<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1999
REGISTRATION NO. 333-76007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WILLIAMS COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 73-1462856
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM G. VON GLAHN, ESQ.
SENIOR VICE PRESIDENT, LAW
WILLIAMS COMMUNICATIONS GROUP, INC.
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
(918) 573-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
RANDALL H. DOUD, ESQ. MARLENE ALVA, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP DAVIS POLK & WARDWELL
919 THIRD AVENUE 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 735-3000 (212) 450-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT OFFERING PRICE(2) REGISTRATION FEE(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $0.01 per
share(4).................................. 34,040,000 $23.00 $782,920,000 $217,652
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes an aggregate of 4,440,000 shares which the Underwriters have the
option to purchase solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 promulgated under the Securities Act
of 1933.
(3) $208,500 previously paid.
(4) This registration statement also pertains to Rights to purchase Series A
Participating Preferred Stock of the registrant. Until the occurrence of
certain prescribed events the Rights are not exercisable, are evidenced by
the certificates for the Common Stock and will be transferred along with and
only with such securities. Thereafter, separate Rights certificates will be
issued representing one Right for each share of Common Stock held subject to
adjustment pursuant to anti-dilution provisions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This registration statement contains two forms of prospectus, one to be
used in connection with an offering in the United States and Canada and one to
be used in a concurrent international offering outside the United States and
Canada. The U.S. prospectus and the international prospectus will be identical
in all respects except for the front cover page and back cover page. The front
cover page and back cover page for the international prospectus included in this
registration statement are each labelled "Alternate International Page." The
form of U.S. prospectus is included in this registration statement and the form
of the front and back cover pages of the international prospectus follow the
U.S. prospectus.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999
PROSPECTUS
29,600,000 SHARES
[WILLIAMS COMMUNICATIONS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
------------------
We are selling 29,600,000 shares of our common stock. The underwriters
named in this prospectus may purchase up to 4,440,000 additional shares of our
common stock from us under certain circumstances.
This is an initial public offering of our common stock. We currently expect
the initial public offering price to be between $21.00 and $23.00 per share. Our
common stock has been approved for listing on the New York Stock Exchange under
the symbol "WCG", subject to official notice of issuance.
We are a subsidiary of The Williams Companies, Inc. and following this
offering The Williams Companies, Inc. will continue to hold a controlling
interest in our stock.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds, before expenses, to Williams Communications Group,
Inc. ..................................................... $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------
<TABLE>
<S> <C> <C>
SALOMON SMITH BARNEY LEHMAN BROTHERS MERRILL LYNCH & CO.
</TABLE>
, 1999
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 8
This Prospectus Contains Forward-
Looking Statements............... 20
Use of Proceeds.................... 21
Dividend Policy.................... 21
Capitalization..................... 22
Dilution........................... 23
Selected Consolidated Financial and
Operating Data................... 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 30
Industry Overview.................. 57
Business........................... 64
Regulation......................... 95
Management......................... 103
Principal Stockholders............. 118
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Relationships and Related Party
Transactions..................... 121
Relationship Between Our Company
and Williams..................... 123
Description of Capital Stock....... 130
Description of Indebtedness and
Other Financing Arrangements..... 139
Shares Eligible for Future Sale.... 144
Important United States Federal Tax
Consequences of Our Common Stock
to Non-U.S. Holders.............. 145
Underwriting....................... 148
Legal Matters...................... 153
Experts............................ 153
Where You Can Find Additional
Information...................... 154
Index to Financial Statements...... F-1
</TABLE>
Until __________, 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE> 5
PROSPECTUS SUMMARY
This is only a summary and does not contain all of the information that may
be important to you. You should read the entire prospectus, including the
section entitled "Risk Factors" and our consolidated financial statements and
related notes, before deciding to invest in our common stock.
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 governmental, educational and non-profit institutions. Our
solutions unit provides planning,
1
<PAGE> 6
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 and the notes offering referred to below 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 NOTES OFFERING
Concurrent with the equity offering, we are offering approximately $1.3
billion aggregate principal amount of ____% senior notes due 200_ by means of a
separate prospectus.
For more information about the notes offering, see the section of this
prospectus entitled "Description of Indebtedness and Other Financing
Arrangements -- Notes."
RISK FACTORS
You should consider carefully the risks of an investment in our common
stock. See the section of this prospectus entitled "Risk Factors" for more
information.
2
<PAGE> 7
THE EQUITY OFFERING
Common stock offered in the
equity offering........... 29,600,000 shares
Common stock sold in the
concurrent investments.... 34,965,035 shares
Subtotal................. 64,565,035 shares
Class B common stock owned
by Williams.............. 395,434,965 shares
Total capital stock to be
outstanding after the
equity offering and the
concurrent
investments............ 460,000,000 shares
Use of proceeds............... We estimate that the net proceeds from the
equity offering will be approximately $607.8
million. We estimate that the net proceeds from
the notes offering will be approximately $1.27
billion and the net proceeds from the
concurrent investments will be 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
"Use of Proceeds" for more information.
Voting rights:
Common stock................ One vote per share
Class B common stock........ Ten votes per share
Other common stock
provisions.................... Apart from the different voting rights, the
holders of common stock and Class B common
stock generally have identical rights. See the
section "Description of Capital Stock" for more
information.
NYSE symbol................... "WCG"
Dividend policy............... We do not intend to pay cash dividends on our
common stock in the foreseeable future. See the
section "Dividend Policy" for more information.
The number of shares of common stock to be outstanding immediately after
the equity offering and the concurrent investments presented above and elsewhere
in this prospectus do not unless otherwise indicated take into account the
issuance of up to 4,440,000 shares of common stock which the underwriters have
the option to purchase solely to cover over-allotments, if any, the issuance of
up to 794,857 additional shares of our common stock 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. See the sections
"Business -- Strategic alliances -- SBC" and "Management -- New stock-based and
incentive plans of our company" for more information. The indicated number of
shares of common stock sold in the concurrent investments is based on an assumed
initial public offering price of $22.00 per share, the midpoint of the price
range on the cover page of this prospectus.
3
<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 underwriters'
over-allotment option, 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
4
<PAGE> 9
rights to use communications frequencies. EBITDA is used by management and
certain investors as an indicator of a company's historical ability to service
debt. Management believes that an increase in EBITDA is an indicator of improved
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. However, EBITDA is not intended to
represent cash flows for the period, nor has it been presented as an alternative
to either operating income, as determined by generally accepted accounting
principles, as an indicator of operating performance or cash flows from
operating, investing and financing activities, as determined by generally
accepted accounting principles, and is thus susceptible to varying calculations.
EBITDA as presented may not be comparable to other similarly titled measures of
other companies. We expect that under the permanent credit facility, which we
expect to enter into 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.
5
<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>
6
<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 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.
7
<PAGE> 12
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in shares of our common stock.
RISKS RELATING TO OUR NETWORK UNIT
WE MUST COMPLETE THE WILLIAMS NETWORK EFFICIENTLY AND ON TIME TO INCREASE OUR
REVENUES BUT FACTORS OUTSIDE OUR CONTROL MAY PREVENT US FROM DOING SO, WHICH
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our ability to become a leading coast-to-coast 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
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network. Any failure by these companies to provide service to us would adversely
affect our ability to serve our customers or increase our costs of doing so.
Costs of obtaining local services from other carriers comprise a
significant proportion of the operating expenses of long distance carriers,
including 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,
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under-utilization of employees, reduced operating margins and loss of market
share. Many of our competitors have significantly greater financial, technical
and marketing resources or greater name recognition than we currently have. We
also face competition from lower cost providers and from new entrants to the
market.
RISKS RELATING TO OUR COMPANY
AFTER THE OFFERINGS, WILLIAMS 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
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terms depends on the future performance of our business. If we do not have
enough cash flow in the future to make interest or principal payments on our
debt, we may be required to refinance all or a part of our debt or to raise
additional capital. We do not know if refinancing our debt will be possible at
that time or if we will be able to find someone who will lend us more money, nor
do we know upon what terms we could borrow more money.
RESTRICTIONS AND COVENANTS IN OUR DEBT AGREEMENTS LIMIT OUR ABILITY TO CONDUCT
OUR BUSINESS AND COULD PREVENT US FROM OBTAINING FUNDS WHEN WE NEED THEM IN THE
FUTURE
The notes and some of our other debt and financing arrangements contain a
number of significant limitations that will restrict our ability to conduct our
business and to:
- borrow additional money
- pay dividends or other distributions to our stockholders
- make investments
- create liens on our assets
- sell assets
- enter into transactions with affiliates
- engage in mergers or consolidations
These restrictions may limit our ability to obtain future financing, fund
needed capital expenditures or withstand a future downturn in our business or
the economy.
IF WE ARE UNABLE TO COMPLY WITH THE RESTRICTIONS AND COVENANTS IN OUR DEBT
AGREEMENTS, THERE COULD BE A DEFAULT UNDER THE TERMS OF THESE AGREEMENTS, WHICH
COULD RESULT IN AN ACCELERATION OF PAYMENT 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
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- regulatory developments
- credit availability from banks or other lenders
- investor confidence in the telecommunications industry and our company
- the success of the Williams network
- provisions of tax and securities laws that are conducive to raising
capital
WE MUST ATTRACT AND RETAIN QUALIFIED EMPLOYEES TO ENSURE THE GROWTH AND SUCCESS
OF OUR COMPANY
We believe that our growth and future success will depend in large part on
our ability to attract and retain highly skilled and qualified personnel. Any
inability of ours in the future to hire, train and retain a sufficient number of
qualified employees could impair our ability to manage and maintain our business
and our customers' communications infrastructures. Some of the problems
experienced by 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
OUR STOCKHOLDERS
After completion of the equity offering and the concurrent investments,
Williams will hold 100% of our Class B common stock and will therefore own
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 to our stockholders. By becoming a stockholder
in our company, you will be considered to have consented to these provisions of
our restated certificate of incorporation, except to the extent that any of
these provisions are inconsistent with Delaware law or the fiduciary duties of
our directors. Although these provisions are designed to resolve conflicts
between us and Williams fairly, we cannot assure you that this will occur.
WE RELY ON WILLIAMS FOR ADMINISTRATIVE SERVICES WHICH WILLIAMS COULD CEASE TO
PROVIDE TO US; WE MAY BE UNABLE TO REPLACE THESE SERVICES IN A TIMELY MANNER OR
ON FAVORABLE TERMS
We have never operated as a stand alone company. While Williams is
contractually obligated to provide us with certain administrative services, we
cannot assure you that these services will be sustained at the same level as
when we were wholly owned by Williams or that we will obtain the same benefits.
We will also lease and sub-lease office and manufacturing facilities from
Williams. We cannot assure you that, after the expiration of these various
arrangements, we will be able to replace the administrative services or enter
into appropriate leases in a timely manner or on terms and conditions, including
cost, as favorable as those we will receive from Williams.
These agreements were made in the context of a parent-subsidiary
relationship. The prices charged to us under these agreements may be higher or
lower than the prices that may be charged by unaffiliated third parties for
similar services. For more information about these arrangements, see the section
of this prospectus entitled "Relationship Between Our Company and Williams."
RISKS RELATING TO OUR COMMON STOCK
THE POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR
STOCKHOLDERS
Prior to the equity offering, you could not buy or sell our common stock
publicly. Although our shares of common stock have been approved for listing on
the NYSE, an active public market for our common stock might not develop or be
sustained after the equity offering. Moreover, even if such a market does
develop, the market price of our common stock may decline below the initial
public offering price. The market price of our common stock could be subject to
significant fluctuations due to a variety of factors, including actual or
anticipated fluctuations in our operating results and financial performance,
announcements of technological innovations by our existing or future competitors
or changes in financial estimates by securities analysts.
Historically, the market prices for securities of emerging companies in the
communications industry have been highly volatile. In addition, the stock market
has experienced volatility that has affected the market prices of equity
securities of many companies and that often has been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of our common stock. Furthermore, following periods of
18
<PAGE> 23
volatility in the market price of a company's securities, stockholders of such a
company have often instituted securities class action litigation against the
company. Any such litigation against our company could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect the conduct of our business.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING MAY ADVERSELY AFFECT OUR
STOCK PRICE
The market price of our common stock could drop in response to possible
sales of a large number of shares of common stock in the market after the equity
offering or to the perception that such sales could occur. As a result, we may
be unable to raise additional capital through the sale of equity at prices
acceptable to us.
We have entered into a registration rights agreement with Williams which
enables Williams to require us to register shares of our common stock owned by
Williams and to include those shares in registrations of common stock made by us
in the future. We have also entered into agreements with SBC, Intel and
Telefonos de Mexico which provide these three companies with registration rights
which enable them to require us to register shares of our common stock they own
after a period of time. If these companies exercise their registration rights,
the additional shares that become eligible for public sale as a consequence
could affect the price at which our shares trade.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BY-LAWS COULD LIMIT OUR SHARE PRICE
AND DELAY A TAKEOVER OR CHANGE IN CONTROL OF OUR COMPANY
Our restated certificate of incorporation and by-laws include provisions
that could delay, deter or prevent a future takeover or change in control of our
company. These provisions include the disproportionate voting rights of the
Class B common stock (relative to the common stock) to elect a majority of the
members of our board of directors and the authorization of our board to issue,
without stockholder approval, one or more series of preferred stock. In
addition, our directors are organized into multiple classes and the members of
only one class are elected each year. These provisions and our stockholder
rights plan may have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of our company, even
though such a change in ownership would be economically beneficial to our
company and our stockholders. See the section of this prospectus entitled
"Description of Capital Stock" for more information.
19
<PAGE> 24
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are principally contained in the sections "Prospectus Summary,"
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. Forward-
looking statements include but are not limited to:
- our expectations and estimates as to completion dates, construction costs
and subsequent maintenance and growth of the Williams network
- our ability to implement successfully our operating strategy and attract
sufficient capacity volumes on the Williams network
- future financial performance, including growth in net sales and earnings
- our continuing relationship with Williams
- our plan to address the Year 2000 issue, the costs associated with Year
2000 compliance and the results of Year 2000 non-compliance by us or one
or more of our customers, suppliers or other strategic business partners
In addition to factors that may be described in our filings with the
Securities and Exchange Commission and this prospectus, the following factors,
among others, could cause our actual results to differ materially from those
expressed in any forward-looking statements we make:
- the effects of and changes in political and/or economic conditions,
including inflation, interest rates and monetary conditions, and in
communications, trade, monetary, fiscal and tax policies in international
markets, including Mexico, Canada, Brazil, Australia and Chile
- changes in external competitive market factors or in our internal
budgeting process which might affect trends in our results of operations
- intense competition from other communications companies
- rapid, unpredictable and dramatic changes in the technological,
regulatory or business environment applicable to us or the communications
industry generally
- changes in the prices of equipment, supplies, rights of way or
construction expenses necessary to complete the Williams network
You should carefully review our consolidated financial statements and
related notes included in this prospectus as well as the risk factors described
in this prospectus before deciding to invest in shares of our common stock.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions, as they relate to our management, are intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties.
20
<PAGE> 25
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
29,600,000 shares of common stock will be approximately $607.8 million, or
approximately $699.8 million if the underwriters exercise their over-allotment
option in full, based on an assumed initial public offering price of $22.00 per
share. We estimate that the net proceeds we will receive from the notes offering
will be approximately $1.27 billion. In addition, we estimate that we will
receive $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' over-allotment option is exercised and will range from $9.5
million (based on a $425 million initial investment by SBC and no exercise of
the underwriters' over-allotment option) to $16.5 million (based on a $500
million initial investment by SBC and the exercise in full of the underwriters'
over-allotment option). 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 Indebtedness and Other Financing
Arrangements."
DIVIDEND POLICY
We have not paid any cash dividends on our capital stock since 1997. We do
not expect to pay cash dividends on our capital stock in the foreseeable future.
The terms of the notes and our other debt agreements place limitations on the
payment of cash dividends. We currently intend to retain our future earnings, if
any, to finance the operation and development of our business. Future dividends,
if any, will be determined by our board of directors and will depend on the
success of our operations, capital needs, financial conditions, contractual
restrictions and other factors that our board of directors considers. See the
section of this prospectus entitled "Description of Indebtedness and Other
Financing Arrangements" for more information.
21
<PAGE> 26
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, the midpoint of the price
range on the cover of this prospectus. The table assumes that the underwriters
do not exercise their over-allotment option 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>
22
<PAGE> 27
DILUTION
As of June 30, 1999, our consolidated net tangible book value was $586.0
million, or $1.27 per share of common stock, based on the expected number of
460,000,000 shares outstanding upon completion of the equity offering and the
concurrent investments. The number of shares outstanding excludes any shares
that may be issued pursuant to the underwriters' over-allotment option, the
issuance of up to 794,857 additional shares that SBC may elect to purchase and
the issuance of shares pursuant to deferred or restricted share awards or option
grants. Consolidated net tangible book value per share represents the total
amount of our consolidated tangible assets, reduced by the amount of total
consolidated liabilities and divided by the number of shares of common stock
outstanding. Tangible assets are defined as our consolidated assets, excluding
intangible assets such as goodwill. After giving effect to the equity offering
and the concurrent investments, after deducting underwriting discounts and
commissions and estimated expenses, the recharacterization of $200 million of
paid-in capital to amounts due to Williams and after application of the net
proceeds from the offerings and the concurrent investments, our net consolidated
tangible book value at June 30, 1999 would have been approximately $1.72
billion, or $3.74 per share. This represents an immediate increase in
consolidated net tangible book value of approximately $2.47 per share to
Williams and an immediate dilution of $18.26 per share to new investors in the
equity offering.
Dilution per share represents the difference between the price per share to
be paid by new investors and the net consolidated tangible book value per share
immediately after the equity offering and the concurrent investments. The
following table illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $22.00
Consolidated net tangible book value before the equity
offering, the concurrent investments and the
recharacterization of $200 million of paid-in capital to
amounts due to Williams................................... 1.27
Consolidated increase per share attributable to new
investors, including the concurrent investments........... 2.47
Adjusted consolidated tangible book value per share after
the equity offering, the concurrent investments and the
recharacterization of $200 million of paid-in capital to
amounts due to Williams................................... 3.74
------
Net consolidated tangible book value dilution per share to
new investors............................................. $18.26
======
</TABLE>
This table does not take into account the issuance of deferred shares or
the exercise of options to be granted at the time of the completion of the
equity offering. See the section of this prospectus entitled "Management -- New
stock-based and incentive plans of our company." If these amounts had been taken
into consideration, assuming the exercise of all options and the receipt of the
full amount of cash consideration, the dilution per share to new investors would
have been reduced by $.29 per share.
The following table sets forth, on a pro forma basis at June 30, 1999, the
number of shares of common stock purchased from us, the total consideration paid
and the average price per share paid by Williams, by SBC, by Intel, by Telefonos
de Mexico and by the new investors purchasing shares of common stock in the
equity offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Williams..................... 395,434,965 86.0% $1,191,161,000 46.4% $ 3.01
SBC, Intel and Telefonos de
Mexico..................... 34,965,035 7.6 725,000,000 28.2 $20.73
Investors in the equity
offering................... 29,600,000 6.4 651,200,000 25.4 $22.00
----------- ----- -------------- -----
Total................... 460,000,000 100.0% $2,567,361,000 100.0% $ 5.58
=========== ===== ============== =====
</TABLE>
23
<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 underwriters'
over-allotment option, 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
24
<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
25
<PAGE> 30
purposes, the 1996 and 1997 consulting, outsourcing and internal
telephone management activities previously performed in our strategic
investments unit that were transferred to our network unit have been
reflected in our network unit's results. See Note 3 to our
consolidated financial statements for more information regarding
segment disclosures.
- Other expense in 1997 included $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.
26
<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>
27
<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>
28
<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>
29
<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
30
<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
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<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.
35
<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.
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<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-
38
<PAGE> 43
denominated $521 million loan from Ericsson Project Finance AB to ATL. ATL had
significant pre-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.
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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.
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."
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<PAGE> 45
Our solutions unit's gross profit increased to $357.9 million in 1998 from
$308.7 million in 1997, while gross margin increased to 26.2% in 1998 from 25.9%
in 1997. Our solutions unit's cost of sales increased $128.4 million, or 15%, to
$1.01 billion in 1998 from $881.1 million in 1997, due primarily to an increase
of $121.4 million arising from an additional four months of combined operations
with Nortel in 1998 as compared to 1997. $49.4 million of the increased costs
are attributable to direct costs associated with new systems and upgrades
revenues and $43.5 million of the increased costs are direct costs associated
with maintenance and customer 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
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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 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
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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 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
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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 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.
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OUR STRATEGIC INVESTMENTS UNIT
Our strategic investments unit's revenues increased $85.5 million, or 65%,
to $218.0 million in 1997 from $132.5 million in 1996, due primarily to
acquisitions which contributed revenues of $80.6 million. Our strategic
investments unit's revenues in 1997 also included revenues from our learning
content business for which, in late 1997, we developed a plan for disposal and
defined as an asset held for sale. As detailed in our consolidated financial
statements, a series of acquisitions were completed in 1996 and 1997 which
expanded our strategic investments unit's product offerings to include satellite
links, audio and video conferencing, closed-circuit video broadcasting for
businesses and advertising distribution.
Our strategic investments unit's gross profit increased to $62.1 million in
1997 from $49.0 million in 1996, while gross margins decreased to 28.5% in 1997
from 37.0% in 1996. Cost of sales increased $72.4 million, or 87%, to $155.9
million in 1997 from $83.5 million in 1996, due primarily to the $68.0 million
impact of the acquired operations.
Our strategic investments unit's selling, general and administrative
expenses increased $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.
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LIQUIDITY AND CAPITAL RESOURCES
Our operations currently do not provide positive cash flow. Accordingly, we
have funded capital expenditures, acquisitions and other cash needs through a
combination of borrowings and capital contributions from Williams as well as
external borrowings when required. After the completion of the offerings, we
plan on financing future cash outlays through internally generated and external
funds without relying on cash advances, credit support or contributions from
Williams. Some amounts denominated in dollars represent amounts actually
denominated in foreign currencies. These amounts have been converted from these
currencies as of recent dates.
HISTORICAL FUNDING SOURCES AND USES
Total cash expended from January 1, 1996 to 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 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.
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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 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 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 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:
- 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
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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."
- Notes offering: Concurrently with the equity offering, we expect to
issue in the notes offering approximately $1.3 billion principal amount
of publicly traded debt securities.
- 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.
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- 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 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 the notes offering, the amount funded by
Williams, our borrowings under our bank facilities and the funds available under
the asset defeasance program that will continue in place following the
completion of the offerings, see the section of this prospectus entitled
"Description of Indebtedness and Other Financing Arrangements."
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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 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.
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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.
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. Additionally, we will have interest rate risk associated with
our permanent credit facility, which we expect will replace our interim credit
facility, as well as the $1.3 billion in notes to be issued at the time of the
equity offering. 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 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
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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.
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.
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We, with Williams, established a plan in 1997 to address Year 2000 issues
relating to the areas of our business that could be impacted by the date and
time change from 1999 to 2000. We are reviewing our products and services as
well as our internal systems in order to identify and modify the products,
services and systems that are date-and time-sensitive. These areas include:
- traditional informational technology
- non-traditional informational technology
- external interfaces with our customers and vendors
Our traditional information technology, or IT, includes our software,
applications, data and related computer hardware equipment, such as mainframe
and personal or midrange computers. Our non-traditional technology, or Non-IT,
includes all computer hardware, network hardware, plant equipment and other
embedded items that contain date-sensitive code. Examples of Non-IT include
elevator control systems, card key access systems and telecommunications
equipment.
Also in 1997, Williams established a Year 2000 committee to oversee
management and execution of the plan. The Year 2000 issue is being addressed in
the following phases:
- awareness
- inventory and assessment
- renovation and replacement
- testing and validation
The initial phase, awareness, is a continuing process intended to heighten
awareness of Year 2000 issues both within our company and among our customers.
We have completed the inventory and assessment phase. During this phase, we
inventoried and classified all systems with possible Year 2000 implications into
the following categories:
- highest, compliance is business critical
- high, compliance necessary within a short period of time following
January 1, 2000
- medium, compliance necessary within 30 days from January 1, 2000
- low, compliance desirable but not required
- unnecessary
We designated the first three categories above as critical and as our major
focus. Critical systems are systems that directly support customer systems and
applications for our products and services customer base. Examples of critical
systems include our solutions unit's "SIMS" database which holds our solutions
unit's customer records and our network unit's provisioning and ordering
fulfillment system.
We split the inventory and assessment phase into two categories, IT and
Non-IT. We hired an external contractor as a consultant to provide support
services for the IT assessment. Third-party software information was compared
with the contractor's master product compliance database to determine Year 2000
compliance status. Vendors were contacted for software not found in this master
database. The systems identified in the assessment phase included all date-and
time-sensitive hardware and embedded items. The Non-IT assessment was developed
to ensure that all computer hardware, network hardware and plant equipment
continues to operate without interruption up to and beyond the rollover to the
year 2000. The systems identified in the assessment included both manned sites
and unmanned network sites as well as other Non-IT systems.
For the testing and validation phases, a Year 2000 test lab capable of
testing almost any software is in place and operational. As of August 31, 1999,
all critical IT and Non-IT systems
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have been fully tested or otherwise validated as compliant. An example of
another way a system is validated as compliant is when a business process is
determined not to be date- and time-sensitive. 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.
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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 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
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a failure would likely lead to lost revenues, increased operations costs, loss
of customers or other business interruptions of a material nature, in addition
to potential claims including mismanagement, misrepresentation or breach of
contract.
CONTINGENCY PLANS
We began initial contingency planning during 1998 and significant focus on
that phase of the project is taking place in 1999. Guidelines for that process
were issued in January 1999 in the form of a formal business continuity plan. An
external contractor is working within each business unit to review existing
business continuity plans and to modify these plans to include Year 2000
contingency plans for the critical business processes, critical business
partners, suppliers and system replacements that may experience significant
delays.
Our Year 2000 contingency plan methodology is as follows:
- assess each business process for business risk and potential need for
contingency plans
- create business process contingency plans as needed based on the risk
analysis
- test the completed plans, evaluate the test results and revise plans
accordingly
- store completed plans both on-site and off-site
- maintain plan copies at the appropriate Year 2000 offices
- review and modify contingency plans as part of an ongoing change
management process
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 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
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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.
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.
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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.
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.
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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 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
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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.
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
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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. 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.
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- 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 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
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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.
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Monitoring. We monitor the Williams network 24 hours a day, seven days a
week from our network management centers in Tulsa, Oklahoma and St. Louis,
Missouri. Each network management center provides centralized network
surveillance, troubleshooting and customer service. The system currently allows
our technicians to detect a component malfunction in the Williams network,
quickly reroute the customer's traffic to an available alternate path and effect
an expedited repair. Upon completion of the Williams network, the rerouting
function will be fully automated and nearly instantaneous so that customers will
not experience any disruptions in service quality. We expect this will reduce
service costs and customer downtime. We have also implemented a program which
encourages people to phone a toll-free number prior to breaking ground, backed
up by Williams' "call before you dig" group to reduce the risk of damage to our
conduit or fiber system. Additionally, we place above-ground markers at frequent
intervals along the route of the Williams network.
PRODUCTS AND SERVICES
Our network products and services fall into seven categories:
- packet-based data services
- private line services
- voice services
- local services
- dark fiber and conduit 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
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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 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
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increase our volume of business and provide additional customers for our network
and solutions units. We do not believe these alliances and investments will
adversely impact our relationships with our other customers. For more
information about our strategic alliances, see "-- Strategic alliances" below.
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
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older systems operated by these carriers generally face disadvantages when
compared to the Williams network, such as:
- lower transmission speeds
- lower overall capacity
- more costly maintenance requirements
- inefficiency due to design and competing traffic requirements
- greater susceptibility to systems interruption from physical damage to
the network infrastructure
Many older systems will face greater difficulty in upgrading to more
advanced fiber due to lack of a spare conduit. We are aware that other
competitors may employ advanced technology that is similar to that of the
Williams network. Additional capacity that is expected to be available over the
next several years from competitors may cause significant decreases in prices
overall.
The prices we can charge our customers for transmission capacity on the
Williams network could decline due to installation by us and our competitors,
some of which are expanding 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
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providers, including some of our network's customers. In April 1997, we
purchased Nortel's equipment distribution business, which we then combined with
our equipment distribution business to create Williams Communications Solutions,
LLC. We own 70% of Solutions LLC and Nortel owns the remaining 30%. Our
solutions unit consists primarily of Solutions LLC.
Our broad range of voice and data solutions allows us to serve as a
single-source provider for our customers' communications needs. We distribute
the products and services of a number of communications suppliers, primarily
Nortel, as well as Cisco, Octel (a division of Lucent), NEC, 3COM, Bell
Atlantic, SBC and U S WEST, and are therefore able to provide our customers with
multiple options. By offering equipment from a variety of vendors, we help
businesses optimize the productivity and reduce the cost of their communications
systems. We have expertise in the most complex network technologies to ensure
that products from various suppliers operate together effectively.
