or by way of a
sinking fund applicable to the payment of
such Debt or by way of any mandatory
redemption, defeasance, retirement or
repurchase thereof by the Company (including
any redemption, retirement or repurchase
which is contingent upon events or
circumstances, but excluding any retirement
required by virtue of the acceleration of
any payment with respect to such Debt upon
any event of default under such Debt), in
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each case on or prior to the Stated
Maturity of the Notes, and
o permit redemption or other retirement
(including pursuant to an offer to purchase
made by the Company) of such Debt at the
option of the holder of such Debt on or
prior to the Stated Maturity of the Notes,
other than, in the case of these points under (C) a redemption or retirement at
the option of the holder of such Debt, including pursuant to an offer to
purchase made by the Company, which is conditioned upon a change of control or
asset disposition pursuant to provisions substantially similar to those
described in Section 3.15 and Section 3.18;
(5) Debt outstanding on the date of the Indenture;
(6) Debt owed by the Company to any Restricted Subsidiary of the
Company or Debt owed by a Restricted Subsidiary of the Company to the
Company or a Restricted Subsidiary of the Company; provided, however,
that
o upon any subsequent transfer, conveyance or other
disposition by any such Restricted Subsidiary or the
Company of any Debt so permitted to a Person other
than the Company or another Restricted Subsidiary of
the Company or
o if for any reason such Restricted Subsidiary ceases
to be a Restricted Subsidiary,
the provisions of this clause (6) shall no longer be applicable to such
Debt and such Debt shall be deemed to have been Incurred by the issuer
thereof at the time of such transfer, conveyance or other disposition
or when such Restricted Subsidiary ceases to be a Restricted
Subsidiary;
(7) Debt Incurred by a Person prior to the time
(A) such Person became a Restricted Subsidiary,
(B) such Person merges into or consolidates with a
Restricted Subsidiary or
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(C) another Restricted Subsidiary merges into or
consolidates with such Person, in a transaction in which such
Person becomes a Restricted Subsidiary, which Debt was not
Incurred with, or in anticipation of, such transaction or such
Person becoming a Restricted Subsidiary;
(8) Debt Incurred to renew, extend, refinance, defease, repay,
replace, prepay, repurchase, redeem, retire, exchange or refund (each,
a "REFINANCING") Debt Incurred pursuant to clause (1), (2), (3), (5),
(7), (12) or (13) of this paragraph (b) or this clause (8), in an
aggregate principal amount, or if issued at a discount, the then
Accreted Value, not to exceed the aggregate principal amount, or if
issued at a discount, the then Accreted Value, of and accrued interest
on the Debt so refinanced plus the amount of any premium, accrued
interest, prepayment penalties, fees and expenses required to be paid
with such refinancing pursuant to the terms of the Debt so refinanced
or the amount of any premium or accrued interest reasonably determined
by the Board of Directors of the Company as necessary to accomplish
such refinancing by means of a redemption, tender offer or privately
negotiated repurchase plus the amount of fees and expenses incurred
with such redemption, tender offer or privately negotiated repurchase;
provided, however, that
o the refinancing Debt shall not be senior in right of
payment to the Debt that is being refinanced and
o in the case of any refinancing of Debt Incurred
pursuant to clause (1), (5), (7) or (12) or, if such
Debt previously refinanced Debt Incurred pursuant to
any such clause, this clause (8), the refinancing
Debt by its terms, or by the terms of any agreement
or instrument pursuant to which such Debt is issued,
(x) does not provide for payments of principal of such Debt at stated
maturity or by way of a sinking fund applicable to the payment of such
Debt or by way of any mandatory redemption, defeasance, retirement or
repurchase thereof by the Company, including any redemption, retirement
or repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of the acceleration of any
payment with respect to such Debt upon any event of default under such
Debt, in each case prior to the time the same are required by the terms
of the Debt being refinanced and
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(y) does not permit redemption or other retirement, including
pursuant to an offer to purchase made by the Company, of such Debt at
the option of the holder of such Debt prior to the time the same are
required by the terms of the Debt being refinanced, other than, in the
case of clause (x) or (y), any such payment, redemption or other
retirement, including pursuant to an offer to purchase made by the
Company, which is conditioned upon a change of control or asset sale
pursuant to provisions substantially similar to those in Section 3.15
and Section 3.18.
provided further that the above clauses (x) and (y) and the limitation on the
aggregate principal amount referred to above in this clause (8) shall not apply
to any refinancing of all of the Notes then outstanding;
(9) Debt
(A) in respect of performance, surety or appeal bonds,
Guarantees, letters of credit or reimbursement obligations
Incurred or provided in the ordinary course of business
securing the performance of contractual, franchise, lease,
self-insurance or license obligations and not in connection
with the Incurrence of Debt or
(B) in respect of customary agreements providing for
indemnification, adjustment of purchase price after closing,
or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any such
obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, Incurred in
connection with the disposition of any business, assets or
Restricted Subsidiary of the Company (other than Guarantees of
Debt Incurred by any Person acquiring all or any portion of
such business, assets or Restricted Subsidiary of the Company
for the purpose of financing such acquisition) and in an
aggregate principal amount not to exceed the gross proceeds
actually received by the Company or any Restricted Subsidiary
in connection with such disposition;
(10) Debt consisting of Permitted Interest Rate or Currency
Protection Agreements;
(11) Debt secured by Receivables originated by the Company or any
Restricted Subsidiary and related assets; provided that such Debt is
nonrecourse to the Company and any of its other Restricted
Subsidiaries; provided further, that Receivables shall not be available
at any time to
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secure Debt under this clause to the extent that they are used as the
basis for the Incurrence of Debt pursuant to clause (2) (y) of this
paragraph (b);
(12) Debt Incurred after the date of the Indenture pursuant to the
Williams Note, including Debt Incurred in lieu of payments under the
Williams Intercompany Arrangements and any accrual of interest that is
capitalized under, or added to the principal amount of, the Williams
Note; provided that the aggregate amount of such Debt Incurred in lieu
of payments under the Williams Intercompany Arrangements, other than in
respect of any such accrual of interest, in reliance on this clause
(12) does not exceed $25 million in any 12-month period;
(13) Debt Incurred pursuant to the lease, dated as of September 2,
1998, between 1998 WCI Trust, as lessor, and Williams Communications,
Inc., as lessee, in an aggregate principal amount not to exceed $750
million at any one time outstanding; and
(14) Debt not otherwise permitted to be Incurred pursuant to
clauses (1) through (13) above, which, together with any other
outstanding Debt Incurred pursuant to this clause (14), has an
aggregate principal amount not in excess of $50 million at any time
outstanding.
Notwithstanding any other provision of this Section, the maximum amount
of Debt that the Company or a Restricted Subsidiary may Incur pursuant to this
Section will not be exceeded solely as a result of fluctuations in the exchange
rates of currencies.
For purposes of determining any particular amount of Debt under this
Section:
o Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of such
particular amount shall not be included; and
o any Liens granted for the benefit of the Notes pursuant to the
equal and ratable provisions referred to in the covenant described
in Section 3.13 shall not be treated as Debt.
For purposes of determining compliance with this Section, if an item of
Debt meets the criteria of more than one of the types of Debt described in the
above clauses, the Company, in its sole discretion, may classify such item of
Debt and only be required to include the amount and type of such Debt in one of
such
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clauses, but also may classify a portion of such item of Debt in more than one
of such clauses and in any order the Company so chooses.
SECTION 3.09. Limitation on Debt of Restricted Subsidiaries. The
Company may not permit any Restricted Subsidiary that is not a Guarantor to
Incur any Debt except any and all of the following, each of which shall be given
independent effect:
(1) Domestic Restricted Subsidiary Guarantees;
(2) Debt outstanding on the date of the Indenture;
(3) Debt of Restricted Subsidiaries under Credit Facilities
permitted to be Incurred pursuant to clause (2) of paragraph (b) of
Section 3.08;
(4) Purchase Money Debt of Restricted Subsidiaries permitted to be
Incurred pursuant to clause (3) of paragraph (b) of Section 3.08;
(5) Debt owed by a Restricted Subsidiary to the Company or a
Restricted Subsidiary of the Company permitted to be Incurred pursuant
to clause (6) of paragraph (b) of Section 3.08;
(6) Debt of Restricted Subsidiaries consisting of Permitted
Interest Rate or Currency Protection Agreements permitted to be
Incurred pursuant to clause (10) of paragraph (b) of Section 3.08;
(7) Debt of Restricted Subsidiaries permitted to be Incurred under
clause (7) of paragraph (b) of Section 3.08;
(8) Debt of Restricted Subsidiaries permitted to be Incurred under
clause (9) or (14) of paragraph (b) of Section 3.08;
(9) Debt of Restricted Subsidiaries secured by Receivables
originated by the Company or any Restricted Subsidiary and related
assets permitted to be Incurred under clause (11) of paragraph (b) of
Section 3.08;
(10) Debt permitted to be Incurred pursuant to clause (12) of
paragraph (b) of Section 3.08;
(11) Debt Incurred pursuant to the lease, dated as of September 2,
1998, between 1998 WCI Trust, as lessor, and Williams Communications,
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Inc., as lessee, in an aggregate principal amount not to exceed $750
million at any one time outstanding; and
(12) Debt which is Incurred to refinance any Debt of a Restricted
Subsidiary permitted to be Incurred pursuant to clauses (1), (2), (3),
(4), (7), (10) or (11) of this paragraph or this clause (12), in an
aggregate principal amount (or if issued at a discount, the then
Accreted Value) not to exceed the aggregate principal amount (or if
issued at a discount, the then Accreted Value) of the Debt so
refinanced, plus the amount of any premium, prepayment penalties,
accrued interest, fees and expenses required to be paid for such
refinancing pursuant to the terms of the Debt so refinanced or the
amount of any premium or accrued interest reasonably determined by the
Board of Directors of the Company as necessary to accomplish such
refinancing by means of a redemption, tender offer or privately
negotiated repurchase, plus the amount of fees and expenses of the
Company and the applicable Restricted Subsidiary Incurred with such
refinancing; provided, however, that, in the case of any refinancing of
Debt Incurred pursuant to clause (1), (2) or (7) or, if such Debt
previously refinanced Debt Incurred pursuant to any such clause, this
clause (12), the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which such Debt is issued,
(x) does not provide for payments of principal at the
stated maturity of such Debt or by way of a sinking fund
applicable to such Debt or by way of any mandatory redemption,
defeasance, retirement or repurchase of such Debt by the
Company or any Restricted Subsidiary, including any
redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required
by virtue of acceleration of such Debt upon an event of
default thereunder, in each case prior to the time the same
are required by the terms of the Debt being refinanced and
(y) does not permit redemption or other retirement,
including pursuant to an offer to purchase made by the Company
or a Restricted Subsidiary, of such Debt at the option of the
holder of such Debt prior to the stated maturity of the Debt
being refinanced,
other than, in the case of clause (x) or (y), any such payment, redemption or
other retirement, including pursuant to an offer to purchase made by the Company
or a Restricted Subsidiary, which is conditioned upon the change of control or
asset sale of the Company pursuant to provisions substantially similar to those
in Section 3.15 and Section 3.18;
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provided further that the above clauses (x) and (y) and the limitation on the
aggregate principal amount referred to above in this clause (12) shall not apply
to any refinancing of all of the Notes then outstanding.
Notwithstanding any other provision of this Section, the maximum amount
of Debt that a Restricted Subsidiary may Incur pursuant to this Section will not
be exceeded solely as a result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Debt under this
Section, Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of such particular
amount shall not be included. For purposes of determining compliance with this
Section, if an item of Debt meets the criteria of more than one of the types of
Debt described in the above clauses, the Company, in its sole discretion, may
classify such item of Debt and only be required to include the amount and type
of such Debt in one of such clauses, but also may classify a portion of such
item of Debt in more than one of such clauses and in any order the Company so
chooses.
SECTION 3.10. Limitation on Issuances of Guarantees by, and Debt
Securities of, Domestic Restricted Subsidiaries. The Company will not permit any
of its Domestic Restricted Subsidiaries, directly or indirectly, to issue or
Guarantee any Debt Securities, unless such Domestic Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for the Guarantee of the payment of the Notes by such Domestic
Restricted Subsidiary, which Guarantee shall be senior to or rank equally with
such Debt Securities.
Any such Guarantee by a Domestic Restricted Subsidiary of the Notes
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon a sale or other disposition, by way of merger or
otherwise, to any Person not an Affiliate of the Company, of the Company's
equity interest in, or the assets of, such Domestic Restricted Subsidiary, which
sale or other disposition results in such Domestic Restricted Subsidiary ceasing
to be a Domestic Restricted Subsidiary and such sale or other disposition is
made in compliance with, and the Net Available Proceeds therefrom are applied in
accordance with, the applicable provisions of the Indenture.
The form of such supplemental indenture is attached as an exhibit to
the Indenture. The foregoing provisions will not be applicable to:
o Guarantees of Debt Securities of a Person by its subsidiaries in
effect prior to the time such Person is merged with or into or
became a Domestic Restricted Subsidiary, provided that such
Guarantees do not
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extend to any other Debt Securities of such Person or any other
Person; and
o any one or more Guarantees of up to $100 million in aggregate
principal amount of Debt Securities of the Company or any Domestic
Restricted Subsidiary at any time outstanding.
SECTION 3.11. Limitation on Restricted Payments. (a) The Company:
(1) may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, declare or pay any dividend, or make any
distribution, in respect of its Capital Stock or to the holders of its
Capital Stock, excluding any dividends or distributions which are made
solely to the Company or a Restricted Subsidiary (and, if such
Restricted Subsidiary declaring, paying or making any such dividend or
distribution is not a Wholly Owned Subsidiary, to the other
stockholders or equity owners of such Restricted Subsidiary on a pro
rata basis or on a basis that results in the receipt by the Company or
a Restricted Subsidiary of dividends or distributions of greater value
than it would receive on a pro rata basis) or any dividends or
distributions payable solely in shares of Capital Stock of the Company,
other than Disqualified Stock, or in options, warrants or other rights
to acquire Capital Stock of the Company, other than Disqualified Stock;
(2) may not, and may not permit any Restricted Subsidiary to,
purchase, redeem, or otherwise retire or acquire for value
o any Capital Stock of the Company or any Restricted
Subsidiary of the Company or
o any options, warrants or rights to purchase or
acquire shares of Capital Stock of the Company or any
Restricted Subsidiary or any securities convertible
or exchangeable into shares of Capital Stock of the
Company or any Restricted Subsidiary,
except, in any such case, any such purchase, redemption or retirement
or acquisition for value
o paid to the Company or a Restricted Subsidiary (or,
in the case of any such purchase, redemption or other
retirement or acquisition for value with respect to a
Restricted Subsidiary that is not a Wholly Owned
Subsidiary, to the
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other stockholders or equity owners of such
Restricted Subsidiary on a pro rata basis or on a
basis that results in the receipt by the Company or a
Restricted Subsidiary of payments of greater value
than it would receive on a pro rata basis) or
o paid solely in shares of Capital Stock, other than
Disqualified Stock, of the Company;
(3) may not make, or permit any Restricted Subsidiary to make, any
Investment, other than an Investment in the Company or a Restricted
Subsidiary or a Permitted Investment, in any other Person, including
the Designation of any Restricted Subsidiary as an Unrestricted
Subsidiary, or the Revocation of any such Designation, according to
Section 3.20;
(4) may not, and may not permit any Restricted Subsidiary to,
redeem, defease, repurchase, retire or otherwise acquire or retire for
value, prior to any scheduled maturity, repayment or sinking fund
payment, Debt of the Company which is subordinate in right of payment
to the Notes (other than any redemption, defeasance, repurchase,
retirement or other acquisition or retirement for value made in
anticipation of satisfying a scheduled maturity, repayment or sinking
fund obligation due within one year thereof); and
(5) may not, and may not permit any Restricted Subsidiary to,
issue, transfer, convey, sell or otherwise dispose of Capital Stock of
any Restricted Subsidiary to a Person other than the Company or another
Restricted Subsidiary if the result thereof is that such Restricted
Subsidiary shall cease to be a Restricted Subsidiary, in which event
the amount of such "Restricted Payment" shall be the Fair Market Value
of the remaining interest, if any, in such former Restricted Subsidiary
held by the Company and the other Restricted Subsidiaries;
each of clauses (1) through (5) being a "RESTRICTED PAYMENT," if:
(A) an Event of Default, or an event that with the
passing of time or the giving of notice, or both, would
constitute an Event of Default, shall have occurred and be
continuing; or
(B) upon giving effect to such Restricted Payment, the
Company could not Incur at least $1.00 of additional Debt
pursuant to the terms of the Indenture described in paragraph
(a) of Section 3.08; or
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(C) upon giving effect to such Restricted Payment, the
aggregate of all Restricted Payments made on or after the date
of the Indenture, plus Permitted Investments made on or after
the date of the Indenture pursuant to clause (i) or (n) of the
definition thereof, other than any such Permitted Investments
that are Permitted Investments in the Company or any
Restricted Subsidiary (the amount of any such Restricted
Payment or Permitted Investment, if made other than in cash,
to be based upon Fair Market Value), exceeds the sum of:
o 50% of cumulative Consolidated Net Income (or, in the
case that Consolidated Net Income shall be negative,
100% of such negative amount) since June 30, 1999
through the last day of the last full fiscal quarter
for which consolidated financial statements are
available;
o in the case of any Revocation made after the date of
the Indenture, an amount equal to the lesser of the
portion (proportionate to the Company's direct or
indirect equity interest in the Subsidiary to which
such Revocation relates) of the Fair Market Value of
the net assets of such Subsidiary at the time of
Revocation and the amount of Investments previously
made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such
Subsidiary; and
o the aggregate amount of Returned Investments since
the date of the Indenture and on or prior to the date
of such Restricted Payment;
provided, however, that the Company or a Restricted Subsidiary of
the Company may, without regard to the limitations in clause (C)
but subject to clauses (A) and (B), make Restricted Payments in an
aggregate amount not to exceed the sum of $50 million and the
aggregate net cash proceeds received after the date of the
Indenture
(1) as capital contributions to the Company, or proceeds
from the issuance, other than to a Subsidiary, of Capital
Stock, other than Disqualified Stock, of the Company and
options, warrants or rights to purchase or acquire shares of
Capital Stock (other than Disqualified Stock) of the Company,
and
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(2) from the issuance or sale of Debt of the Company or
any Restricted Subsidiary, other than to a Subsidiary, the
Company or a Plan, that after the date of the Indenture has
been converted into or exchanged for Capital Stock, other than
Disqualified Stock, of the Company;
provided, further, that in the case of the issuance of Capital Stock of
the Company to any Plan, if such Plan Incurs any Debt for the purpose
of purchasing such Capital Stock, the aggregate net cash proceeds from
such issuance shall be included for purposes of the above proviso only
to the extent of any increase in the Consolidated Net Worth of the
Company resulting from principal repayments made with respect to the
Debt Incurred to finance the purchase of such Capital Stock.
The aggregate net cash proceeds referred to in the immediately
preceding clauses (x) and (y) shall not be utilized to make Restricted Payments
pursuant to such clauses to the extent such proceeds have been utilized to make
Permitted Investments under clause (i) of the definition of "Permitted
Investments."
(b) The restrictions in paragraph (a) do not prevent the following:
(1) The Company or any Restricted Subsidiary may pay any dividend
on Capital Stock of any class of the Company within 60 days after the
declaration of such dividend if, on the date when the dividend was
declared, the Company or such Restricted Subsidiary, as the case may
be, could have paid such dividend in accordance with the above
provisions; provided, however, that at the time of such payment of such
dividend, no other Event of Default shall have occurred and be
continuing, or result from, the payment of such dividend;
(2) The Company or any Restricted Subsidiary may repurchase,
redeem, acquire, cancel or otherwise retire for value any shares of its
Common Stock or options to acquire its Common Stock from Persons who
are currently or were formerly directors, officers or employees of the
Company or any of its Subsidiaries or other Affiliates, or their
estates or beneficiaries under their estates, or from any Plan, upon
death, disability, retirement or termination of employment in an amount
not to exceed $3 million in any 12-month period;
(3) The Company and any Restricted Subsidiary may refinance any
Debt otherwise permitted by clause (8) of paragraph (b) of Section 3.08
or clause (12) of Section 3.09;
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(4) The Company and any Restricted Subsidiary may retire or
repurchase any Capital Stock of the Company or of any Restricted
Subsidiary or any Subordinated Debt of the Company in exchange for, or
out of the proceeds of the substantially concurrent sale, other than to
a Subsidiary of the Company or any Plan, of, Capital Stock, other than
Disqualified Stock, of the Company; provided that the proceeds from any
such exchange or sale of Capital Stock shall be excluded from any
calculation pursuant to clause (b) of the definition of "Invested
Capital";
(5) The Company or any Restricted Subsidiary may purchase shares
of Capital Stock of the Company or any Restricted Subsidiary of the
Company for the purpose of contributing such shares to any Plan;
provided that all such purchases referred to in this clause (5) may not
exceed $10 million in any 12-month period;
(6) The Company or any Restricted Subsidiary may purchase all, but
not less than all, excluding directors' qualifying shares, of the
Capital Stock or other ownership interests in a Subsidiary of the
Company which Capital Stock or other ownership interests were not until
that time owned by the Company or a Subsidiary of the Company such that
after giving effect to such purchase such Subsidiary becomes a Wholly
Owned Subsidiary of the Company;
(7) The Company or any Restricted Subsidiary may redeem, defease,
repurchase, retire or acquire for value any Subordinated Debt upon a
Change of Control or Asset Disposition to the extent required by the
Indenture or other agreement pursuant to which such Subordinated Debt
was issued, but only if the Company has first complied with its
obligations under Section 3.15 and Section 3.18; and
(8) The Company or any Restricted Subsidiary may make
distributions to the stockholders or equity owners of Restricted
Subsidiaries that are partnerships, limited liability companies that
are treated as partnerships for U.S. tax purposes or other similar
pass-through entities in order to reimburse or compensate such other
stockholders or equity owners for income taxes attributable to the
operations of such Restricted Subsidiaries as required by the formation
agreement, operating agreement or partnership agreement or similar
governing document of the Restricted Subsidiary.
The Restricted Payments described in the foregoing clauses (1), (2),
(5), (6) and (7) shall be included in the calculation of Restricted Payments;
the
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Restricted Payments described in clauses (3), (4) and (8) shall be excluded
in the calculation of Restricted Payments.
SECTION 3.12. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries. (a) The Company may not, and may not permit
any Restricted Subsidiary to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or
restriction, other than pursuant to law or regulation, on the ability of any
Restricted Subsidiary:
(1) to pay dividends, in cash or otherwise, or make any other
distributions in respect of its Capital Stock owned by the Company or
any other Restricted Subsidiary or pay any Debt or other obligation
owed to the Company or any other Restricted Subsidiary,
(2) to make loans or advances to the Company or any other
Restricted Subsidiary, or
(3) to transfer any of its Property to the Company or any other
Restricted Subsidiary.
(b) Despite the above limitation, the Company may, and may permit any
Restricted Subsidiary to, create or otherwise cause or suffer to exist:
(1) any encumbrance or restriction pursuant to any agreement in
effect on the date of the Indenture and pursuant to the Permanent
Credit Facility (or, in each case, encumbrances or restrictions that
are substantially similar taken as a whole);
(2) any customary (as conclusively determined in good faith by the
Chief Financial Officer of the Company) encumbrance or restriction
applicable to a Restricted Subsidiary that is contained in an agreement
or instrument governing or relating to Debt contained in any Credit
Facilities or Purchase Money Debt; provided that such encumbrances and
restrictions do not prohibit the distribution of funds to the Company
in an amount sufficient for the Company to make the timely payment of
interest, premium, if any, and principal (whether at stated maturity,
by way of a sinking fund applicable thereto, by way of any mandatory
redemption, defeasance, retirement or repurchase thereof, including
upon the occurrence of designated events or circumstances or by virtue
of acceleration upon an event of default, or by way of redemption or
retirement at the option of the holder of the Debt, including pursuant
to offers to purchase) according to the terms of the Indenture and the
Notes
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and other Debt that is solely an obligation of the Company, but
provided further that such agreement may nevertheless contain customary
(as so determined) net worth, restricted payment, leverage, interest
coverage invested capital and other financial covenants, customary (as
so determined) covenants regarding the merger of or sale of all or any
substantial part of the assets of the Company or any Restricted
Subsidiary, customary (as so determined) restrictions on transactions
with affiliates and customary (as so determined) subordination
provisions governing Debt owed to the Company or any Restricted
Subsidiary,
(3) any encumbrance or restriction pursuant to an agreement
relating to any Acquired Debt, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person,
other than the Person so acquired,
(4) any encumbrance or restriction pursuant to an agreement
effecting a refinancing of Debt Incurred pursuant to an agreement
referred to in clause (1), (2) or (3) of this paragraph (b); provided,
however, that the provisions contained in such agreement relating to
such encumbrance or restriction are no more restrictive (as so
determined) in any material respect than the provisions contained in
the agreement governing the Debt being refinanced;
(5) in the case of clause (3) of paragraph (a) above, any
encumbrance or restriction contained in any security agreement
(including a Capital Lease Obligation) securing Debt of the Company or
a Restricted Subsidiary otherwise permitted under the Indenture, but
only to the extent such restrictions restrict the transfer of the
Property subject to such security agreement;
(6) in the case of clause (3) of paragraph (a) above, customary
provisions
o that restrict the subletting, assignment or transfer
of any Property that is a lease, license, conveyance
or similar contract,
o contained in asset sale or other asset disposition
agreements limiting the transfer of the Property
being sold or disposed of pending the closing of such
sale or disposition or
o arising or agreed to in the ordinary course of
business, not relating to any Debt, and that do not,
individually or in the
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aggregate, detract from the value of Property of the
Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary,
(7) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement which has been entered into
for the sale or disposition of all or substantially all of the Capital
Stock or Property of such Restricted Subsidiary, provided that the
consummation of such transaction would not result in a Default or an
Event of Default, that such restriction terminates if such transaction
is abandoned and that the consummation or abandonment of such
transaction occurs within one year of the date such agreement was
entered into;
(8) any encumbrance or restriction pursuant to the Indenture and
the Notes (or encumbrances or restrictions that are substantially
similar taken as a whole); and
(9) Permitted Liens.
SECTION 3.13. Limitation on Liens. The Company may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to
exist any Lien on or with respect to any Property now owned or acquired after
the date of the Indenture to secure any Debt without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Notes
o equally and ratably with such Debt as to such Property for so long
as such Debt will be so secured or
o in the event such Debt is Debt of the Company or a Guarantor which
is subordinate in right of payment to the Notes or the applicable
Domestic Restricted Subsidiary Guarantee, prior to such Debt as to
such Property for so long as such Debt will be so secured.
These restrictions shall not apply to:
(1) Liens existing on the date of the Indenture;
(2) Liens Incurred on or after the date of the Indenture pursuant
to any Credit Facility to secure Debt permitted to be Incurred pursuant
to clause (2) of paragraph (b) of Section 3.08;
(3) Liens securing Debt in an amount which, together with the
aggregate amount of Debt then outstanding or available under all Credit
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Facilities (together with all refinancing Debt then outstanding or
available pursuant to clause (8) of paragraph (b) of Section 3.08 in
respect of Debt previously Incurred under Credit Facilities), does not
exceed 1.5 times the Company's Consolidated Cash Flow Available for
Fixed Charges for the four full fiscal quarters preceding the
Incurrence of such Lien for which the Company's consolidated financial
statements are available, determined on a pro forma basis as if such
Debt had been Incurred and the proceeds thereof had been applied at the
beginning of such four fiscal quarters;
(4) Liens in favor of the Company or any Restricted Subsidiary;
provided, however, that any subsequent issue or transfer of Capital
Stock or other event that results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of the
Debt secured by any such Lien, except to the Company or a Restricted
Subsidiary, shall be deemed, in each case, to constitute the Incurrence
of such Lien by the issuer thereof,
(5) Liens to secure Purchase Money Debt permitted to be Incurred
pursuant to clause (3) of paragraph (b) of Section 3.08; provided that
any such Lien may not extend to any Property other than the
Telecommunications Assets installed, constructed, acquired, leased,
developed or improved with the proceeds of such Purchase Money Debt and
any improvements or accessions thereto (it being understood that all
Debt to any single lender or group of related lenders or outstanding
under any single credit facility, and in any case relating to the same
group or collection of Telecommunications Assets financed thereby,
shall be considered a single Purchase Money Debt, whether drawn at one
time or from time to time);
(6) Liens to secure Acquired Debt; provided that
o such Lien attaches to the acquired Property prior to
the time of the acquisition of such Property and
o such Lien does not extend to or cover any other
Property,
(7) Liens to secure Debt permitted to be Incurred pursuant to
clause (13) of paragraph (b) of Section 3.08;
(8) Liens to secure Debt Incurred to refinance, in whole or in
part, Debt secured by any Lien referred to in the foregoing clauses
(1), (2), (5), (6) and (7) or this clause (8) so long as such Lien does
not extend to any other Property (other than improvements and
accessions to the original
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Property) and the principal amount of Debt so secured is not increased
except as otherwise permitted under clause (8) of paragraph (b) of
Section 3.08 or clause (12) of Section 3.09;
(9) Liens to secure Debt consisting of Permitted Interest Rate and
Currency Protection Agreements permitted to be Incurred pursuant to
clause (10) of paragraph (b) of Section 3.08;
(10) Liens to secure Debt secured by Receivables permitted to be
Incurred pursuant to clause (11) of paragraph (b) of Section 3.08;
(11) Liens granted after the date of the Indenture to secure the
Notes;
(12) Permitted Liens; and
(13) Liens not otherwise permitted by the foregoing clauses (1)
through (12) that, at the time of Incurrence thereof, taken together
with all other Liens Incurred after the date of the Indenture in
reliance on this clause (13) and which remain in existence, secure Debt
in an aggregate principal amount not to exceed 5% of the Company's
Consolidated Tangible Assets as of the most recent balance sheet date
as of which the Company's consolidated balance sheet is available;
SECTION 3.14. Limitation on Sale and Leaseback Transactions. The
Company may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, enter into, assume, Guarantee or otherwise become liable with
respect to any Sale and Leaseback Transaction, unless:
(1) The Company or such Restricted Subsidiary would be entitled to
Incur
o Debt in an amount equal to the Attributable Value of
the Sale and Leaseback Transaction pursuant to the
covenant described in Section 3.08 and
o a Lien pursuant to the covenant described in Section
3.13, equal in amount to the Attributable Value of
the Sale and Leaseback Transaction, without also
securing the Notes; and
(2) the Sale and Leaseback Transaction is treated as an Asset
Disposition and all of the conditions of the Indenture described in
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Section 3.15 (including the provisions concerning the application of
Net Available Proceeds) are satisfied with respect to such Sale and
Leaseback Transaction, treating all of the consideration received in
such Sale and Leaseback Transaction as Net Available Proceeds for
purposes of such covenant.