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
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100,000 customer sites. Our nationwide presence allows us to better serve
multi-location customers and makes us a very attractive partner for
leading communications equipment and service providers. Our large,
installed customer base provides us and leading communications equipment
and service providers with an existing market to sell new products and
services.
- Extend the reach of our network unit's carrier customers. We are able to
distribute the products and services of our network unit's customers to
our solutions unit's customer base. We are currently using our solutions
unit's 1,200 sales personnel to sell Concentric's Internet services and
UniDial's long distance services. In addition, we have agreed to offer
SBC's network services as they are made available to us. We believe that
our ability to extend the reach of our network unit's carrier customers
provides our network unit with a valuable point of differentiation.
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
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of services and equipment from us prior to December 1, 2002. Through at least
2007 and for so long as we own at least 5% of Concentric's common stock, we are
Concentric's preferred provider of communications equipment and long distance
multimedia network services. As a preferred provider, we retain a right of last
refusal to provide these services so long as the equipment and services are
competitive to the market in technology and price. During this period,
Concentric must first try to buy all services and equipment it requires from us
if we provide the products Concentric requires. Our solutions unit has also
entered into an agreement with Concentric which provides that we will market and
resell Concentric's telecommunications services in the U.S. Our investment in
Concentric allows us to better understand the requirements of Internet service
providers so that we can scale these service offerings to better serve our
customers. We are discussing with Concentric an expansion of our commercial
relationship but such discussions are in preliminary stages.
UniDial. UniDial Communications, Inc. is a reseller of long distance and
other communications products, including frame relay, Internet and conferencing
services. In October 1998, we purchased shares of preferred stock of UniDial for
$27 million. Dividends accrue at the rate of 10% per annum beginning October 1,
1999. The shares are convertible into common stock under certain circumstances,
with our resulting percentage being subject to various formulas and timing
restrictions. We currently estimate that our preferred stock would convert into
approximately 12% of UniDial's common stock. We entered into an agreement with
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
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stadium seats which provide access to statistics, different views of the field,
player- and venue-related information and access to current information from
other sports events.
INTERNATIONAL
On May 27, 1999, Williams contributed to us interests in communications
ventures in Brazil (ATL), Australia (PowerTel) and Chile (MetroCom). We are
responsible for any capital or other commitments which Williams had related to
these interests. Williams has granted us an option to acquire its interest in a
holding company whose subsidiaries are communications service providers in
Brazil (Algar 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
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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.
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 set forth on the cover page of this prospectus, 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'
over-allotment option is exercised in full) and approximately $11.3 million if
SBC's initial investment is $500 million ($16.5 million if the underwriters'
over-allotment option is exercised 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
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- SBC also has registration rights in connection with its holdings
We have a call option to purchase all the shares of the common stock
acquired by SBC under the securities purchase agreement in the event of the
termination of certain agreements with SBC. Williams, so long as it has a 50%
interest in our common stock, has a right of first purchase with respect to any
shares of our common stock that SBC should decide to offer. We also have a right
of first purchase with respect to any shares of common stock not purchased by
Williams.
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.
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
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- 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.
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
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- 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.
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
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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 of this prospectus
entitled "Description of Indebtedness and Other Financing Arrangements -- Asset
defeasance program."
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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 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
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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 STOCKHOLDERS
We intend to furnish to our stockholders annual reports containing audited
financial statements examined by our independent auditors and quarterly reports
containing unaudited financial statements for each of the first three quarters
of each fiscal year.
REGULATION
GENERAL REGULATORY ENVIRONMENT
We are subject to federal, state and local regulations that affect our
product offerings, competition, demand, costs and other aspects of our
operations. Federal laws and regulations generally apply to interstate
telecommunications, including international telecommunications that originate or
terminate in the United States, while state laws and regulations apply to
telecommunications terminating within the state of origination. The regulation
of the telecommunications industry is changing rapidly, and varies from state to
state. Our operations are also subject to a variety of environmental, safety,
health and other governmental regulations. We cannot guarantee that future
regulatory, judicial or legislative activities will not have a material adverse
effect on us, or that domestic or international regulators or third parties will
not raise material issues with regard to our compliance or noncompliance with
applicable regulations.
The Telecommunications Act seeks to promote competition in local and long
distance telecommunications services, including by allowing entities affiliated
with power utilities entry into providing telecommunications services and by
allowing GTE and, subject to certain limitations and conditions, the regional
Bell operating companies' entry into providing long distance services. We
believe that the regional Bell operating companies' and other companies' entry
into providing long distance services will provide opportunities for us to sell
fiber or lease high-volume long distance capacity.
The Telecommunications Act allows a regional Bell operating company to
provide long distance services originating outside its traditional exchange
service area or from mobile services, and to own 10% or less of the equity of a
long distance carrier operating in its traditional service area. In addition,
Section 271 of the Telecommunications Act allows a regional Bell operating
company to provide long distance services originating in a state in its
traditional exchange service area if it satisfies several procedural and
substantive requirements. These include obtaining FCC approval upon a showing
that the regional Bell operating company has entered into, or under some
circumstances has offered to enter into, interconnection agreements which
satisfy a 14-point "checklist" of competitive requirements. On February 22,
1999, the United States Supreme Court issued an order confirming the FCC's
authority to adopt requirements for compliance with the checklist. This order
reversed an earlier decision by the U.S. Court of Appeals for the Eighth Circuit
that required the FCC to defer to state determinations as to certain elements of
the checklist. To date, the FCC has not granted any petitions by regional Bell
operating companies for entry and has denied several of these petitions. We
expect that additional petitions for entry will be filed, and that the regional
Bell operating companies will obtain approval to provide long distance services
in some states within the next two years.
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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 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
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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 Inc. and PageNet
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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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<PAGE> 114
stock at the same time and at the same rate as dividends paid to
stockholders generally. Each individual will have the right to receive
deferred shares of our common stock in exchange for deferred shares of
Williams common stock as described in "-- New stock-based and incentive
plans of our company -- Treatment of specified Williams stock awards" below.
(3) Adjusted to reflect stock splits.
(4) Amounts reported in this column represent the value of contributions made by
Williams to defined contribution pension plans, on behalf of each of our
executive officers named in the table.
(5) This amount includes a Williams deferred stock award of 80,000 shares
granted for retention purposes on May 21, 1998 under The Williams Companies,
Inc. 1996 stock plan. 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
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<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 Williams Companies,
Inc. 1996 stock plan. If all of the eligible employees were to exercise their
rights to exchange existing Williams awards for deferred shares or options to
purchase our
117
<PAGE> 122
common stock, we would issue approximately 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. Employees who participate in certain 401(k) plans
will have the option to execute this purchase through the 401(k) plan. Up to
7.0% of the common stock constituting the equity offering will be available for
purchase under this program, with no more than 0.7% of the common stock
constituting the equity offering to be available for purchase under this program
by independent directors of our company and Williams or our suppliers and
customers. See the section of this prospectus entitled "Underwriting" for more
information.
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 the issuance of any shares of our common stock upon exercise of
the underwriters' over-allotment option.
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<PAGE> 123
<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' over-allotment option is
exercised 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' over-allotment option is exercised 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 8/24/99
- ---- -------- ------------- -------------- --------------
<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 8/24/99
- ---- -------- ------------- -------------- --------------
<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. 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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<PAGE> 128
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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<PAGE> 130
- 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 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 or us. The administrative services
agreement would be automatically renewed for additional
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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.
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
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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 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
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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.
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions of our capital
stock. For a more detailed description, see our restated certificate of
incorporation and by-laws, copies of which we have filed as exhibits to the
registration statement, and the applicable provisions of Delaware law.
Immediately prior to the closing of the equity offering, we will restate
our certificate of incorporation to change our authorized capital stock to
1,000,000,000 shares of Class A common stock (which we refer to as common stock
in this prospectus), 500,000,000 shares of Class B common stock and 500,000,000
shares of preferred stock, par value $0.01 per share, and to convert all 1,000
outstanding shares of our current common stock into a total of 395,434,965
shares of our newly created Class B common stock.
COMMON STOCK AND CLASS B COMMON STOCK
GENERAL
The holders of common stock and Class B common stock have identical rights
except with respect to voting, conversion and transfer.
VOTING RIGHTS
Holders of our common stock are entitled to one vote per share on all
matters to be voted on by stockholders, while holders of Class B common stock
are entitled to ten votes per share. Holders of shares of common stock and Class
B common stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority of the votes entitled to be cast by all holders of common
stock and Class B common stock present in person or represented by proxy, voting
together as a single class, subject to any voting rights granted to holders of
any preferred stock. Except as otherwise provided by law or in our restated
certificate of incorporation, and subject to any voting rights granted to
holders of any outstanding preferred stock, amendments to our restated
certificate of incorporation must be approved by a majority of the votes
entitled to be cast by all holders of common stock and Class B common stock
present in person or represented by proxy, voting together as a single class.
However, amendments to our restated certificate of incorporation that would
alter or change the powers, preferences or special rights of the common stock so
as to affect them adversely also must be approved by a majority of the votes
entitled to be cast by the holders of the common stock, voting as a separate
class. Any amendment to our restated certificate of incorporation to increase
the authorized shares of any class requires the approval only of a majority of
the votes entitled to be cast by all holders of common stock and Class B common
stock present in person or represented by proxy, voting together as a single
class, subject to the rights set forth in any series of preferred stock created
as described below.
DIVIDENDS
Holders of our common stock and Class B common stock will share equally on
a per share basis in any dividend declared by the board of directors, subject to
any preferential rights of any outstanding preferred stock. Dividends consisting
of shares of common stock and Class B common stock may be paid only as follows:
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(a) shares of common stock may be paid only to holders of common stock, and
shares of Class B common stock may be paid only to holders of Class B common
stock; and
(b) the number of shares so paid will be equal on a per share basis with
respect to each outstanding share of common stock and Class B common stock.
We may not split, reclassify, subdivide or combine shares of either class
of common stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class.
ISSUANCE OF CLASS B COMMON STOCK, OPTIONS OR WARRANTS
Subject to certain provisions regarding dividends and other distributions
described above and except for payment of the purchase price for the Algar
option, we will not be entitled to issue additional shares of Class B common
stock, or issue options, rights or warrants to subscribe for additional shares
of Class B common stock, except that we may make a pro rata offer to all holders
of common stock of rights to purchase additional shares of the class of common
stock held by them. The common stock and the Class B common stock will be
treated equally with respect to any offer we make to holders of common stock of
options, rights or warrants to subscribe for any of our other capital stock.
MERGER OR CONSOLIDATION
In the event of a merger or consolidation, the holders of common stock and
Class B common stock will be entitled to receive the same per share
consideration, if any, except that if the consideration includes voting
securities, or the right to acquire voting securities or securities exchangeable
for, or convertible into, voting securities, we may, but are not required to,
provide for the holders of Class B common stock to receive consideration
entitling them to ten times the number of votes per share as the consideration
being received by holders of the common stock.
CONVERSION OF CLASS B COMMON STOCK
Our Class B common stock will be convertible into common stock on a
share-for-share basis at the option of the holder at any time, or automatically
upon transfer to a person or entity which is not a permitted transferee. In
general, permitted transferees will include Williams, its direct and indirect
subsidiaries, any person or entity in which Williams or any successor
beneficially owns, directly or indirectly, at least 50% of the equity or the
voting securities, any successor of any of the foregoing and stockholders of
Williams who receive our Class B common stock in a tax-free spin-off. A tax-free
spin-off generally means a transaction in which stockholders of Williams receive
shares of our common stock or Class B common stock as a distribution with
respect to, or in exchange for, stock of Williams without being required to
recognize gain or loss for federal income tax purposes by reason of Section 355
of the Code (or any corresponding provision of any successor statute). Following
any distribution of Class B common stock to stockholders of Williams, shares of
Class B common stock will no longer be convertible into shares of common stock.
Shares of Class B common stock transferred to stockholders of Williams in a
tax-free spin-off will not be converted into shares of common stock and,
following a tax-free spin-off, shares of Class B common stock will be
transferable as Class B common stock, subject to applicable laws.
PREFERRED STOCK
Our board of directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, and the board of directors may fix the numbers of shares of each series
and the designation, powers, privileges,
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preferences and rights and the qualifications, limitations and restrictions of
the shares of each series.
The specific matters that our board of directors may determine include the
following:
- the designation of each series
- the number of shares of each series
- the rate of any dividends
- whether any dividends shall be cumulative or non-cumulative
- the terms of any redemption
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of our company
- rights and terms of any conversion or exchange
- restrictions on the issuance of shares of the same series or any other
series
- any voting rights
The Series A preferred stock described below under "-- Stockholder rights
plan" is a series of preferred stock that has been authorized by our board.
Although no shares of preferred stock are currently outstanding and we have
no current plans to issue preferred stock, the issuance of shares of preferred
stock, or the issuance of rights to purchase shares of preferred stock, could be
used to discourage an unsolicited acquisition proposal. For example, a business
combination could be impeded by issuing a series of preferred stock containing
class voting rights that would enable the holder or holders of this series to
block such a transaction. Alternatively, a business combination could be
facilitated by issuing a series of preferred stock having sufficient voting
rights to provide a required percentage vote of the stockholders. In addition,
under certain circumstances, the issuance of preferred stock could adversely
affect the voting power and other rights of the holders of the common stock.
Although our board is required to make any determination to issue any preferred
stock based on its judgment as to the best interests of our stockholders, it
could act in a manner that would discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be in
their best interests or in which stockholders might receive a premium for their
stock over prevailing market prices of the stock. Our board does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or applicable stock exchange
requirements.
LIMITATION ON LIABILITY OF DIRECTORS
Our restated certificate of incorporation provides, as authorized by
Section 102(b)(7) of the Delaware General Corporation Law, that our directors
will not be personally liable to us or our stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability imposed by law, as
in effect from time to time, for the following:
- any breach of the director's duty of loyalty to our company or our
stockholders
- any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL
- any transaction from which the director derived an improper personal
benefit
The inclusion of this provision in our restated certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against our directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their
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duty of care, even though such an action, if successful, might otherwise have
benefitted our company and our stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are a Delaware corporation and subject to Section 203 of the DGCL.
Generally, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the time a stockholder became an interested stockholder
unless, as described below, certain conditions are satisfied. Thus, it may make
acquisition of control of our company more difficult. See "-- Limitations on
changes of control of our company" below. The prohibitions in Section 203 of the
DGCL do not apply if the following occur:
- prior to the time the stockholder became an interested stockholder, our
board of directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of our company outstanding at the time the
transaction commenced
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by our board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder
Under Section 203 of the DGCL, a business combination includes the
following:
- any merger or consolidation of our company with the interested
stockholder
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of our company, to or with the interested stockholder of
assets of our company having an aggregate market value equal to 10% or
more of either the aggregate market value of all the assets of our
company or the aggregate market value of all the outstanding stock of our
company
- certain transactions resulting in the issuance or transfer by our company
of our stock to the interested stockholder
- certain transactions involving our company which have the effect of
increasing the proportionate share of the stock of any class or series of
our company which is owned by the interested stockholder
- certain transactions in which the interested stockholder receives
financial benefits provided by us
Under Section 203 of the DGCL, an interested stockholder generally is one
of the following:
- any person that owns 15% or more of the outstanding voting stock of our
company
- any person that is an affiliate or associate of our company and was the
owner of 15% or more of the outstanding voting stock of our company at
any time within the three-year period prior to the date on which it is
sought to be determined whether that person is an interested stockholder
- the affiliates or associates of that person
Because Williams will own more than 15% of our voting stock before we
become a public company and upon completion of the equity offering, Section 203
of the DGCL by its terms is currently not applicable to business combinations
with Williams even though Williams owns 15% or more of our outstanding stock. If
any other person acquires 15% or more of our outstanding stock, that person will
be subject to the provisions of Section 203 of the DGCL.
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PROVISIONS OF OUR RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
Our by-laws contain provisions requiring that advance notice be delivered
to us of any business to be brought by a stockholder before an annual or special
meeting of stockholders and providing for certain procedures to be followed by
stockholders in nominating persons for election to our board. Generally, these
advance notice provisions require that the stockholder must give written notice
to the secretary of our company:
- in the case of an annual meeting, not less than 90 days nor more than 120
days before the first anniversary of the preceding year's annual meeting
of stockholders
- in the case of a special meeting, not less than 90 days, or, if later, 10
days after the first public announcement of the date of the special
meeting, nor more than 120 days prior to the scheduled date of such
special meeting
In each case, the notice must set forth specific information regarding the
stockholder giving the notice and each director nominee or other business
proposed by the stockholder, as applicable, as provided in our by-laws.
Notwithstanding the foregoing, any stockholder, including Williams, who together
with its affiliates owns capital stock entitled to exercise a majority of the
voting power in an election of directors, may nominate one or more individuals
for election as directors by giving notice to our company not later than five
days before the scheduled date for the election of directors. Generally, only
business set forth in the notice for a special meeting of stockholders may be
conducted at a special meeting.
Our by-laws provide, in accordance with our restated certificate of
incorporation, that except as may be provided in connection with the issuance of
any series of preferred stock, the number of directors shall be fixed from time
to time exclusively pursuant to a resolution adopted by a majority of the whole
board, as that term is defined in our restated certificate of incorporation. Our
restated certificate of incorporation provides for a classified board of
directors, consisting of three classes as nearly equal in size as practicable.
Each class holds office until the third annual stockholders' meeting for
election of directors following the most recent election of that class, except
that the initial terms of the three classes expire in 2000, 2001 and 2002. See
the section of the prospectus entitled "Management -- Our directors" for more
information.
Subject to the rights of the holders of any series of preferred stock to
elect and remove additional directors under specified circumstances, on or after
the time when Williams and its affiliates own less than 50% of the voting power
of our then-outstanding capital stock, a director of our company may be removed
only for cause by affirmative vote of the holders of at least a majority of the
voting power of all of our outstanding shares generally entitled to vote in the
election of directors, voting together as a single class, and vacancies on our
board may only be filled by the affirmative vote of a majority of the remaining
directors. Prior to the time when Williams and its affiliates own less than 50%
of our then-outstanding capital stock, subject to the rights of holders of any
series of preferred stock, a director of our company may be removed, with or
without cause, by the affirmative vote of the holders of at least a majority of
the voting power of all voting stock then outstanding, voting together as a
single class, and vacancies on our board may be filled only by the affirmative
vote of at least 80% of the remaining directors then in office.
Our restated certificate of incorporation provides that, on or after the
time when Williams and its affiliates own less than 50% of our then-outstanding
capital stock, stockholders may not act by written consent in lieu of a meeting.
On or after the time when Williams and its affiliates own less than 50% of our
then-outstanding capital stock, special meetings of the stockholders may be
called only by a majority of the whole board, but may not be called by
stockholders. Before the time when Williams and its affiliates own less than 50%
of our then-outstanding
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capital stock, the secretary of our company is required to call a special
meeting of the stockholders at the request of Williams or its affiliates and
stockholder action may be taken by written consent in lieu of a meeting.
In general, our by-laws may be altered or repealed and new by-laws adopted
by the holders of a majority of the voting stock or by a majority of the whole
board. However, certain provisions, including those relating to the limitation
of actions by stockholders taken by written consent, the calling of special
stockholder meetings, other stockholder actions and proposals and certain
matters related to our board, may be amended only by the affirmative vote of
holders of at least 80% of the total voting stock.
LIMITATIONS ON CHANGES OF CONTROL OF OUR COMPANY
The provisions of our restated certificate of incorporation and by-laws
described above, as well as the stockholder rights plan described below and the
provisions of Section 203 of the DGCL, could have the following effects, among
others:
- delaying, deferring or preventing a change in control
- delaying, deferring or preventing the removal of existing management
- deterring potential acquirors from making an offer to our stockholders
- limiting any opportunity of our stockholders to realize premiums over
prevailing market prices of our common stock in connection with offers by
potential acquirors
Any of the above could occur, notwithstanding that a majority of our
stockholders might benefit from such a change in control or offer.
TRANSACTIONS AND CORPORATE OPPORTUNITIES
Our restated certificate of incorporation includes provisions which
regulate and define the conduct of certain business and affairs of our company
from the time of the completion of the equity offering until the time Williams
ceases to be a significant stockholder of our company. These provisions serve to
determine and delineate the respective rights and duties of our company,
Williams, and some of our directors and officers in anticipation of the
following:
- directors, officers and/or employees of Williams may serve as directors
of our company
- Williams may engage in lines of business that are the same, similar or
related to, overlap or compete with our lines of business, subject to the
separation agreement
- our company and Williams will engage in material business transactions,
including pursuant to the various agreements described above
Our company may, from time to time, enter into and perform agreements with
Williams to engage in any transaction, and to agree to compete or not to compete
with each other, including to allocate, or to cause their respective directors,
officers and employees to allocate, corporate opportunities between themselves.
Our restated certificate of incorporation provides that no such agreement, or
its performance, shall be considered contrary to any fiduciary duty of Williams,
as the controlling stockholder of our company, or of any such director, officer
and/or employee, if any of the following conditions are satisfied:
- the agreement was entered into before our company ceased to be a
wholly-owned subsidiary of Williams and is continued in effect after this
time
- the agreement or transaction was approved, after being made aware of the
material facts of the relationship between our company and Williams and
the material terms and facts of the agreement or transaction, by:
- our board, by affirmative vote of a majority of directors who are not
interested persons
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- by a committee of our board consisting of members who are not
interested persons, by affirmative vote of a majority of those members
- by one or more of our officers or employees who is not an interested
person and who was authorized by our board or a board committee as
specified above or, in the case of an employee, to whom authority has
been delegated by an officer to whom the authority to approve such an
action has been so delegated
- the agreement or transaction was fair to our company as of the time it
was entered into by our company
- the agreement or transaction was approved by affirmative vote of a
majority of the shares of capital stock entitled to vote and who do vote
on the agreement or transaction, excluding Williams and any interested
person in respect of such agreement or transaction
For purposes of these provisions, an interested person is generally an
individual who has a personal financial interest in the relevant transaction.
The provisions of our restated certificate of incorporation with regard to
such transactions and/or corporate opportunities shall terminate when Williams,
together with its affiliates, ceases to be the owner of voting stock
representing 25% or more of the votes entitled to be cast by the holders of all
the then outstanding voting stock; provided, however, that the termination shall
not terminate the effect of these provisions with respect to any agreement
between our company and Williams that was entered into before the time of
termination or any transaction entered into in the performance of such
agreement, whether entered into before or after such time, or any transaction
entered into between our company and Williams or the allocation of any
opportunity between them before such time. These provisions do not alter the
fiduciary duty of loyalty of our directors under applicable Delaware law. By
becoming a stockholder in our company, you will be deemed to have notice of and
have consented to these provisions of our restated certificate of incorporation,
except to the extent that any of these provisions are inconsistent with Delaware
law or the fiduciary duties of our directors.
LISTING
Our common stock has been approved for listing on the New York Stock
Exchange under the symbol "WCG," subject to official notice of issuance.
TRANSFER AGENT
Our transfer agent and registrar for our common stock is The Bank of New
York.
STOCKHOLDER RIGHTS PLAN
Our board has adopted a stockholder rights plan. Pursuant to the rights
plan, one right will be issued and attached to each outstanding share of capital
stock. Each right will entitle the holder, in circumstances described below, to
purchase from our company a unit consisting of one one-hundredth of a share of
Series A junior preferred stock, par value $0.01 per share, at an exercise price
of $100 per right, subject to adjustment in certain events.
Initially, the rights will be attached to all certificates representing
outstanding shares of capital stock and will be transferred with and only with
these certificates. The rights will become exercisable and separately
certificated only upon the distribution date, which will occur upon the earlier
of the following:
- ten business days following a public announcement that a person or group
other than certain exempt persons has acquired or obtained the right to
acquire beneficial ownership of 15% or more of the shares of common stock
then outstanding
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- ten business days, or later if determined by our board prior to any
person acquiring 15% or more of the shares of common stock then
outstanding, following the commencement or announcement of an intention
to commence a tender offer or exchange offer that would result in a
person or group becoming an acquiring person
As soon as practicable after the distribution date, certificates will be
mailed to holders of record of capital stock as of the close of business on the
distribution date. From and after the distribution date, the separate
certificates alone will represent the rights. Prior to the distribution date,
all shares of capital stock issued will be issued with rights. Shares of capital
stock issued after the distribution date will not be issued with rights, except
that shares issued pursuant to any of the following that exist prior to the
distribution date may be issued with rights:
- the exercise of stock options that exist prior to the distribution date
- under employee plans or arrangements that exist prior to the distribution
date
- upon exercise, conversion or exchange of certain securities
- in other cases as may be deemed appropriate by our board
The final expiration date of the rights will be at the close of business on
June 30, 2009, unless earlier redeemed or exchanged by us as described below.
In the event that a person acquires 15% or more of the shares of common
stock then outstanding, except pursuant to any action or transaction approved by
our board before the person acquires 15% or more of the shares of common stock
then outstanding, each holder of a right other than that person and certain
related parties, whose rights will automatically become null and void, will
thereafter be entitled to receive, upon exercise of the right, a number of
shares of common stock, or, in certain circumstances, cash, property or other
securities of our company, having a current market price averaged over the
previous 30 consecutive trading days equal to two times the exercise price of
the right.
In the event that, at any time on or after a person acquires 15% or more of
the shares of common stock then outstanding, our company effects a merger or
other business combination in which it is not the surviving entity, or any
shares of our capital stock are changed into or exchanged for other securities,
or 50% or more of its assets, cash flow or earning power is sold or transferred,
then each holder of a right, except rights owned by any person who has acquired
15% or more of the shares of common stock then outstanding or certain related
parties, which will have become void as set forth above, shall thereafter have
the right to receive, upon exercise, a number of shares of common stock of the
acquiring company having a fair market value equal to two times the exercise
price of the right.
The exercise price payable, and the number of units of Series A preferred
stock, shares of capital stock or other securities or property issuable, upon
exercise of the rights are subject to adjustment from time to time to prevent
dilution in the event of a stock dividend or distribution on the capital stock,
a grant or distribution to holders of the capital stock of certain subscription
rights, warrants, evidence of indebtedness, cash or other assets, or other
similar events.
No fractional units will be issued. In lieu thereof, an adjustment in cash
will be made based on the market price of the common stock on the last trading
date prior to the date of exercise. Pursuant to the rights plan, we reserve the
right to require prior to the occurrence of one of the events that triggers the
ability to exercise the rights that, upon any exercise of rights, a number of
rights be exercised so that only whole shares of Series A preferred stock will
be issued.
We will also have the option, at any time after a person acquires 15% or
more of our capital stock as described above on and before that person becomes,
or simultaneously with that person
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becoming, the beneficial owner of 50% or more or the shares of rights plan
voting stock then outstanding, to exchange the rights, other than rights owned
by an acquiring person or certain related parties, which will have become void,
in whole or in part, at an exchange ratio of one share of capital stock, and/or
other equity securities deemed to have the same value as one share of capital
stock, per right, subject to adjustment.
At any time prior to the close of business on the tenth business day
following the stock acquisition date, our company, by vote of a majority of our
board, may redeem the rights in whole, but not in part, at a price of $0.01 per
right, payable, at our option, in cash, shares of capital stock or such other
consideration as our board may determine. The rights will terminate at the time
so designated by our board and thereafter the only right of the holders of
rights will be to receive the redemption price.
For as long as the rights are redeemable, our company may, except with
respect to the redemption price, amend the rights plan in any manner, including
to extend the time period in which the rights may be redeemed. After the time
the rights cease to be redeemable, we may amend the rights in any manner that
does not materially adversely affect the interests of holders of the rights as
such. Until a right is exercised, the holder, as such, will have no rights as a
stockholder of our company, including the right to vote or to receive dividends.
Our restated certificate of designations of the Series A preferred stock
provides that each share of Series A preferred stock that may be issued upon
exercise of the rights will be entitled to receive, when, as and if declared,
cash and non-cash dividends equal to:
- a dividend multiple of 100 times the aggregate per share amount of all
cash and non-cash dividends declared or paid on the common stock, subject
to adjustments for stock splits or dividends payable in common stock or
reclassifications of common stock
- preferential quarterly cash dividends of $.01 per share, less any
dividends received
Holders of Series A preferred stock will have a vote multiple of 100 votes
per share, subject to adjustments for stock splits or dividends payable in
common stock or reclassifications of common stock and, except as otherwise
provided by the certificate of designations, our restated certificate of
incorporation or applicable law, shall vote together with holders of capital
stock as a single class. In the event that the preferential quarterly cash
dividends are in arrears for six or more quarterly dividend payment periods,
holders of Series A preferred stock will have the right to elect two additional
members to our board, to serve until the next annual meeting of our company or
until such earlier time as all accrued and unpaid preferential quarterly cash
dividends are paid in full.