SECTION 3.15. Limitation on Asset Dispositions. The Company may not,
and may not permit any Restricted Subsidiary to, make any Asset Disposition
unless:
(1) The Company or the Restricted Subsidiary, as the case may be,
receives consideration for such disposition at least equal to the Fair
Market Value for the Property sold or disposed of; and
(2) at least 75% of the consideration for such disposition
consists of cash or Cash Equivalents or the assumption of Debt of the
Company or any Restricted Subsidiary (other than Debt that is
subordinated to the Notes or any Domestic Restricted Subsidiary
Guarantee) and release of the Company and all Restricted Subsidiaries
from all liability on the Debt assumed (or if less than 75%, the
remainder of such consideration consists of Telecommunications Assets).
The Net Available Proceeds or any portion thereof from Asset
Dispositions may be applied by the Company or a Restricted Subsidiary, to the
extent the Company or such Restricted Subsidiary elects or is required by the
terms of any Debt:
o to the permanent repayment or reduction of Debt then outstanding
under any Credit Facility, to the extent such Credit Facility
would require such application or prohibit payments pursuant to an
Offer to Purchase in accordance with this Section 3.15 (other than
Debt owed to the Company or any Affiliate of the Company); or
o to reinvest in Telecommunications Assets (including by means of an
Investment in Telecommunications Assets by a Restricted Subsidiary
with Net Available Proceeds received by the Company or another
Restricted Subsidiary).
Any Net Available Proceeds from an Asset Disposition not applied in
accordance with the preceding paragraph within 360 days from the date of the
receipt of such Net Available Proceeds shall constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $10 million, the Company will be
required to make an Offer to Purchase with such Excess Proceeds on a pro rata
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basis according to principal amount, or, in the case of Debt issued at a
discount, the then Accreted Value, for
(x) outstanding Notes at a price in cash equal to 100% of the
principal amount of the Notes on the purchase date plus accrued and
unpaid interest, if any, on the notes, subject to the right of Holders
of record on the relevant record date to receive interest due on the
relevant interest payment date, and
(y) any other Debt of the Company or any Guarantor that ranks
equally with the Notes, or any Debt of a Restricted Subsidiary that is
not a Guarantor, at a price no greater than 100% of the principal
amount thereof plus accrued and unpaid interest, if any, to the
purchase date (or 100% of the then Accreted Value plus accrued and
unpaid interest, if any, to the purchase date in the case of original
issue discount Debt, to the extent, in the case of this clause (y),
required under the terms of such Debt other than Debt owed to the
Company or any Affiliate of the Company).
To the extent there are any remaining Excess Proceeds following the
completion of the Offer to Purchase, the Company shall apply such Excess
Proceeds to the repayment of other Debt of the Company or any Restricted
Subsidiary, to the extent permitted or required under the terms of such other
Debt. Any other remaining Excess Proceeds may be applied to any use as
determined by the Company which is not otherwise prohibited by the Indenture,
and the amount of Excess Proceeds shall be reset to zero.
SECTION 3.16. Limitation on Issuance and Sale of Capital Stock of
Restricted Subsidiaries. The Company may not, and may not permit any Restricted
Subsidiary to, issue, transfer, convey, sell or otherwise dispose of any shares
of Capital Stock of a Restricted Subsidiary or securities convertible or
exchangeable into, or options, warrants, rights or any other interest with
respect to, Capital Stock of a Restricted Subsidiary to any Person other than
the Company or a Restricted Subsidiary except:
(1) a sale of all of the Capital Stock of such Restricted
Subsidiary owned by the Company and any Restricted Subsidiary that
complies with the provisions described in the section above entitled
Section 3.15 to the extent such provisions apply,
(2) in a transaction that results in such Restricted Subsidiary
becoming a Joint Venture; provided
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o such transaction complies with the provisions
described in Section 3.15 to the extent such
provisions apply and
o the remaining interest of the Company or any other
Restricted Subsidiary in such Joint Venture would
have been permitted as a new Restricted Payment or
Permitted Investment under the provisions of Section
3.11;
(3) the issuance, transfer, conveyance, sale or other disposition
of shares of such Restricted Subsidiary so long as after giving effect
to such transaction such Restricted Subsidiary remains a Restricted
Subsidiary and such transaction complies with the provisions described
in Section 3.15 to the extent such provisions apply;
(4) the transfer, conveyance, sale or other disposition of shares
required by applicable law or regulation;
(5) if required, the issuance, transfer, conveyance, sale or other
disposition of directors' qualifying shares;
(6) Disqualified Stock issued in exchange for, or upon conversion
of, or the proceeds of the issuance of which are used to redeem,
replace, refund or refinance, shares of Disqualified Stock of such
Restricted Subsidiary, provided that the amounts of the redemption
obligations of such Disqualified Stock shall not exceed the amounts of
the redemption obligations of, and such Disqualified Stock shall have
redemption obligations no earlier than those required by, the
Disqualified Stock being exchanged, converted, redeemed, replaced,
refunded or refinanced,
(7) in a transaction where the Company or a Restricted Subsidiary
acquires at the same time not less than its Proportionate Interest in
such issuance of Capital Stock,
(8) Capital Stock issued and outstanding on the date of the
Indenture;
(9) Capital Stock of a Restricted Subsidiary issued and
outstanding prior to the time that such Person becomes a Restricted
Subsidiary so long as such Capital Stock was not issued in
contemplation of such Person's becoming a Restricted Subsidiary or
otherwise being acquired by the Company; and
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(10) an issuance of Preferred Stock of a Restricted Subsidiary
(other than Preferred Stock convertible or exchangeable into Common
Stock of any Restricted Subsidiary) otherwise permitted by the
Indenture.
SECTION 3.17. Limitation on Transactions with Affiliates. The Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, sell, lease, transfer, or otherwise dispose of any of its Property
to, or purchase any Property from, or enter into any contract, agreement,
understanding, loan, advance, Guarantee or transaction, including the rendering
of services, with or for the benefit of, any Affiliate (each of the foregoing,
an "AFFILIATE TRANSACTION"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions
is in the best interest of the Company or such Restricted Subsidiary
and on terms that are fair and reasonable to, and in the best interests
of, the Company or the Restricted Subsidiary, as the case may be; and
(b) The Company delivers to the Trustee
o with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
payments in excess of $10 million but less than $15
million, a certificate of the chief executive, operating
or financial officer of the Company evidencing such
officer's determination that such Affiliate Transaction or
series of Affiliate Transactions complies with clause (a)
above and
o with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
payments equal to or in excess of $15 million, a board
resolution certifying that such Affiliate Transaction or
series of Affiliate Transactions complies with clause (a)
above and that such Affiliate Transaction or series of
Affiliate Transactions has been approved by the Board of
Directors of the Company, including a majority of the
disinterested members of the Board of Directors of the
Company, provided that, if there shall not be at least two
disinterested members of the Board of Directors of the
Company with respect to the Affiliate Transaction, the
Company shall, in addition to such board resolution, file
with the Trustee a written opinion from an investment
banking firm of national standing in the United States
which, in the good faith judgment of the Board of
Directors of the Company, is independent with respect to
the Company and its Affiliates and
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qualified to perform such task, which opinion shall be to
the effect that the consideration to be paid or received
in connection with such Affiliate Transaction is fair,
from a financial point of view, to the Company or such
Restricted Subsidiary.
Despite (a) and (b) above, the following shall not be deemed Affiliate
Transactions:
(1) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice;
(2) any agreement or arrangement with respect to the compensation
of a director or officer of the Company or any Restricted Subsidiary
approved by a majority of the Board of Directors of the Company and
consistent with industry practice;
(3) transactions between or among the Company and its Restricted
Subsidiaries; provided that no more than 10% of the Voting Stock, on a
fully diluted basis, of any such Restricted Subsidiary is owned by an
Affiliate of the Company (other than a Restricted Subsidiary);
(4) Restricted Payments and Permitted Investments permitted by the
covenant described in Section 3.11 (other than Investments in
Affiliates that are not the Company or Restricted Subsidiaries);
(5) transactions pursuant to the terms of or performance of any
agreement or arrangement as in effect on the date of the Indenture;
(6) transactions pursuant to and any payments under, compliance
with, or performance of obligations under, the Williams Intercompany
Arrangements;
(7) transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiber optic
lines, equipment, rights-of-way or other access rights, between the
Company, or any Restricted Subsidiary, and any other Person; provided
that, in the case of this clause (7), such transaction complies with
clause (a) in the immediately preceding paragraph;
(8) loans, advances or extensions of credit to employees, officers
and directors of the Company or any Restricted Subsidiary made in the
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ordinary course of business and consistent with past practice or in
connection with employee benefits agreements or arrangements approved
by the Board of Directors of the Company; provided, however, that if
the Company or any Restricted Subsidiary makes loans, advances or
extensions of credit to employees, officers and directors in excess or
$3 million in the aggregate at any one time outstanding, the Board of
Directors of the Company must determine that such loans, advances or
extensions of credit in excess of $3 million are fair and reasonable
to, and in the best interests of, the Company or the Restricted
Subsidiary, as the case may be.
(9) the granting or performance of registration rights under any
written registration rights agreement approved by the Board of
Directors of the Company;
(10) transactions with Persons solely in their capacity as holders
of Debt or Capital Stock of the Company or any of its Subsidiaries,
where such Persons are treated no more favorably than holders of Debt
or Capital Stock of the Company generally;
(11) sales or issuances of Capital Stock, other than Disqualified
Stock, in exchange for cash, securities or Property; provided that such
transactions comply with clause (a) in the immediately preceding
paragraph; and
(12) any agreement to do any of the foregoing.
SECTION 3.18. Repurchase of Notes Upon Change of Control Triggering
Event. Within 30 days of both a Change of Control and a Rating Decline with
respect to the Notes (a "CHANGE OF CONTROL TRIGGERING EVENT"), the Company will
be required to make an Offer to Purchase all outstanding Notes in accordance
with this Section 3.18 at a price in cash equal to 101% of the principal amount
of the Notes on the purchase date plus any accrued and unpaid interest, if any,
to such purchase date, subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date.
A "CHANGE OF CONTROL" means the occurrence of any of the following
events:
(A) if any "person" or "group" (as such terms are used in Section
13(d) and Section 14(d) of the Exchange Act or any successor provisions
to either of the foregoing), including any group acting for the purpose
of acquiring, holding, voting or disposing of securities within the
meaning of Rule l3d-5 (b) (1) under the Exchange Act, other than any
one
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or more of the Permitted Holders, becomes the "BENEFICIAL OWNER"
(as defined in Rule l3d-3 under the Exchange Act, except that a person
will be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of 35% or more of the total voting power of the Voting Stock of the
Company at a time when the Permitted Holders are the "beneficial
owners" (as defined in Rule l3d-3 under the Exchange Act, except that a
person will be deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, in the aggregate of a lesser percentage of the total voting
power of the Voting Stock of the Company than such other person or
group (for purposes of this clause (A), such person or group shall be
deemed to beneficially own any Voting Stock of a corporation held by
any other corporation so long as such person or group beneficially
owns, directly or indirectly, in the aggregate a majority of the total
voting power of the Voting Stock of such other corporation); or
(B) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all the
assets of the Company and the Restricted Subsidiaries, considered as a
whole (other than a disposition of such assets as an entirety or
virtually as an entirety to one or more Permitted Holders) shall have
occurred; or
(C) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election or appointment
by such board or whose nomination for election by the shareholders of
the Company was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office; or
(D) the shareholders of the Company shall have approved any plan
of liquidation or dissolution of the Company.
If the Company makes an Offer to Purchase the notes in accordance with
the this Section 3.18, the Company intends to comply with any applicable
securities laws and regulations, including any applicable requirements of
Section 14(e) of, and Rule l4e-1 under, the Exchange Act. To the extent that the
provisions of any applicable securities laws or regulations conflict with the
provisions relating to the Offer to Purchase, the Company will comply with the
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applicable securities laws and regulations and will not be deemed to have
breached its obligations described above by virtue thereof.
The existence of the Holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control Triggering
Event may deter a third party from acquiring the Company in a transaction that
constitutes a Change of Control. If an Offer to Purchase the notes in accordance
with this Section 3.18 is made, there can be no assurance that the Company will
have sufficient funds to pay the purchase price for Notes tendered by Holders
seeking to accept the Offer to Purchase. In addition, instruments governing
other Debt of the Company may prohibit the Company from purchasing any Notes
prior to their Stated Maturity, including pursuant to an Offer to Purchase, or
require that such Debt be repurchased upon a Change of Control.
If an Offer to Purchase the notes in accordance with this Section 3.18
occurs at a time when the Company does not have sufficient available funds to
pay the purchase price for all Notes tendered pursuant to such Offer to Purchase
or a time when the Company is prohibited from purchasing the Notes, and the
Company is unable either to obtain the consent of the holders of the relevant
Debt or to repay such Debt, an Event of Default would occur under the Indenture.
In addition, one of the events that constitutes a Change of Control under the
Indenture is a sale, transfer, assignment, lease, conveyance or other
disposition of all or substantially all of the assets of the Company. The
Indenture will be governed by New York law, and there is no established
definition under New York law of "substantially all" of the assets of a
corporation. Accordingly, if the Company were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of its
assets and whether the Company was required to make an Offer to Purchase the
notes in accordance with this Section 3.18.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit Holders of Notes to
require that the Company repurchase or redeem Notes in the event of a takeover,
recapitalization or similar restructuring.
SECTION 3.19. Reports. Whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the
Company shall file with the Commission, unless the Commission will not accept
such filing, the annual reports, quarterly reports and other documents
which the Company would have been required to file with the Commission pursuant
to such Section 13(a) or 15(d) or any successor provision thereto if the Company
were subject to such successor provision, such documents to be filed with the
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Commission on or prior to the respective dates by which the Company would have
been required to file them.
The Company shall also in any event:
(a) within 15 days of each required filing date;
o transmit by mail to all Holders, as their names and
addresses appear in the security register, without cost
to such Holders; and
o file with the Trustee copies of the annual reports,
quarterly reports and other documents, without exhibits,
which the Company would have been required to file with
the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act or any successor provisions thereto if the
Company were subject to such successor provisions and
(b) if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, promptly upon written request, supply copies
of such documents, without exhibits, to any prospective Holder.
Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 3.20. Limitation on Designations of Unrestricted Subsidiaries.
The Indenture will provide that the Company will not designate any Subsidiary of
the Company, other than a newly created Subsidiary in which no Investment has
previously been made, as an "Unrestricted Subsidiary" under the Indenture (a
"DESIGNATION") unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(b) immediately after giving effect to such Designation, the
Company would be able to Incur $1.00 of Debt under paragraph (a) of
Section 3.08; and
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(c) The Company would not be prohibited under the Indenture from
making an Investment at the time of Designation (assuming the
effectiveness of such Designation) in an amount (the "DESIGNATION
AMOUNT") equal to the portion (proportionate to the Company's equity
interest in such Restricted Subsidiary) of the Fair Market Value of the
net assets of such Restricted Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to Section
3.11 for all purposes of the Indenture in the Designation Amount; provided,
however, that, upon a Revocation of any such Designation of a Subsidiary, the
Company shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary of an amount (if positive) equal to (1) the Company's
"Investment" in such Subsidiary at the time of such Revocation less (2) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the Fair Market Value of the net assets of such Subsidiary at the time of such
Revocation less (3) any Returned Investment. At the time of any Designation of
any Subsidiary as an Unrestricted Subsidiary, such Subsidiary shall not own any
Capital Stock of the Company or any Restricted Subsidiary.
The Indenture will further provide that neither the Company nor any
Restricted Subsidiary shall at any time (x) provide credit support for, or a
Guarantee of, any Debt of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Debt); provided that the
Company or a Restricted Subsidiary may pledge Capital Stock or Debt of any
Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no
claim whatsoever against the Company other than to obtain such pledged Capital
Stock or Debt, (y) be directly or indirectly liable for any Debt of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any Debt
which provides that the holder of such Debt may (upon notice, lapse of time or
both) declare a default thereon or cause the payment thereof to be accelerated
or payable prior to its final scheduled maturity upon the occurrence of a
default with respect to any Debt, Lien or other obligation of any Unrestricted
Subsidiary (including any right to take enforcement action against such
Unrestricted Subsidiary), except in the case of clause (x) or (y) to the extent
permitted under Section 3.11 and Section 3.17.
Unless Designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of the Company will be classified as a Restricted
Subsidiary; provided, however, that such Subsidiary shall not be designated as a
Restricted Subsidiary and shall be automatically classified as an Unrestricted
Subsidiary if either of the requirements set forth in clauses (a) and (b) of the
immediately following paragraph will not be satisfied immediately following such
classification. Except as
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provided in the first sentence of this Section, no Restricted Subsidiary may be
redesignated as an Unrestricted Subsidiary.
The Indenture will further provide that a Designation may be revoked (a
"REVOCATION") by a resolution of the Board of Directors of the Company; provided
that the Company will not make any Revocation unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation;
and
(b) all Liens and Debt of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time,
have been permitted to be Incurred at such time for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by resolutions of
the Board of Directors of the Company delivered to the Trustee
o certifying compliance with the foregoing provisions and
o giving the effective date of such Designation or Revocation, such
delivery to the Trustee to occur within 45 days after the end of
the fiscal quarter of the Company in which such Designation or
Revocation is made (or, in the case of a Designation or Revocation
made during the last fiscal quarter of the Company's fiscal year,
within 90 days after the end of such fiscal year).
SECTION 3.21. Existence. Subject to Articles Three and Eight of this
Indenture, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each of its Restricted Subsidiaries in accordance with the respective
organizational documents of the Company and each such Restricted Subsidiary and
the rights (whether pursuant to charter, partnership certificate, agreement,
statute or otherwise), material licenses and franchises of the Company and each
such Restricted Subsidiary, provided that the Company shall not be required to
preserve any such right, license or franchise, or the existence of any
Restricted Subsidiary, if the maintenance or preservation thereof is no longer
desirable in the conduct of the business of the Company and its Restricted
Subsidiaries taken as a whole.
SECTION 3.22. Payment of Taxes and Other Claims. The Company will pay
or discharge and shall cause each of its Restricted Subsidiaries to pay or
discharge, or cause to be paid or discharged, before the same shall become
delinquent (a) all material taxes, assessments and governmental charges levied
or
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imposed upon (i) the Company or any such Restricted Subsidiary, (ii) the income
or profits of any such Restricted Subsidiary which is a corporation or (iii) the
property of the Company or any such Restricted Subsidiary and (b) all material
lawful claims for labor materials and supplies that, if unpaid, might by law
become a lien upon the property of the Company or any such Restricted
Subsidiary; provided that the Company shall not be required to pay of discharge,
or cause to be paid or discharged, any such tax, assessment, charge or claim the
amount, applicability or validity of which is being contested in good faith by
appropriate proceedings and for which adequate reserves have been established.
SECTION 3.23. Maintenance of Properties and Insurance. The Company will
cause all properties used or useful in the conduct of its business or the
business of any of its Restricted Subsidiaries, to be maintained and kept in
good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided
that nothing in this Section shall prevent the Company or any such Restricted
Subsidiary from discontinuing the use, operation or maintenance of any of such
properties or disposing of any of them, if such discontinuance or disposal is,
in the judgment of the Company, desirable in the conduct of the business of the
Company or such Restricted Subsidiary.
The Company will provide or cause to be provided, for itself and its
Restricted Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds customarily insured against by corporations
similarly situated and owning like properties, including, but not limited to,
products liability insurance and public liability insurance, with reputable
insurers or with the government of the United States of America, or an agency or
instrumentality thereof, in such amounts, with such deductibles and by such
methods as shall be customary for corporations similarly situated in the
industry in which the Company or such Restricted Subsidiary, as the case may be,
is then conducting business.
SECTION 3.24. Waiver of Stay, Extension or Usury Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not (1) at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or other law
that would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Notes as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this Indenture and the Company will expressly waive all benefit
or advantage of any such law and (2) hinder, delay or impede the execution of
any power granted
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to the Trustee under this Indenture and will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE 4
REMEDIES OF THE TRUSTEE AND HOLDERS ON EVENT OF DEFAULT
SECTION 4.01. Events of Default. Each of the following constitutes an
"EVENT OF DEFAULT":
(a) default in the payment of principal of, or premium, if any, on,
any Note when the same becomes due and payable, upon acceleration,
redemption or otherwise;
(b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30
days;
(c) default in the payment of principal of and interest on Notes
required to be purchased pursuant to an Offer to Purchase under Section
3.18;
(d) failure to comply with the requirements of Article Eight;
(e) the Company or any Guarantor defaults in the performance of or
breaches any other covenant or agreement in the Indenture or under the
Notes (other than (a), (b) or (c) above) and such default or breach
continues for a period of 60 consecutive days after written notice by
the Trustee or the Holders of 25% or more in aggregate principal amount
of the Notes;
(f) there occurs a default under the terms of any instrument
evidencing or securing Debt of the Company or any Restricted Subsidiary
having an outstanding principal amount of $25 million or its foreign
currency equivalent at the time individually or in the aggregate which
default results in the acceleration of the payment of such indebtedness
or constitutes the failure to pay such indebtedness when due (after
expiration of any applicable grace period);
(g) the rendering of a final judgment or judgments, not subject to
appeal or covered by insurance, against the Company or any Restricted
Subsidiary in an aggregate amount in excess of $25 million or its
foreign
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currency equivalent at the time and which shall not be waived,
satisfied or discharged for any period of 45 consecutive days after the
date on which the right to appeal has expired;
(h) any Domestic Restricted Subsidiary Guarantee ceases to be in full
force and effect, other than in accordance with the terms of such
Domestic Restricted Subsidiary Guarantee, or any Guarantor denies or
disaffirms its obligations under its Domestic Restricted Subsidiary
Guarantee;
(i) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any of its Restricted
Subsidiaries in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any of its
Restricted Subsidiaries or for all or substantially all of the property
and assets of the Company or any of its Restricted Subsidiaries or (C)
the winding up or liquidation of the affairs of the Company or any of
its Restricted Subsidiaries and, in each case, such decree or order
shall remain unstayed and in effect for a period of 60 consecutive
days; or
(j) the Company or any of its Restricted Subsidiaries (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any of its Restricted Subsidiaries or for
all or substantially all of the property and assets of the Company or
any of its Restricted Subsidiaries or (C) effects any general
assignment for the benefit of creditors.
SECTION 4.02. Acceleration. If any Event of Default (other than an
Event of Default described in clause (i) or (j) of Section 4.01) shall occur and
be continuing under the Indenture, either the Trustee or the Holders of at least
25% in aggregate principal amount of the Notes then outstanding, by written
notice to the Company (and to the Trustee if such notice is given by the Holders
(the "ACCELERATION NOTICE")), may, and the Trustee at the request of such
Holders shall, declare the principal of, premium, if any, and accrued interest
on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such principal of, premium, if any, and accrued interest shall be
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) of Section 4.01 has occurred
and is continuing, such
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declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (e) of
Section 4.01 shall be remedied or cured by the Company or the relevant Domestic
Restricted Subsidiary or waived by the holders of the relevant Debt within 60
days after the declaration of acceleration with respect thereto. If an Event of
Default specified in clause (i) or (j) of Section 4.01 occurs with respect to
the Company, the principal of, premium, if any, and accrued interest on the
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
SECTION 4.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal or interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.
SECTION 4.04. Waiver of Past Defaults. The Holders of at least a
majority in principal amount of the outstanding Notes by written notice to the
Company and to the Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if (1) all existing Events of
Default (other than (x) the nonpayment of the principal of, premium, if any, and
interest on the Notes that have become due solely by such declaration of
acceleration or (y) with respect to a covenant or provision of this Indenture
which under Section 7.02 cannot be modified or amended without the consent of
the Holders of each outstanding Note affected thereby) have been cured or waived
and (2) the rescission would not conflict with any judgment or decree of a court
of competent jurisdiction. Upon any such waiver, such Default shall cease to
exist, and any Event of Default arising therefrom shall be deemed to have been
cured for every purpose of this Indenture; but no such waiver shall extend to
any subsequent or other Default or impair any right consequent thereon.
SECTION 4.05. Control by Majority. The Holders of at least a majority
in aggregate principal amount of the outstanding Notes may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee. However, the
Trustee may refuse to follow any direction that conflicts with law or the
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in
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good faith may be unduly prejudicial to the rights of Holders of Notes not
joining in the giving of such direction and may take any other action it deems
proper that is not inconsistent with any such direction received from Holders of
Notes.
SECTION 4.06. Limitation on Suits. A Holder may not pursue any remedy
with respect to the Indenture or the Notes unless:
(i) the Holder gives the Trustee written notice of a continuing
Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of at least a majority
in aggregate principal amount of the outstanding Notes do not give the
Trustee a direction that is inconsistent with the request.
SECTION 4.07. Rights of Holders to Receive Payment. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal, premium, if any, and interest on the Note, on or after the respective
due dates expressed in the Note, or to bring suit for the enforcement of any
such payment on or after such respective dates, shall not be impaired or
affected without the consent of the Holder.
SECTION 4.08. Collection Suit by Trustee. If an Event of Default
specified in Section 4.01(a) or (b) hereof occurs and is continuing, the Trustee
is authorized to recover judgment in its own name and as trustee of an express
trust against the Company or any other obligor for the whole amount of
principal, premium, if any, and interest remaining unpaid on the Notes and
interest on overdue principal and, to the extent lawful, interest and such
further amount as shall be sufficient to cover amounts due the Trustee under
Section 5.07 hereof, including the costs and expenses of collection, including
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel.
SECTION 4.09. Trustee May File Proofs of Claim. The Trustee is
authorized to file such proofs of claim and other papers or documents as may be
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necessary or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel) and the Holders allowed in any judicial
proceedings relative to the Company (or any other obligor upon the Notes), its
creditors or its property and shall be entitled and empowered to collect,
receive and distribute any money or other property payable or deliverable on any
such claims and any custodian in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee, and in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 5.07 hereof. To
the extent that the payment of any such compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 5.07 hereof out of the estate in any such proceeding,
shall be denied for any reason, payment of the same shall be secured by a Lien
on, and shall be paid out of, any and all distributions, dividends, money,
securities and other properties which the Holders may be entitled to receive in
such proceeding whether in liquidation or under any plan of reorganization or
arrangement or otherwise. Nothing herein contained shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 4.10. Priorities. If the Trustee collects any money pursuant
to this Article, it shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 5.07, including payment of all compensation, expense and liabilities
incurred, and all advances made, by the Trustee and the costs and expenses of
collection;
Second: to Holders for amounts due and unpaid on the Notes for
principal, premium, if any, and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the Notes for
principal, premium, if any and interest, respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
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The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section upon five Business Days prior notice to the
Company.
SECTION 4.11. Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as a Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a Holder pursuant to Section 4.06 hereof, or a
suit by Holders of more than 10% in aggregate principal amount of the then
outstanding Notes.
ARTICLE 5
CONCERNING THE TRUSTEE
SECTION 5.01. Duties and Responsibilities of the Trustee; During
Default; Prior to Default. The Trustee, prior to the occurrence of a Default and
after the curing or waiving of any Default which may have occurred, undertakes
to perform such duties and only such duties as are specifically set forth in
this Indenture. In case an Event of Default has occurred (which has not been
cured or waived) the Trustee shall exercise such of the rights and powers vested
in it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own wilful misconduct, except that
(a) prior to the occurrence of an Event of Default of which the
Trustee has actual notice and after the curing or waiving of all such Events of
Default which may have occurred:
(i) the duties and obligations of the Trustee shall be determined
solely by the express provisions of this Indenture, and the Trustee
shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
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(ii) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon any statements,
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Indenture; but in the case of any such statements,
certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a
duty to examine the same to determine whether or not they conform to
the requirements of this Indenture (but need not confirm or investigate
the accuracy of the facts stated therein);
(b) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer or Responsible Officers of the Trustee,
unless it shall be proved that the Trustee was negligent in ascertaining the
pertinent facts; and
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction of
the Holders of not less than a majority in principal amount of the Notes at the
time outstanding relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred upon the Trustee, under this Indenture.
No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
This Section is in furtherance of and subject to Section 315 and
Section 316 of the Trust Indenture Act of 1939.