In the event of the liquidation, dissolution or winding up of our company,
after provision for liabilities and any preferential amounts payable with
respect to any preferred stock ranking senior to the Series A preferred stock,
the holders of any Series A preferred stock will be entitled to receive
liquidation payments per share in an amount equal to the greater of the
following:
- $100.00 plus an amount equal to accrued and unpaid dividends and
distributions thereon to the date of payment
- a liquidation multiple of 100 times the aggregate amount to be
distributed per share to holders of capital stock, subject to adjustments
for stock splits or dividends payable in common stock or
reclassifications of common stock
The rights of the Series A preferred stock as to dividends, voting and
liquidation are protected by antidilution provisions.
In the event of a consolidation, merger or other transaction in which the
shares of capital stock are exchanged, holders of shares of Series A preferred
stock will be entitled to receive the
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amount and type of consideration equal to the per share amount received by the
holders of the capital stock, multiplied by the highest of the dividend
multiple, the vote multiple or the liquidation multiple as in effect immediately
prior to the event.
Except for the acquisition of shares of Series A preferred stock in any
other manner permitted by law, our certificate of designations or our restated
certificate of incorporation, the shares of Series A preferred stock are not
redeemable at the option of our company or any holder thereof.
The rights will have certain anti-takeover effects. The rights will cause
substantial dilution to any person or group that attempts to acquire our company
without the approval of our board. As a result, the overall effect of the rights
may be to render more difficult or discourage any attempt to acquire our
company, even if such acquisition may be in the interest of our stockholders.
Because our board can redeem the rights or approve a permitted offer, the rights
will not interfere with a merger or other business combination approved by our
board.
The rights plan excludes Williams and its affiliates and associates from
being considered acquiring persons until Williams first ceases to beneficially
own 15% or more of the rights plan voting stock then outstanding.
DESCRIPTION OF INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS
The following are summaries of the material provisions of our debt
agreements, copies of which we have filed as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable law. See the section of this prospectus entitled "Where You Can Find
Additional Information" for more information.
NOTES
GENERAL
The notes are to be issued under an indenture, to be dated as of
____________, 1999, between us and The Bank of New York, as trustee. The notes
are general unsecured senior obligations of ours, and will rank on a parity with
all our other unsecured senior indebtedness.
The notes will be limited to $1.3 billion aggregate principal amount and
will mature on ____________ , 200_. Interest on the notes will be payable on
____________ and ____________ of each year, commencing ____________ at the rate
of ____% per annum. Prior to ____________, 200_, we may redeem all or part of
the notes at any time at a make-whole price. 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. In addition, any time or from time to time
prior to ____, 2002, we may redeem up to 35% of the aggregate principal amount
of the notes at a redemption price equal to ______% of the principal amount of
the notes so redeemed, with the net cash proceeds of one or more offerings of
common stock as described in the indenture. The notes will also be redeemable,
at our option, in whole or in part, at any time after ____________, 200__, at
redemption prices starting at ____% of their principal amount and declining to
100% of their principal amount on or after ____________, plus accrued and unpaid
interest. Upon a change of control of our company, each note holder will have
the right to require us to purchase that holder's notes.
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COVENANTS
The indenture contains certain restrictive covenants, including, among
others, the following:
- a limitation on our ability and that of our subsidiaries to incur
indebtedness
- a limitation on our ability and that of our subsidiaries to, directly or
indirectly, make certain payments, including payment of dividends,
prepayment of subordinated indebtedness, the repurchase of capital stock
and making of investments
- a limitation on our ability to allow to exist certain dividend and other
payment restrictions affecting our subsidiaries
- a limitation on our ability to sell or to permit any subsidiary to issue
or sell capital stock of a subsidiary
- a limitation on our ability and that of our subsidiaries to consummate
certain asset dispositions unless certain conditions are fulfilled
- limitations on transactions with affiliates
- limitations on our ability and that of our subsidiaries to incur liens
In addition, the indenture limits our ability to merge with or to transfer
all or substantially all of our assets to another person. Except as set forth
above, the indenture does not contain any material quantitative financial
requirements. The notes provide for acceleration upon customary events of
default.
As of the date of the indenture, all of our subsidiaries will be subject to
the restrictive covenants described above. However, if we meet certain
conditions, we have the ability to designate subsidiaries as "unrestricted,"
which means they will no longer be subject to these covenants.
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
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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 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
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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
- 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
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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 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.
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SHARES ELIGIBLE FOR FUTURE SALE
After the equity offering and the concurrent investments, we will have
approximately 460,000,000 shares of common stock outstanding, 34,965,035 of
which will be owned by SBC, Intel and Telefonos de Mexico in the aggregate. The
amounts of outstanding shares excludes the issuance of up to an additional
794,857 shares that SBC may elect to purchase. If the underwriters exercise
their over-allotment option in full, we will have a total of approximately
464,440,000 shares of common stock outstanding. There will also be outstanding
up to 557,079 shares which will be owned by selected officers. There will also
be outstanding options to purchase up to approximately 8,029,000 shares of our
common stock that will be issued to directors and selected officers and other
employees of our company and Williams. In addition, we will have 395,434,965
shares of Class B common stock outstanding, all of which will be owned by
Williams. The Class B common stock is convertible into common stock on a share-
for-share basis at the option of the holder at any time, or automatically upon
transfer to a person or entity which is not a permitted transferee. See the
section of our prospectus of "Description for Capital Stock" for more
information. All of the common stock sold in the equity offering will be freely
transferable without restriction or further registration under the Securities
Act, except for shares acquired by our directors and executive officers. The
shares of Class B common stock to be retained by Williams and the shares of
common stock to be acquired the concurrent investments are not being acquired
under the equity offering and will have restrictions on resale.
We, Williams, SBC, Intel, Telefonos de Mexico, our directors and executive
officers and selected customers and suppliers who are purchasing common stock in
the equity offering have agreed, subject to certain exceptions, not to offer,
sell, or otherwise dispose of any capital stock for a period of 180 days after
the date of this prospectus, without the prior written consent of Salomon Smith
Barney Inc. and Lehman Brothers Inc. on behalf of the underwriters. Williams is
not under any contractual obligation to retain our common stock or Class B
common stock, except during this 180-day period. SBC, Intel and Telefonos de
Mexico have agreed to additional restrictions on transfer of the shares of our
common stock acquired by them. We can give no assurance concerning how long
these parties will continue to hold their common stock after the equity
offering.
The shares of common stock acquired by SBC, Intel and Telefonos de Mexico
will be restricted securities, and, as such, will be subject to the resale
limitations of Rule 144 of the Securities Act.
The shares of Class B common stock held by Williams and the shares of
common stock acquired by any of our other affiliates will also be subject to the
resale limitations of Rule 144 of the Securities Act. Rule 144 defines an
affiliate as a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
the issuer.
In general, a stockholder subject to Rule 144 who has owned common stock of
an issuer for at least one year may, within any three-month period, sell up to
the greater of:
- 1% of the total number of shares of common stock then outstanding; and
- the average weekly trading volume of the common stock during the four
weeks preceding the stockholder's required notice of sale.
Rule 144 requires stockholders to aggregate their sales with other
stockholders with which it is affiliated for purposes of complying with this
volume limitation. A stockholder who has owned common stock for at least two
years, and who has not been an affiliate of the issuer for at least 90 days, may
sell common stock free from the volume limitation and notice requirements of
Rule 144.
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Following expiration of the 180-day period noted above, Williams will be
entitled to require us to use our best efforts to register for sale under the
Securities Act any shares of common stock held by it or any of its affiliates or
that may be received by it upon conversion of its Class B common stock. SBC,
Intel and Telefonos de Mexico also have registration rights. See the sections of
this prospectus entitled "Relationship Between Our Company and Williams" and
"Business -- Strategic alliances."
We cannot estimate the number of shares of common stock that may be sold by
third parties in the future because these sales will depend on market prices and
other factors.
Prior to the equity offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that future sales of shares
of our common stock or the availability of our shares for sale would have on the
prevailing market price of our common stock. Sales of a significant number of
shares of our common stock, or the perception that these sales could occur,
could adversely affect the prevailing market price of our common stock and could
impair our future ability to raise capital through an offering of equity
securities. See "Risk Factors -- Risks relating to our common stock -- Shares
eligible for public sale after this offering may adversely affect our stock
price."
IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES
OF OUR COMMON STOCK TO NON-U.S. HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our common stock
by a holder that, for U.S. federal income tax purposes, is not a U.S. person as
we define that term below. A holder of our common stock who is not a U.S. person
is a non-U.S. holder. We assume in this discussion that you will hold our common
stock issued pursuant to the offering as a capital asset (generally, property
held for investment). We do not discuss all aspects of U.S. federal taxation
that may be important to you in light of your individual investment
circumstances, such as special tax rules that would apply to you, for example,
if you are a dealer in securities, financial institution, bank, insurance
company, tax-exempt organization, partnership or owner of more than 5% of our
common stock. Our discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations, judicial opinions,
published positions of the U.S. Internal Revenue Service and other applicable
authorities, all as in effect on the date of this prospectus and all of which
are subject to differing interpretations or change, possibly with retroactive
effect. We have not sought, and will not seek, any ruling from the IRS with
respect to the tax consequences discussed in this prospectus, and there can be
no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained. We urge you to consult your tax advisor about the U.S. federal tax
consequences of acquiring, holding, and disposing of our common stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local, or other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
- a citizen or resident of the U.S.
- a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
- an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source
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- a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust
DIVIDENDS
Dividends paid to a non-U.S. holder will generally be subject to
withholding of U.S. federal income tax at the rate of 30%. If, however, the
dividend is effectively connected with the conduct of a trade or business in the
U.S. by the non-U.S. holder, the dividend will be subject to U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax. Non-U.S. holders should consult any applicable income tax treaties
that may provide for a reduction of, or exemption from, withholding taxes. For
purposes of determining whether tax is to be withheld at a reduced rate as
specified by a treaty, we generally will presume that dividends we pay on or
before December 31, 2000, to an address in a foreign country are paid to a
resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a non-U.S. holder generally will be required to
provide certification as to that non-U.S. holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether, for
purposes of applying a treaty, dividends that we pay to a non-U.S. holder that
is an entity should be treated as paid to holders of interests in that entity.
GAIN ON DISPOSITION
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our common stock unless any one of the following is true:
- the gain is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder
- the non-U.S. holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
- the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates
- we are or have been during certain periods a "United States real property
holding corporation" for U.S. federal income tax purposes
If we are or have been a United States real property holding corporation, a
non-U.S. holder will generally not be subject to U.S. federal income tax on gain
recognized on a sale or other disposition of our common stock provided that:
- the non-U.S. holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of our outstanding common
stock and
- our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes
We believe that our common stock will be traded on an established securities
market for this purpose in any quarter during which it is listed on the NYSE.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a non-U.S. holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a
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withholding tax, generally at a rate of 10% of the proceeds. Any amount withheld
pursuant to a withholding tax will be creditable against a non-U.S. holder's
U.S. federal income tax liability.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the non-U.S. holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax, but will generally not be subject to withholding. Non-U.S. holders
should consult any applicable income tax treaties that may provide for different
rules.
UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S., as specially defined for U.S. federal
estate tax purposes, on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each non-U.S. holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides.
Under current U.S. Treasury regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a non-U.S. holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its non-U.S. holder status under penalties of perjury or otherwise establishes
an exemption. Information reporting requirements, but not backup withholding
tax, will also apply to payments of the proceeds of a sale or other taxable
disposition of our common stock by foreign offices of U.S. brokers or foreign
brokers with certain types of relationships to the U.S., unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met or the holder otherwise established an
exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
147
<PAGE> 152
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, the underwriters of the equity offering in the United
States and Canada named below, for whom Salomon Smith Barney Inc., Lehman
Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting
as U.S. representatives, and the underwriters of the concurrent equity offering
outside the United States and Canada named below, for whom Lehman Brothers
International (Europe), Salomon Brothers International Limited and Merrill Lynch
International are acting as international representatives, severally agreed to
purchase, and we have agreed to sell to the underwriters, the number of shares
set forth opposite the name of each underwriter. Salomon Smith Barney Inc. and
Lehman Brothers Inc. are also acting as joint book-running managers for the
equity offering and Lehman Brothers Inc. is the structural advisor. Merrill
Lynch, Pierce, Fenner & Smith Incorporated is the co-lead manager of the equity
offering.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
U.S. underwriters:
Salomon Smith Barney Inc. ................................
Lehman Brothers Inc. .....................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................
Banc of America Securities LLC............................
CIBC World Markets Corp...................................
Credit Suisse First Boston Corporation....................
Donaldson, Lufkin & Jenrette Securities Corporation.......
--------
Subtotal...............................................
--------
</TABLE>
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
International underwriters:
Lehman Brothers International (Europe)....................
Salomon Brothers International Limited....................
Merrill Lynch International...............................
Cazenove & Co.............................................
Bank of America International Limited.....................
CIBC World Markets International Limited..................
Credit Suisse First Boston (Europe) Limited...............
Donaldson, Lufkin & Jenrette International................
--------
Subtotal...............................................
--------
Total.......................................
========
</TABLE>
We refer to the U.S. underwriters and the international underwriters as the
underwriters and the U.S. representatives and international representatives as
the representatives. The underwriting agreement provides that the obligations of
the several underwriters to purchase the shares included in this offering are
subject to approval of legal matters by counsel as well as to other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares. The offering price and underwriting discounts and commissions per
share for the U.S. offering and the international offering are identical. The
closing of the U.S. offering is a condition to the closing of the international
offering and the closing of the international offering is a condition to the
closing of the U.S. offering.
148
<PAGE> 153
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $____ per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $____ per share on sales
to certain other dealers. If all of the shares are not sold at the initial
offering price, the representatives may change the public offering price and the
other selling terms. The representatives have advised us that the underwriters
do not intend to confirm any sales to any accounts over which they exercise
discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 4,440,000 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to its initial purchase commitment.
We, Williams, SBC, Intel and Telefonos de Mexico and our executive officers
and directors have agreed not to do any of the following, whether any
transaction described in clause (1), (2) or (3) below is to be settled by
delivery of common stock or other securities, in cash or otherwise, in each case
without the prior written consent of Salomon Smith Barney Inc. and Lehman
Brothers Inc., on behalf of the underwriters, for a period of 180 days after the
date of this prospectus:
(1) offer, sell, pledge, or otherwise dispose of, or enter into any transaction
or device which is designed or could be expected to, result in the
disposition by any person at any time in the future of, any shares of common
stock or securities convertible into or exchangeable for common stock, other
than any of the following:
- the common stock sold under this prospectus
- our issuance and sale of shares of common stock to SBC, Intel and
Telefonos de Mexico in connection with the concurrent investments
- our issuance of shares of Class B common stock to Williams in connection
with our exercise of the Algar Telecom option
- shares of common stock we issue pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date of this prospectus or pursuant to currently
outstanding options, warrants or rights
- shares of common stock we use as consideration for acquisitions or that
we issue in connection with strategic alliances, provided that the
recipient of these shares of our common stock agrees to be bound by the
transfer restrictions set forth in this prospectus for the remaining term
(2) sell or grant options, rights or warrants for shares of our common stock or
securities convertible into or exchangeable for our common stock except for
common stock and options for common stock which we issue or grant to our
officers, directors or employees
(3) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or risks of
ownership of shares of common stock
The U.S. underwriters and the international underwriters have entered into
an agreement among U.S. underwriters and international underwriters, pursuant to
which each U.S.
149
<PAGE> 154
underwriter has agreed that, as part of the distribution of the shares of common
stock offered in the U.S. offering:
- it is not purchasing any of these shares for the account of anyone other
than a U.S. person, which is generally U.S. or Canadian residents,
nationals or entities, and
- it has not offered or sold, will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
relating to the U.S. offering to anyone other than a U.S. person
In addition, pursuant to the agreement, each international underwriter has
agreed that, as part of the distribution of the shares of common stock offered
in the international offering:
- it is not purchasing any of the shares for the account of a U.S. person,
and
- it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
relating to the international offering to any U.S. person
The limitations described above do not apply to stabilization transactions
or to other transactions specified in the underwriting agreement and the
agreement among U.S. underwriters and international underwriters, including:
- some purchases and sales between U.S. underwriters and the international
underwriters
- some offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investments discretion
- purchases, offers or sales by a U.S. underwriter who is also acting as an
international underwriter or by an international underwriter who is also
acting as a U.S. underwriter
- other transactions specifically approved by the U.S. representatives and
the international representatives
Any offer of the shares of common stock in Canada will be made only
pursuant to an exemption from the prospectus filing requirement and an exemption
from the dealer registration requirement (where such an exemption is not
available, offers shall be made only by a registered dealer) in the relevant
Canadian jurisdiction where any such offer is made.
Each international underwriter has represented and agreed to all of the
following:
- It has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer or sell any
shares of common stock to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995.
- It has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the Public Offers of Securities
Regulations 1995 with respect to anything done by it in relation to the
shares of common stock in, from or otherwise involving the United
Kingdom.
- It has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise be issued or passed upon.
150
<PAGE> 155
Under the agreement between the U.S. underwriters and the international
underwriters, each international underwriter has further represented that it has
not offered or sold, and has agreed not to offer or sell, directly or
indirectly, in Japan or to or for the account of any resident of Japan, any of
the shares of common stock in connection with the distribution contemplated by
this prospectus, except for offers and sales to Japanese international
underwriters or dealers and except pursuant to any exemption from the
registration requirements of the Securities and Exchange Law and otherwise in
compliance with applicable provisions of Japanese law. Each international
underwriter has further agreed to send to any dealer who purchases from it any
of the shares of common stock a notice stating in substance that, by purchasing
these shares, the dealer represents and agrees that it has not offered or sold,
and will not offer or sell, any of these shares, directly or indirectly, in
Japan or to or for the account of any resident of Japan except for offers or
sales to Japanese international underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and Exchange
Law and otherwise in compliance with applicable provisions of Japanese law, and
that the dealer will send to any other dealer to whom it sells any of these
shares a notice containing substantially the same statements as set forth in
this sentence.
Pursuant to the agreement among the U.S. underwriters and international
underwriters, sales may be made between the U.S. underwriters and the
international underwriters of the number of shares of common stock as may be
mutually agreed. The price of any shares so sold shall be the public offering
price as then in effect for the shares of common stock being sold by the U.S.
underwriters and the international underwriters less an amount equal to the
selling concession allocable to those shares of common stock, unless otherwise
determined by mutual agreement. To the extent that there are sales between the
U.S. underwriters and the international underwriters pursuant to the agreement
among the U.S. underwriters and the international underwriters, the number of
shares of common stock available for sale by the U.S. underwriters or by the
international underwriters may be more or less than the amount specified on the
cover page of this prospectus.
In connection with the equity offering, Salomon Smith Barney Inc. and
Lehman Brothers Inc., on behalf of the underwriters, may purchase and sell
shares of our common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in the offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
our common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of our common stock made for the purpose of preventing
or retarding a decline in the market price of our common stock while this
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc. and Lehman Brothers Inc., in covering syndicate short
positions or making stabilizing purchases, repurchase shares originally sold by
that syndicate member.
Any of these activities may cause the price of our common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the NYSE, in
the over-the-counter market or otherwise and, if commenced, may be discontinued
at any time.
At our request, the underwriters have reserved shares of common stock
offered in this prospectus for sale to all of the regular domestic employees and
independent directors of our
151
<PAGE> 156
company and of Williams and selected suppliers and customers of our company at
the initial public offering price set forth on the cover page of this
prospectus. Up to 7.0% of the common stock constituting the equity offering will
be available for purchase under the program, with no more than 0.7% of the
common stock constituting the equity offering to be available for purchase by
the independent directors of our company and Williams or our customers and
suppliers. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase reserved shares. Our suppliers and customers who purchase
shares of common stock will agree not to sell these shares for a period of 180
days after the date of this prospectus without the prior written consent of
Salomon Smith Barney Inc. and Lehman Brothers Inc., on behalf of the
underwriters.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges in accordances with the laws and
practices of the country of purchase, in addition to the offering price set
forth on the cover of this prospectus.
We expect that more than 10% of the net proceeds of the offerings will be
paid to affiliates of certain of the underwriters. Accordingly, the offering is
being conducted in accordance with Rule 2710(c)(8) of the National Association
of Securities Dealers, Inc., which requires that the initial public offering
price be no higher than that recommended by a qualified independent underwriter
as defined by the NASD. Salomon Smith Barney Inc. has agreed to serve in that
capacity in connection with the equity offering and performed due diligence
investigations and reviewed and participated in the preparation of the
registration statement of which this prospectus is a part. Salomon Smith Barney
Inc. will receive no compensation for acting in this capacity; however, we have
agreed to indemnify Salomon Smith Barney Inc. for acting as qualified
independent underwriter against certain liabilities under the Securities Act of
1933.
Certain of the underwriters of the equity offering and their affiliates
engage in transactions with, and perform services for, our company in the
ordinary course of business and have engaged and may in the future engage in
commercial banking and investment banking transactions with us and with
Williams, for which they receive customary compensation. In addition, Salomon
Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Banc of America Securities LLC, CIBC World Markets Corp. and
Credit Suisse First Boston Corporation will also act as underwriters for the
notes offering. Furthermore, Bank of America, an affiliate of Banc of America
Securities LLC, one of the underwriters, is a lender under our interim credit
facility, and affiliates of Salomon Smith Barney, Inc., Lehman Brothers Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated 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.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
152
<PAGE> 157
LEGAL MATTERS
The validity of the common stock offered in this prospectus and certain
legal matters in connection with the offerings will be passed upon for us by our
Senior Vice President, Law, William von Glahn. 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.
153
<PAGE> 158
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common
stock offered in this prospectus. This prospectus does not contain all the
information which is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer you to the registration statement for further
information about our company and the securities offered in this prospectus.
Statements contained in this prospectus concerning the provisions of documents
are not necessarily summaries of the material provisions of those documents, and
each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. You can inspect and copy the
registration statement and the reports and other information we file with the
Commission under the Exchange Act at the public reference room maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You can obtain information on the operation of the public reference
room by calling the Commission at 1-800-SEC-0330. The same information will be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, N.Y. 10048 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You can also obtain copies of this material from the public reference room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site which provides online access to
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at the address
http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. In addition, Williams is subject to the information requirements of
the Exchange Act and files reports and other information under the Exchange Act
with the Commission. You can inspect and copy these reports and other
information of our company and Williams at the locations set forth above or
download these reports from the Commission's web site.
154
<PAGE> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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
<PAGE> 167
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
<PAGE> 168
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
<PAGE> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
-------- ------------ ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Revenues:
External customers:
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
<PAGE> 177
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> 178
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STRATEGIC
NETWORK SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
------- ------------ ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Revenues:
External customers:
Capacity and other.................................... $ -- $ -- $ 130,816 $ -- $ 130,816
New systems sales and upgrades........................ -- 306,110 -- -- 306,110
Maintenance and customer service orders............... -- 251,221 -- -- 251,221
Other................................................. -- 9,379 -- -- 9,379
------- ---------- ----------- ---------- ----------
Total external customers................................. -- 566,710 130,816 -- 697,526
Affiliates............................................... 4,918 1,362 1,381 -- 7,661
Intercompany............................................. 6,145 -- 280 (6,425) --
------- ---------- ----------- ---------- ----------
Total segment revenues..................................... $11,063 $ 568,072 $ 132,477 $ (6,425) $ 705,187
======= ========== =========== ========== ==========
Cost of sales:
Capacity and other....................................... $ 4,681 $ -- $ 81,535 $ -- $ 86,216
New systems sales and upgrades........................... -- 223,519 -- -- 223,519
Maintenance and customer service orders.................. -- 155,130 -- -- 155,130
Indirect operating and maintenance....................... -- 52,357 -- -- 52,357
Intercompany............................................. -- 4,484 1,941 (6,425) --
------- ---------- ----------- ---------- ----------
Total cost of sales........................................ $ 4,681 $ 435,490 $ 83,476 $ (6,425) $ 517,222
======= ========== =========== ========== ==========
Segment profit (loss):
Income (loss) from operations............................ $ 5,750 $ 8,887 $ (14,728) $ -- $ (91)
Equity losses............................................ -- -- (1,601) -- (1,601)
Add back -- allocated charges from parent................ -- 5,439 $ 1,204 -- 6,643
------- ---------- ----------- ---------- ----------
Total segment profit (loss)................................ $ 5,750 $ 14,326 $ (15,125) $ -- $ 4,951
======= ========== =========== ========== ==========
Total assets............................................... $ -- $ 344,606 $ 377,081 $ -- $ 721,687
Equity method investments.................................. $ -- $ -- $ 6,550 $ -- $ 6,550
Additions to long-lived assets............................. $ -- $ 34,906 $ 192,071 $ -- $ 226,977
Depreciation and amortization.............................. $ -- $ 16,023 $ 16,355 $ -- $ 32,378
</TABLE>
F-20
<PAGE> 179
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> 180
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> 181
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> 182
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
F-24
<PAGE> 183
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets include application of the tax sharing agreement with Williams, tax law
changes and expiration of carryforward periods. The valuation allowance
decreased during 1998 and increased during 1997, primarily due to application of
the tax sharing agreement with Williams.
If WCG had filed a separate federal income tax return for all periods
presented, the provision (benefit) for income taxes for 1998 and 1997 would
reflect additional benefit from the carryback or carryforward of federal net
operating losses that would have been recognized by WCG on a separate return
basis. The deferred federal income tax benefit for 1998 would have increased by
$5,588,000, to reflect the benefit of a deferred tax asset for the federal net
operating loss carryforward generated in 1998, to the extent of the existing net
deferred tax liability. A current federal income tax benefit for 1997 of
$12,761,000 would have been recognized to reflect the refund of tax from
carryback of the federal net operating loss generated in 1997. The provision
(benefit) for income taxes for 1996 would not change since a federal net
operating loss was not generated in 1996.
Cash payments for income taxes (net of refunds) were $2,067,000, $1,148,000
and $2,444,000 in 1998, 1997 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
Substantially all of WCG's employees are covered by noncontributory defined
benefit pension plans. Effective August 1, 1997, separate plans were established
for the Solutions LLC union employees and Solutions LLC salaried employees.
Substantially all of the remaining WCG employees are covered by Williams'
noncontributory defined benefit pension plans in which WCG is included. WCG is
also included in Williams' health care plan that provides postretirement medical
benefits to certain retired employees.
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> 184
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> 185
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> 186
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> 187
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> 188
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> 189
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.
F-31
<PAGE> 190
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<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> 191
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 OUTSTANDING
--------------------------------------- STOCK OPTIONS 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>
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
F-33
<PAGE> 192
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-34
<PAGE> 193
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-35
<PAGE> 194
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 co-location, 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.
F-36
<PAGE> 195
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-37
<PAGE> 196
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the agreement under which WCG provides network
transport services. The initial public offering price, less the underwriters'
discount will determine the price of the SBC shares.
Once SBC receives regulatory approval to enter the long-distance business
within one state in its local service territory, it will have one seat on the
WCG board of directors. WCG will serve as SBC's preferred provider for all
domestic U.S. transport services. SBC will be WCG's preferred provider for
platform products and certain international transport services, so long as such
preferred services are provided at mutually acceptable prices and regulations do
not prohibit such an arrangement. WCG will work with SBC to connect SBC's
international cables to WCG's domestic network. The agreement also will allow
both parties to cross-market certain of each others services, and specifically
enable Solutions to offer SBC-branded products and services as an addition to
its array of voice and data communication equipment products and network
services.
Williams has a call option to purchase not less than all of the shares of
stock acquired by SBC, in the event of the termination, other than due to a
breach by WCG, of certain agreements with SBC, provided that Williams has at
least a 50% interest in WCG. The purchase price is equal to the market price at
the time of exercise less the underwriting discounts and commissions applicable
to the shares at the time of the initial offering.
On May 21, 1999, WCG entered into two memoranda of understanding with
Metromedia Fiber Network, Inc. under which both parties agree to enter into
20-year agreements with the other, providing for the following:
- Metromedia will lease to WCG dark fiber on up to 3,200 route miles on
its local networks, 6 to 96 fibers per segment, and will provide WCG
with maintenance
F-38
<PAGE> 197
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services and dark fiber connectivity to approximately 250 points of
presence and data centers, in exchange for approximately $317
million payable by WCG over the duration of the agreement
- Metromedia will lease from WCG six dark fibers over substantially all
of the Williams network and WCG will provide colocation and
maintenance services in exchange for approximately $317 million
payable by Metromedia over the duration of the agreement
On May 24, 1999, WCG and Intel Corporation, on behalf of Intel Internet
Data Services, entered into a long-term master alliance agreement. The alliance
agreement provides that WCG and Intel Internet Data Services will purchase
services from one another pursuant to a service agreement and create a
co-marketing arrangement, each of which will have shorter terms than that of the
master alliance agreement. The services WCG will provide include domestic
transport services and may also include Internet connectivity. Intel will
provide web hosting services pursuant to the co-marketing arrangement.