SECTION 5.02. Certain Rights of the Trustee. In furtherance of and
subject to the Trust Indenture Act of 1939, and subject to Section 5.01:
(a) the Trustee may conclusively rely and shall be protected in acting
or refraining from acting upon any resolution, Officers' Certificate or any
other certificate, statement, instrument, opinion, report, notice, request,
consent, order, bond, debenture, note, coupon, security or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) any request, direction, order or demand of the Company mentioned
herein shall be sufficiently evidenced by an Officers' Certificate (unless other
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evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Trustee by a copy
thereof certified by the secretary or an assistant secretary of the Company;
(c) the Trustee may consult with counsel of its selection and any
advice or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted to be taken by it
hereunder in good faith and in accordance with such advice or Opinion of
Counsel;
(d) the Trustee shall not be liable for any action taken or omitted by
it in good faith and believed by it to be authorized or within the discretion,
rights or powers conferred upon it by this Indenture;
(e) prior to the occurrence of a Default hereunder, of which the
Trustee has actual notice, and after the curing or waiving of all Defaults, the
Trustee shall not be bound to make any investigation into the facts or matters
stated in any resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, approval, appraisal, bond, debenture, note,
coupon, security, or other paper or document unless requested in writing so to
do by the Holders of not less than a majority in aggregate principal amount of
the Notes then outstanding; provided that, if the payment within a reasonable
time to the Trustee of the costs, expenses or liabilities likely to be incurred
by it in the making of such investigation is, in the reasonable opinion of the
Trustee, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Indenture, the Trustee may require indemnity satisfactory to
it against such expenses or liabilities as a condition to proceeding; the
reasonable expenses of every such examination shall be paid by the Company or,
if paid by the Trustee or any predecessor trustee, shall be repaid promptly by
the Company upon demand;
(f) the Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by the Trustee at the Corporate Trust Office of the Trustee,
and such notice references the Notes and this Indenture;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder; and
(h) the rights, privileges, protections, immunities and benefits given
to the Trustee, including, without limitation, its rights to be indemnified, are
extended
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to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and to each agent, custodian and other Person employed to act
hereunder.
SECTION 5.03. Trustee Not Responsible for Recitals, Disposition of
Notes or Application of Proceeds Thereof. The recitals contained herein and in
the Notes, except the Trustee's certificates of authentication, shall be taken
as the statements of the Company, and the Trustee assumes no responsibility for
the correctness of the same. The Trustee makes no representation as to the
validity or sufficiency of this Indenture or of the Notes. The Trustee shall not
be accountable for the use or application by the Company of any of the Notes or
of the proceeds thereof.
SECTION 5.04. Trustee and Agents May Hold Notes; Collections, etc. The
Trustee or any agent of the Company or the Trustee, in its individual or any
other capacity, may become the owner or pledgee of Notes with the same rights it
would have if it were not the Trustee or such agent and may otherwise deal with
the Company and receive, collect, hold and retain collections from the Company
with the same rights it would have if it were not the Trustee or such agent.
However, subject to Section 5.13 hereof, the Trustee will comply with Section
310(b) and Section 311 of the Trust Indenture Act of 1939.
SECTION 5.05. Moneys Held by Trustee. Subject to the provisions of
Section 10.06 hereof, all moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except to the extent
required by mandatory provisions of law. Neither the Trustee nor any agent of
the Company or the Trustee shall be under any liability for interest on any
moneys received by it hereunder.
SECTION 5.06. Notice of Default. If any Default or any Event of Default
occurs and is continuing and if such Default or Event of Default is actually
known to a Responsible Officer of the Trustee, the Trustee shall mail to each
Holder in the manner and to the extent provided in Trust Indenture Act of 1939
Section 313(c) notice of the Default or Event of Default within 90 days after it
occurs, unless such Default or Event of Default has been cured; provided,
however, that, except in the case of a default in the payment of the principal
of, premium, if any, or interest on any Note, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee or a trust committee of directors and/or Responsible Officers of the
Trustee in good faith determine that the withholding of such notice is in the
interest of the Holders.
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SECTION 5.07. Compensation and Indemnification of Trustee and Its Prior
Claim. The Company covenants and agrees to pay to the Trustee from time to time,
and the Trustee shall be entitled to, such compensation as shall be agreed in
writing between the Company and the Trustee (which shall not be limited by any
provision of law in regard to the compensation of a trustee of an express trust)
and the Company covenants and agrees to pay or reimburse the Trustee and each
predecessor Trustee upon its request for all reasonable expenses, disbursements
and advances incurred or made by or on behalf of it in accordance with any of
the provisions of this Indenture (including the reasonable compensation and the
expenses and disbursements of its counsel and of all agents and other persons
not regularly in its employ) except any such expense, disbursement or advance as
may arise from its negligence or bad faith. The Company agrees to indemnify each
of the Trustee or any predecessor Trustee and their employees, directors and
officers for, and to hold them harmless against, any and all loss, damage,
claims, liability or expense, including taxes (other than taxes based upon,
measured by or determined by the income of the Trustee), arising out of or in
connection with the acceptance or administration of the trust or trusts
hereunder, including the costs and expenses of defending itself against any
claim (whether asserted by the Company, or any Holder or any other Person) or
liability in connection with the exercise or performance of any of its powers or
duties hereunder, except to the extent that such loss, damage, claim, liability
or expense is due to its own negligence or bad faith. The obligations of the
Company under this Section to compensate and indemnify the Trustee and each
predecessor Trustee and to pay or reimburse the Trustee and each predecessor
Trustee for expenses, disbursements and advances shall constitute additional
indebtedness hereunder and shall survive the satisfaction and discharge of this
Indenture. Such additional indebtedness shall be a senior lien to that of the
Notes upon all property and funds held or collected by the Trustee as such,
except funds held in trust for the benefit of the Holders of particular Notes,
and the Notes are hereby subordinated to such senior claim.
When the Trustee incurs expenses or renders services in connection with
an Event of Default specified in Section 4.01(i) or Section 4.01(j), the
expenses (including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable Federal or state bankruptcy, insolvency or
other similar law.
SECTION 5.08. Right of Trustee to Rely on Officers' Certificate, etc.
Subject to Section 5.01 and Section 5.02, whenever in the administration of the
trusts of this Indenture the Trustee shall deem it necessary or desirable that a
matter be proved or established prior to taking or suffering or omitting any
action hereunder, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may, in the absence of negligence or bad faith
on the part of the Trustee, be deemed to be conclusively proved and established
by an
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Officers' Certificate delivered to the Trustee, and such certificate, in
the absence of negligence or bad faith on the part of the Trustee, shall be full
warrant to the Trustee for any action taken, suffered or omitted by it under the
provisions of this Indenture upon the faith thereof.
SECTION 5.09. Persons Eligible for Appointment as Trustee. The Trustee
hereunder shall at all times be a corporation having a combined capital and
surplus of at least $50,000,000, and which is eligible in accordance with the
provisions of Section 310(a) of the Trust Indenture Act of 1939. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of a Federal, State or District of Columbia supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published.
SECTION 5.10. Resignation and Removal; Appointment of Successor
Trustee. (a) The Trustee may at any time resign by giving written notice of
resignation to the Company. Upon receiving such notice of resignation, the
Company shall promptly appoint a successor trustee by written instrument in
duplicate, executed by authority of the Board of Directors, one copy of which
instrument shall be delivered to the resigning trustee and one copy to the
successor trustee. If no successor trustee shall have been so appointed and have
accepted appointment within 30 days after the mailing of such notice of
resignation, the resigning trustee may petition, at the expense of the Company,
any court of competent jurisdiction for the appointment of a successor trustee,
or any Noteholder who has been a bona fide Holder of a Note or Notes for at
least six months may, on behalf of himself and all others similarly situated,
petition any such court for the appointment of a successor trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
(b) In case at any time any of the following shall occur:
(i) the Trustee shall fail to comply with the provisions of
Section 310(b) of the Trust Indenture Act of 1939, after written
request therefor by the Company or by any Noteholder who has been a
bona fide Holder of a Note or Notes for at least six months; or
(ii) the Trustee shall cease to be eligible in accordance with
the provisions of Section 5.09 and shall fail to resign after written
request therefor by the Company or by any such Noteholder; or
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(iii) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver or liquidator of the
Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation;
then, in any such case, the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors of the Company, one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor trustee, or,
subject to Section 315(e) of the Trust Indenture Act of 1939, any Noteholder who
has been a bona fide Holder of a Note or Notes for at least six months may on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor trustee. Such court may thereupon, after such notice, if any, as it
may deem proper and prescribe, remove the Trustee and appoint a successor
trustee.
(c) The Holders of a majority in aggregate principal amount of the
Notes at the time outstanding may at any time remove the Trustee and appoint a
successor trustee by delivering to the Trustee so removed, to the successor
trustee so appointed and to the Company the evidence provided for in Section
6.01 of the action in that regard taken by the Noteholders.
If no successor trustee shall have been so appointed and have accepted
appointment 30 days after the mailing of such notice of removal, the Trustee
being removed may petition, at the expense of the Company, any court of
competent jurisdiction for the appointment of a successor trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
(d) Any resignation or removal of the Trustee and any appointment of a
successor trustee pursuant to any of the provisions of this Section shall become
effective upon acceptance of appointment by the successor trustee as provided in
Section 5.11.
SECTION 5.11. Acceptance of Appointment by Successor Trustee. Any
successor trustee appointed as provided in Section 5.10 shall execute and
deliver to the Company and to its predecessor trustee an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all rights,
powers, duties and obligations of its predecessor hereunder, with like effect as
if originally named as Trustee herein; but, nevertheless, on the written request
of the Company or of
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the successor trustee, upon payment of its charges then unpaid, the Trustee
ceasing to act shall, subject to Section 10.06, pay over to the successor
trustee all moneys at the time held by it hereunder and shall execute and
deliver an instrument transferring to such successor trustee all such rights,
powers, duties and obligations. Upon request of any such successor trustee, the
Company shall execute any and all instruments in writing for more fully and
certainly vesting in and confirming to such successor trustee all such rights
and powers. Any Trustee ceasing to act shall, nevertheless, retain a prior claim
upon all property or funds held or collected by such Trustee to secure any
amounts then due it pursuant to the provisions of Section 5.07.
Upon acceptance of appointment by a successor trustee as provided in
this Section, the Company shall mail notice thereof by first-class mail to the
Holders of Notes at their last addresses as they shall appear in the Note
Register. If the acceptance of appointment is substantially contemporaneous with
the resignation, then the notice called for by the preceding sentence may be
combined with the notice called for by Section 5.10. If the Company fails to
mail such notice within 10 days after acceptance of appointment by the successor
trustee, the successor trustee shall cause such notice to be mailed at the
expense of the Company.
SECTION 5.12. Merger, Conversion, Consolidation or Succession to
Business of Trustee. Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or to which the Trustee's assets
may be sold, or any corporation resulting from any merger, conversion,
consolidation or sale to which the Trustee shall be a party or by which the
Trustee's property may be bound, or any corporation succeeding to all or
substantially all the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder, provided that such corporation shall be
eligible under the provisions of Section 5.09, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any of the Notes shall have been authenticated
but not delivered, any such successor to the Trustee may adopt the certificate
of authentication of any predecessor Trustee and deliver such Notes so
authenticated; and, in case at that time any of the Notes shall not have been
authenticated, any successor to the Trustee may authenticate such Notes either
in the name of any predecessor hereunder or in the name of the successor
Trustee; and in all such cases such certificate shall have the full force which
it is anywhere in the Notes or in this Indenture provided that the certificate
of the Trustee shall have; provided, that the right to adopt the certificate of
authentication of any predecessor Trustee
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or to authenticate Notes in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
SECTION 5.13. Preferential Collection of Claims. Reference is made to
Section 311 of the Trust Indenture Act of 1939. For purposes of Section 311(b)
(4) and (6) of such Act, the following terms shall mean:
(a) "CASH TRANSACTION" means any transaction in which full payment for
goods or securities sold is made within seven days after delivery of the goods
or securities in currency or in checks or other orders drawn upon banks or
bankers and payable upon demand; and
(b) "SELF-LIQUIDATING PAPER" means any draft, bill of exchange,
acceptance or obligation which is made, drawn, negotiated or incurred by the
Company for the purpose of financing the purchase, processing, manufacturing,
shipment, storage or sale of goods, wares or merchandise and which is secured by
documents evidencing title to, possession of, or a lien upon, the goods, wares
or merchandise or the receivables or proceeds arising from the sale of the
goods, wares or merchandise previously constituting the security, provided the
security is received by the Trustee simultaneously with the creation of the
creditor relationship with the Company arising from the making, drawing,
negotiating or incurring of the draft, bill of exchange, acceptance or
obligation.
ARTICLE 6
CONCERNING THE HOLDERS
SECTION 6.01. Evidence of Action Taken by Holders. Any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be given or taken by Noteholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Noteholders in person or by agent duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Trustee. Proof of execution
of any instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 5.01 and Section 5.02)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Article.
SECTION 6.02. Proof of Execution of Instruments and of Holding of
Notes; Record Date. Subject to Section 5.01 and Section 5.02, the execution of
any instrument by a Noteholder or his agent or proxy may be proved in accordance
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with such reasonable rules and regulations as may be prescribed by the Trustee
or in such manner as shall be satisfactory to the Trustee. The holding of Notes
shall be proved by the Note register or by a certificate of the Registrar
thereof. The Company may set a record date for purposes of determining the
identity of Holders of Notes entitled to vote or consent to any action referred
to in Section 6.01, which record date may be set at any time or from time to
time by notice to the Trustee, for any date or dates (in the case of any
adjournment or resolicitation) not more than 60 days nor less than five days
prior to the proposed date of such vote or consent, and thereafter,
notwithstanding any other provisions hereof, only Holders of Notes of record on
such record date shall be entitled to so vote or give such consent or to
withdraw such vote or consent.
SECTION 6.03. Notes Owned by Company Deemed Not Outstanding. In
determining whether the Holders of the requisite aggregate principal amount of
Notes have concurred in any direction, consent or waiver under this Indenture,
Notes which are owned by the Company or any other obligor on the Notes or by any
person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company or any other obligor on the Notes shall
be disregarded and deemed not to be outstanding for the purpose of any such
determination, except that for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, consent or waiver only
Notes which a Responsible Officer of the Trustee actually knows are so owned
shall be so disregarded. Notes so owned which have been pledged in good faith
may be regarded as outstanding if the pledgee establishes to the satisfaction of
the Trustee the pledgee's right so to act with respect to such Notes and that
the pledgee is not the Company or any other obligor upon the Notes or any person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company or any other obligor on the Notes. In case of a
dispute as to such right, the advice of counsel shall be full protection in
respect of any decision made by the Trustee in accordance with such advice. Upon
request of the Trustee, the Company shall furnish to the Trustee promptly an
Officers' Certificate listing and identifying all Notes, if any, known by the
Company to be owned or held by or for the account of any of the above-described
persons; and, subject to Section 5.01 and Section 5.02, the Trustee shall be
entitled to accept such Officers' Certificate as conclusive evidence of the
facts therein set forth and of the fact that all Notes not listed therein are
outstanding for the purpose of any such determination.