Intel also entered into a securities purchase agreement with WCG and
Williams to purchase at the closing of this offering the number of shares of
common stock equal to $200 million divided by the initial public offering price
less the underwriting discount. The parties' obligations under the securities
purchase agreement are subject to closing conditions, including that the
alliance agreement is in full effect and that at least $500 million is raised in
this offering and that necessary governmental approvals have been obtained.
In connection with its purchase of common stock, Intel has agreed not to
transfer any of its shares of common stock to anyone except affiliates for a
period of eighteen months, but this transfer restriction provision will be
terminated if we have a change of control. In addition, the transfer restriction
does not prohibit Intel from participating in future registered offerings
initiated by us or from engaging in hedging transactions commencing six months
from the date of the equity offering. Intel also has registration rights in
connection with its holdings.
On May 25, 1999, WCG entered into a non-exclusive alliance agreement with
Telefonos de Mexico. Under the terms of the agreement, both WCG and Telefonos de
Mexico must first seek to obtain select international wholesale services between
Mexico and the United States and various other services from each other. WCG and
Telefonos de Mexico will also sell each other's products to their respective
customers and negotiate the terms under which both parties will provide
installation and maintenance of communications equipment and other services for
the other. In addition, WCG and Telefonos de Mexico will interconnect their long
distance fiber-optic networks to jointly develop seamless voice, data and video
transport services to serve their respective markets.
In addition, on May 25, 1999, Telefonos de Mexico entered into a securities
purchase agreement with WCG and Williams to purchase at the closing of the
equity offering up to the number of shares of common stock equal to $100 million
divided by the initial public offering price less the underwriting discount.
Telefonos de Mexico's obligation and ability to make the investment is
subject to conditions at closing, including that the alliance agreement with
Telefonos de Mexico be in full effect and that SBC approves the portion of
Telefonos de Mexico's investment that exceeds $25 million, which would require
SBC's investment to be limited to $425 million.
F-39
<PAGE> 198
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 199
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> 200
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> 201
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> 202
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> 203
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> 204
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> 205
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (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> 206
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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> 207
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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> 208
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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> 209
DIRECT SALES SUBSIDIARY, NORTEL COMMUNICATIONS SYSTEMS, INC.
AND TTS MERIDIAN SYSTEMS, INC. OF ENTERPRISE NETWORKS OF
NORTHERN TELECOM LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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> 210
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
29,600,000 SHARES
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
LOGO
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
LEHMAN BROTHERS
MERRILL LYNCH & CO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 211
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
OUR SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE INTERNATIONAL PAGE]
SUBJECT TO COMPLETION, SEPTEMBER 1, 1999
PROSPECTUS
29,600,000 SHARES
[WILLIAMS COMMUNICATIONS LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. Our common stock
has been approved for listing on the New York Stock Exchange under the symbol
"WCG", subject to official notice of issuance. We anticipate that the initial
public offering price will be between $21.00 and $23.00 per share.
We are offering 29,600,000 shares. Of the shares being offered, 5,920,000 shares
are being offered outside the United States and Canada and 23,680,000 shares are
concurrently being offered in the United States and Canada.
We are a subsidiary of The Williams Companies, Inc., and following this offering
The Williams Companies, Inc. will continue to hold a controlling interest in our
shares.
Investing in the shares involves risks. "Risk Factors" begin on page 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds, before expenses, to Williams Communications Group,
Inc....................................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to additional
shares of common stock on the same terms and conditions as set forth above
solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expects to deliver the shares to purchasers on or about
, 1999.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
LEHMAN BROTHERS SALOMON SMITH BARNEY MERRILL LYNCH
INTERNATIONAL INTERNATIONAL
</TABLE>
, 1999
<PAGE> 212
[ALTERNATE INTERNATIONAL PAGE]
29,600,000 SHARES
LOGO
COMMON STOCK
---------------------------------------
PROSPECTUS
, 1999
---------------------------------------
LEHMAN BROTHERS
SALOMON SMITH BARNEY INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
<PAGE> 213
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............... $ 217,652
NASD filing fee............................................. 30,500
New York Stock Exchange listing fee......................... 252,600
Blue sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 1,800,000
Legal fees and expenses..................................... 1,800,000
Printing and engraving fees................................. 1,700,000
Miscellaneous............................................... 189,248
----------
Total.................................................. $6,000,000
==========
</TABLE>
- -------------------------
* All fees except the Securities and Exchange Commission and NASD filing fees
are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware ("DGCL") provides that a Delaware corporation may indemnify any persons
who are, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding provided such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his or
her conduct was illegal. A Delaware corporation may indemnify any persons who
are, or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reason of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the corporation's best
interests except that no indemnification is permitted without judicial approval
if the officer or director is adjudged to be liable to the corporation. Where an
officer or director is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him or her against
the expenses which such officer or director has actually and reasonably
incurred.
II-1
<PAGE> 214
Section 145 further provides that the indemnification provisions of Section
145 shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office. The Restated Certificate of Incorporation contains a provision
eliminating, to the fullest extent permitted by the DGCL as it exists or may in
the future be amended, the liability of a director to the Company and its
stockholders for monetary damages for breaches of fiduciary or other duty as a
director. However, the DGCL does not currently allow such provision to limit the
liability of a director for: (i) any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of laws; (iii)
payment of dividends, stock purchases or redemptions that violate the DGCL; or
(iv) any transaction from which the director derived an improper personal
benefit. Such limitation of liability also does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Restated Certificate of Incorporation and the By-Laws also provide
that, to the fullest extent permitted by the DGCL as it exists or may in the
future be amended, the Company will indemnify and hold harmless any director who
is or was made a party or is threatened to be made a party to or is involved in
any manner in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Company or its
subsidiaries, and any person serving at the request of the Company as an
officer, director, partner, member, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust, employee benefit
plan or other enterprise and may indemnify any officer, employee or agent of the
Company; provided, however, that the Company will indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by the Restated
Certificate of Incorporation or By-Laws. In addition, the Company will pay the
expenses incurred by directors, and may pay the expenses incurred by other
persons that may be indemnified pursuant to the Restated Certificate and the
By-Laws, in defending any such proceeding in advance of its final disposition
upon receipt (unless the Company upon authorization of the Board of Directors
waives such requirement to the extent permitted by applicable law) of an
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
Company as authorized in the Restated Certificate of Incorporation or By-Laws or
otherwise. The Restated Certificate and the By-Laws also state that such
indemnification is not exclusive of any other rights of the indemnified party,
including rights under any indemnification agreements or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-2
<PAGE> 215
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of the
Company.
3.2 Form of Restated By-laws of the Company.
4.1 Specimen certificate of common stock.
4.2 Specimen certificate of Class B common stock.
4.3 Form of certificate of designation of Series A Junior
Participating Preferred Stock.+
5.1 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.+
10.2 Amended and Restated Alliance Agreement Between Telefonos de
Mexico, S.A. de C.V. and Williams Communications, Inc.,
dated May 25, 1999.+*
10.3 Securities Purchase Agreement dated as of May 24, 1999 by
and among Williams Communication Group, Inc., The Williams
Companies, Inc. and Intel Corporation.+
10.4 Master Alliance Agreement Between Intel Internet Data
Services and Williams Communications, Inc., dated as of May
24, 1999.+*
10.5 Memorandum of Understanding Regarding the Lease of Fiber
Strands by Metromedia Fiber Network Services, Inc. to
Williams Communications, Inc., dated May 21, 1999.+*
10.6 Memorandum of Understanding Regarding the Lease of Fiber
Strands by Williams Communications, Inc. to Metromedia Fiber
Network Services, Inc., dated May 21, 1999.+*
10.7 Loan Agreement dated as of April 16, 1999 among Williams
Communications Group, Inc., Bank of America National Trust
and Savings Association, and the other financial
institutions party hereto, Nationsbanc Montgomery Securities
LLC, Chase Securities Inc., Bank of Montreal, and The Bank
of New York.+
10.8 Shareholders Agreement by and among Metrogas S.A., Williams
International Telecom (Chile) Limited, and Metrocom S.A.,
dated March 30, 1999 and Letter Agreement dated March 30,
1999.+*
10.9 Share Purchase Agreement by and Among Lightel, S.A.
Technologia de Informacao, Williams International ATL
Limited, Johi Representacoes Ltda and ATL-Algar Telecom
Leste, S.A., dated as of March 25, 1999.+
10.10 Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8, 1999.+*
10.11 Transport Services Agreement dated February 8, 1999, between
Southwestern Bell Communication Services, Inc. and Williams
Communications, Inc.+*
10.12 Securities Purchase Agreement dated February 8, 1999,
between SBC Communications Inc. and Williams Communications
Group, Inc.+
10.13 Second Amended and Restated Credit Agreement dated as of
July 23, 1997 among The Williams Companies, Inc., Northwest
Pipeline Corporation, Transcontinental Gas Pipeline
Corporation, Texas Gas Transmission Corporation, Williams
Pipeline Company, Williams Holdings of Delaware, Inc.,
WilTel Communications, LLC, and Amendment thereto dated as
of January 26, 1999.+
</TABLE>
II-3
<PAGE> 216
<TABLE>
<C> <S>
10.14 Amended and Restated Lease for Bank of Oklahoma Tower, as of
January 1, 1999, by and between Williams Headquarters
Building Company and The Williams Companies, Inc.+
10.15 Lease as of January 1, 1999, for Williams Technology Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.+
10.16 Lease as of January 1, 1999, for Williams Resource Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.+
10.17 Wireless Fiber IRU Agreement by and between WinStar
Wireless, Inc. and Williams Communications, Inc., effective
as of December 17, 1998.+
10.18 IRU Agreement between WinStar Wireless, Inc. and Williams
Communications, Inc., dated December 17, 1998 (long haul),
together with Clarification Agreement effective as of
December 17, 1998 and Side Agreement dated March 31, 1999.+*
10.19 UtiliCom Networks, Inc. Note and Warrant Purchase Agreement
dated December 15, 1998.+
10.20 Consolidated IRU Agreement by and among IXC Carrier, Inc.,
Vyvx, Inc. and The WilTech Group, dated December 9, 1998 and
Amendment No. 4, dated December 22, 1998.+*
10.21 Stock Purchase Agreement for CNG Computer Networking Group
Inc. by and among The Sellers (1310038 Ontario Inc., George
Johnston, Hayden Marcus, The H. Marcus Family Trust and Gary
White), WilTel Communications (Canada), Inc. and Williams
Communications Solutions, LLC, dated October 13, 1998.+
10.22 Preferred Stock Purchase by and among UniDial Holdings, Inc.
and Williams Communications, Inc., dated October 2, 1998.+*
10.23 Amended and Restated Lease between State Street Bank & Trust
Co. of Connecticut, National Association, as Lessor, and
Williams Communications, Inc., as Lessee, as of September 2,
1998.+
10.24 Amended and Restated Participation Agreement dated as of
September 2, 1998, among Williams Communications, Inc.;
State Street Bank & Trust Company of Conn., National
Association, as Trustee; Note Holders and Certificate
Holders; APA Purchasers; State Street Bank & Trust Co., as
Collateral Agent; and Citibank, N.A., as agent, with
Citibank, N.A. and Bank of Montreal as Co-Arrangers; Royal
Bank of Canada, as Documentation Agent; and Bank of America,
The Chase Manhattan Bank and Toronto Dominion, as Managing
Agents.+*
10.25 Capacity Purchase Agreement between Williams Communications,
Inc. and Intermedia Communications, Inc., dated January 5,
1998 and Amendment dated August 5, 1998.+*
10.26 Settlement and Release Agreement by and between WorldCom
Network Services, Inc. and Williams Communications, Inc.,
dated July 1, 1998.+*
10.27 Umbrella Agreement by and between DownTown Utilities Pty
Limited, WilTel Communications Pty Limited, Spectrum Network
Systems Limited, CitiPower Pty, Energy Australia, South East
Queensland Electricity Corporation Limited, Williams
Holdings of Delaware Inc. and Williams International
Services Company, dated June 19, 1998.+
10.28 Carrier Services Agreement between Vyvx, Inc. and U S WEST
Communications, Inc., dated January 5, 1998, and Amendment
No. 1, dated June 14, 1999.+*
10.29 Distributorship Agreement by and between Northern Telecom
Limited and WilTel Communications, L.L.C., dated January 1,
1998.+*
</TABLE>
II-4
<PAGE> 217
<TABLE>
<C> <S>
10.30 Common Stock and Warrant Purchase Agreement by and among Concentric Network Corporation
and Williams Communications Group, Inc., dated July 25, 1997.+
10.31 Note and Warrant Purchase Agreement by and among Concentric Network Corporation and
Williams Communications Group, Inc., dated June 19, 1997.+
10.32 Limited Liability Company Agreement of WilTel Communications, LLC, by and between Williams
Communication Group, Inc. and Northern Telecom, Inc., dated April 30, 1997.+
10.33 Share Purchase Agreement for TTS Meridian Systems Inc. by and among Northern Telecom
Limited, WilTel Communications, LLC and 1228966 Ontario Inc., dated April 30, 1997.+*
10.34 Formation Agreement by and between Northern Telecom, Inc. and Williams Communications
Group, Inc., dated April 1, 1997.+*
10.35 Stock Purchase Agreement among ABC Industria e Comercio S.A.-ABC INCO, Lightel S.A.
Tecnologia da Informacao, Algar S.A.-Empreendimentos e Participacoes and Williams
International Telecom Limited, dated January 21, 1997.+
10.36 Subscription and Shareholders Agreement among Lightel S.A. Tecnologia da Informacao, Algar
S.A.-Empreendimentos e Participacoes and Williams International Telecom Limited, dated
January 21, 1997.+
10.37 Sublease Agreement as of June 1, 1996, by and between Transcontinental Gas Pipeline
Company and Williams Telecommunications Systems, Inc.+
10.38 System Use and Service Agreement between WilTel, Inc. and Vyvx, Inc. effective as of
January 1, 1994.+*
10.39 Form of administrative services agreement.+
10.40 Form of service agreement.+
10.41 Form of tax sharing agreement.+
10.42 Form of indemnification agreement.+
10.43 Form of rights agreement.+
10.44 Form of registration rights agreement.+
10.45 Form of separation agreement.+
10.46 Call option agreement by and among Williams Holdings of Delaware, Inc., Williams
International Company, Williams International Telecom Limited, and Williams Communications
Group, Inc. dated May 27, 1999.
10.47 Form of cross-license agreement.+
10.48 Form of technical, management and administrative services agreement.+
10.49 The Williams Companies, Inc. 1996 Stock Plan.+
10.50 The Williams Companies, Inc. Stock Plan for Nonofficer Employees.+
10.51 Williams Communications Stock Plan.+
10.52 Williams Communications Group, Inc. 1999 Stock Plan.+
10.53 Williams Pension Plan.+
10.54 Solutions LLC Pension Plan.+
10.55 Williams Communications Change in Control Severance Plan.+
10.56 Stock Purchase Agreement by and between Williams Communications, Inc. Conferencing
Acquisition Corporation and Genesys, S.A. dated as of June 30, 1999.+
10.57 Form of loan agreement and promissory note between Williams Communications, Inc. and The
Williams Companies, Inc.+
</TABLE>
II-5
<PAGE> 218
<TABLE>
<S> <C>
10.58 Williams Communications, Inc. Senior Credit Facilities Commitment
Letter, dated June 2, 1999.+
10.59 Form of indenture governing notes.
12.1 Statement re: Computation of Ratios.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen S/C.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of William G. von Glahn, Esq. (contained in opinion filed
as Exhibit 5.1).
23.5 Consent of H. Brian Thompson.+
23.6 Consent of Roy A. Wilkens.+
24 Power of Attorney.+
24.1 Power of Attorney of Michael P. Johnson, Sr. and Scott E.
Schubert.+
27.1 Financial Data Schedule -- 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>
- -------------------------
+ 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.
II-6
<PAGE> 219
(3) it will provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit delivery to each
purchaser.
II-7
<PAGE> 220
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 7 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. 7 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-8
<PAGE> 221
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> 222
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> 223
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of the
Company.
3.2 Form of Restated By-laws of the Company.
4.1 Specimen certificate of common stock.
4.2 Specimen certificate of Class B common stock.
4.3 Form of certificate of designation of Series A Junior
Participating Preferred Stock.+
5.1 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.+
10.2 Amended and Restated Alliance Agreement Between Telefonos de
Mexico, S.A. de C.V. and Williams Communications, Inc.,
dated May 25, 1999.+*
10.3 Securities Purchase Agreement dated as of May 24, 1999 by
and among Williams Communication Group, Inc., The Williams
Companies, Inc. and Intel Corporation.+
10.4 Master Alliance Agreement Between Intel Internet Data
Services and Williams Communications, Inc., dated as of May
24, 1999.+*
10.5 Memorandum of Understanding Regarding the Lease of Fiber
Strands by Metromedia Fiber Network Services, Inc. to
Williams Communications, Inc., dated May 21, 1999.+*
10.6 Memorandum of Understanding Regarding the Lease of Fiber
Strands by Williams Communications, Inc. to Metromedia Fiber
Network Services, Inc., dated May 21, 1999.+*
10.7 Loan Agreement dated as of April 16, 1999 among Williams
Communications Group, Inc., Bank of America National Trust
and Savings Association, and the other financial
institutions party hereto, Nationsbanc Montgomery Securities
LLC, Chase Securities Inc., Bank of Montreal, and The Bank
of New York.+
10.8 Shareholders Agreement by and among Metrogas S.A., Williams
International Telecom (Chile) Limited, and Metrocom S.A.,
dated March 30, 1999 and Letter Agreement dated March 30,
1999.+*
10.9 Share Purchase Agreement by and Among Lightel, S.A.
Technologia de Informacao, Williams International ATL
Limited, Johi Representacoes Ltda and ATL-Algar Telecom
Leste, S.A., dated as of March 25, 1999.+
10.10 Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8, 1999.+*
10.11 Transport Services Agreement dated February 8, 1999, between
Southwestern Bell Communication Services, Inc. and Williams
Communications, Inc.+*
10.12 Securities Purchase Agreement dated February 8, 1999,
between SBC Communications Inc. and Williams Communications
Group, Inc.+
10.13 Second Amended and Restated Credit Agreement dated as of
July 23, 1997 among The Williams Companies, Inc., Northwest
Pipeline Corporation, Transcontinental Gas Pipeline
Corporation, Texas Gas Transmission Corporation, Williams
Pipeline Company, Williams Holdings of Delaware, Inc.,
WilTel Communications, LLC, and Amendment thereto dated as
of January 26, 1999.+
</TABLE>
<PAGE> 224
<TABLE>
<C> <S>
10.14 Amended and Restated Lease for Bank of Oklahoma Tower, as of
January 1, 1999, by and between Williams Headquarters
Building Company and The Williams Companies, Inc.+
10.15 Lease as of January 1, 1999, for Williams Technology Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.+
10.16 Lease as of January 1, 1999, for Williams Resource Center,
by and between Williams Headquarters Building Company and
Williams Communications Group, Inc.+
10.17 Wireless Fiber IRU Agreement by and between WinStar
Wireless, Inc. and Williams Communications, Inc., effective
as of December 17, 1998.+
10.18 IRU Agreement between WinStar Wireless, Inc. and Williams
Communications, Inc., dated December 17, 1998 (long haul),
together with Clarification Agreement effective as of
December 17, 1998 and Side Agreement dated March 31, 1999.+*
10.19 UtiliCom Networks, Inc. Note and Warrant Purchase Agreement
dated December 15, 1998.+
10.20 Consolidated IRU Agreement by and among IXC Carrier, Inc.,
Vyvx, Inc. and The WilTech Group, dated December 9, 1998 and
Amendment No. 4, dated December 22, 1998.+*
10.21 Stock Purchase Agreement for CNG Computer Networking Group
Inc. by and among The Sellers (1310038 Ontario Inc., George
Johnston, Hayden Marcus, The H. Marcus Family Trust and Gary
White), WilTel Communications (Canada), Inc. and Williams
Communications Solutions, LLC, dated October 13, 1998.+
10.22 Preferred Stock Purchase by and among UniDial Holdings, Inc.
and Williams Communications, Inc., dated October 2, 1998.+*
10.23 Amended and Restated Lease between State Street Bank & Trust
Co. of Connecticut, National Association, as Lessor, and
Williams Communications, Inc., as Lessee, as of September 2,
1998.+
10.24 Amended and Restated Participation Agreement dated as of
September 2, 1998, among Williams Communications, Inc.;
State Street Bank & Trust Company of Conn., National
Association, as Trustee; Note Holders and Certificate
Holders; APA Purchasers; State Street Bank & Trust Co., as
Collateral Agent; and Citibank, N.A., as agent, with
Citibank, N.A. and Bank of Montreal as Co-Arrangers; Royal
Bank of Canada, as Documentation Agent; and Bank of America,
The Chase Manhattan Bank and Toronto Dominion, as Managing
Agents.+*
10.25 Capacity Purchase Agreement between Williams Communications,
Inc. and Intermedia Communications, Inc., dated January 5,
1998 and Amendment dated August 5, 1998.+*
10.26 Settlement and Release Agreement by and between WorldCom
Network Services, Inc. and Williams Communications, Inc.,
dated July 1, 1998.+*
10.27 Umbrella Agreement by and between DownTown Utilities Pty
Limited, WilTel Communications Pty Limited, Spectrum Network
Systems Limited, CitiPower Pty, Energy Australia, South East
Queensland Electricity Corporation Limited, Williams
Holdings of Delaware Inc. and Williams International
Services Company, dated June 19, 1998.+
10.28 Carrier Services Agreement between Vyvx, Inc. and U S WEST
Communications, Inc., dated January 5, 1998, and Amendment
No. 1, dated June 14, 1999.+*
10.29 Distributorship Agreement by and between Northern Telecom
Limited and WilTel Communications, L.L.C., dated January 1,
1998.+*
</TABLE>
<PAGE> 225
<TABLE>
<C> <S>
10.30 Common Stock and Warrant Purchase Agreement by and among Concentric Network Corporation
and Williams Communications Group, Inc., dated July 25, 1997.+
10.31 Note and Warrant Purchase Agreement by and among Concentric Network Corporation and
Williams Communications Group, Inc., dated June 19, 1997.+
10.32 Limited Liability Company Agreement of WilTel Communications, LLC, by and between Williams
Communication Group, Inc. and Northern Telecom, Inc., dated April 30, 1997.+
10.33 Share Purchase Agreement for TTS Meridian Systems Inc. by and among Northern Telecom
Limited, WilTel Communications, LLC and 1228966 Ontario Inc., dated April 30, 1997.+*
10.34 Formation Agreement by and between Northern Telecom, Inc. and Williams Communications
Group, Inc., dated April 1, 1997.+*
10.35 Stock Purchase Agreement among ABC Industria e Comercio S.A.-ABC INCO, Lightel S.A.
Tecnologia da Informacao, Algar S.A.-Empreendimentos e Participacoes and Williams
International Telecom Limited, dated January 21, 1997.+
10.36 Subscription and Shareholders Agreement among Lightel S.A. Tecnologia da Informacao, Algar
S.A.-Empreendimentos e Participacoes and Williams International Telecom Limited, dated
January 21, 1997.+
10.37 Sublease Agreement as of June 1, 1996, by and between Transcontinental Gas Pipeline
Company and Williams Telecommunications Systems, Inc.+
10.38 System Use and Service Agreement between WilTel, Inc. and Vyvx, Inc. effective as of
January 1, 1994.+*
10.39 Form of administrative services agreement.+
10.40 Form of service agreement.+
10.41 Form of tax sharing agreement.+
10.42 Form of indemnification agreement.+
10.43 Form of rights agreement.+
10.44 Form of registration rights agreement.+
10.45 Form of separation agreement.+
10.46 Call option agreement by and among Williams Holdings of Delaware, Inc., Williams
International Company, Williams International Telecom Limited, and Williams Communications
Group, Inc. dated May 27, 1999.
10.47 Form of cross-license agreement.+
10.48 Form of technical, management and administrative services agreement.+
10.49 The Williams Companies, Inc. 1996 Stock Plan.+
10.50 The Williams Companies, Inc. Stock Plan for Nonofficer Employees.+
10.51 Williams Communications Stock Plan.+
10.52 Williams Communications Group, Inc. 1999 Stock Plan.+
10.53 Williams Pension Plan.+
10.54 Solutions LLC Pension Plan.+
10.55 Williams Communications Change in Control Severance Plan.+
10.56 Stock Purchase Agreement by and between Williams Communications, Inc. Conferencing
Acquisition Corporation and Genesys, S.A. dated as of June 30, 1999.+
10.57 Form of loan agreement and promissory note between Williams Communications, Inc. and The
Williams Companies, Inc.+
</TABLE>
<PAGE> 226
<TABLE>
<C> <S>
10.58 Williams Communications, Inc. Senior Credit Facilities Commitment
Letter, dated June 2, 1999.+
10.59 Form of indenture governing notes.
12.1 Statement re: Computation of Ratios.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen S/C.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of William G. von Glahn, Esq. (contained in opinion filed
as Exhibit 5.1).
23.5 Consent of H. Brian Thompson.+
23.6 Consent of Roy A. Wilkens.+
24 Power of Attorney.+
24.1 Power of Attorney of Michael P. Johnson, Sr. and Scott E.
Schubert.+
27.1 Financial Data Schedule -- 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>
- -------------------------
+ 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
[ ] SHARES
WILLIAMS COMMUNICATIONS GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
[______], 1999
SALOMON SMITH BARNEY INC.
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
As Representatives of the several
Underwriters named in Schedule 1,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
SALOMON BROTHERS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
As Representatives of the several
Underwriters named in Schedule 2,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Williams Communications Group, Inc., a Delaware corporation (the
"COMPANY"), proposes to sell [ ] shares (the "FIRM STOCK") of the Company's
Common Stock, par value $0.01 per share (the "COMMON STOCK").
It is understood that, subject to the conditions hereinafter stated, [
] shares of the Firm Stock (the "U.S. FIRM STOCK") will be sold to the several
U.S. Underwriters named in Schedule 1 hereto (the "U.S. UNDERWRITERS") in
connection with the offering and sale of such U.S. Firm Stock in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and [ ] shares of the Firm Stock (the "INTERNATIONAL FIRM
STOCK") will be sold to the several International Underwriters named in
<PAGE> 2
Schedule 2 hereto (the "INTERNATIONAL UNDERWRITERS") in connection with the
offering and sale of such International Firm Stock outside the United States
and Canada to persons other than United States and Canadian Persons. Salomon
Smith Barney Inc., Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated shall act as representatives (the "U.S. REPRESENTATIVES") of
the several U.S. Underwriters, and Lehman Brothers International (Europe),
Salomon Brothers International Limited and Merrill Lynch International shall
act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the "UNDERWRITERS."
The U.S. Representatives and the International Representatives are hereinafter
collectively referred to as the "REPRESENTATIVES."
In addition, the Company proposes to grant to the U.S. Underwriters an
option to purchase up to an additional [ ] shares of the Common Stock on the
terms and for the purposes set forth in Section 3 (the "OPTION STOCK"). The
Firm Stock and the Option Stock, if purchased, are hereinafter collectively
called the "STOCK." This is to confirm the agreement concerning the purchase of
the Stock from the Company by the Underwriters.
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 issue and sell the Stock pursuant to this Agreement and shall issue
and sell $[ ]million aggregate principal amount of its [ ]% Senior Notes due
2009 (the "NOTES") pursuant to an underwriting agreement (the "DEBT UNDERWRITING
AGREEMENT") of even date herewith and (ii) 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 as of 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").
It is further understood that [ ] shares of the Firm Stock (the
"DIRECTED STOCK") will initially be reserved by the several Underwriters for
offer and sale, upon the terms and conditions set forth in the Prospectus and
in accordance with the rules and regulations of the National Association of
Securities Dealers, Inc. (the "DIRECTED STOCK PROGRAM"), to employees and
directors of the Company and its affiliates and subsidiaries (collectively,
"PARTICIPANTS") who have heretofore delivered to the Representatives offers or
indications of interest to
2
<PAGE> 3
purchase shares of Directed Stock in form satisfactory to the Representatives,
and that any allocation of such Directed Stock among such persons will be made
in accordance with timely directions received by the Representatives from the
Company; provided, that under no circumstances will the Representatives or any
Underwriter be liable to the Company or to any such person for any action taken
or omitted in good faith in connection with such offering to any Participant.
It is further understood that any shares of Directed Stock which are not orally
confirmed for purchase by any Participant by the end of the business day on
which this agreement is executed will be offered by the Underwriters to the
public upon the terms and conditions set forth in the Prospectus.