SECTION 6.04. Right of Revocation of Action Taken. At any time prior to
(but not after) the evidencing to the Trustee, as provided in Section 6.01, of
the taking of any action by the Holders of the percentage in aggregate principal
amount of the Notes specified in this Indenture in connection with such action,
any Holder of a Note the serial number of which is shown by the evidence to be
included among the serial numbers of the Notes the Holders of which have
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consented to such action may, by filing written notice at the Corporate Trust
Office and upon proof of holding as provided in this Article, revoke such action
so far as concerns such Note. Except as aforesaid any such action taken by the
Holder of any Note shall be conclusive and binding upon such Holder and upon all
future Holders and owners of such Note and of any Notes issued in exchange or
substitution therefor, irrespective of whether or not any notation in regard
thereto is made upon any such Note. Any action taken by the Holders of the
percentage in aggregate principal amount of the Notes specified in this
Indenture in connection with such action shall be conclusively binding upon the
Company, the Trustee and the Holders of all the Notes.
ARTICLE 7
SUPPLEMENTAL INDENTURES
SECTION 7.01. Supplemental Indentures Without Consent of Holders. The
Company, the Guarantors, if any, and the Trustee may, at any time and from time
to time, enter into one or more indentures supplemental to the Indenture without
notice to, or the consent of, any Holder:
(i) to evidence the succession of another Person to the Company
and the assumption by such successor of the covenants of the Company in
the Indenture and the Notes;
(ii) to add to the covenants of the Company, for the benefit of
the Holders, or to surrender any right or power conferred upon the
Company by the Indenture;
(iii) to add any additional Events of Default;
(iv) to provide for uncertificated Notes in addition to or in
place of certificated Notes;
(v) to evidence and provide for the acceptance of appointment
under the Indenture of a successor trustee;
(vi) to secure the Notes;
(vii) to comply with the Trust Indenture Act of 1939;
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(viii) to add additional Guarantees with respect to the Notes or
to release Guarantors from Domestic Restricted Subsidiary Guarantees as
provided by the terms of the Indenture; or
(ix) to cure any ambiguity in the Indenture, to correct or
supplement any provision in the Indenture which may be inconsistent
with any other provision therein or to add any other provision with
respect to matters or questions arising under the Indenture;
provided such actions shall not adversely affect the interests of the Holders in
any material respect.
Upon the request of the Company accompanied by a Board Resolution
authorizing the execution of any such supplemental indenture, and upon receipt
by the Trustee of the documents described in Section 7.04 hereof, the Trustee
shall join with the Company and the Guarantors, if any, in the execution of any
supple mental indenture authorized or permitted by the terms of this Indenture
and to make any further appropriate agreements and stipulations which may be
therein contained, but the Trustee shall not be obligated to enter into such
supplemental indenture which affects its own rights, duties or immunities under
this Indenture or otherwise.
SECTION 7.02. Supplemental Indentures With Consent of Holders. Except
as provided in the next succeeding paragraphs, this Indenture or the Notes may
be amended or supplemented with the consent of the Holders of at least a
majority in aggregate principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for such
Notes), and any existing default or compliance with any provision of this
Indenture or the Notes may be waived with the consent of the Holders of a
majority in aggregate principal amount of the then outstanding Notes (including
consents obtained in connection with a tender offer or exchange offer for such
Notes).
Upon the request of the Company accompanied by a Board Resolution
authorizing the execution of any such supplemental indenture, and upon the
filing with the Trustee of evidence satisfactory to the Trustee of the consent
of the Holders as aforesaid, and upon receipt by the Trustee of the documents
described in Section 7.04 hereof, the Trustee shall join with the Company and
the Guarantors (if any), in the execution of such supplemental indenture unless
such supplemental indenture affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to, enter into such supplemental
indenture.
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It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment or waiver, but
it shall be sufficient if such consent approves the substance thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such supplemental indenture or waiver.
Subject to Section 4.04 and Section 4.07 hereof, the Holders of a majority in
aggregate principal amount of the Notes then outstanding may waive compliance in
a particular instance by the Company with any provision of this Indenture or the
Notes. With the consent of the Holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into one
or more indentures supplemental to the Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the Holders; provided
that no such supplemental indenture shall, without the consent of the Holder of
each outstanding Note:
(i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount
thereof or the interest thereon that would be due and payable upon the
Stated Maturity thereof, or change the place of payment where, or the
coin or currency in which, any Note or any premium or interest thereon
is payable, or impair the right to institute suit for the enforcement
of any such payment on or after the Stated Maturity thereof;
(ii) reduce the percentage in principal amount of the outstanding
Notes, the consent of whose Holders is necessary for any such
supplemental indenture or required for any waiver of compliance with
certain provisions of the Indenture or certain Defaults thereunder;
(iii) subordinate in right of payment, or otherwise subordinate,
the Notes to any other Debt;
(iv) except as otherwise required by the Indenture, release any
security interest that may have been granted in favor of the Holders of
the Notes;
(v) reduce the premium payable upon the redemption of any Note
nor change the time at which any Note may be redeemed, as described in
the Indenture;
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(vi) reduce the premium payable upon a Change of Control
Triggering Event;
(vii) make any change in any Domestic Restricted Subsidiary
Guarantee that would adversely affect the Holders of the Notes; or
(viii) modify any provision of this paragraph (except to increase
any percentage set forth herein).
Neither the Company nor any of its Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise to any Holder of any Notes for or as an inducement to
any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all Holders of the Notes that consent, waive or agree to amend in
the time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
SECTION 7.03. Effect of Supplemental Indenture. Upon the execution of
any supplemental indenture pursuant to the provisions hereof, this Indenture
shall be and be deemed to be modified and amended in accordance therewith and
the respective rights, limitations of rights, obligations, duties and immunities
under this Indenture of the Trustee, the Company and the Holders of Notes shall
thereafter be determined, exercised and enforced hereunder subject in all
respects to such modifications and amendments, and all the terms and conditions
of any such supplemental indenture shall be and be deemed to be part of the
terms and conditions of this Indenture for any and all purposes.
SECTION 7.04. Documents to Be Given to Trustee; Compliance with TIA.
The Trustee, subject to the provisions of Section 5.01 and Section 5.02, may
receive an Officers' Certificate and an Opinion of Counsel as conclusive
evidence that any such supplemental indenture complies with the applicable
provisions of this Indenture. Every such supplemental indenture shall comply
with the TIA.
SECTION 7.05. Notation on Notes in Respect of Supplemental Indentures.
Notes authenticated and delivered after the execution of any supplemental
indenture pursuant to the provisions of this Article may bear a notation
approved by the Trustee as to form (but not as to substance) as to any matter
provided for by such supplemental indenture or as to any action taken at any
such meeting. If the Company or the Trustee shall so determine, new Notes so
modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any modification of this Indenture contained in any such
supplemental indenture may
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be prepared by the Company, authenticated by the Trustee and delivered in
exchange for the Notes then outstanding.
ARTICLE 8
CONSOLIDATION, MERGER OR SALE OF ASSETS
SECTION 8.01. Consolidation, Merger or Sale of Assets. The Company
may not, in a single transaction or a series of related transactions,
(1) consolidate with or merge into any other Person or Persons or
permit any other Person to consolidate with or merge into the Company
or
(2) directly or indirectly, transfer, sell, lease, convey or
otherwise dispose of all or substantially all its assets to any other
Person or Persons unless:
(a) in a transaction in which the Company is not the
resulting, surviving or transferee Person or in which the
Company transfers, sells, leases, conveys or otherwise
disposes of all or substantially all of its assets to any
other Person, the resulting, surviving or transferee Person
(the "SUCCESSOR ENTITY") is organized under the laws of the
United States of America or any State thereof or the District
of Columbia and shall expressly assume, by a supplemental
indenture executed and delivered to the Trustee in form
satisfactory to the Trustee, all of the Company's obligations
under the Indenture;
(b) immediately before and after giving effect to such
transaction and treating any Debt which becomes an obligation
of the Company or a Restricted Subsidiary as a result of such
transaction as having been Incurred by the Company or such
Restricted Subsidiary at the time of the transaction, no
Default or Event of Default shall have occurred and be
continuing;
(c) immediately after giving effect to such transaction
and treating any Debt which becomes an obligation of the
Company or a Restricted Subsidiary as a result of such
transaction as having been Incurred by the Company (or the
successor entity to the Company) or such Restricted Subsidiary
at the time of the transaction, the Company (or the successor
entity to the Company)
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could Incur at least $1.00 of additional Debt pursuant to
paragraph (a) of Section 3.08;
(d) if, as a result of any such transaction, Property of
the Company or any Restricted Subsidiary would become subject
to a Lien prohibited by the Company in Section 3.13, the
Company or the successor entity to the Company shall have
secured the Notes as required by said covenant; and
(e) in the case of a transfer, sale, lease, conveyance or
other disposition of all or substantially all of the assets of
the Company, such assets shall have been transferred as an
entirety or virtually as an entirety to one Person and such
Person shall have complied with all the provisions of this
Section.
SECTION 8.02. Successor Corporation Substituted. (a) Upon any
consolidation or merger, or any sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 8.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
assignment, transfer, lease, conveyance or other disposition is made shall
succeed to, and be substituted for (so that from and after the date of such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer, except in the case of a lease, instead to the successor corporation), and
may exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein.
(b) Notwithstanding the foregoing, (1) a consolidation or merger by
the Company with or into, or (2) the sale, assignment, transfer, lease,
conveyance or other disposition by the Company of all or substantially all of
its property or assets to, one or more of its Subsidiaries shall not relieve the
Company from its obligations under this Indenture and the Notes.
(c) Notwithstanding the foregoing, but subject to Section 8.01(2(a))
and (b), the Company may merge or consolidate with or into any Restricted
Subsidiary.
SECTION 8.03. Opinion of Counsel to Trustee. The Trustee, subject to
the provisions of Section 5.01 and Section 5.02, may receive an Opinion of
Counsel as conclusive evidence that any such consolidation, merger, conveyance,
sale, transfer, lease, exchange or other disposition complies with the
applicable provisions of this Indenture.
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ARTICLE 9
REDEMPTION OF NOTES
SECTION 9.01. Right of Optional Redemption; Prices. Prior to ____,
200_, the Company may redeem all or part of the Notes at any time upon not less
than 30 nor more than 60 days' notice at the Make-Whole Price, plus accrued and
unpaid interest on the Notes, if any, to the redemption date. On or after
[ ], 200_, the Company at its option may, at any time, redeem all,
or from time to time any part of, the Notes upon payment of the optional
redemption prices set forth in the form of Note hereinabove recited, together
with accrued and unpaid interest to the date fixed for redemption.
In addition, at any time or from time to time prior to ______, 2002,
the Company may redeem up to 35% of the original aggregate principal amount of
the Notes at a redemption price equal to ___% of the principal amount of the
Notes so redeemed, plus accrued and unpaid interest thereon (if any) to the
redemption date (subject to the right of Holders of record on the relevant
Regular Record Date to receive interest due on the relevant Interest Payment
Date), with the net cash proceeds of one or more private placements to Persons
other than Affiliates of the Company or public offerings of common stock of the
Company, in each case resulting in gross proceeds to the Company of at least
$100 million in the aggregate; provided that (1) at least 65% of the original
aggregate principal amount of the Notes would remain outstanding immediately
after giving effect to such redemption; (2) any such redemption shall be made
within 90 days of such private placement or public offering upon not less than
30 nor more than 60 days' prior notice; and (3) any such redemption may not
occur in connection with or after the occurrence of a Change of Control.
SECTION 9.02. Notice of Redemption; Partial Redemptions. Notice of
redemption to the Holders of Notes to be redeemed as a whole or in part shall be
given by mailing notice of such redemption by first class mail, postage prepaid,
at least 30 days and not more than 60 days prior to the date fixed for
redemption to such Holders of Notes at their last addresses as they shall appear
upon the registry books. Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the Holder receives the notice. Failure to give notice by mail, or any defect in
the notice to the Holder of any Note designated for redemption as a whole or in
part shall not affect the validity of the proceedings for the redemption of any
other Note.
The notice of redemption to each such Holder shall identify the Notes
to be redeemed (including the CUSIP number) and shall specify the principal
amount of each Note held by such Holder to be redeemed, the date fixed for
redemption, the redemption price, the place or places of payment, that payment
will be made upon
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presentation and surrender of such Notes, that interest accrued to the date
fixed for redemption will be paid as specified in said notice and that on and
after said date interest thereon or on the portions thereof to be redeemed will
cease to accrue. In case any Note is to be redeemed in part only the notice of
redemption shall state the portion of the principal amount thereof to be
redeemed and shall state that on and after the date fixed for redemption, upon
surrender of such Note, a new Note or Notes in principal amount equal to the
unredeemed portion thereof will be issued.
The notice of redemption of Notes to be redeemed at the option of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
No later than 10:00 a.m. on the redemption date specified in the notice
of redemption given as provided in this Section, the Company will deposit with
the Trustee or with one or more paying agents (or, if the Company is acting as
its own paying agent, set aside, segregate and hold in trust as provided in
Section 3.04) an amount of money sufficient to redeem on the redemption date all
the Notes so called for redemption at the appropriate redemption price, together
with accrued interest to the date fixed for redemption. The Company will deliver
to the Trustee at least 70 days prior to the date fixed for redemption an
Officers' Certificate stating the aggregate principal amount of Notes to be
redeemed.
If less than all the Notes are to be redeemed, the Trustee shall
select, either pro rata, by lot or by any other method it shall in its sole
discretion deem fair and appropriate, Notes to be redeemed in whole or in part;
provided that no Note of $1,000 in principal amount or less shall be redeemed in
part. The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Notes selected for partial
redemption, the principal amount thereof to be redeemed. For all purposes of
this Indenture, unless the context otherwise requires, all provisions relating
to the redemption of Notes shall relate, in the case of any Note redeemed or to
be redeemed only in part, to the portion of the principal amount of such Note
which has been or is to be redeemed.
SECTION 9.03. Payment of Notes Called for Redemption. If notice of
redemption has been given as above provided, the Notes or portions of Notes
specified in such notice shall become due and payable on the date and at the
place stated in such notice at the applicable redemption price, together with
interest accrued to the date fixed for redemption, and on and after said date
(unless the Company shall default in the payment of such Notes at the redemption
price, together with interest accrued to said date) interest on the Notes or
portions of Notes so called for redemption shall cease to accrue and, except as
provided in Section 5.05 and Section 11.06, such Notes shall cease from and
after the date
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fixed for redemption to be entitled to any benefit or security under this
Indenture, and the Holders thereof shall have no right in respect of such Notes
except the right to receive the redemption price thereof and unpaid interest to
the date fixed for redemption. On presentation and surrender of such Notes at a
place of payment specified in said notice, said Notes or the specified portions
thereof shall be paid and redeemed by the Company at the applicable redemption
price, together with interest accrued thereon to the date fixed for redemption;
provided that any semi-annual payment of interest becoming due on or prior to
the date fixed for redemption shall be payable to the Holders of such Notes
registered as such on the relevant Regular Record Date subject to the terms and
provisions of Section 2.04 hereof.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal shall, until paid or duly provided for,
bear interest from the date fixed for redemption at the rate borne by the Note.