SECTION 1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect to the Stock 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 "SECURITIES
ACT"), and the rules and regulations (the "RULES AND REGULATIONS") of the
Securities and Exchange Commission (the "COMMISSION") thereunder, (ii) been
filed with the Commission under the Securities Act and (iii) become effective
under the Securities Act. The registration statement contains two prospectuses
to be used in connection with the offering and sale of the Stock: the U.S.
prospectus, to be used in connection with the offering and sale of Stock in the
United States and Canada to United States and Canadian Persons, and the
international prospectus, to be used in connection with the offering and sale
of Stock outside the United States and Canada to persons other than United
States and Canadian Persons. The international prospectus is identical to the
U.S. prospectus except for the outside front cover page and the section
entitled "Underwriting". 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 amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the Commission
by the Company with the consent of the Representatives pursuant to Rule 424(a)
of the Rules and Regulations; "REGISTRATION STATEMENT" means such registration
statement, as amended at the Effective Time, including all information
contained in the final prospectus filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations and deemed to be a part of the registration
statement as of the Effective Time pursuant to Rule 430A of the Rules and
Regulations; and "PROSPECTUS" means the U.S. prospectus and the international
prospectus in the respective forms first used to
3
<PAGE> 4
confirm sales of Stock. If the Company has filed an abbreviated registration
statement to register additional shares of Common Stock pursuant to Rule 462(b)
under the Securities 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.
(b) 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 Securities Act and the Rules and 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.
(c) The Company and each of its significant subsidiaries (as defined
in Rule 1-02 of Regulation S-X under the Securities Act) (each, a "SIGNIFICANT
SUBSIDIARY" and collectively, "SIGNIFICANT SUBSIDIARIES"), which are listed on
Schedule 3 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 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.
(d) 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'
4
<PAGE> 5
qualifying shares) are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims.
(e) The shares of the Stock to be issued and sold by the Company to
the Underwriters hereunder and the shares of Common Stock to be issued and sold
by the Company to SBC in connection with the Strategic Alliance have been duly
authorized and, when issued and delivered against payment therefor in
accordance with this Agreement and the Securities Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable; and the
Stock and the Common Stock will conform in all material respects to the
descriptions thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered by
the Company.
(g) The execution, delivery and performance of this Agreement 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 Securities Act and such
consents, approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act, the Securities Act, applicable state
securities laws and securities laws of foreign jurisdictions in connection with
the purchase and distribution of the Stock by the Underwriters and the purchase
and distribution of the Notes by the underwriters named in the Debt
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.
5
<PAGE> 6
(h) 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 Securities 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.
(i) 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.
(j) 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.
(k) 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 7(f) hereof, are independent
public accountants as required by the Securities Act and the 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 7(f)
hereof, were independent accountants as required by the Securities Act and the
Rules and Regulations during the periods covered by the financial statements on
which they reported.
(l) 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
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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
material and do not interfere with the conduct of business of the Company and
its subsidiaries, taken as a whole.
(m) 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.
(n) 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.
(o) 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.
(p) 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 Securities Act or by the Rules and Regulations which have not been
described in the Prospectus or filed as exhibits to the Registration Statement.
(q) 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.
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(r) 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 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.
(s) 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.
(t) 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.
(u) 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
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<PAGE> 9
permitted only in accordance with management's authorization and (D) the
reported accountability for its assets is compared with existing assets at
reasonable intervals.
(v) 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.
(w) 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
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the consolidated financial 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.
(x) 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.
(y) 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.
(z) The Registration Statement and the Preliminary Prospectus
distributed in connection with the Directed Stock Program conform in all
material respects with applicable laws or regulations of foreign jurisdictions
in which they were distributed, and any further amendments or supplements to
the Registration Statement or the Prospectus will, when they become effective
or are filed with any applicable regulatory agencies, conform in all material
respects, with applicable laws or regulations of foreign jurisdictions in which
they are distributed in connection with the Directed Stock Program.
(aa) No consent, approval, authorization or order of, or qualification
with, any governmental body or agency, other than those obtained or that will
be obtained by the Closing Date, is required in connection with the offering of
the Directed Stock in any jurisdiction where the Directed Stock is being
offered.
SECTION 2. Purchase of the Stock by the Underwriters. On the basis of
the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell [ ] shares of the
Firm Stock to the several Underwriters and each of the Underwriters, severally
and not jointly, agrees to purchase the number of shares of the Firm Stock set
forth opposite that Underwriter's name in Schedule 1 and 2 hereto. The
respective purchase obligations of the Underwriters with respect to the Firm
Stock shall be rounded among the Underwriters to avoid fractional shares, as
the Representatives may determine.
In addition, the Company grants to the U.S. Underwriters an option to
purchase up to [ ] shares of Option Stock. Such option is granted for the
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<PAGE> 11
purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 4 hereof. Shares of Option Stock shall be
purchased severally for the account of the U.S. Underwriters in proportion to
the number of shares of Firm Stock set forth opposite the name of such U.S.
Underwriters in Schedule 1 hereto. The respective purchase obligations of each
U.S. Underwriter with respect to the Option Stock shall be adjusted by the U.S.
Representatives so that no U.S. Underwriter shall be obligated to purchase
Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $[ ]
per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), except upon payment
for all the Stock to be purchased on such Delivery Date as provided herein.
SECTION 3. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
SECTION 4. Delivery of and Payment for the Stock. Delivery of and
payment for the Firm Stock shall be made at the offices of Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017, at 10:00 A.M., New
York City time, on the fourth full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the Company. This date and time are sometimes
referred to as the "FIRST DELIVERY DATE." On the First Delivery Date, the
Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company of the purchase price by wire
transfer in immediately available funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a
further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than
2:00 P.M., New York City time, on the business day prior to the First Delivery
Date.
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The option granted in Section 2 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the U.S. Representatives. Such
notice shall set forth the aggregate number of shares of Option Stock as to
which the option is being exercised, the names in which the shares of Option
Stock are to be registered, the denominations in which the shares of Option
Stock are to be issued and the date and time, as determined by the U.S.
Representatives, when the shares of Option Stock are to be delivered; provided,
however, that this date and time shall not be earlier than the First Delivery
Date nor earlier than the second business day after the date on which the
option shall have been exercised nor later than the fifth business day after
the date on which the option shall have been exercised. The date and time the
shares of Option Stock are delivered are sometimes referred to as a "SECOND
DELIVERY DATE" and the First Delivery Date and any Second Delivery Date are
sometimes each referred to as a "DELIVERY DATE".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the U.S.
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver
or cause to be delivered the certificates representing the Option Stock to the
U.S. Representatives for the account of each U.S. Underwriter against payment
to or upon the order of the Company of the purchase price by wire transfer in
immediately available funds. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of each U.S. Underwriter hereunder. Upon delivery, the Option
Stock shall be registered in such names and in such denominations as the U.S.
Representatives shall request in the aforesaid written notice. For the purpose
of expediting the checking and packaging of the certificates for the Option
Stock, the Company shall make the certificates representing the Option Stock
available for inspection by the U.S. Representatives in New York, New York, not
later than 2:00 P.M., New York City time, on the business day prior to such
Second Delivery Date.
SECTION 5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Representatives, promptly after it receives
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notice thereof, of the time when any amendment to the Registration Statement
has been filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish the Representatives with
copies thereof; to advise the Representatives, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or suspending any such qualification, to use promptly its reasonable
best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as originally
filed with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits) and
(ii) each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus; and, if the delivery of a prospectus is required at
any time after the Effective Time in connection with the offering or sale of
the Stock or any other securities relating thereto and if at such time any
events shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be necessary
to amend or supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to prepare and
furnish without charge to each Underwriter and to any dealer in securities as
many copies as the Representatives may from time to time reasonably request of
an amended or supplemented Prospectus which will correct such statement or
omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Representatives, be required by
the Securities Act or requested by the Commission;
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(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing, which consent shall not be unreasonably
withheld;
(f) As soon as practicable after the Effective Date, to make generally
available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Securities Act
and the Rules and Regulations (including, at the option of the Company, Rule
158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives or make publicly available copies of all
materials furnished by the Company to its shareholders and all public reports
and all reports and financial statements furnished by the Company to the
principal national securities exchange upon which the Common Stock may be
listed pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of the
Commission thereunder;
(h) Promptly from time to time to take such action, with the
cooperation of the Representatives, as the Representatives may reasonably
request to qualify the Stock for offering and sale under the securities laws of
such jurisdictions as the Representatives may reasonably request and to comply
with such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be reasonably necessary to complete the
distribution of the Stock; provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose
of (or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock (other than (a) the Stock, (b) shares of Common Stock issued
and sold to SBC in connection with the Strategic Alliance as described in the
Prospectus, (c) shares of the Company's Class B Common Stock issued to The
Williams Companies, Inc. in connection with the Company's exercise of the
Lightel Option (as defined and on the terms described in the Prospectus), (d)
shares of Common Stock issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation plans existing on the date
hereof or pursuant to currently outstanding options, warrants or rights and (e)
shares of Common Stock used as
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consideration for acquisitions or issued in connection with strategic
alliances, provided that the recipient of any such shares of Common Stock
agrees to be bound by the transfer restrictions set forth herein for the
unexpired remaining term thereof), or sell or grant options, rights or warrants
with respect to any shares of Common Stock or securities convertible into or
exchangeable for Common Stock (other than the grant of options pursuant to
option plans existing on the date hereof), or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or otherwise,
in each case without the prior written consent of Salomon Smith Barney Inc. and
Lehman Brothers Inc. on behalf of the Underwriters; and to cause each
shareholder, officer and director of the Company to furnish to the
Representatives, prior to the First Delivery Date, a letter or letters,
substantially in the form of Exhibit A hereto, pursuant to which each such
person shall agree not to, directly or indirectly, (1) offer for sale, sell,
pledge or otherwise dispose of (or enter into any transaction or device which
is designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable for Common Stock or (2) enter into any swap or
other derivatives transaction that transfers to another, in whole or in part,
any of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case for a period of 180 days from the date of the
Prospectus, without the prior written consent of Salomon Smith Barney Inc. and
Lehman Brothers Inc. on behalf of the Underwriters;
(j) To apply for the listing of the Stock on the New York Stock
Exchange, and to use its reasonable best efforts to complete that listing,
subject only to official notice of issuance, prior to the First Delivery Date;
(k) To apply the net proceeds from the Transactions as set forth in
the Prospectus;
(l) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment company" as defined
in the Investment Company Act of 1940, as amended;
(m) To place stop transfer orders on any Directed Stock that has been
sold to Participants subject to the three month restriction on sale, transfer,
assignment, pledge or hypothecation imposed by NASD Regulation, Inc. under its
Interpretative Material 2110-1 on free-riding and withholding to the extent
necessary to ensure compliance with the three month restrictions; and
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(n) To comply with all applicable securities and other laws, rules and
regulations in each jurisdiction in which the Directed Stock is offered in
connection with the Directed Stock Program.
SECTION 6. Expenses. The Company agrees to pay (a) the costs incident
to the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement, the Agreement Between U.S. Underwriters and International
Managers, any Supplemental Agreement Among U.S. Underwriters and any other
related documents in connection with the offering, purchase, sale and delivery
of the stock; (e) the filing fees incident to securing the review by the
National Association of Securities Dealers, Inc. of the terms of sale of the
Stock; (f) any applicable listing or other fees; (g) the fees and expenses (not
in excess, in the aggregate, of $10,000) of qualifying the Stock under the
securities laws of the several jurisdictions as provided in Section 5(h) and of
preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the Underwriters); (h) all reasonable costs and
expenses of the Underwriters, including the reasonable fees and disbursements
of counsel for the Underwriters, directly attributable to the Directed Stock
Program; (i) 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 Stock, 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 and (j) all other costs and expenses incident to the
performance of the obligations of the Company under this Agreement; provided
that, except as provided in this Section 6 and in Section 11, the Underwriters
shall pay their own costs and expenses, including the costs and expenses of
their counsel, any transfer taxes on the Stock which they may sell and the
expenses of advertising any offering of the Stock made by the Underwriters.
SECTION 7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when
made and on each Delivery Date, of the representations and warranties of the
Company
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contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 5(a); no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or otherwise shall
have been complied with.
(b) All corporate proceedings and other legal matters incident to the
authorization of this Agreement, the Stock, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement, the
transactions contemplated hereby and the Transactions shall be reasonably
satisfactory in all material respects to counsel for the Underwriters, and the
Company shall have furnished to such counsel all documents and information that
they may reasonably request to enable them to pass upon such matters.
(c) 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 such Delivery Date, 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, an officer's
certificate regarding the outstanding capital stock and a certificate
of the transfer agent for the capital stock;
(ii) The shares of the Stock being delivered on such Delivery
Date to the Underwriters hereunder and the shares of Common Stock
being delivered on such Delivery Date to SBC in connection with the
Strategic Alliance have been duly and authorized and, when issued and
delivered against payment therefor will be validly issued, fully paid
and non-assessable;
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(iii) Except as described in the Prospectus, there are no
preemptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any shares of the Stock
pursuant to the Company's charter or by-laws or any agreement or other
instrument listed on Schedule __ to counsel's opinion as an
"Applicable Contract";
(iv) At the time the Registration Statement became effective, the
Registration Statement, and the Prospectus, as of its date (except
for the financial statements and financial schedules and other
financial data included therein or excluded therefrom or the exhibits
to the Registration Statement, as to which such counsel need express no
belief) appear on their face to be appropriately responsive in all
material respects with the requirements of the Securities Act and the
Rules and Regulations and 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 (v) below);
(v) The statements contained in the Prospectus under the captions
"Description of Capital Stock," insofar as they constitute summaries of
matters of law or summaries of provisions of the Stock, 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 sentences "We are
currently authorized to provide intrastate services, at least to some
extent, in 50 states," and "In a number of states, we have pending
applications for additional authority or are awaiting tariff
approval."); 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;
(vi) To the best of such counsel's knowledge based solely on
discussions 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
Securities Act or by the Rules and Regulations which have not been
described or filed as exhibits to the Registration Statement;
(vii) 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;
(viii) To the best of such counsel's knowledge, the issue and
sale of the shares of Stock being delivered on such Delivery Date by
the Company pursuant to this Agreement and the issue and sale of the
shares of Common
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<PAGE> 19
Stock being delivered on such Delivery Date to SBC in connection with
the Strategic Alliance, and the execution, delivery and compliance by
the Company with all of the provisions of this Agreement 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, 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 Securities
Act and such consents, approvals, filings authorizations, registrations
or qualifications as may be required under the Exchange Act and
applicable state securities laws, as to which counsel need express no
opinion, in connection with the purchase and distribution of the Stock
by the Underwriters and the purchase and distribution of the Notes by
the underwriters named in the Debt Underwriting Agreement, no
Governmental Approval is required for the execution, delivery and
performance of this Agreement or any of the Transaction Documents and
the consummation of the transactions contemplated hereby and thereby,
except for such Governmental Approvals as have been obtained or made;
and
(ix) The Company is not an "investment company" as defined in the
Investment Company Act of 1940, as amended.
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
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<PAGE> 20
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, any 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 (viii) 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 Securities 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 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
by the Commission; and
In rendering such opinion, such counsel may state that their opinion
is limited to matters governed by the Federal laws of the United States of
America, to the extent specifically referred to 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, 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 statements 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 (v) above).
(d) 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 such Delivery Date, in form and substance reasonably
satisfactory to the Representatives, to the effect that:
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<PAGE> 21
(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; and all of the issued
shares of capital stock of each Significant Subsidiary have been duly
and validly authorized and issued and are fully paid, non-assessable
and (except for directors' qualifying shares and as disclosed in the
Prospectus) are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(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 Securities 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)
21
<PAGE> 22
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 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; and
(vi) The statements contained in the Prospectus under the
captions "Relationships and Related Party Transactions," "Relationship
Between our Company and Williams" and "Description of 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.
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<PAGE> 23
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.
(e) The Representatives shall have received from Davis Polk &
Wardwell, counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, 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.
(f) At the time of execution of this Agreement, the Representatives
shall have received from Ernst & Young and Deloitte and Touche a letter or
letters, in form and substance satisfactory to the Representatives, addressed
to the Underwriters and dated the date hereof (i) confirming that they are
independent public accountants within the meaning of the Securities Act and are
in compliance with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission and (ii)
stating, as of the date hereof (or, with respect to matters involving changes
or developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five days
prior to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily covered by
accountants' "COMFORT LETTERS" to underwriters in connection with registered
public offerings.
(g) With respect to the letter or letters of Ernst & Young referred to
in the preceding paragraph and delivered to the Representatives concurrently
with the execution of this Agreement (the "INITIAL LETTERS"), the Company shall
have furnished to the Representatives a letter (the "BRING-DOWN LETTER") of
such accountants, addressed to the Underwriters and dated such Delivery Date
(i) confirming that they are independent public accountants within the meaning
of the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus,
as of a date not more than five days prior to the date of the bring-down
letter), the conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial letters and
(iii) confirming in all material respects the conclusions and findings set
forth in the initial letters.
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<PAGE> 24
(h) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President, a Vice President or its chief financial officer stating that:
(i) The representations, warranties and agreements of the Company
in Section 1 are true and correct as of such Delivery Date; the
Company has complied with all its agreements contained herein; and the
conditions set forth in Sections 7(a), 7(i) and 7 (j) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement and
the Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus.
(i) Since the date of the latest audited financial statements included
in the Prospectus (A) neither the Company nor any of the Significant
Subsidiaries shall have sustained 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, otherwise than as set forth or contemplated in the Prospectus or (B)
there shall not have been any material change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective 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, the effect of which, in any such case described
in clause (A) or (B), is, in the judgment of the Representatives, so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Stock being delivered on such Delivery
Date on the terms and in the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (a) (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange, or
trading in any securities of the Company on any exchange, shall have been
suspended or minimum prices shall have been established on any such exchange by
the Commission, by such exchange or by any other regulatory body or
governmental authority having jurisdiction, (ii) a general banking moratorium
in New York shall have been declared by Federal or New York state authorities,
(iii) the United States shall have become engaged in hostilities, there shall
have been an escalation in hostilities involving the United States or there
shall have been a declaration of a
24
<PAGE> 25
national emergency or war by the United States or (iv) there shall have
occurred a change in general economic, political or financial conditions (or
the effect of international conditions on the financial markets in the United
States shall be such) that in the judgment of the Representatives is material
and adverse and (b) in the case of any of the events specified in clauses
(a)(i) through (a)(iv) above, such event, singly or together with any other
such event, makes it, in the judgment of the Representatives, impracticable or
inadvisable to proceed with the public offering or delivery of the Stock being
delivered on such Delivery Date on the terms and in the manner contemplated in
the Prospectus.
(k) The New York Stock Exchange, Inc. shall have approved the Stock
for listing, subject only to official notice of issuance.
(l) You shall have received evidence satisfactory to you that each of
the Transactions (other than the offering of the Stock and the Notes) shall have
occurred or will occur simultaneously with the offering of the Stock on the
Closing Date, including the issuance of the intercompany note to The Williams
Companies, Inc. and the concurrent sale of the shares of Common Stock to SBC in
connection with the Strategic Alliance, in each case as described in the
Prospectus without modification, change or waiver, except for such
modifications, changes or waivers as have been specifically identified to the
Underwriters and which in the judgment of the Underwriters do not make it
impracticable or inadvisable to proceed with the offering and delivery of the
Stock on the Closing Date on the terms and in the manner contemplated in the
Prospectus.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
SECTION 8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any
Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto or (ii) the omission or alleged omission to state
25
<PAGE> 26
in any Preliminary Prospectus, the Registration Statement or the Prospectus, or
in any amendment or supplement thereto, any material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse each Underwriter and each such officer, employee or controlling
person promptly upon demand for any legal or other expenses reasonably incurred
by that Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in reliance upon and in
conformity with written information concerning such Underwriter furnished to
the Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein which information consists solely of the
information specified in Section 8(e); 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, claim, damage or liability resulted from the fact that such
Underwriter, in contravention of a requirement of applicable law, sold Stock to
a person to whom such Underwriter failed to send or give, at or prior to the
Closing Date, 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 Date to allow for distribution by the Closing Date) to
the Underwriter and the loss, claim, damage or liability 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 Date
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 Date to the party or parties asserting such
loss, claim, damage or liability 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 officer, employee or controlling person of that Underwriter.
Without limitation and in addition to its obligations under the other
paragraphs of this Section 8, the Company agrees to indemnify and hold harmless
Salomon Smith Barney Inc., its officers and employees and each person who
controls Salomon Smith Barney Inc. within the meaning of the Securities Act
against any loss, claim, damage or liability, joint or several, to which they
or any of them may become subject, insofar as such loss, claim, damage or
liability (or action in respect thereof) arises out of or is based upon Salomon
Smith Barney Inc.'s acting as a "qualified independent underwriter" (within the
meaning of National
26
<PAGE> 27
Association of Securities Dealers, Inc. Conduct Rule 2720) in connection with
the offering contemplated by this Agreement, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage
or liability results from the gross negligence or willful misconduct of Salomon
Smith Barney Inc.
The Company agrees to indemnify and hold harmless Salomon Smith Barney
Inc. (including its officers and employees) and each person, if any, who
controls Salomon Smith Barney Inc. within the meaning of the Securities Act
(collectively, the "SALOMON ENTITIES"), from and against any loss, claim,
damage or liability or any action in respect thereof to which any of the
Salomon Entities may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon (i) the failure of any Participant to pay for and accept delivery of
the Directed Stock sold pursuant to the Directed Stock Program which,
immediately following the effectiveness of the Registration Statement, were
subject to a properly confirmed agreement to purchase or (ii) the Directed
Stock Program, provided that, the Company shall not be responsible under this
subparagraph (ii) for any loss, claim, damage, liability or action that is
finally judicially determined to have resulted from the gross negligence or
willful misconduct of the Salomon Entities. The Company shall reimburse the
Salomon Entities promptly upon demand for any legal or other expenses
reasonably incurred by them in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action
as such expenses are incurred.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment
or supplement thereto, any material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each case only
to the extent that the untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of that Underwriter
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<PAGE> 28
specifically for inclusion therein, and shall reimburse the Company and any
such director, officer or controlling person for any legal or other expenses
reasonably incurred by the Company or any such director, officer or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses are
incurred. 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.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however,
that the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 8. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
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 8 for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than 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 respective officers, employees and 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 8 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 reasonably 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 make it improper for such counsel to
represent both the indemnified party and the Company (in which case the Company
28
<PAGE> 29
shall not have the right to assume the defense of such action or proceeding on
behalf of such indemnified party). The Company shall not, in connection with
any one such action or proceeding, or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm for the Underwriters and all such
indemnified parties (in addition to any local counsel), which firm will be
designated by the Representatives, as representative of the Underwriters, and
the Company shall reimburse all such reasonable fees and expenses as they are
billed. Notwithstanding anything contained herein to the contrary, if indemnity
may be sought pursuant to Section 8(a) hereof in respect of such claim or
action, then in addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the fees and expenses of not more than
one separate firm (in addition to any local counsel) for the Salomon Entities
for the defense of any loss, claim, damage, liability or action arising out of
the Directed Stock Program. No indemnifying party shall (i) 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 pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) 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 be 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.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Stock or (ii) if the allocation provided by clause (i)
above 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 the Underwriters on
the other with respect to the statements or omissions which resulted in such
loss, claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the
29
<PAGE> 30
one hand and the Underwriters on the other with respect to such offering shall
be deemed to be in the same proportion as the total net proceeds from the
offering of the Stock purchased under this Agreement (before deducting
expenses) received by the Company, on the one hand, and the total underwriting
discounts and commissions received by the Underwriters with respect to the
shares of the Stock purchased under this Agreement, on the other hand, bear to
the total gross proceeds from the offering of the shares of the Stock under
this Agreement, in each case as set forth in the table on the cover page of the
Prospectus. Benefits received by Salomon Smith Barney Inc. in its capacity as
"qualified independent underwriter" (within the meaning of National Association
of Securities Dealers, Inc. Conduct Rule 2720) shall be deemed to be equal to
the compensation received by Salomon Smith Barney for acting in such capacity.
The relative fault shall be determined by reference to whether the 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 the
Underwriters, the intent of the parties and their relative 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 contributions pursuant to this Section were to be 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 into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section shall be deemed to
include, for purposes of this Section 8(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8(d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Stock underwritten
by it and distributed to the public was offered to the public exceeds the
amount of any damages which such Underwriter has otherwise paid or become
liable to pay by reason of any untrue or alleged untrue statement or omission
or alleged omission, nor shall Salomon Smith Barney Inc. in its capacity as
"qualified independent underwriter" be responsible for any amount in excess of
the compensation received by Salomon Smith Barney Inc. for acting in such
capacity. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 8(d) are
several in proportion to their respective underwriting obligations and not
joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning
over-allotments and the concession and reallowance figures appearing under the
caption
30
<PAGE> 31
"Underwriting" in, the Prospectus are correct and constitute the only
information concerning such Underwriters furnished in writing to the Company by
or on behalf of the Underwriters specifically for inclusion in the Registration
Statement and the Prospectus.
SECTION 9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1 or
Schedule 2 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting Underwriters in Schedule
1 or Schedule 2 hereto; provided, however, that the remaining non-defaulting
Underwriters shall not be obligated to purchase any of the Stock on such
Delivery Date if the total number of shares of the Stock which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such date exceeds
9.09% of the total number of shares of the Stock to be purchased on such
Delivery Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase more than 110% of the number of shares of the Stock which
it agreed to purchase on such Delivery Date pursuant to the terms of Section 3.
If the foregoing maximums are exceeded, the remaining non-defaulting
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Stock to be purchased
on such Delivery Date. If the remaining Underwriters or other underwriters
satisfactory to the Representatives and the Company do not elect to purchase
the shares which the defaulting Underwriter or Underwriters agreed but failed
to purchase on such Delivery Date, this Agreement (or, with respect to the
Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company, except that the Company
will continue to be liable for the payment of expenses to the extent set forth
in Sections 6 and 11. As used in this Agreement, the term "UNDERWRITER"
includes, for all purposes of this Agreement unless the context requires
otherwise, any party not listed in Schedule 1 or 2 hereto who, pursuant to this
Section 9, purchases which a defaulting Underwriter agreed but failed to
purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to
effect any
31
<PAGE> 32
changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
SECTION 10. Termination. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(i) or 7(j), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
SECTION 11. Reimbursement of Underwriters' Expense. If the Company
shall fail to tender the Stock for delivery to the Underwriters by reason of
any failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company
(including, without limitation, with respect to the transactions) is not
fulfilled, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred
by the Underwriters in connection with this Agreement and the proposed purchase
of the Stock, and upon demand the Company shall pay the full amount thereof to
the Representatives. If this Agreement is terminated pursuant to Section 9 by
reason of the default of one or more Underwriters, the Company shall not be
obligated to reimburse any defaulting Underwriter on account of those expenses.
SECTION 12. Notices, Etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to (i) Salomon Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013, Attention: [ ] with a copy, in the case of
any notice pursuant to Section 8(c), to [ ] and (ii) Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant
to Section 8(c), to the Director of Litigation, Office of the General Counsel,
Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: General Counsel (Fax: (918) 573-4503);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
32
<PAGE> 33
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by
the Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement
given or made on behalf of the Underwriters by Salomon Smith Barney Inc. and
Lehman Brothers Inc. on behalf of the Representatives.
SECTION 13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the
Company, and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the Company
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any Underwriter within the meaning of
Section 15 of the Securities Act and (B) the indemnity agreement of the
Underwriters contained in Section 8(b) of this Agreement shall be deemed to be
for the benefit of directors of the Company, officers of the Company who have
signed the Registration Statement and any person controlling the Company within
the meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 13, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
SECTION 14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
SECTION 15. Definition of the Terms "BUSINESS DAY" and "SUBSIDIARY".
For purposes of this Agreement, (a) "BUSINESS DAY" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "SUBSIDIARY" has the meaning set forth in Rule 405 of the Rules
and Regulations.
SECTION 16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
SECTION 17. Counterparts. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
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<PAGE> 34
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
SECTION 18. Headings. The headings herein are inserted for convenience
of reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
34
<PAGE> 35
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
WILLIAMS COMMUNICATIONS GROUP, INC.
By
--------------------------------
Name:
Title:
35
<PAGE> 36
Accepted:
SALOMON SMITH BARNEY INC.
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By SALOMON SMITH BARNEY INC.
By
---------------------------------------
Authorized Representative
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
SALOMON BROTHERS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
For themselves and as Representatives
of the several Underwriters named
in Schedule 2 hereto
By LEHMAN BROTHERS INTERNATIONAL (EUROPE)
By
---------------------------------------
Authorized Representative
36
<PAGE> 37
SCHEDULE 1
<TABLE>
<CAPTION>
Number of Shares of Firm
U.S. Underwriters Stock to be Purchased
----------------- ------------------------
<S> <C>
Salomon Smith Barney Inc......................................
Lehman Brothers Inc...........................................
Merrill Lynch, Pierce, Fenner &
Smith Incorporated.........................................
Banc of America Securities LLC................................
CIBC World Markets Corp. .....................................
Credit Suisse First Boston Corporation........................
Donaldson, Lukfin & Jenrette Securities
Corporation................................................
Goldman, Sachs & Co. ........................................
Total......................................................... ===================
</TABLE>
<PAGE> 38
SCHEDULE 2
<TABLE>
<CAPTION>
Number of Shares of
International Underwriters Firm Stock to be Purchased
- -------------------------- --------------------------
<S> <C>
Lehman Brothers International (Europe)........................
Salomon Brothers International Limited........................
Merrill Lynch International...................................
Cazenove & Co. ...............................................
Bank of America International Limited.........................
CIBC World Markets International Limited......................
Credit Suisse First Boston Corporation........................
Donaldson, Lufkin & Jenrette International....................
Goldman Sachs International...................................
Total.................................................................... ===================
</TABLE>
<PAGE> 39
SCHEDULE 3
Significant Subsidiaries
2
<PAGE> 40
EXHIBIT A
LOCK-UP LETTER AGREEMENT
SALOMON SMITH BARNEY INC.
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
As Representatives of the several
Underwriters named in Schedule 1,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
SALOMON BROTHERS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
As Representatives of the several
Underwriters named in Schedule 2,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
The undersigned understands that you and certain other firms propose
to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT")
providing for the purchase by you and such other firms (the "UNDERWRITERS") of
shares (the "SHARES") of Common Stock, par value $0.01 per share (the "COMMON
STOCK"), of Williams Communications Group, Inc., a Delaware corporation (the
"COMPANY"), and that the Underwriters propose to reoffer the Shares to the
public (the "OFFERING").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Salomon
Smith Barney Inc. and Lehman Brothers Inc., on behalf of the Underwriters, the
undersigned will not, directly or indirectly, (1) offer for sale, sell, pledge,
or otherwise dispose of (or enter into any transaction or device that is
designed to, or could be expected to, result in the disposition by any person
at any time in the future of) any shares of
1
<PAGE> 41
Common Stock (including, without limitation, shares of Common Stock that may be
deemed to be beneficially owned by the undersigned in accordance with the rules
and regulations of the Securities and Exchange Commission and shares of Common
Stock that may be issued upon exercise of any option or warrant) or securities
convertible into or exchangeable for Common Stock (other than the Shares) owned
by the undersigned on the date of execution of this Lock-Up Letter Agreement or
on the date of the completion of the Offering, or (2) enter into any swap or
other derivatives transaction that transfers to another, in whole or in part,
any of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or other securities, in cash or
otherwise, for a period of 180 days after the date of the final Prospectus
relating to the Offering.
In furtherance of the foregoing, the Company and its Transfer Agent
are hereby authorized to decline to make any transfer of securities if such
transfer would constitute a violation or breach of this Lock-Up Letter
Agreement.
It is understood that, if the Company notifies you that it does not
intend to proceed with the Offering, if the Underwriting Agreement does not
become effective, or if the Underwriting Agreement (other than the provisions
thereof which survive termination) shall terminate or be terminated prior to
payment for and delivery of the Shares, we will be released from our
obligations under this Lock-Up Letter Agreement.
The undersigned understands that the Company and the Underwriters will
proceed with the Offering in reliance on this Lock-Up Letter Agreement.
Whether or not the Offering actually occurs depends on a number of
factors, including market conditions. Any Offering will only be made pursuant
to an Underwriting Agreement, the terms of which are subject to negotiation
between the Company and the Underwriters.
2
<PAGE> 42
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into this Lock-Up Letter Agreement and
that, upon request, the undersigned will execute any additional documents
necessary in connection with the enforcement hereof. Any obligations of the
undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
Very truly yours,
By:
-------------------------------
Name:
Title:
Dated:
-----------------
3
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
WILLIAMS COMMUNICATIONS GROUP, INC.
The name of the corporation (which is hereinafter referred to as the
"Corporation") is "Williams Communications Group, Inc."
The original Certificate of Incorporation (the "Certificate of
Incorporation") was filed with the Secretary of State of the State of Delaware
on December 1, 1994, under the name "WilTel Technology Ventures, Inc." Such
Certificate of Incorporation was amended on September 20, 1995, and February 11,
1997.
This Restated Certificate of Incorporation, which restates, integrates
and amends the Certificate of Incorporation, has been duly adopted in accordance
with Sections 103, 242 and 245 of the General Corporation Law of the State of
Delaware. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read in its entirety as follows:
ARTICLE I
The name of this corporation (hereinafter called the "Corporation") is:
WILLIAMS COMMUNICATIONS GROUP, INC.
ARTICLE II
The purpose or purposes of this Corporation shall be to engage in any
lawful acts or activities for which corporations may be organized under the
General Corporation Law of the State of Delaware (the "Delaware Code").
ARTICLE III
The name and address of the Corporation's registered agent in the State
of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, Wilmington, Delaware 19801.
<PAGE> 2
ARTICLE IV
CAPITAL STOCK
SECTION 1. Authorized Stock.
The maximum number of shares of capital stock which this Corporation
shall have authority to issue is 2,000,000,000 consisting of 1,000,000,000
shares of class A common stock, $.01 par value per share (the "Class A Common
Stock"), 500,000,000 shares of class B common stock, $.01 par value per share
(the "Class B Common Stock"), and 500,000,000 shares of preferred stock, $.01
par value per share (the "Preferred Stock"). The Class A Common Stock and the
Class B Common Stock are hereinafter referred to collectively as the "Common
Stock." The powers, preferences and rights and the qualifications, limitations
and restrictions in respect of the shares of each class are set forth in the
following Sections.
SECTION 2. Preferred Stock.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby expressly authorized, by resolution or
resolutions, to provide for the issuance of up to 500,000,000 shares of
Preferred Stock in one or more series and, by filing a certificate pursuant to
the Delaware Code (hereinafter referred to as a "Preferred Stock Designation"),
to establish from time to time the number of shares constituting each such
series and the designation of such series, the voting powers (if any) of the
shares of such series, and the relative rights, powers, privileges, preferences
and limitations of the shares of such series. The authority of the Board of
Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) the designation of the series, which may be made by
distinguishing number, letter or title;
(b) the number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease, but not below the number of shares
thereof then outstanding) in the manner permitted by law;
(c) the rate of any dividends (or method of determining the
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends shall be paid and the date or dates or the method for
determining the date or dates upon which such dividends shall be payable;
2
<PAGE> 3
(d) whether dividends, if any, shall be cumulative or
noncumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates or method of determining the date or dates
from which dividends on the shares of such series shall cumulate;
(e) if the shares of such series may be redeemed by the
Corporation, the price or prices (or method of determining such price or prices)
at which, the form of payment of such price or prices (which may be cash,
property or rights, including securities of the Corporation or of another
corporation or other entity) for which, the period or periods within which and
the other terms and conditions upon which the shares of such series may be
redeemed, in whole or in part, at the option of the Corporation or at the option
of the holder or holders thereof or upon the happening of a specified event or
events, if any, including the obligation, if any, of the Corporation to purchase
or redeem shares of such series pursuant to a sinking fund or otherwise;
(f) the amount payable out of the assets of the Corporation to
the holders of shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation;
(g) provisions, if any, for the conversion or exchange of the
shares of such series, at any time or times, at the option of the holder or
holders thereof or at the option of the Corporation or upon the happening of a
specified event or events, into shares of any other class or classes or any
other series of the same class of capital stock of the Corporation or into any
other security of the Corporation, or into the stock or other securities of any
other corporation or other entity, and the price or prices or rate or rates of
conversion or exchange and any adjustments applicable thereto, and all other
terms and conditions upon which such conversion or exchange may be made;
(h) restrictions on the issuance of shares of the same series
or of any other class or series of capital stock of the Corporation, if any; and
(i) the voting rights and powers, if any, of the holders of
shares of the series
Shares of Preferred Stock, regardless of series, that are converted
into other securities or other consideration shall be retired and canceled and
the Corporation shall take all such actions as are necessary to cause such
shares to have the status of authorized but unissued shares of Preferred Stock,
without designation as to series.
3
<PAGE> 4
SECTION 3. Common Stock.
A. Voting Rights.
Subject to applicable law and the rights of any outstanding series of
Preferred Stock to vote as a separate class or series, the shares of Class A
Common Stock and Class B Common Stock shall vote together as a single class and
shall have the following voting rights: (i) each share of Class A Common Stock
shall entitle the holder thereof to one (1) vote upon all matters upon which
stockholders shall have the right to vote; and (ii) each share of Class B Common
Stock shall entitle the holder thereof to ten (10) votes upon all matters upon
which stockholders shall have the right to vote, subject to Section 3.E.8. of
this Article IV. The authorized number of shares of Class A Common Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding or reserved for issuance upon conversion of the Class B Common Stock
or any other class or series of outstanding Stock) by the affirmative vote of
the holders of Common Stock entitled to cast a majority of the total votes
entitled to be cast by the holders of the Common Stock, voting as a single
class, without a separate class vote of the holders of the Class A Common Stock.
The Corporation may, as a condition to counting the votes cast by any holder of
shares of Class B Common Stock, require proof as set forth in Section 3.E.8 of
this Article IV that the shares of Class B Common Stock held by such holder have
not been converted into shares of Class A Common Stock. Except as otherwise
provided by law or by another provision of this Restated Certificate of
Incorporation or by a Preferred Stock Designation, the Common Stock shall have
the exclusive right to vote for the election of directors and on all other
matters or proposals presented to the stockholders and all matters to be voted
on by stockholders must be approved by a majority of the outstanding shares
entitled to vote; provided, however, that the holders of shares of Common Stock,
as such, shall not be entitled to vote on any amendment of this Restated
Certificate of Incorporation (including any amendment of any provision of a
Preferred Stock Designation) that solely relates to the powers, privileges,
preferences or rights pertaining to one or more outstanding series of Preferred
Stock, or the number of shares of any such series, and does not affect the
number of authorized shares of Preferred Stock or the powers, privileges and
rights pertaining to the Common Stock, if the holders of any of such series of
Preferred Stock are entitled, separately or together with the holders of any
other series of Preferred Stock, to vote thereon pursuant to this Restated
Certificate of Incorporation (including any Preferred Stock Designation) or
pursuant to the Delaware Code, unless a vote of holders of shares of Common
Stock is otherwise required by any provision of the
4
<PAGE> 5
Preferred Stock Designation for any such series or any other provision of this
Restated Certificate of Incorporation fixing the powers, privileges, and rights
of any such series or the qualifications, limitations or restrictions thereon or
is otherwise required by law. Holders of Preferred Stock of any series shall not
be entitled to receive notice of any meeting of stockholders at which they are
not entitled to vote, except as may be explicitly provided by any Preferred
Stock Designation. The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock, without a vote of the holders of the
Preferred Stock, or any series thereof, unless a vote of any such holders is
required pursuant to another provision of this Restated Certificate of
Incorporation (including any Preferred Stock Designation). Except as otherwise
provided by law or in this Restated Certificate of Incorporation, and subject to
any voting rights granted to holders of any outstanding Preferred Stock,
amendments to this Restated Certificate of Incorporation must be approved by a
majority of the votes entitled to be cast by all shares of Class A Common Stock
and Class B Common Stock, voting together as a single class, provided, however,
that any amendment to this Restated Certificate of Incorporation that would
alter or change the powers, preferences or special rights of the Class A Common
Stock so as to affect them adversely also must be approved by a majority of the
votes entitled to be cast by the holders of the Class A Common Stock, voting as
a separate class. Any amendment to this Restated Certificate of Incorporation to
increase the authorized shares of any class requires the approval only of a
majority of the votes entitled to be cast by all shares of Class A Common Stock
and Class B Common Stock, voting together as a single class, subject to the
rights set forth in any series of Preferred Stock. Holders of shares of Common
Stock are not entitled to cumulate their votes in the election of directors.
B. Dividends and Distributions.
Subject to the preferential and other dividend rights of any
outstanding series of Preferred Stock, holders of Class A Common Stock and Class
B Common Stock shall be entitled to such dividends and other distributions in
cash, stock or property of the Corporation as may be declared thereon by the
Board of Directors from time to time out of assets or funds of the Corporation
legally available therefor. No dividend or other distribution may be declared or
paid on any share of Class A Common Stock unless a like dividend or other
distribution is simultaneously declared or paid, as the case may be, on each
share of Class B Common Stock, nor shall any dividend or other distribution be
declared or paid on any share of Class B Common Stock unless a like dividend or
other distribution is simultaneously declared or paid, as the case
5
<PAGE> 6
may be, on each share of Class A Common Stock, in each case without preference
or priority of any kind; provided, however, that all dividends and distributions
on the Class A Common Stock and Class B Common Stock payable in shares of Common
Stock of the Corporation shall be made in shares of Class A Common Stock and
Class B Common Stock, respectively. In no event will shares of either class of
Common Stock be reclassified, split, divided or combined unless the outstanding
shares of the other class of Common Stock shall be proportionately reclassified,
split, divided or combined.
In the event of a transaction as a result of which the shares of Class
A Common Stock are converted into or exchanged for one or more other securities,
cash or other property (a "Class A Conversion Event"), then from and after such
Class A Conversion Event, a holder of Class B Common Stock shall be entitled to
receive, upon the conversion of such Class B Common Stock pursuant to
Section 3.E. of this Article IV, the amount of such securities, cash and other
property that such holder would have received if the conversion of such Class B
Common Stock had occurred immediately prior to the record date (or if there is
no record date, the effective date) of the Class A Conversion Event and if the
securities, cash or other property that the Class A Common Stock may be
converted into or exchanged for in a Class A Conversion Event is dependent upon
the holder of the Class A Common Stock making an election, the holder of the
Class A Common Stock had failed to make an election. This paragraph shall be
applicable in the same manner to all successive conversions or exchanges of
securities issued pursuant to any Class A Conversion Event. No adjustments in
respect of dividends shall be made upon the conversion of any share of Class B
Common Stock; provided, however, that if a share shall be converted after the
record date for the payment of a dividend or other distribution on shares of
Class B Common Stock but before such payment, then the record holder of such
share at the close of business on such record date shall be entitled to receive
the dividend or other distribution payable on such share of Class B Common Stock
on the payment date notwithstanding the conversion thereof.
C. Options, Rights or Warrants.
Subject to Section 3.B. of this Article IV, the Corporation shall not,
and shall not be entitled to, issue additional shares of Class B Common Stock,
or issue options, rights or warrants to subscribe for or purchase additional
shares of Class B Common Stock, except that the Corporation may (i) make a pro
rata offer to all holders of Common Stock of rights to subscribe for additional
shares of the class of Common Stock held by them and (ii) issue additional
shares of Class B Common Stock under the circumstances permitted by the
Separation Agreement (the "Separation
6
<PAGE> 7
Agreement"), dated as of , 1999, between the Corporation and The Williams
Companies, Inc. ("Williams"). The Corporation may make offerings of options,
rights or warrants to subscribe for or purchase shares of any class or classes
of capital stock (other than Class B Common Stock) to all holders of Class A
Common Stock or Class B Common Stock if an identical offering is made
simultaneously to all the holders of the other class of Common Stock. All
offerings of options, rights or warrants shall offer the respective holders of
Class A Common Stock and Class B Common Stock the right to subscribe or purchase
at the same consideration per share.
D. Merger or Consolidation.
In the event of a merger or consolidation of the Corporation with or
into another entity (whether or not the Corporation is the surviving entity),
the holders of each share of Class A Common Stock and Class B Common Stock shall
be entitled to receive the same per share consideration as the per share
consideration, if any, received by the holders of each share of the other class
of Common Stock; provided that, if such consideration shall consist in any part
of voting securities (or of options, rights or warrants to purchase, or of
securities convertible into or exchangeable for, voting securities), then the
Corporation may provide in the applicable merger or such other agreement for the
holders of shares of Class B Common Stock to receive, on a per share basis,
voting securities with ten (10) times the number of votes per share as those
voting securities to be received by the holders of shares of Class A Common
Stock (or options, rights or warrants to purchase, or securities convertible
into or exchangeable for, voting securities with ten (10) times the number of
votes per share as those voting securities issuable upon exercise of the
options, rights or warrants to be received by the holders of the shares of Class
A Common Stock, or into which the convertible or exchangeable securities to be
received by the holders of the shares of Class A Common Stock may be converted
or exchanged).
E. Conversion of Class B Common Stock.
1. Voluntary Conversion.
Prior to the date on which shares of Class B Common
Stock are transferred to stockholders of Williams in a
Tax-Free Spin-Off (as defined in paragraph (E) (3)(a) below),
each share of Class B Common Stock shall be convertible, at
the option of its record holder, into one validly issued,
fully paid and non-assessable share of Class A Common Stock at
any time. Following a Tax-Free Spin-Off, shares of Class B
Common Stock shall no longer be convertible into shares of
Class A Common Stock.
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2. Voluntary Conversion Procedures.
At the time of a voluntary conversion, the record
holder of shares of Class B Common Stock shall deliver to the
principal office of the Corporation or any transfer agent for
shares of the Class A Common Stock (i) the certificate or
certificates representing the shares of Class B Common Stock
to be converted, duly endorsed in blank or accompanied by
proper instruments of transfer, and (ii) written notice to the
Corporation stating that the record holder elects to convert
such share or shares and stating the name or names and
denominations in which the certificate or certificates
representing the shares of Class A Common Stock issuable upon
the conversion are to be issued and including instructions for
the delivery thereof. Conversion shall be deemed to have been
effected at the time when delivery is made to the principal
office of the Corporation or the office of any transfer agent
for shares of Class A Common Stock of such written notice and
the certificate or certificates representing the shares of
Class B Common Stock to be converted, and as of such time,
each Person (as hereinafter defined) named in such written
notice as the Person to whom a certificate representing shares
of Class A Common Stock is to be issued shall be deemed to be
the holder of record of the number of shares of Class A Common
Stock to be evidenced by that certificate. Upon such delivery,
the Corporation or its transfer agent shall promptly issue and
deliver a certificate or certificates representing the number
of shares of Class A Common Stock to which such record holder
is entitled by reason of such conversion, and shall cause such
shares of Class A Common Stock to be registered in the name of
the record holder.
3. Automatic Conversion.
(a) Subject to Section 3.E.3.(b) of this
Article IV, prior to a Tax-Free Spin-Off, in the event of any
Transfer (as hereinafter defined) of any share of Class B
Common Stock to any Person, other than to the Williams Group
(as defined in paragraph (E)(9) below) such share of Class B
Common Stock shall automatically, without any further action,
convert into one share of Class A Common Stock.
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Notwithstanding anything to the contrary set forth in this
Restated Certificate of Incorporation, shares of Class B
Common Stock shall not convert into shares of Class A Common
Stock (i) in any transfer effected in connection with a
distribution of Class B Common Stock to stockholders or
security holders of Williams in a transaction (including any
distribution in exchange for shares of capital stock or
securities of Williams) intended to qualify as a tax-free
distribution under Section 355 of the Internal Revenue Code of
1986, as amended (the "Code"), or any successor provision (a
"Tax-Free Spin-Off") or (ii) in any transfer after a Tax-Free
Spin-Off. For purposes of this paragraph (E), a Tax-Free
Spin-Off shall be deemed to have occurred at the time shares
are first transferred to stockholders or security holders of
Williams.
(b) Notwithstanding anything to the contrary
set forth in this Article IV, Section 3, a holder of shares of
Class B Common Stock may pledge such holder's shares of Class
B Common Stock to a financial institution pursuant to a bona
fide pledge of such shares of Class B Common Stock as
collateral security for any indebtedness or other obligation
of any Person (the "Pledged Stock") due to the pledgee or its
nominee; provided, however, that (i) such shares shall not be
voted by or registered in the name of the pledgee and shall
remain subject to the provisions of this Article IV, Section
3.E. and (ii) upon any foreclosure, realization or other
similar action by the pledgee prior to a Tax-Free Spin-Off,
such Pledged Stock shall automatically convert into shares of
Class A Common Stock on a share-for-share basis.
(c) The foregoing automatic conversion events
described in this Article IV, Section 3.E.3 shall be referred
to hereinafter as an "Event of Automatic Conversion." The
determination of whether an Event of Automatic Conversion
shall have occurred will be made by the Board of Directors or
a duly authorized committee thereof in accordance with Article
IV, Section 3.E.8 below.
4. Automatic Conversion Procedure.
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Any conversion pursuant to an Event of Automatic
Conversion shall be deemed to have been effected at the time
the Event of Automatic Conversion occurred (the "Conversion
Time"). At the Conversion Time, the certificate or
certificates that represented immediately prior thereto the
shares of Class B Common Stock that were so converted (the
"Converted Class B Common Stock") shall, automatically and
without further action, represent the same number of shares of
Class A Common Stock. Holders of Converted Class B Common
Stock shall deliver their certificates, duly endorsed in blank
or accompanied by proper instruments of transfer, to the
principal office of the Corporation or the office of any
transfer agent for shares of the Class A Common Stock,
together with a written notice setting out the name or names
(with addresses) and denominations in which the certificate or
certificates representing such shares of Class A Common Stock
are to be issued and including instructions for delivery
thereof. Upon such delivery, the Corporation or its transfer
agent shall promptly issue and deliver at such stated address
to such holder of shares of Class A Common Stock a certificate
or certificates representing the number of shares of Class A
Common Stock to which such holder is entitled by reason of
such conversion, and shall cause such shares of Class A Common
Stock to be registered in the name of such holder. The Person
entitled to receive the shares of Class A Common Stock
issuable upon such conversion shall be treated for all
purposes as the record holder of such shares of Class A Common
Stock at and as of the Conversion Time, and the rights of such
Person as a holder of shares of Class B Common Stock that have
been converted shall cease and terminate at and as of the
Conversion Time, in each case without regard to any failure by
such holder to deliver the certificates or the notice required
by this Section.
5. Unconverted Shares.
In the event of the conversion of less than all the
shares of Class B Common Stock evidenced by a certificate
surrendered to the Corporation in accordance with the
procedures of this Section 3.E., the Corporation shall execute
and deliver to, or upon the written order of, the holder of
such unconverted shares, without charge to such holder, a new
certificate evidencing the number of shares of Class B Common
Stock not converted.
6. Retired Shares.
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Shares of Class B Common Stock that are converted
into shares of Class A Common Stock as provided herein shall
be retired and canceled and the Corporation shall take all
such actions as are necessary to cause such shares to have the
status of authorized but unissued shares of Class B Common
Stock.
7. Reservation.
The Corporation shall at all times prior to a
Tax-Free Spin-Off reserve and keep available, out of its
authorized and unissued shares of Class A Common Stock, for
the purposes of effecting conversions, such number of duly
authorized shares of Class A Common Stock as shall from time
to time be sufficient to effect the conversion of all
outstanding shares of Class B Common Stock. All the shares of
Class A Common Stock so issuable shall, when so issued, be
duly and validly issued, fully paid and non-assessable and
free from liens and charges with respect to such issuance.
8. Determination of Voting Rights and Event of Automatic
Conversion.
The Board of Directors of the Corporation or a duly
authorized committee thereof shall have the power to
determine, in good faith after reasonable inquiry, whether an
Event of Automatic Conversion has occurred with respect to any
share of Class B Common Stock. A determination by the Board of
Directors of the Corporation or such committee that an Event
of Automatic Conversion has occurred shall be conclusive. As a
condition to counting the votes cast by any holder of shares
of Class B Common Stock at any annual or special meeting
of stockholders, in connection with any written consent of
stockholders, as a condition to registration of transfer of
shares of Class B Common Stock, or for any other purpose, the
Board of Directors or a duly authorized committee thereof, in
its discretion, may require the holder of such shares to
furnish such affidavits or other proof as the Board of
Directors or such committee deems necessary or advisable to
determine whether an Event of Automatic Conversion shall have
occurred. If the Board of Directors or such committee shall
determine that a holder has substantially failed to comply
promptly with any request by the Board of Directors or such
committee for such proof, the shares held by such holder shall
be
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entitled to one (1) vote per share until such time as the
Board of Directors or such committee shall determine that such
holder has complied with such request. The Board of Directors
or a duly authorized committee thereof may exercise the
authority granted by this Article IV, Section 3.E.8 through
duly authorized officers or agents of the Corporation.
9. Definitions.
For purposes of this Article IV, Section E:
(a) Beneficial Owner.
A Person shall be deemed the "Beneficial Owner"
of, and to "Beneficially Own" and to have
"Beneficial Ownership" of, any share (i) which
such Person has the power to vote or dispose,
or to direct the voting or disposition of,
directly or indirectly, through any agreement,
arrangement or understanding (written or oral),
or (ii) which such Person has the right to
acquire (whether such right is exercisable
immediately or only after the passage of time)
pursuant to any agreement, arrangement or
understanding (written or oral), or upon the
exercise of conversion rights, exchange rights,
warrants or options, or otherwise.
(b) Nominee.
The term "Nominee" shall mean a Person that is
acting as a bona fide nominee for the
registration of record ownership of securities
Beneficially Owned by another Person.
(c) Subsidiary.
The term "subsidiary" shall mean, as to any
person or entity, a corporation, partnership,
joint venture, association or other entity in
which such person or entity beneficially owns
(directly or indirectly) 50% or more of the
outstanding voting stock, voting power,
partnership interests or similar voting
interests, or 50% or more of the value of the
equity of such entity.
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(d) Person.
The term "Person" means any natural person,
corporation, association, partnership, limited
liability company, organization, business,
government or political subdivision thereof or
governmental agency.
(e) Transfer.
The term "Transfer" shall mean any sale,
transfer (including a transfer made in whole
or in part without consideration as a gift),
exchange, assignment, pledge, encumbrance,
alienation or any other disposition or
hypothecation of record ownership or of
Beneficial Ownership of any share, whether by
operation of law or otherwise; provided,
however, that (i) a pledge of any share made
in accordance with the provisions of Article
IV, Section 3.E.3.(b). and (ii) a grant of a
revocable proxy, written consent or other
authorization with respect to any share to a
Person designated by the Board of Directors or
management of the Corporation who is
soliciting proxies on behalf of the
Corporation shall not be considered a
"Transfer"; and provided, further, that in the
case of any transferee of record ownership
that is a Nominee, such Transfer of record
ownership shall be deemed to be made to the
Person or Persons for whom such Nominee is
acting.
(f) Williams Group.
.
The term "Williams Group" shall mean Williams,
its direct and indirect subsidiaries, any
person or entity in which Williams or any
successor beneficially owns, directly or
indirectly, at least 50% of the equity or the
voting securities, any successor of any of the
foregoing and stockholders of Williams who
receive the Corporation's Class B Common Stock
in a transaction
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intended to qualify as a tax-free distribution
under section 355 of the Code, or any
corresponding provision of any successor
statute in a Tax-Free Spin-Off, but shall not
include the Corporation and its subsidiaries.
10. Stock Legend.
The Corporation shall include a legend on the
certificates representing shares of Class B Common Stock
stating that such shares are subject to automatic conversion
in certain circumstances as set forth in this Article IV,
Section 3.E.
11. Taxes.
The issuance of a certificate representing shares of
Class A Common Stock issued upon conversion of shares of Class
B Common Stock shall be made without charge to the holder of
such shares for any stamp or other similar tax in respect of
such issuance. However, if any such certificate is to be
issued in a name other than that of the record holder of the
shares of Class B Common Stock converted, the Person or
Persons requesting the issuance thereof shall pay to the
Corporation the amount of any tax which may be payable in
respect of any Transfer involved in such issuance or shall
establish to the satisfaction of the Corporation that such tax
has been paid or is not required to be paid.
F. Liquidation.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, after distribution in full of the preferential
and/or other amounts to be distributed to the holders of shares of any
outstanding series of Preferred Stock, the holders of shares of Class A Stock
and Class B Common Stock shall be entitled to receive all of the remaining
assets of the Corporation available for distribution to its stockholders,
ratably in proportion to the number of shares of Common Stock held by them. In
any such distribution shares of Class A Common Stock and Class B Common Stock
shall be treated equally on a per share basis.
ARTICLE V
Purchase of Shares by Corporation
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The Corporation may purchase any shares of outstanding capital stock of
the Corporation or the right to purchase any such shares of capital stock from
any holder thereof on terms and conditions established by the Board of Directors
or a duly authorized committee thereof.
ARTICLE VI
Board of Directors
SECTION 1. Number and Terms.
Except as otherwise fixed by or pursuant to the provisions of this
Restated Certificate of Incorporation relating to the rights of the holders of
any class or series of Preferred Stock, the number of directors of the
Corporation shall be determined by resolution adopted by a majority of the
entire Board of Directors, but the number shall not be less than three;
provided, however, that (i) no reduction in the number of directors shall end
the term of office of any incumbent director prior to the date such director's
term of office would otherwise end, and (ii) the By-laws of the Corporation (the
"By-laws") may provide that the vote of a greater number of the directors may
be required for action of the Board of Directors changing the size of the Board
of Directors. The directors, other than those who may be elected by the holders
of any class or series of Preferred Stock, shall be classified by the Board of
Directors with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, one class to be originally
elected for a term expiring at the annual meeting of stockholders to be held in
2000, another class to be originally elected for a term expiring at the annual
meeting of stockholders to be held in 2001, and another class to be originally
elected for a term expiring at the annual meeting of stockholders to be held in
2002. Each director of the Corporation shall hold office until his or her
successor is duly elected and qualified, such classification to be effective
upon the date shares of Class A Common Stock are first publicly held. At each
succeeding annual meeting of stockholders, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third annual meeting of stockholders following such director's
election and until such director's successor shall have been elected and
qualified. No decrease in the number of directors shall shorten the term of any
incumbent director. Unless and except to the extent that the By-laws shall so
require, the election of directors need not be by written ballot.