Upon presentation of any Note redeemed in part only, the Company shall
execute and the Trustee shall authenticate and make available for delivery to or
on the order of the Holder thereof, at the expense of the Company, a new Note or
Notes, of authorized denominations, in principal amount equal to the unredeemed
portion of the Note so presented.
SECTION 9.04. Exclusion of Certain Notes from Eligibility for Selection
for Redemption. Notes shall be excluded from eligibility for selection for
redemption if they are identified by registration and certificate number in a
written statement signed by an authorized officer of the Company and delivered
to the Trustee at least 40 days prior to the last date on which notice of
redemption may be given as being owned of record and beneficially by, and not
pledged or hypothecated by either (a) the Company or (b) an entity specifically
identified in such written statement as directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company.
ARTICLE 10
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 10.01. Company's Option to Effect Defeasance or Covenant
Defeasance. The Company may at its option by a Board Resolution, at any time,
elect to have either Section 10.02 or Section 10.03 applied to the outstanding
Notes upon compliance with the conditions set forth below in this Article Ten.
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SECTION 10.02. Legal Defeasance and Discharge. Upon the Company's
exercise under Section 10.01 hereof of the option applicable to this Section,
the Company shall be deemed to have been discharged from any and all Obligations
with respect to all outstanding Notes (and any Guarantor will be discharged from
any and all Obligations in respect of its Subsidiary Guarantee) on the date
which is the 123rd day after the deposit referred to in Section 10.04(a);
provided that all of the conditions set forth below are satisfied (hereinafter,
"LEGAL DEFEASANCE"). For this purpose, such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire Debt represented
by the outstanding Notes, which shall thereafter be deemed to be "outstanding"
only for the purposes of Section 10.05 hereof and the other Sections of this
Indenture referred to in clauses (1) and (2) of this Section, and to have
satisfied all its other obligations under such Notes and this Indenture (and the
Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following provisions which
shall survive until otherwise terminated or discharged hereunder: (1) the rights
of Holders of outstanding Notes to receive solely from the trust fund described
in Section 10.04 hereof, and as more fully set forth in such Section, payments
in respect of the principal of, premium, if any, and interest on such Notes when
such payments are due, (2) the Company's obligations with respect to such Notes
under Sections 2.01, 2.02, 2.05, 2.06, 2.07, 2.08, 2.10, 3.01, 3.02, 3.04 and
10.05 hereof, (3) the rights, powers, trusts, duties and immunities of the
Trustee hereunder, including, without limitation, the Trustee's rights under
Section 5.07 hereof, and (4) the Company's obligations in connection therewith
and with this Article Ten. Subject to compliance with this Article Ten, the
Company may exercise its option under this Section notwithstanding the prior
exercise of its option under Section 10.03 hereof with respect to the Notes.
SECTION 10.03. Covenant Defeasance. Upon the Company's exercise under
Section 10.01 hereof of the option applicable to this Section, the Company shall
be released from its obligations under the covenants contained in Section 3.08
through Section 3.18 and clauses (3), (4) and (5) of Section 8.01 hereof with
respect to the outstanding Notes on and after the date the conditions set forth
below are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the Notes shall
thereafter be deemed not outstanding for the purposes of any direction, waiver,
consent or declaration or act of Holders (and the consequences of any thereof)
in connection with such covenants, but shall continue to be deemed outstanding
for all other purposes hereunder. For this purpose, such Covenant Defeasance
means that, with respect to the outstanding Notes, the Company may omit to
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any other
document and such
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omission to comply shall not constitute a Default or an Event of Default under
Section 4.01(c) or 4.01(d) hereof, but, except as specified above, the remainder
of this Indenture and such Notes shall be unaffected thereby.
SECTION 10.04. Conditions to Legal or Covenant Defeasance. The
following shall be the conditions to application of either Section 10.02 or
Section 10.03 hereof to the outstanding Notes:
(a) the Company has deposited with the Trustee, in trust, money and/or
U.S. Government Obligations that through the payment of interest and principal
in respect thereof in accordance with their terms will provide money in an
amount sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes;
(b) in the case of an election under Section 10.02 hereof, the Company
has delivered to the Trustee (1) either (x) an Opinion of Counsel to the effect
that Holders will not recognize income, gain or loss for Federal income tax
purposes as a result of the Company's exercise of its option under this Article
Ten and will be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the Internal Revenue
Service to the same effect unless there has been a change in applicable Federal
income tax law after the date of this Indenture such that a ruling is no longer
required or (y) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned Opinion of Counsel and
(2) an Opinion of Counsel to the effect that the creation of the defeasance
trust does not violate the Investment Company Act of 1940 and after the passage
of 123 days following the deposit, the trust fund will not be subject to the
effect of Section 547 of the United States Bankruptcy Code or Section 15 of the
New York Debtor and Creditor Law;
(c) in the case of an election under Section 10.03 hereof, the
delivery by the Company to the Trustee of (1) an Opinion of Counsel to the
effect that, among other things, the Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and defeasance
and will be subject to Federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred and (2) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company Act of
1940 and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of
113
<PAGE> 119
Section 547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law;
(d) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or lapse of
time or both would become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 123rd
day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Company is a party or by which the Company is bound,
(e) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge,
(f) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit made by the Company pursuant to its
election under Section 10.02 or 10.03 hereof was not made by the Company with
the intent of preferring the Holders of the Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others, and
(g) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the Legal Defeasance under Section
10.02 or the Covenant Defeasance under Section 10.03 (as the case may be) have
been complied with as contemplated by this Section.
SECTION 10.05. Deposited Money and Government Securities to Be Held in
Trust; Other Miscellaneous Provisions. Subject to Section 10.06 hereof, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee pursuant to Section 10.04 hereof in respect of the outstanding
Notes shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any paying agent (including the Company acting as paying agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal of, premium, if any, and interest,
but such money need not be segregated from other funds except to the extent
required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the money or U.S. Government
114
<PAGE> 120
Obligations deposited pursuant to Section 10.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
Anything in this Article Ten to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the Company's
request any money or U.S. Government Obligations held by it as provided in
Section 10.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
10.04(a) hereof), are in excess of the amount thereof which would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 10.06. Repayment to Company. Any money deposited with the
Trustee or any paying agent, or then held by the Company, in trust for the
payment of the principal of, premium, if any, or interest on any Note and
remaining unclaimed for two years after such principal, premium, if any, or
interest has become due and payable shall be paid to the Company on its written
request or (if then held by the Company) shall be discharged from such trust;
and the Holder of such Note shall thereafter, as an unsecured general creditor,
look only to the Company for payment thereof, and all liability of the Trustee
or such paying agent with respect to such trust money, and all liability of the
Company as Trustee thereof, shall thereupon cease; provided, however, that the
Trustee or such paying agent, before being required to make any such repayment,
may at the expense of the Company cause to be published once, in The New York
Times and The Wall Street Journal (national edition), notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 10.07. Reinstatement. If the Trustee or paying agent is unable
to apply any money or U.S. Government Obligations in accordance with Section
10.02 or 10.03 hereof, as the case may be, by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company's obligations under this
Indenture and the Notes shall be revived and reinstated as though no deposit had
occurred pursuant to Section 10.02 or 10.03 hereof until such time as the
Trustee or paying agent is permitted to apply all such amounts in accordance
with Section 10.02 or 10.03 hereof, as the case may be; provided, however, that,
if the Company makes any payment of principal of, premium, if any, or interest
on any Note following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Note to receive such payment
from the amounts held by the Trustee or paying agent.
115
<PAGE> 121
ARTICLE 11
MISCELLANEOUS PROVISIONS
SECTION 11.01. Incorporators, Stockholders, Officers, Directors,
Employees and Controlling Persons of Company Exempt from Individual Liability.
No recourse for the payment of the principal of, premium, if any, or interest on
any of the Notes or any claim based thereon or otherwise in respect thereof, and
no recourse under or upon any obligation, covenant or agreement of the Company
contained in this Indenture, or in any Note, or because of the creation of any
indebtedness evidenced thereby, shall be had against any incorporator, as such,
or against any past, present or future stockholder, officer, director, employee
or controlling person, as such, of the Company or of any successor Person,
either directly or through the Company or any successor Person, under any rule
of law, statute or constitutional provision or by the enforcement of any
assessment or by any legal or equitable proceeding or otherwise, all such
liability being expressly waived and released by the acceptance of the Notes by
the Holders thereof and as part of the consideration for the issue of the Notes.
SECTION 11.02. Provisions of Indenture for the Sole Benefit of Parties
and Holders. Nothing in this Indenture or in the Notes, expressed or implied,
shall give or be construed to give to any person, firm or corporation, other
than the parties hereto and their successors and the Holders of the Notes, any
legal or equitable right, remedy or claim under this Indenture or under any
covenant or provision herein contained, all such covenants and provisions being
for the sole benefit of the parties hereto and their successors and of the
Holders of the Notes.
SECTION 11.03. Successors and Assigns of Company Bound by Indenture.
All the covenants, stipulations, promises and agreements in this Indenture
contained by or in behalf of the Company shall bind its successors and assigns,
whether so expressed or not.
SECTION 11.04. Notices and Demands on Company, Trustee and Holders. Any
notice or demand which by any provision of this Indenture is required or
permitted to be given or served by the Trustee or by the Holders of Notes to or
on the Company may be given or served by being deposited postage prepaid,
first-class mail (except as otherwise specifically provided herein) addressed
(until another address of the Company is filed by the Company with the Trustee)
to [ ], Attention: [ ], with a copy to [ ]. Any notice, direction, request or
demand by the Company or any Noteholder to or upon the Trustee shall be deemed
to have been sufficiently given or made, for all purposes, if given or made at
the Corporate Trust Office.
116
<PAGE> 122
Where this Indenture provides for notice to Holders, such notice shall
be sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class postage prepaid, to each Holder entitled thereto, at his
last address as it appears in the Note Register. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. The Trustee may waive notice
to it of any provision herein, and such waiver shall be deemed to be for its
convenience and discretion. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
In case, by reason of the suspension of or irregularities in regular
mail service, it shall be impracticable to mail notice to the Company and
Noteholders when such notice is required to be given pursuant to any provision
of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.
SECTION 11.05. Officers' Certificates and Opinions of Counsel;
Statements to Be Contained Therein. Upon any application or demand by the
Company to the Trustee to take any action under any of the provisions of this
Indenture, the Company shall furnish to the Trustee an Officers' Certificate
stating that all conditions precedent provided for in this Indenture relating to
the proposed action have been complied with and an Opinion of Counsel stating
that in the opinion of such counsel all such conditions precedent have been
complied with, except that in the case of any such application or demand as to
which the furnishing of such documents is specifically required by any provision
of this Indenture relating to such particular application or demand, no
additional certificate or opinion need be furnished.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or covenant
provided for in this Indenture shall include (a) a statement that the person
making such certificate or opinion has read such covenant or condition, (b) a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based, (c) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with and (d) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
117
<PAGE> 123
Any certificate, statement or opinion of an officer of the Company may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of or representations by counsel, unless such officer knows that the certificate
or opinion or representations with respect to the matters upon which his
certificate, statement or opinion may be based as aforesaid are erroneous, or in
the exercise of reasonable care should know that the same are erroneous. Any
certificate, statement or opinion of counsel may be based, insofar as it relates
to factual matters or information which is in the possession of the Company,
upon the certificate, statement or opinion of or representations by an officer
or officers of the Company, unless such counsel knows that the certificate,
statement or opinion or representations with respect to the matters upon which
his certificate, statement or opinion may be based as aforesaid are erroneous,
or in the exercise of reasonable care should know that the same are erroneous.
Any certificate, statement or opinion of an officer of the Company or
of counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Company, unless such officer or counsel, as the
case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.
Any certificate or opinion of any independent firm of public
accountants filed with the Trustee shall contain a statement that such firm is
independent.
SECTION 11.06. Payments Due on Saturdays, Sundays and Holidays. If the
date of maturity of interest on or principal of the Notes or the date fixed for
redemption of any Note shall not be a Business Day, then payment of interest or
principal need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the date of maturity
or the date fixed for redemption, and no interest shall accrue for the period
after such date.
SECTION 11.07. Conflict of Any Provision of Indenture with Trust
Indenture Act of 1939. If and to the extent that any provision of this Indenture
limits, qualifies or conflicts with another provision included in this Indenture
by operation of Section 310 to Section 317, inclusive, of the Trust Indenture
Act of 1939 (an "INCORPORATED PROVISION"), such incorporated provision shall
control.
SECTION 11.08. New York Law to Govern. This Indenture and each Note
shall be deemed to be a contract under the laws of the State of New York, and
for all purposes including the obligations of the Company and any Guarantor and
the
118
<PAGE> 124
rights of Holders of the Notes arising out of or in connection with the Notes,
including the obligations of the Company and any Guarantor to pay all principal,
interest or other amounts payable under the Indenture and such Note, will be
governed by and shall be construed in accordance with the laws of said State,
without giving effect to the conflict of laws provisions thereof, except as may
otherwise be required by mandatory provisions of law.
SECTION 11.09. Counterparts. This Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall together constitute but one and the same instrument.
SECTION 11.10. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
119
<PAGE> 125
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of [ ], 1999.
WILLIAMS COMMUNICATIONS GROUP, INC.,
as Issuer
By
---------------------------------------
Title:
THE BANK OF NEW YORK,
as Trustee
By
---------------------------------------
Title:
<PAGE> 1
DRAFT
[William G. von Glahn letterhead]
[Date] , 1999
Williams Communications Group, Inc.
One Williams Center
Tulsa, Oklahoma 74172
Ladies and Gentlemen:
I am Senior Vice President - Law for Williams Communications Group,
Inc., a Delaware corporation (the "Company"), and have acted as such in
connection with the registration under the Securities Act of 1933, as amended
(the "Securities Act"),by the Company of $1,300,000,000 aggregate principal
amount of ___% Senior Notes due 200_ (the "Notes") to be issued under an
indenture between the Company and The Bank of New York, as trustee (the
"Indenture"). The form of the Notes and of the Indenture are filed as exhibits
to the Registration Statement of the Company on Form S-1 referenced below (the
"Registration Statement"). This opinion is being delivered in connection with
the registration under the Securities Act of the Notes in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act.
I have examined and am familiar with originals or copies, certified or
otherwise identified to my satisfaction, of the following: (i) the Registration
Statement on Form S-1 (File No. 333-76877) relating to the Notes, as filed with
the Securities and Exchange Commission (the "Commission") on April 23, 1999 as
amended on May 28, 1999, July 13, 1999, July 15, 1999, July 29, 1999, August 18,
1999, September 2, 1999 and the date of this opinion (such Registration
Statement, as so amended, being hereinafter referred to as the "Registration
Statement"); (ii) the Restated Certificate of Incorporation and the By-laws of
the Company, each as amended to the date hereof; (iii) the forms of both the
Indenture and the Notes; (iv) the Purchase Agreement to be entered into among
the Company and certain underwriters in respect of the Notes in the form filed
as an exhibit to the Registration Statement (the "Purchase Agreement"); and (v)
resolutions adopted by the Board of Directors of the Company (the "Board") on
April 6, 1999 by unanimous written consent relating, among other things, to the
issuance of the Notes. I have also examined originals or copies, certified or
otherwise identified to my satisfaction, of such records of the Company and such
agreements, certificates of public officials, certificates of officers or other
representatives of the
<PAGE> 2
Williams Communications Group, Inc.