SECTION 2. Vacancies.
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Except as otherwise provided for or fixed by or pursuant to the
provisions of this Restated Certificate of Incorporation relating to the rights
of the holders of any series of Preferred Stock, any vacancy on the Board of
Directors of the Corporation resulting from death, resignation, removal or
other cause and any newly created directorship resulting from any increase in
the authorized number of directors between meetings of stockholders shall be
filled only by the affirmative vote of (i) at least 66 and 2/3% of the
remaining directors then in office if prior to the Trigger Date, or (ii) a
majority of all the directors then in office, even though less than a quorum if
on or after the Trigger Date, but in any event not by the stockholders. Any
director so chosen shall hold office for the remainder of the full term of the
class of directors in which the vacancy occurred or the new directorship was
created and until a successor is duly elected and qualified or until his or her
earlier death, resignation or removal from office in accordance with this
Restated Certificate of Incorporation or any applicable law or pursuant to an
order of a court. If there are no directors in office, then an election of
directors may be held in the manner provided by applicable law.
SECTION 3. Notice.
Advance notice of nominations for the election of directors and
business to be transacted at any stockholders' meeting shall be given in the
manner and to the extent provided in the By-laws.
SECTION 4. Removal.
Except as otherwise provided for or fixed by or pursuant to the
provisions of this Restated Certificate of Incorporation relating to the rights
of the holders of any series of Preferred Stock, (i) prior to the Trigger Date,
any director may be removed from office with or without cause but only by the
affirmative vote of the holders of a majority of the combined voting power of
the then-outstanding shares of stock of the Corporation entitled to vote for the
election of directors, voting together as a single class, and (ii) on and after
the Trigger Date, any director may be removed from office only for cause by the
affirmative vote of the holders of at least a majority of the combined voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote for the election of directors, voting together as a single class.
SECTION 5. Amendment of this Article.
Notwithstanding anything to the contrary elsewhere contained in this
Restated Certificate of Incorporation, the affirmative vote of the holders of at
least 66 and 2/3% of the
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combined voting power of the then-outstanding shares of stock of the Corporation
entitled to vote for the election of directors, voting together as a single
class, shall be required to alter, amend or repeal, or to adopt any provision
inconsistent with, this Article VI.
ARTICLE VII
Stockholder Action; No Cumulative Voting
SECTION 1. Action by Consent in Lieu of a Meeting.
Effective upon and commencing as of the day following the day on which
Williams, and any company that is directly or indirectly controlled by Williams
and of which at least a majority of the equity interests therein are directly or
indirectly beneficially owned by Williams shall first cease to be the owner, in
the aggregate, of at least a majority of the then-outstanding shares of Common
Stock (the "Trigger Date"), and except as otherwise provided pursuant to the
provisions of this Restated Certificate of Incorporation (including any
Preferred Stock Designation) fixing the powers, privileges or rights of any
class or series of stock other than the Common Stock in respect of action by
written consent of the holders of such class or series of stock, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of such holders and may not
be effected by any consent in writing by such holders. Prior to the Trigger
Date, the By-laws may provide that any action required to be taken at any
meeting of stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of shares of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares of stock entitled to vote were
present and voted, provided that prompt notice of the taking of the corporation
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
SECTION 2. Meetings.
Effective upon and commencing as of the Trigger Date, except as
otherwise required by law and subject to the rights of the holders of any class
or series of Preferred Stock, special meeting of stockholders of the Corporation
of any class or
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series for any purpose or purposes may be called only by the Board of Directors
pursuant to a resolution stating the purpose or purposes thereof approved by a
majority of the entire Board of Directors and, effective as of the Trigger Date,
any power of stockholders to call a special meeting is specifically denied. No
business other than that stated in the notice shall be transacted at any special
meeting.
Prior to the Trigger Date, subject to the rights of the holders of any
outstanding series of Preferred Stock, special meetings of stockholders of the
Corporation may be called only by the Secretary of the Corporation at the
request of Williams or its affiliates.
Notwithstanding the foregoing, whenever the holders of any one or more
outstanding series of Preferred Stock shall have the right, voting separately by
class or series, as applicable, to elect directors at an annual or special
meeting of stockholders, the calling of special meetings of the holders of such
class or series shall be governed by the terms of the applicable resolution or
resolutions of the Board of Directors establishing such series of Preferred
Stock pursuant to Article IV of this Restated Certificate of Incorporation.
SECTION 3. Stockholder Nomination of Director Candidates and other
Stockholder Proposals.
Advance notice of stockholder nominations for the election of directors
and of the proposal by stockholders of any other action to be taken by the
stockholders shall be given in such manner as shall be provided in the By-laws
(as amended and in effect from time to time).
SECTION 4. Amendment of this Article.
Notwithstanding anything to the contrary contained in this Restated
Certificate of Incorporation, the affirmative vote of the holders of at least 66
and 2/3% of the combined voting power of the then-outstanding shares of stock of
the Corporation entitled to vote for the election of directors, voting together
as a single class, shall be required to alter, amend or repeal, or to adopt any
provision inconsistent with, this Article.
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ARTICLE VIII
By-laws
The Board of Directors shall have the power to adopt, alter, amend or
repeal the By-laws. The stockholders of the Corporation may adopt, amend or
repeal the By-laws but only by the affirmative vote of holders of at least a
majority of the combined voting power of the then-outstanding shares of capital
stock of all classes and series of the Corporation entitled to vote generally on
matters requiring the approval of stockholders, voting together as a single
class.
ARTICLE IX
Amendments
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Restated
Certificate of Incorporation, and any other provisions authorized by the laws of
the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law; and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors or any
other persons whomsoever by and pursuant to this Restated Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the right reserved in this Article IX.
ARTICLE X
Indemnification; Limitation of Liability.
SECTION 1. Indemnification.
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit, or proceeding, whether civil,
criminal, administrative, or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director of the Corporation or any
of its direct or indirect subsidiaries or is or was serving at the request of
the Corporation as a director of any other corporation or of a partnership,
limited liability company, joint venture, trust, or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "indemnitee"),
whether the basis of such proceeding is alleged action in an official capacity
as a director or in any other capacity while serving as a director, shall be
indemnified and held harmless by the Corporation to the fullest
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extent authorized by the Delaware Code, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
permitted prior thereto), against all expense, liability, and loss (including
attorneys' fees, judgments, fines, excise or other taxes assessed with respect
to an employee benefit plan, penalties, and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith, and
such indemnification shall continue as to an indemnitee who has ceased to be a
director and shall inure to the benefit of the indemnitee's heirs, executors,
and administrators; provided, however, that, except as provided in Paragraph B
of this Section 1 with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Paragraph A of this Section 1 shall
include the right to be paid by the Corporation the expenses incurred in
defending any proceeding for which such right to indemnification is applicable
in advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that, if the Delaware Code requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director (and not
in any other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section 1 or otherwise.
C. The rights to indemnification and to the advancement of expenses conferred in
Paragraphs A and B of this Section 1 shall be contract rights. If a claim under
Paragraph A or B of this Section 1 is not paid in full by the Corporation within
60 days after a written claim has been received by the Corporation, except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be 20 days, the indemnitee may at anytime thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit
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brought by an indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Code, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such expenses upon a
final adjudication that the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Code. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware Code, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Section 1 or
otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of Expenses conferred
in this Section 1 shall not be exclusive of any right which any person may have
or hereafter acquire under any statute, this certificate of incorporation,
by-law, agreement, vote of stockholders or disinterested directors, or
otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust, or other enterprise against any
expense, liability, or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability, or loss under the
Delaware Code.
F. The Corporation's obligation, if any, to indemnify any person who was or is
serving as a director of any direct or indirect subsidiary of the Corporation
or, at the request of the Corporation, of any other corporation or of a
partnership, joint venture, trust, or other enterprise shall be reduced by any
amount such person may collect as indemnification from such other corporation,
partnership, joint venture, trust or other enterprise.
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G. Any repeal or modification of the foregoing provisions of this Section 1
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
H. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant indemnification rights and rights to the advancement of
expenses to any officer, employee or agent of the Corporation to the fullest
extent of the provision of this Article with respect to the indemnification and
advancement of expenses to directors.
SECTION 2. Limited Liability.
No director of the Corporation shall be liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that this provision does not eliminate
the liability of the director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of Title B of the Delaware Code, or (iv) for any
transaction from which the director derived an improper personal benefit. For
purposes of the prior sentence, the term "damages" shall, to the extent
permitted by law, include without limitation, any judgment, fine amount paid in
settlement, penalty, punitive damages, excise or other tax assessed with respect
to an employee benefit plan, or expense of any nature (including, without
limitation, counsel fees and disbursements). Each person who serves as a
director of the Corporation while this Section 2 is in effect shall be deemed to
be doing so in reliance on the provisions of this Section 2, and neither the
amendment or repeal of this Section 2, nor the adoption of any provision of this
Restated Certificate of Incorporation inconsistent with this Section 2, shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for, arising out of, based upon, or in connection
with any acts or omissions of such director occurring prior to such amendment,
repeal, or adoption of an inconsistent provision. The provisions of this Section
2 are cumulative and shall be in addition to and independent of any and all
other limitations on or eliminations of the liabilities of directors of the
Corporation, as such, whether such limitation or eliminations arise under or are
created by any law, rule, regulation, by-law, agreement, vote of stockholders or
disinterested directors, or otherwise.
ARTICLE XI
Certain Transactions With Stockholders and Corporation Opportunities.
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SECTION 1. Certain Acknowledgments; Certain Fiduciary Duties
In anticipation that (i) the Corporation will cease to be a wholly
owned subsidiary of Williams, but that Williams will remain a stockholder of the
Corporation and have continued contractual, corporate, and business relations
with the Corporation, and in anticipation that the Corporation and Williams may
enter into contracts or otherwise transact business with each other and that the
Corporation may derive benefits therefrom, (ii) that directors, officers and/or
employees of Williams or of Affiliated Companies (as defined below in this
Article XI) of Williams may serve as directors and/or officers of the
Corporation, (iii) that Williams and Affiliated Companies thereof engage and are
expected to continue to engage in the same, similar or related lines of business
as those in which the Corporation, directly or indirectly, may engage and/or
other business activities that overlap with or compete with those in which the
Corporation, directly or indirectly, may engage, subject to the Separation
Agreement, (iv) the Corporation may from time to time enter into contractual,
corporate or business relations with one or more of its directors, or one or
more corporations, partnerships, associations or other organizations in which
one or more of its directors have a financial interest (collectively, "Related
Entities"), the provisions of this Article XI Section 2. are set forth to
regulate and define certain contractual relations of the Corporation as they may
involve Williams, Related Entities, and their respective officers and directors,
and the powers, rights, duties and liabilities of the Corporation and its
officers, directors and stockholders in connection therewith. The provisions of
this Article XI, Section 2. are in addition to, and not in limitation of, the
provisions of the Delaware Code and the other provisions of this Restated
Certificate of Incorporation. Any contract or business relation that does not
comply with the procedures set forth in this Article XI., Section 2. shall not
by reason thereof be deemed void or voidable or result in any breach of
fiduciary duty or duty of loyalty or failure to act in good faith or in the best
interests of the Corporation or derivation of any improper personal benefit, but
shall be governed by the provisions of this Restated Certificate of
Incorporation, the By-laws, the Delaware Code, and other applicable law.
SECTION 2. Certain Agreements and Transactions Permitted;
No contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) between the Corporation and Williams or
between the Corporation and one or more of the directors or officers of the
Corporation, Williams, or any Affiliated Company or between the Corporation and
any Affiliated Company shall be void or voidable solely for the reason that
Williams, any Affiliated Company, or any one or more of the officers or
directors of the
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Corporation, Williams, or any Affiliated Company are parties thereto, or solely
because any such directors or officers are present at or participate in the
meeting of the Board of Directors or committee thereof which authorizes the
contract, agreement, arrangement, or transaction (or the amendment, modification
or termination thereof), or solely because his or their votes are counted for
such purpose. Subject to Section 4 of this Article, no such agreement (or the
amendment, modification or termination thereof), or the performance thereof by
the Corporation or Williams, or any Affiliated Company thereof, (a) shall be
contrary to (i) any fiduciary duty that Williams or any Affiliated Company
thereof may owe to the Corporation or any Affiliated Company thereof or to any
stockholder or other owner of an equity interest in the Corporation or any
Affiliated Company thereof by reason of Williams or any Affiliated Company
thereof being a controlling stockholder of the Corporation or participating in
the control of the Corporation or of any Affiliated Company thereof; or (ii) any
fiduciary duty of any director or officer of the Corporation or of any
Affiliated Company thereof who is also a director, officer or employee of
Williams or any Affiliated company thereof to the Corporation or such Affiliated
Company, or to any stockholder thereof; and Williams, any Affiliated Company,
and such directors and officers (i) shall be deemed to have acted in good faith
and in a manner such persons reasonably believe to be in and not opposed to the
best interests of the Corporation and (ii) shall be deemed not to have breached
their duties of loyalty to the Corporation and its stockholders and not to have
derived an improper personal benefit therefrom, if:
(i) such agreement shall have been entered into before
the Corporation ceased to be a wholly owned
subsidiary of Williams and continued in effect in
respect of any such transaction or opportunity after
such time, or
(ii) the material facts as to the contract, agreement,
arrangement, transaction, amendment,
modification or termination are disclosed or are
known to the Board of Directors or the
committee thereof which authorizes the
contract, agreement, arrangement or transaction
(or the amendment, modification or termination
thereof), and the Board of Directors or such
committee in good faith authorizes the contract,
agreement, arrangement or transaction (or the
amendment, modification or termination
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thereof) is approved by (a) the affirmative vote of a
majority of the disinterested directors, even though
the disinterested directors be less than a quorum;
(b) such committee of the Board of Directors
constituted solely of members who are not Interested
Persons in respect of such agreement by the
affirmative vote of a majority of the members of such
committee or (c) one or more officers or employees of
the Corporation (including officers or employees of
the Corporation acting as directors, officers,
trustees, partners or members of, or in any similar
capacity on behalf of, any Affiliated Company of the
Corporation) who in each case is not an Interested
Person in respect of such agreement and to whom the
authority to approve such agreement has been
delegated either by the Board of Directors by the
same affirmative vote required by subclause (a) of
this subparagraph for approval of such agreement by
the Board of Directors or by a committee of the Board
of Directors constituted as provided by and acting by
the same affirmative vote as required by subclause
(b) of this subparagraph for approval of such
agreement by such committee or, in the case of an
employee, to whom such authority has been delegated
by an officer to whom authority to approve such
agreement has been so delegated, or
(iii) the material facts as to the contract, agreement,
arrangement or transaction (or the amendment,
modification or termination thereof) are
disclosed or are known to the holders of voting
stock entitled to vote thereon, and the contract,
agreement, arrangement, or transaction (or the
amendment, modification or termination
thereof) is specifically approved in good faith
by vote of the holders of a majority of the then
outstanding voting stock not owned by
Williams or a Affiliated Company, as the case
may be, or
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(iv) such contract, agreement, arrangement or transaction
(or the amendment, modification or termination
thereof) is fair as to the Corporation as of the time
it is authorized, approved or ratified by the Board
of Directors, a committee thereof or the stockholders
of the Corporation, or
(v) in the case of any such transaction that was not
entered into in the performance of an agreement that
satisfied the requirements of clause (i), (ii),
(iii) or (iv) of this sentence, such transaction
shall have been approved or ratified by (a) the Board
of Directors of the Corporation by the affirmative
vote of a majority of the members (even though less
than a quorum) who are not Interested Persons in
respect of such transaction or (b) by a committee of
the Board of Directors of the Corporation constituted
solely of members who are not Interested Persons in
respect of such transaction by the affirmative vote
of a majority of the members of such committee or (c)
by one or more officers or employees of the
Corporation (including officers or employees of the
Corporation acting as directors, officers, trustees,
partners or members of, or in any similar capacity on
behalf of, any Affiliated Company of the Corporation)
who in each case is not an Interested Person in
respect of such transaction and to whom the authority
to approve such transaction has been delegated either
by the Board of Directors by the same affirmative
vote required by subclause (a) of this subparagraph
for approval of such transaction of the Board of
Directors or a
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committee of the Board of Directors constituted as
provided by and acting by the same affirmative vote
as required by subclause (b) of this subparagraph for
approval of such transaction by such committee or, in
the case of an employee, to whom such authority has
been delegated by an officer to whom authority to
approve such transaction has been so delegate;,
provided, however, that, before such approval or
ratification, the material facts of the relationship
between the Corporation or such Affiliated Company
thereof, on the one hand, and Williams or such
Affiliated Company thereof, on the other hand, and
the material facts as to such transaction were
disclosed to or were known by the members of the
Board of directors or of such committee or the
officer or officers or employee or employees who
acted on approval or ratification of such
transaction, as the case may be; or
(vi) in the case of any such transaction that was not
entered into in the performance of an agreement that
satisfied the requirements of clause (i), (ii), (iii)
or (iv) of this sentence, such transaction was fair
to the Corporation as of the time it was entered into
by the Corporation; or
(vii) in the case of any such transaction that was not
entered into in the performance of an agreement that
satisfied the requirements of clause (i), (ii), (iii)
or (iv) of this sentence, such transaction was
approved or ratified by the affirmative vote of the
holders of a majority of the shares of capital stock
of the Corporation entitled to vote thereon and who
do not vote thereon, exclusive of Williams and any
Affiliated Company thereof and any Interested Person
in respect of such transaction.
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Subject to Section 4 of this Article XI, neither Williams nor any
Affiliated Company thereof, as a stockholder of the Corporation or participant
in control of the Corporation, shall have or be under any fiduciary duty to
refrain from entering into any agreement or participating in any transaction
that meets the requirements of any of clauses (i), (ii), (iii), (iv), (v), (vi)
or (vii) of the immediately preceding sentence and no director, officer or
employees of the Corporation who is also a director, officer or employee of
Williams or any Affiliated Company thereof shall have or be under any fiduciary
duty to the Corporation to refrain from acting on behalf of the Corporation or
any Affiliated Company thereof in respect of any such agreement or transaction
or performing any such agreement in accordance with its terms. Directors of the
Corporation who are also directors or officers of Williams or any Affiliated
Company may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract,
agreement, arrangement, or transaction (or the amendment, modification or
termination thereof).Voting stock owned by Williams and any Affiliated Companies
thereof may be counted in determining the presence of a quorum at a meeting of
stockholders which authorizes the contract, agreement, arrangement or
transaction. Any person purchasing or otherwise acquiring any shares of capital
stock of the Corporation, or any interest therein, shall be deemed to have
notice of and to have consented to the provisions of this Article. The failure
of any agreement or transaction between the Corporation or an Affiliated Company
thereof, on the one hand, and Williams or an Affiliated Company thereof, on the
other hand, to satisfy the requirements of this Section shall not, by itself,
cause such agreement or transaction to constitute any breach of any fiduciary
duty to the Corporation or to any Affiliated Company thereof, or, any to
stockholder or other owner of an equity interest therein, by any controlling
stockholder of the Corporation or such Affiliated Company thereof or by any
director or officer of the Corporation.
For purposes of this Article XI, Section 2., any contract, agreement,
arrangement, or transaction (or amendment, modification, or termination thereof)
with any corporation, partnership, joint venture, association, or other entity
in which the Corporation owns (directly or indirectly) 50% or more of the
outstanding voting stock, voting power, partnership interests, or similar
ownership interests, or with any officer or director thereof, shall be deemed to
be a contract, agreement, arrangement or transaction with the Corporation.
SECTION 3. Certain Definitions.
For purposes of this Article, the following definitions shall apply:
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<PAGE> 29
"Affiliated Company" shall mean in respect of Williams, any company
which is controlled by Williams controls Williams or is under common control
with Williams (other than the Corporation and any company that is controlled by
the Corporation) and in respect of the Corporation shall mean any company
controlled by the Corporation.
"Interested Person" in respect of an agreement or transaction referred
to in Section 2 of this Article XI shall mean any director, officer or employees
of Williams or an Affiliated Company thereof and any person who has a financial
interest that is material to such person in Williams or such Affiliated Company
or otherwise has a personal financial interest that is material to such person
in such agreement or transaction; provided, however, that no such financial
interest shall be considered material by reason of a person' ownership of
securities of Williams or an Affiliated Company thereof, if such ownership of
securities has been determined in good faith not to be reasonably likely to
influence such individual's decision on behalf of the Corporation or an
Affiliated Company thereof in respect of the agreement or transaction either in
the specific instance by, or pursuant to, a policy adopted by, the Board of
Directors of the Corporation by the affirmative vote of a majority of the
members (even though less than a quorum) who are not directors, officers or
employees of Williams or any Affiliated Company thereof or a committee of the
Board of Directors of the Corporation constituted solely of members who are not
directors, officers or employees of Williams or any Affiliated Company thereof
by the affirmative vote of a majority of such committee.
SECTION 4. Termination.
The provisions of this Article XI shall have no further force or effect
at such time as Williams and any company controlling, controlled by or under
common control with Williams shall first cease to be the owner, in the
aggregate, of stock representing 25% or more of the votes entitled to be cast
by the holders of all the then outstanding shares of stock entitled to vote;
provided, however, that such termination shall not terminate the effect of such
provisions with respect to (i) any agreement between the Corporation or an
Affiliated Company thereof and Williams or an Affiliated Company thereof that
was entered into before such time or any transaction entered into in the
performance of such agreement, whether entered into before or after such time,
or (ii) any transaction entered into between the Corporation or an Affiliated
Company thereof and Williams or an Affiliated Company thereof or the allocation
of any opportunity between them before such time.
SECTION 5. Amendment of this Article.
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Notwithstanding anything to the contrary elsewhere contained in this
Restated Certificate of Incorporation, the affirmative vote of the holders of at
least 80% of the combined voting power of the then outstanding shares of stock
of the Corporation entitled to vote for the election of directors, voting
together as a single class, shall be required to alter, amend or repeal, or to
adopt any provision inconsistent with, this Article XI.
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IN WITNESS WHEREOF, Williams Communications Group, Inc.
has caused this Restated Certificate of Incorporation to be signed by its Vice
President this _______ day of_________, 1999.
Williams Communications Group, Inc.
------------------------------------
Name:
Title
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<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
WILLIAMS COMMUNICATIONS GROUP, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine.
---------------------
<PAGE> 2
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for
the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors.
Section 2. Annual Meetings. The Annual Meetings of
stockholders for the election of directors shall be held on such date and at
such time as shall be designated from time to time by the Board of Directors.
Any other proper business may be transacted at the Annual Meeting of
stockholders.
Section 3. Special Meetings. Unless otherwise required by law
or the Restated Certificate of Incorporation of the Corporation, as it may be
amended or restated from time to time (the "Restated Certificate of
Incorporation"), and subject to the rights of the holders of any class or series
of stock having a preference over the common stock as to dividends or
distributions upon liquidation, Special Meetings of stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be one,
or (ii) the President, (iii) any Vice President, if there be one, (iv) the
Secretary or (v) any Assistant Secretary, if there be one, and shall be called
by any such officer at the request in writing of (i) the Board of Directors,
(ii) a committee of
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<PAGE> 3
the Board of Directors that has been duly designated by the Board of Directors
and whose powers and authority include the power to call such meetings, or (iii)
anytime prior to the day following the day on which The Williams Companies, Inc.
("Williams"), and any company that is directly or indirectly controlled by
Williams and of which at least a majority of the equity interests therein are
directly or indirectly beneficially owned by Williams, shall first cease to be
the owner, in the aggregate, of at least a majority of the then-outstanding
shares of common stock (the "Trigger Date"), by Williams or its affiliates.
Following the Trigger Date, Special Meetings cannot be called by any
stockholder. Such request shall state the purpose or purposes of the proposed
meeting. At a Special Meeting of stockholders, only such business shall be
conducted as shall be specified in the notice of meeting (or any supplement
thereto).
Section 4. Notice. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a Special Meeting, the purpose or purposes for which the meeting is
called. Unless otherwise required by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Section 5. Adjournments. Any meeting of the stockholders may
be adjourned from time to time to reconvene at the same or some other place, and
notice
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<PAGE> 4
need not be given of any such adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have been trans-
acted at the original meeting. If the adjournment is for more than thirty days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 6. Quorum. Unless otherwise required by law or the
Restated Certificate of Incorporation, the holders of a majority of the capital
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
in the manner provided in Section 5, until a quorum shall be present or
represented.
Section 7. Nature of Business at Meetings of Stockholders.
(a) Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of
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the Corporation, except as may be otherwise provided in the Corporation's
Restated Certificate of Incorporation with respect to the right of holders of
preferred stock of the Corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
Board of Directors may be made at any Annual Meeting of stockholders, or at any
Special Meeting of stockholders called for the purpose of electing directors,
(a) by or at the direction of the Board of Directors (or any duly authorized
committee thereof) or (b) by any stockholder of the Corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 7 and on the record date for the determination of stockholders
entitled to vote at such meeting and (ii) who complies with the notice
procedures set forth in this Section 7.
In addition to any other applicable requirements, for a
nomination to be made by a stockholder, such stockholder must have given timely
notice thereof in proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation (a) in the case of an Annual Meeting, not less than ninety (90) days
nor more than one hundred and twenty (120) days prior to the anniversary date of
the immediately preceding Annual Meeting of stockholders; provided, however,
that in the event that the Annual Meeting is called for a date that is not
within thirty (30) days before or
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after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the Annual Meeting was
mailed or such public disclosure of the date of the Annual Meeting was made,
whichever first occurs; and (b) in the case of a Special Meeting of stockholders
called for the purpose of electing directors, not less than ninety (90) days or,
if later, not later than the close of business on the tenth (10th) day following
the day on which notice of the date of the Special Meeting was mailed or public
disclosure of the date of the Special Meeting was made, whichever first occurs,
and not more than one hundred and twenty (120) days prior to the scheduled date
of the Special Meeting.
To be in proper written form, a stockholder's notice to the
Secretary must set forth (a) as to each person whom the stockholder proposes to
nominate for election as a director (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment of
the person, (iii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by the person and (iv)
any other information relating to the person that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder; and (b)
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as to the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by such
stockholder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the persons named in its notice
and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
Notwithstanding the foregoing, any holder of common stock of
the Corporation, who together with its affiliates owns capital stock entitled to
exercise a majority of the voting power in an election of directors, may
nominate one or more individuals for election as directors by giving notice to
the Corporation not later than five days before the scheduled date for the
election of directors.
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No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in
this Section 7. If the Chairman of the meeting determines that a nomination was
not made in accordance with the foregoing procedures, the Chairman shall declare
to the meeting that the nomination was defective and such defective nomination
shall be disregarded.
(b) No business may be transacted at an Annual Meeting of
stockholders, other than business that is either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the Annual Meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (c) otherwise properly
brought before the Annual Meeting by any stockholder of the Corporation (i) who
is a stockholder of record on the date of the giving of the notice provided for
in this Section 7 and on the record date for the determination of stockholders
entitled to vote at such Annual Meeting and (ii) who complies with the notice
procedures set forth in this Section 7.
In addition to any other applicable requirements, for any
other business to be properly brought before an Annual Meeting by a stockholder,
such stockholder must have given timely notice thereof in proper written form to
the Secretary of the Corporation.
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To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than ninety (90) days nor more than one hundred twenty
(120) days prior to the anniversary date of the immediately preceding Annual
Meeting of stockholders; provided, however, that in the event that the Annual
Meeting is called for a date that is not within thirty (30) days before or after
such anniversary date, notice by the stockholder in order to be timely must be
so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the Annual Meeting was
mailed or such public disclosure of the date of the Annual Meeting was made,
whichever first occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder proposes to bring
before the Annual Meeting (i) a brief description of the business desired to be
brought before the Annual Meeting and the reasons for conducting such business
at the Annual Meeting, (ii) the name and record address of such stockholder,
(iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by such stockholder, (iv)
a description of all arrangements or understandings between such stockholder
and any other person or persons (including their names) in connection with the
proposal of such business by such stockholder and any material interest of such
stockholder in such business and (v) a representation that such
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<PAGE> 10
stockholder intends to appear in person or by proxy at the Annual Meeting to
bring such business before the meeting.