[Date], 1999
Page 2
Company and others, and such other documents, certificates and records as I have
deemed necessary or appropriate as a basis for the opinions set forth herein.
In my examination, I have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to me as certified, conformed or photostatic copies and the
authenticity of the originals of such copies. I have assumed that the Purchase
Agreement and the Indenture, in each case in the forms that I have reviewed,
will be executed on behalf of the Company by one or more duly authorized
representatives. I have also assumed that the certificates representing the
Notes have been or will have been signed by facsimile or otherwise by one or
more authorized officers of the Company and authorized representatives of the
trustee and conform and will conform to the specimen thereof examined by me. As
to any facts material to this opinion that I did not independently establish or
verify, I have relied upon oral or written statements and representations of
officers and other representatives of the Company and others.
I am admitted to the Bar of the State of Oklahoma, the jurisdiction in
which the Company has its principal place of business, and New York, and I
express no opinion as to the laws of any other jurisdiction other than the
General Corporation Law of the State of Delaware and the laws of the United
States of America to the extent specifically set forth herein.
Based upon the foregoing, and having regard for the legal
considerations as I have deemed relevant, I am of the opinion that, assuming the
Registration Statement has become effective under the Securities Act and the
Indenture qualified under the Trust Indenture Act of 1939, and that the officer
of the Company designated by the Board for such purpose will have properly taken
the required actions in connection with the issuance and sale of the Notes, the
issuance and sale of the Notes has been duly and validly authorized by the
Company and, when issued in accordance with the Indenture and the Purchase
Agreement and as set forth in the Registration Statement, the Notes will then
have been validly issued and will constitute valid and binding obligations of
the Company enforceable in accordance with their terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws relative
to or affecting generally the enforcement of creditor's rights and by principles
of equity.
This opinion is limited to the matters stated herein, and no opinion is
implied or may be inferred beyond the matters expressly stated.
I hereby consent to the use of my name in the Registration Statement
under the caption "Legal Matters" and to the filing of this opinion as an
Exhibit to the Registration Statement. In giving such consent, I do not thereby
admit that I come
<PAGE> 3
Williams Communications Group, Inc.
[Date], 1999
Page 3
within the category of persons whose consent is required under Section 7 of the
Securities Act of rules and regulations of the Commission thereunder.
Very truly yours,
- ------------------------------
William G. von Glahn
Senior Vice President and
General Counsel
<PAGE> 1
EXHIBIT 12.1
WILLIAMS COMMUNICATIONS GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS EXCEPT RATIOS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- -------- --------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss)
before income
taxes........... $(150,231) $(42,060) $(186,026) $(33,805) $(3,146) $ 6,763 $(9,829)
Add:
Interest
expenses-net.. 20,235 1,694 7,468 933 17,367 13,999 7,405
Rental expense
representative
of interest
factor....... 32,408 19,382 44,590 28,120 18,786 1,784 1,230
Minority
interest
income of
consolidated
subsidiaries... (11,272) 4,904 (15,645) 13,506 -- -- --
Equity losses... 18,682 2,739 7,908 2,383 1,601 93 --
--------- -------- --------- -------- ------- ------- -------
Total
earnings
(loss)
as
adjusted
plus
fixed
charges... $ (90,178) $(13,341) $(141,705) $ 11,137 $34,608 $22,639 $(1,194)
========= ======== ========= ======== ======= ======= =======
Combined fixed
charges:
Interest expense-
net............. 20,235 1,694 $ 7,468 $ 933 $17,367 $13,999 $ 7,405
Capitalized
interest........ 8,798 4,556 11,182 7,781 -- -- --
Rental expense
representative
of interest
factor.......... 32,408 19,382 44,590 28,120 18,786 1,784 1,230
--------- -------- --------- -------- ------- ------- -------
Total
fixed
charges... $ 61,441 $ 25,632 $ 63,240 $ 36,834 $36,153 $15,783 $ 8,635
========= ======== ========= ======== ======= ======= =======
Ratio of earnings to
fixed charges...... (a) (a) (a) (a) (a) 1.43 (a)
========= ======== ========= ======== ======= ======= =======
</TABLE>
- ---------------
(a) Earnings were inadequate to cover fixed charges by $151,619,000,
$38,973,000, $204,945,000, $25,697,000, $1,545,000 and $9,829,000 for the
six months ended June 30, 1999 and 1998 (unaudited) and the years ended
1998, 1997, 1996 and 1994, respectively.
<PAGE> 1
EXHIBIT 21
WILLIAMS COMMUNICATIONS GROUP, INC.
LIST OF SUBSIDIARIES
AS OF AUGUST 27, 1999
<TABLE>
<CAPTION>
OWNED BY
SUBSIDIARY PARENT
- ---------- -------
<S> <C> <C>
Williams Communications, Inc. Delaware 100%
CSI Incorporated Delaware 84.54%
Concentric Network Corporation Delaware 11.5%
Critical Connections, Inc. Delaware 100%
FTV Communications LLC Delaware 33%
Global Access Telecommunications Services Limited UK 100%
Intersys Mexico, S.A. de CV Mexico 100%
Unidial Delaware 1%
Vvytech, Ltd. UK 100%
Vyvx International Ltd UK 100%
WCS Communications Systems, Inc. Delaware 100%
WCS Microwave Services, Inc. Nevada 100%
Williams Communications Solutions, LLC Delaware 70%
WCS, Inc. Delaware 100%
WilTel Communications (Canada), Inc. Canada 100%
CNG Computer Networking Group, Inc. Delaware 100%
Williams Communications Group PTE Ltd. Singapore 100%
Williams Communications Group, Ltd. UK 100%
Williams Communications of Virginia, Inc. Virginia 100%
Williams International ATL Limited Cayman Islands 100%
ATL -- Algar Telecom Leste, S.A. Brazil 20%
ATL Cayman International Cayman Islands 100%
Johl Ropresentacoes Ltda Brazil 100%
ATL -- Algar Telecom Leste, S.A. Brazil 35%
SKTI -- US L.L.C. Delaware 50%
ATL -- Algar Telecom Leste, S.A. Brazil 30%
Williams International Australian Cayman Islands 100%
Telecom Limited
Seroja Klaslk Sdn. Bhd. Malaysia 19.9%
PowerTel Limited Australia 31.7%
Williams International Ventures Company Delaware 100%
Powertel Pty Limited Australia 100%
WilTel Communications Pty Limited Australia 100%
PowerTel Limited Australia 35%
Williams International Telecom (Chile) Cayman Islands 100%
Limited
MetroCom S.A. Chile 19.9%
Williams Learning Network, Inc. Delaware 100%
Williams Local Network, Inc. Delaware 100%
Williams Wireless, Inc. Delaware 100%
Ziplink Delaware 1.7%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial and Operating Data" and to the use of our
report on the financial statements dated April 7, 1999, except for the matters
described in the third paragraph of Note 10 and Note 17, as to which the date is
July 27, 1999 and our report on the financial statement schedule dated July 27,
1999, in Amendment No. 6 to the Registration Statement on Form S-1 and related
prospectus of Williams Communications Group, Inc. for the registration of its
senior notes.
/s/ ERNST & YOUNG LLP
------------------------------------
ERNST & YOUNG LLP
Tulsa, Oklahoma
August 31, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the financial statements of ATL -- ALGAR TELECOM LESTE S.A. as of
December 31, 1998 and for the period from inception (March 26, 1998) through
December 31, 1998 (and to all references to our Firm) included in or made a part
of the amendment to the registration statement on Form S-1 of Williams
Communications Group, Inc.
/s/ ARTHUR ANDERSEN S/C
----------------------------------------
ARTHUR ANDERSEN S/C
Belo Horizonte, Brazil
August 31, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 26, 1999, in Amendment No. 6 to the
Registration Statement Form S-1, Registration Statement No. 333-76877, and
related Prospectus of Williams Communications Group, Inc. for the registration
of its senior notes.
/s/ DELOITTE & TOUCHE LLP
----------------------------------------
DELOITTE & TOUCHE LLP
Toronto, Ontario
September 1, 1999
<PAGE> 1
EXHIBIT 25
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) [ ]
------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
------------------
WILLIAMS COMMUNICATIONS GROUP, INC.
(Exact name of obligor as specified in its charter)
Delaware 73-1462856
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
One Williams Center
Tulsa, Oklahoma 74172
(Address of principal executive offices) (Zip code)
------------------
____% senior notes due 200__
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Name Address
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE
7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit
1 to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 24th day of August, 1999.
THE BANK OF NEW YORK
By: /s/ REMO J. REALE
----------------------------------
Name: REMO J. REALE
Title: ASSISTANT VICE PRESIDENT
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit
1 to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form
T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
</TABLE>
<PAGE> 5
EXHIBIT 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1999,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS In Thousands
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin .......................... $ 5,597,807
Interest-bearing balances ................................................... 4,075,775
Securities:
Held-to-maturity securities ................................................. 785,167
Available-for-sale securities ............................................... 4,159,891
Federal funds sold and Securities purchased under
agreements to resell ........................................................ 2,476,963
Loans and lease financing receivables:
Loans and leases, net of unearned
income...............38,028,772
LESS: Allowance for loan and
lease losses............568,617
LESS: Allocated transfer risk
reserve........................16,352
Loans and leases, net of unearned income,
allowance, and reserve .................................................... 37,443,803
Trading Assets ................................................................. 1,563,671
Premises and fixed assets (including capitalized
leases) ..................................................................... 683,587
Other real estate owned ........................................................ 10,995
Investments in unconsolidated subsidiaries and
associated companies ........................................................ 184,661
Customers' liability to this bank on acceptances
outstanding ................................................................. 812,015
Intangible assets .............................................................. 1,135,572
Other assets ................................................................... 5,607,019
---------------
Total assets ................................................................... $ 64,536,926
===============
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
LIABILITIES
Deposits:
In domestic offices ......................................................... $ 26,488,980
Noninterest-bearing.......................10,626,811
Interest-bearing..........................15,862,169
In foreign offices, Edge and Agreement
subsidiaries, and IBFs .................................................... 20,655,414
Noninterest-bearing..........................156,471
Interest-bearing..........................20,498,943
Federal funds purchased and Securities sold under
agreements to repurchase .................................................... 3,729,439
Demand notes issued to the U.S.Treasury ........................................ 257,860
Trading liabilities ............................................................ 1,987,450
Other borrowed money:
With remaining maturity of one year or less ................................. 496,235
With remaining maturity of more than one year
through three years ....................................................... 465
With remaining maturity of more than three years ............................ 31,080
Bank's liability on acceptances executed and
outstanding ................................................................. 822,455
Subordinated notes and debentures .............................................. 1,308,000
Other liabilities .............................................................. 2,846,649
---------------
Total liabilities .............................................................. 58,624,027
===============
EQUITY CAPITAL
Common stock ................................................................... 1,135,284
Surplus ........................................................................ 815,314
Undivided profits and capital reserves ......................................... 4,001,767
Net unrealized holding gains (losses) on
available-for-sale securities ............................................... (7,956)
Cumulative foreign currency translation adjustments............................. (31,510)
---------------
Total equity capital ........................................................... 5,912,899
---------------
Total liabilities and equity capital ........................................... $ 64,536,926
===============
</TABLE>
<PAGE> 7
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Reyni )
Alan R. Griffith ) Directors
Gerald L. Hassell )
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 73,706
<SECURITIES> 0
<RECEIVABLES> 513,330
<ALLOWANCES> 34,098
<INVENTORY> 81,493
<CURRENT-ASSETS> 957,840
<PP&E> 1,271,364
<DEPRECIATION> 210,729
<TOTAL-ASSETS> 3,171,438
<CURRENT-LIABILITIES> 533,662
<BONDS> 1,414,231
0
0
<COMMON> 1
<OTHER-SE> 1,391,160
<TOTAL-LIABILITY-AND-EQUITY> 3,174,138
<SALES> 0
<TOTAL-REVENUES> 1,001,139
<CGS> 0
<TOTAL-COSTS> 1,119,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,810
<INTEREST-EXPENSE> 29,033
<INCOME-PRETAX> (153,931)
<INCOME-TAX> 45,834
<INCOME-CONTINUING> (199,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (199,765)
<EPS-BASIC> (199,765.00)
<EPS-DILUTED> (199,765.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 801,726
<CGS> 0
<TOTAL-COSTS> 836,026
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,696
<INTEREST-EXPENSE> 6,250
<INCOME-PRETAX> (45,110)
<INCOME-TAX> (1,183)
<INCOME-CONTINUING> (43,927)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,927)
<EPS-BASIC> (43,927.00)
<EPS-DILUTED> (43,927.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,004
<SECURITIES> 0
<RECEIVABLES> 515,447
<ALLOWANCES> 23,576
<INVENTORY> 67,699
<CURRENT-ASSETS> 841,404
<PP&E> 896,273
<DEPRECIATION> 183,869
<TOTAL-ASSETS> 2,338,546
<CURRENT-LIABILITIES> 557,046
<BONDS> 623,730
0
0
<COMMON> 1
<OTHER-SE> 1,007,681
<TOTAL-LIABILITY-AND-EQUITY> 2,338,546
<SALES> 0
<TOTAL-REVENUES> 1,733,469
<CGS> 0
<TOTAL-COSTS> 1,905,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21,591
<INTEREST-EXPENSE> 18,650
<INCOME-PRETAX> (190,826)
<INCOME-TAX> (5,097)
<INCOME-CONTINUING> (185,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185,729)
<EPS-BASIC> (185,729.00)
<EPS-DILUTED> (185,729.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,290
<SECURITIES> 0
<RECEIVABLES> 303,887
<ALLOWANCES> 12,787
<INVENTORY> 63,484
<CURRENT-ASSETS> 560,179
<PP&E> 541,055
<DEPRECIATION> 127,603
<TOTAL-ASSETS> 1,511,834
<CURRENT-LIABILITIES> 409,214
<BONDS> 125,746
0
0
<COMMON> 1
<OTHER-SE> 868,501
<TOTAL-LIABILITY-AND-EQUITY> 1,511,834
<SALES> 0
<TOTAL-REVENUES> 1,428,513
<CGS> 0
<TOTAL-COSTS> 1,477,577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,837
<INTEREST-EXPENSE> 8,714
<INCOME-PRETAX> (28,005)
<INCOME-TAX> 2,038
<INCOME-CONTINUING> (30,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,043)
<EPS-BASIC> (30,043.00)
<EPS-DILUTED> (30,043.00)
</TABLE>