No business shall be conducted at the Annual Meeting of
stockholders except business brought before the Annual Meeting in accordance
with the procedures set forth in this Section 7; provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 7 shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an Annual
Meeting determines that business was not properly brought before the Annual
Meeting in accordance with the foregoing procedures, the Chairman shall declare
to the meeting that the business was not properly brought before the meeting and
such business shall not be transacted.
Section 8. Voting. Unless otherwise required by law, the
Restated Certificate of Incorporation or these By-laws, any question brought
before any meeting of stockholders, other than the election of directors, shall
be decided by the vote of the holders of a majority of the total number of votes
of the capital stock represented and entitled to vote thereat, voting as a
single class. Unless otherwise provided in the Restated Certificate of
Incorporation, and subject to Section 5 of Article V hereof, each stockholder
represented at a meeting of stockholders shall be entitled to cast one vote for
each share of the capital stock entitled to vote thereat held by such
stockholder. Such votes may be cast in person or by proxy, but no proxy
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shall be voted on or after three years from its date, unless such proxy provides
for a longer period. The Board of Directors, in its discretion, or the officer
of the Corporation presiding at a meeting of stockholders, in such officer's
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
Section 9. Consent of Stockholders in Lieu of Meeting. Except
as otherwise provided in the Restated Certificate of Incorporation, any action
required or permitted to be taken at any Special Meeting of stockholders of the
Corporation may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in the State of Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
days of the earliest dated consent delivered in the manner required by this
Section 9 to the
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Corporation, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of meetings
of stockholders are recorded. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing and who, if the action
had been taken at a meeting, would have been entitled to notice of the meeting
if the record date for such meeting had been the date that written consents
signed by a sufficient number of holders to take the action were delivered to
the Corporation as provided above in this Section 9.
Section 10. Record Date for Action by Written Consent. In
order that the corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. Any
stockholder of record seeking to have the stockholders authorize or take
corporate action by written consent shall, by written notice to the Secretary,
request the Board of Directors to fix a record date. The Board of Directors
shall promptly, but in all events within ten (10) days after the date on which
such a request is received, adopt a
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resolution fixing the record date. If no record date has been fixed by the Board
of Directors within ten (10) days of the date on which such a request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of stockholders
meetings are recorded, to the attention of the Secretary of the Corporation.
Delivery shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors and prior
action by the Board of Directors is required by applicable law, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.
Section 11. List of Stockholders Entitled to Vote. The officer
of the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the
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name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof and may be inspected
by any stockholder of the Corporation who is present.
Section 12. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 11 of this Article II or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 13. Conduct of Meetings. The Board of Directors of the
Corporation may adopt by resolution such rules and regulations for the conduct
of the meeting of the stockholders as it shall deem appropriate. Except to the
extent inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of the stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the
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following: (i) the establishment of an agenda or order of business for the
meeting; (ii) the determination of when the polls shall open and close for any
given matter to be voted on at the meeting; (iii) rules and procedures for
maintaining order at the meeting and the safety of those present; (iv)
limitations on attendance at or participation in the meeting to stockholders of
record of the Corporation, their duly authorized and constituted proxies or such
other persons as the chairman of the meeting shall determine; (v) restrictions
on entry to the meeting after the time fixed for the commencement thereof; and
(vi) limitations on the time allotted to questions or comments by participants.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors
The exact number of Directors on the Board of Directors shall
be fixed initially by resolution of a majority of the entire Board of Directors
in accordance with the Restated Certificate of Incorporation, but the number
shall not be less than three; provided, however, that (i) no reduction in the
number of directors shall end the term of office of any incumbent director prior
to the date such director's term of office would otherwise end; and (ii) before
the Trigger Date, and except as otherwise provided pursuant to the provisions of
the Restated Certificate of Incorporation fixing the powers, privileges or
rights of any class or
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series of stock other than the common stock, action by the Board of Directors
fixing the number of directors shall require the affirmative vote of 80% of the
entire Board of Directors.
The directors, other than those who may be elected by the
holders of any class or series of preferred stock, shall be classified by the
Board of Directors with respect to the time for which they severally hold office
into three classes as nearly equal in number as possible, one class to be
originally elected for a term expiring at the Annual Meeting of stockholders to
be held in 2000, another class to be originally elected for a term expiring at
the Annual Meeting of stockholders to be held in 2001, and another class to be
originally elected for a term expiring at the Annual Meeting of stockholders to
be held in 2002. Each director of the Corporation shall hold office until his or
her successor is duly elected and qualified, such classification to be effective
upon the date shares of Class A Common Stock, par value $0.01 per share, are
first publicly held. At each succeeding Annual Meeting of stockholders,
directors elected to succeed those directors whose term then expires shall be
elected for a term of office to expire at the third Annual Meeting of
stockholders following such director's election and until such director's
successor shall have been elected and qualified or until such director's earlier
death, resignation or removal. Except as provided in Section 2 of this Article
III, directors shall be elected by a plurality of the votes cast at the Annual
Meetings of
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stockholders. Any director may resign at any time upon written notice to the
Corporation. Directors need not be stockholders.
Section 2. Vacancies. Except as otherwise provided for or
fixed by or pursuant to the provisions of the Restated Certificate of
Incorporation relating to the rights of the holders of any series of Preferred
Stock, prior to the Trigger Date, any vacancy on the Board of Directors of the
Corporation resulting from death, resignation, removal or other cause and any
newly created directorship resulting from any increase in the authorized number
of directors between meetings of stockholders shall be filled only by the
affirmative vote of 80% of all the directors then in office, but in any event
not by the stockholders. Following the Trigger Date, vacancies may only be
filled by the affirmative vote of a majority of the remaining directors. Any
director so chosen shall hold office for the remainder of the full term of the
class of directors in which the vacancy occurred or the new directorship was
created and until a successor is duly elected and qualified or until his or her
earlier death, resignation or removal from office in accordance with the
Restated Certificate of Incorporation or any applicable law or pursuant to an
order of a court. If there are no directors in office, then an election of
directors may be held in the manner provided by applicable law.
Section 3. Duties and Powers. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors,
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which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Restated Certificate of
Incorporation or by these By-laws required to be exercised or done by the
stockholders.
Section 4. Removal of directors from the Board of Directors
shall be in accordance with the Restated Certificate of Incorporation.
Section 5. Meetings. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
Regular meetings of the Board of Directors may be held without notice at such
time and at such place as may from time to time be determined by the Board of
Directors. Special meetings of the Board of Directors may be called by the
Chairman, if there be one, the President, or by any director. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail not less than forty-eight (48) hours before the date of the
meeting, by telephone or telegram on twenty-four (24) hours' notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
Section 6. Quorum. Except as otherwise required by law or the
Restated Certificate of Incorporation, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be
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present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting of the time and place of the adjourned meeting,
until a quorum shall be present.
Section 7. Actions by Written Consent. Unless otherwise
provided in the Restated Certificate of Incorporation, or these By-laws, any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting, if all the
members of the Board of Directors or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section 8. Meetings by Means of Conference Telephone. Unless
otherwise provided in the Restated Certificate of Incorporation, members of the
Board of Directors of the Corporation, or any committee thereof, may participate
in a meeting of the Board of Directors or such committee by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 8 shall constitute presence in person at such
meeting.
Section 9. Committees. The Board of Directors may designate
one or more committees, each committee to consist of one or more of the
directors of the
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Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to the
extent permitted by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each committee shall keep regular minutes and report to the
Board of Directors when required.
Section 10. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director, payable in cash or securities. No such payment
shall preclude any director from serving the Corporation in any other capacity
and receiving compensation
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therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be
chosen by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, also may choose a Chairman
of the Board of Directors (who must be a director) and one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law or the Restated Certificate of Incorporation. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the case
of the Chairman of the Board of Directors, need such officers be directors of
the Corporation.
Section 2. Election. The Board of Directors, at its first
meeting held after each Annual Meeting of stockholders (or action by written
consent of stock holders in lieu of the Annual Meeting of stockholders), shall
elect the officers of the Corporation who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors; and all officers of the
Corporation shall hold office until their successors
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are chosen and qualified, or until their earlier death, resignation or removal.
Any officer elected by the Board of Directors may be removed at any time by the
affirmative vote of the Board of Directors. Any vacancy occurring in any office
of the Corporation shall be filled by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers
of attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the President or any Vice
President or any other officer authorized to do so by the Board of Directors,
and any such officer may, in the name of and on behalf of the Corporation, take
all such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall possess and may
exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of
the Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. The Chairman of the Board of
Directors shall be the
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Chief Executive Officer of the Corporation, unless the Board of Directors
designates the President as the Chief Executive Officer, and, except where by
law the signature of the President is required, the Chairman of the Board of
Directors shall possess the same power as the President to sign all contracts,
certificates and other instruments of the Corporation which may be authorized by
the Board of Directors. During the absence or disability of the President, the
Chairman of the Board of Directors shall exercise all the powers and discharge
all the duties of the President. The Chairman of the Board of Directors shall
also perform such other duties and may exercise such other powers as may from
time to time be assigned by these By-laws or by the Board of Directors.
Section 5. President. The President shall, subject to the
control of the Board of Directors and, if there be one, the Chairman of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. The President shall execute all bonds, mortgages, contracts
and other instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-laws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at
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all meetings of the stockholders and the Board of Directors. If there be no
Chairman of the Board of Directors, or if the Board of Directors shall otherwise
designate, the President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as may from time to time be assigned to such officer by these
By-laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or
in the President's absence or in the event of the President's inability or
refusal to act (and if there be no Chairman of the Board of Directors), the Vice
President, or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors), shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Each Vice President shall perform such
other duties and have such other powers as the Board of Directors from time to
time may prescribe. If there be no Chairman of the Board of Directors and no
Vice President, the Board of Directors shall designate the officer of the
Corporation who, in the absence of the President or in the event of the
inability or refusal of the President to act, shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings
of the Board of Directors and all meetings of stockholders and record all the
proceedings
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thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for committees of the Board of Directors when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors, the Chairman
of the Board of Directors or the President, under whose supervision the
Secretary shall be. If the Secretary shall be unable or shall refuse to cause to
be given notice of all meetings of the stockholders and special meetings of the
Board of Directors, and if there be no Assistant Secretary, then either the
Board of Directors or the President may choose another officer to cause such
notice to be given. The Secretary shall have custody of the seal of the
Corporation, and the Secretary or any Assistant Secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest to the affixing by such officer's signature. The Secretary shall see
that all books, reports, statements, certificates and other documents and
records required by law to be kept or filed are properly kept or filed, as the
case may be.
Section 8. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts
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and disbursements in books belonging to the Corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all transactions as
Treasurer and of the financial condition of the Corporation. If required by the
Board of Directors, the Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of the
Treasurer and for the restoration to the Corporation, in case of the Treasurer's
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the Treasurer's
possession or under the Treasurer's control belonging to the Corporation.
Section 9. Assistant Secretaries. Assistant Secretaries, if
there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Secretary, and in the absence of the
Secretary or in the event of the Secretary's disability or refusal to act, shall
perform the duties of the Secretary, and when so
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acting, shall have all the powers of and be subject to all the restrictions upon
the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if
there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of the Treasurer's disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer. If required
by the Board of Directors, an Assistant Treasurer shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of the office
of Assistant Treasurer and for the restoration to the Corporation, in case of
the Assistant Treasurer's death, resignation, retirement or removal from office,
of all books, papers, vouchers, money and other property of whatever kind in the
Assistant Treasurer's possession or under the Assistant Treasurer's control
belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board
of Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may
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delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such stockholder in the Corporation.
Section 2. Signatures. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
Section 3. Lost Certificates. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an
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affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or the owner's legal representative, to advertise the same in such
manner as the Board of Directors shall require and/or to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed or the issuance of such new certificate.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, which shall be cancelled before
a new certificate shall be issued. No transfer of stock shall be valid as
against the Corporation for any purpose until it shall have been entered in the
stock records of the Corporation by an entry showing from and to whom
transferred.
Section 5. Record Date.
(a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not
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precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors, and which record date shall not be more than sixty (60)
nor less than ten (10) days before the date of such meeting. If no record date
is fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; providing, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than ten (10)
days after the date upon which the resolution fixing the record date is adopted
by the Board of Directors. If no record date has been fixed by the Board of
Directors, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by law, shall be the first date on which a signed
written consent setting forth the action taken or proposed to
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be taken is delivered to the Corporation by delivery to its registered office in
this State, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolutions taking such prior action.
(c) In order that the Corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
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Section 6. Record Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise required by
law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by
law, the Restated Certificate of Incorporation or these By-laws, to be given to
any director, member of a committee or stockholder, such notice may be given by
mail, addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, telex or cable.
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Section 2. Waivers of Notice. Whenever any notice is required
by law, the Certificate of Incorporation or these By-laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto. Attendance of
a person at a meeting, present in person or represented by proxy, shall
constitute a waiver of notice of such meeting, except where the person attends
the meeting for the express purpose of objecting at the beginning of the meeting
to the transaction of any business because the meeting is not lawfully called or
convened.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the requirements of the DGCL and the provisions of the
Restated Certificate of Incorporation, if any, may be declared by the Board of
Directors at any regular or special meeting of the Board of Directors (or any
action by written consent in lieu thereof in accordance with Section 7 of
Article III hereof), and
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may be paid in cash, in property, or in shares of the Corporation's capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
34
<PAGE> 35
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings
other than Those by or in the Right of the Corporation. Subject to Section 3 of
this Article VIII, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party 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 the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against 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 if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation, or except as otherwise
provided in the Restated Certificate of Incorporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to the best interests of the
35
<PAGE> 36
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings
by or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such
36
<PAGE> 37
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any
indemnification under this Article VIII (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (i) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (ii) by a committee of such directors designated by a
majority vote of such directors, even though less than a quorum, or (iii) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion or (iv) by the stockholders. Such
determination shall be made, with respect to former directors and officers, by
any person or persons having the authority to act on the matter on behalf of the
Corporation. To the extent, however, that a present or former director or
officer of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding described above, or in defense of any
claim, issue or matter therein, such person shall be indemnified against
expenses
37
<PAGE> 38
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith, without the necessity of authorization in the specific
case.
Section 4. Good Faith Defined. For purposes of any
determination under Section 3 of this Article VIII, a person shall be deemed to
have acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation, or, with respect to
any criminal action or proceeding, to have had no reasonable cause to believe
such person's conduct was unlawful, if such person's action is based on the
records or books of account of the Corporation or another enterprise, or on
information supplied to such person by the officers of the Corporation or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this Section 4 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
Section 1 or 2 of this Article VIII, as the case may be.
38
<PAGE> 39
Section 5. Indemnification by a Court. Notwithstanding any
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to the Court of Chancery in the State of Delaware
for indemnification to the extent otherwise permissible under Sections 1 and 2
of this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable standards
of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be.
Neither a contrary determination in the specific case under Section 3 of this
Article VIII nor the absence of any determination thereunder shall be a defense
to such application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on
39
<PAGE> 40
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement
of Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under the Restated Certificate of Incorporation, any By-law, 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, it being the policy of the Corporation that indemnification
of the persons specified in Sections 1 and 2 of this Article VIII shall be made
to the fullest extent permitted by law. The provisions of this Article VIII
shall not be deemed to preclude the indemnification of any person who is not
specified in Section 1 or 2 of this Article VIII but whom the Corporation has
the power or obligation to indemnify under the provisions of the General
Corporation Law of the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation, or is or was a director or officer of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership,
40
<PAGE> 41
joint venture, trust, employee benefit plan or other enterprise against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power or the obligation to indemnify such person
against such liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the
41
<PAGE> 42
Corporation which imposes duties on, or involves services by, such director or
officer with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VIII.
Section 10. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
anything contained in this Article VIII to the contrary, except for proceedings
to enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors,
42
<PAGE> 43
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-laws may be altered, amended
or repealed, in whole or in part, or new By-laws may be adopted by the
stockholders or by the Board of Directors, provided, however, that notice of
such alteration, amendment, repeal or adoption of new By-laws be contained in
the notice of such meeting of stockholders or Board of Directors as the case may
be. All such amendments must be approved by either the holders of a majority of
the outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office; provided, however, that any proposed
alteration or repeal of, or the adoption of any By-law inconsistent with, any of
Section 3, 7 or 9 of Article II, Section 1 or 2 of Article III, or this Article
IX of these By-laws by the stockholders shall require the affirmative vote of at
least 80% of the voting power of all capital stock then outstanding, voting
together as a single class; and provided further, that, in the case of any such
stockholder action at a Special Meeting of stockholders, notice of the
43
<PAGE> 44
proposed alteration, repeal or adoption of the new by-law or By-laws must be
contained in the notice of such Special Meeting.
Section 2. Entire Board of Directors. As used in this Article
IX and in these By-Laws generally, the term "entire Board of Directors" means
the total number of directors which the Corporation would have if there were no
vacancies.
* * *
Adopted as of: _____________________
Last Amended as of: ________________
<PAGE> 1
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS CLASS A COMMON STOCK
OF THE STATE OF DELAWARE
PAR VALUE $.01
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NEW YORK
______ SHARES
WCG NUMBER __________ CUSIP 969455 10 4
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
[LOGO]
WILLIAMS COMMUNICATIONS GROUP, INC.
THIS IS TO CERTIFY THAT
IS THE OWNER OF
FULL-PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK OF
CERTIFICATE OF STOCK
Williams Communications Group, Inc. (hereinafter called the "Corporation"),
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented thereby are issued and
shall be held subject to the provisions of the Certificate of Incorporation and
By-Laws of the Corporation and the amendments from time to time made thereto
(copies of which are or will be on file at the office of the Transfer Agent), to
all of which the holder, by acceptance hereof, assents. This Certificate is not
valid until countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ HOWARD E. JANZEN [SEAL]
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED
THE BANK OF NEW YORK
By
TRANSFER AGENT
AND REGISTRAR,
/s/ ROY A. WILKENS
CHAIRMAN OF THE BOARD
AUTHORIZED SIGNATURE
/S/ SHAWNA L. GEHRES
SECRETARY
<PAGE> 1
EXHIBIT 4.2
A DELAWARE CORPORATION
No. SPECIMEN SPECIMEN Shares
-------- --------
WILLIAMS COMMUNICATIONS GROUP, INC.
Class B Common Stock
Authorized Capital Stock: 500,000,000 shares
THIS CERTIFIES THAT ______________________________________________ IS THE OWNER
OF _________________________________ SHARES OF THE CAPITAL STOCK OF Williams
Communications Group, Inc., fully paid and nonassessable, TRANSFERABLE ONLY ON
THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY ATTORNEY UPON
SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE
TO BE SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE
HEREUNTO AFFIXED THIS _________ DAY OF _________ A.D. __
[SEAL]
----------------------------- -------------------------------
Secretary President
SHARES Par $.01 Value EACH
<PAGE> 1
FORM OF OPINION
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 an aggregate of up to shares (the
"Shares") of the Company's Class A Common Stock, par value $ .01 per share (the
"Common Stock"), with the associated Preferred Stock Purchase Rights of the
Company (the "Rights," and, unless the context otherwise requires, such term
shall be deemed to be included in all references to "Common Stock") issuable
pursuant to a Rights Agreement, dated as of _______, 1999, between the Company
and The Bank of New York, as Rights Agent, in the form as filed as an exhibit to
the Registration Statement on Form S-1 referenced below (the "Rights
Agreement"). This opinion is being delivered in connection with the registration
under the Securities Act of the Shares (the "Registered Shares") 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. 333-76007) relating to the Registered Shares, as
filed with the Securities and Exchange Commission (the "Commission") on April 9,
1999 under the Securities Act as amended on May 28, 1999, July 3, 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) specimen
certificates evidencing the Common Stock; (iii) the Restated Certificate of
Incorporation and the By-laws of the Company, each as amended to the date
hereof; (iv) the form of the Rights Agreement; and (v) the Underwriting
Agreement to be entered into among the Company and certain underwriters in
respect of the Registered Shares in the form filed as an exhibit to the
Registration Statement (the "Underwriting Agreement"); and (vi) resolutions
adopted by the Board of Directors of the Company (the "Board") on April 6, 1999
by
<PAGE> 2
Williams Communications Group, Inc.
[Date], 1999
Page 2
unanimous written consent relating, among other things, to the issuance of
the Registered Shares. 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 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
Underwriting Agreement and the Rights Agreement, in each case in the forms that
I have reviewed, will be executed on behalf of the Company by one or more duly
authorized officers of the Company and by the other parties thereto by their
duly authorized representatives. I have also assumed that the certificates
representing the Registered Shares have been or will be signed by facsimile or
otherwise by one or more authorized officers of the Company and authorized
representations of the transfer agent, and registered by the registrar, 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 in the State of Oklahoma, the jurisdiction in
which the Company has its principal place of business, 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 and subject to the foregoing, and having regard to the legal
considerations as I have deemed relevant, I am of the opinion that, assuming
that the Registration Statement has become effective under the Securities Act
and that the Special Committee designated by the Board for such purpose will
have properly taken the required actions in connection with the issuance and
sale of the Registered Shares, the issuance of the Registered Shares has been
duly and validly authorized by the Company and, when issued in accordance with
the terms of the Underwriting Agreement and the Rights Agreement and as set
forth in the Registration Statement, the Registered Shares will then have been
validly issued, fully paid and nonassessable.
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
<PAGE> 3
Williams Communications Group, Inc.
[Date], 1999
Page 3
Registration Statement. In giving such consent, I do not thereby
admit that I come 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 10.46
CALL OPTION AGREEMENT
This CALL OPTION AGREEMENT ("Agreement") dated as of the 27th day of
May, 1999, is entered into by and among Williams Holdings of Delaware, Inc., a
Delaware corporation ("WHD"), Williams International Company, a Delaware
corporation ("WIC"), Williams International Telecom Limited, a Delaware
corporation ("WITL") and Williams Communications Group, Inc., a Delaware
corporation ("WCG").
WHEREAS, WHD, a wholly-owned subsidiary of The Williams Companies, Inc.
("TWC"), owns all of the issued and outstanding stock of WCG; and
WHEREAS, WHD owns all of the issued and outstanding stock of WIC, which
in turn owns all of the issued and outstanding stock of WITL, which is the owner
and holder of debt and equity in Lightel S.A. Tecnologia Da
Informacao, a Brazilian company ("Lightel"); and
WHEREAS, in connection with TWC's initial public offering of shares of
WCG stock, WHD, WIC and WITL have determined to grant an exclusive option to WCG
to acquire either (1) the stock of WITL (the "WITL stock") or (2) the debt and
equity interests of WITL in Lightel (the "Lightel Assets" ) in exchange for
shares of WCG stock after the Initial Public Offering.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE 1
CALL OPTION RIGHT
WHD, WIC and WITL hereby grant to WCG an exclusive option to acquire
the WITL stock or the Lightel Assets (the "Call Option") in a transaction
intended to qualify as tax-free pursuant to Sections 368 (a) and 351 of the
Internal Revenue Code of 1986, as amended. The Call Option shall provide that
the WITL stock or the Lightel Assets are to be transferred by WIC and WITL to
WHD and subsequently contributed by WHD to WCG in exchange for shares of Class B
common stock of WCG equal in value to the net book value of the Lightel Assets.
The value and number of WCG Class B common shares to be transferred by WCG to
WHD shall be computed by using such shares' average closing price per share over
the twenty day trading-period prior to the transfer date in an amount which is
equal to the net book value of the Lightel Assets at the date of the transfer.
The Call Option shall be exercisable by WCG from January 1, 2000 through January
1, 2001, and shall be exercised in accordance with the Notice Provision below.
1
<PAGE> 2
Prior to the transfer of the WITL stock or Lightel Assets, and as a
condition thereto, WCG shall agree to be bound by all of the terms and
conditions of the following agreements:
(1) Subscription and Shareholder's Agreement dated January 27, 1997 by
and among Lightel S.A. Tecnologia Da Informacao ("Lightel"), Algar S.A.
Empreendimentos e Participacoes ("Algar") and Williams International Telecom
Limited ("WITL") as amended.
(2) Stock Purchase Agreement dated as of January 21, 1997 among ABC
Industria e Comercio S.A. - ABC INCO, Lightel, Algar and WITL.
(3) Loan Agreement dated as of March 30, 1998 among Lightel, Algar and
WITL.
and shall indemnify and hold harmless WHD, WIC and WITL from any and all
damages, liabilities, claims and expenses associated with such agreements. WCG
shall also agree to obtain from third parties and execute any amendments,
assignments, consents or other documentation necessary to transfer the WITL
stock or Lightel Assets from WIC and WITL to WHD and from WHD to WCG and shall
be required to assume any capital or other commitments WHD, WIC or WITL may have
to Lightel from the time of the transfer.
ARTICLE II
NOTICE OF EXERCISE OF CALL OPTION
In order to exercise the Call Option, WCG shall provide written notice
to WHD, WIC and WITL at the following address:
Mr. William G. Von Glahn
Sr. Vice-President, General Counsel
Williams Holdings of Delaware, Inc.
Suite 4900
Tulsa, Oklahoma 74172
Facsimile (918) 573-5942
The notice shall include an estimate of the number of WCG shares to be
transferred, the date of the transfer and any other pertinent details. WHD, WIC
and WITL shall make the determination of whether to transfer the WITL stock or
the Lightel Assets and shall then proceed to transfer in accordance with WCG's
notice.
2
<PAGE> 3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EACH PARTY
Each of the parties represents and warrants to each other party that:
(a) Such party has been duly organized, and is validly
existing and in good standing, under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby,
and has taken all necessary corporate action to authorize the execution,
delivery and performance of this Agreement;
(b) This Agreement has been duly executed and delivered by
such party and, assuming due and valid authorization, upon execution and
delivery by the other parties hereto, this Agreement constitutes a legal, valid
and binding obligation of such party, enforceable against such party in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other similar
laws of general application affecting enforcement of creditors' rights generally
and (ii) the availability of the remedy of specific performance or injunctive or
other forms of equitable relief being subject to equitable defenses and being
subject to the discretion of the court before which any proceeding therefor may
be brought;
(c) The execution and delivery of this Agreement by such party
will not result in a violation of, or a default under, or conflict with, or
require any consent, approval or notice under, any contract, trust, commitment,
agreement, obligation, understanding, arrangement or restriction of any kind to
which such party is a party or by which such party is bound.
ARTICLE IV
AMENDMENT AND WAIVER
No modification or amendment of this Agreement shall be effective
unless such modification or amendment is approved in writing by all of the
parties hereto. The failure of any party to enforce any of the provisions of
this Agreement shall in no way be construed as a waiver of such provisions and
shall not affect the right of such party thereafter to enforce each and every
provision of the Agreement in accordance with its terms.
3
<PAGE> 4
ARTICLE V
ARBITRATION
In the event of a dispute between any two or more parties with regard
to this Agreement, the matter will be submitted to arbitration for final and
binding resolution in accordance with the International Chamber of Commerce
Arbitration Rules. The arbitration will be held in Tulsa, Oklahoma in the United
States of America. The arbitrators shall be requested to render their decision
as promptly as reasonably practicable. An action to enforce judgment on the
award or decision of the arbitrators may be brought in any court of competent
jurisdiction.
ARTICLE VI
SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law. If
any provision of this Agreement is held to be invalid, illegal or unenforceable
in any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
or any other jurisdiction, but this Agreement shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
ARTICLE VII
GOVERNING LAW
This Agreement shall be governed by, enforced and construed in
accordance with the laws of the State of Oklahoma without regard to conflicts of
law rules which may refer the construction of the Agreement to any other
jurisdiction.
ARTICLE VIII
ASSIGNMENT
This Agreement and the rights, duties, benefits and obligations
hereunder shall be freely assignable by WHD, WIC and WITL but shall only be
assignable by WCG with the express written consent of the other parties hereto.
The rights, duties, benefits and obligations hereunder shall enure to the
benefit of and be binding upon the successors and permitted assigns of the
parties.
4
<PAGE> 5
ARTICLE IX
DESCRIPTIVE HEADINGS
The descriptive headings are for convenience only and do not constitute
a part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Call Option
Agreement on the date first above written.
WILLIAMS HOLDINGS OF DELAWARE, INC.
By: /s/ MARK W. HUSBAND
------------------------------------------------
Name: Mark W. Husband
----------------------------------------------
Title: Assistant Treasurer
---------------------------------------------
WILLIAMS COMMUNICATIONS GROUP INC.
By: /s/ S. MILLER WILLIAMS
------------------------------------------------
Name: S. Miller Williams
----------------------------------------------
Title: Senior Vice President
---------------------------------------------
WILLIAMS INTERNATIONAL COMPANY
By: /s/ JOHN C. BUMGARNER, JR.
------------------------------------------------
Name: John C. Bumgarner, Jr.
----------------------------------------------
Title: President
---------------------------------------------
WILLIAMS INTERNATIONAL TELECOM, LIMITED
By: /s/ JACK D. MCCARTHY
------------------------------------------------
Name: Jack D. McCarthy
----------------------------------------------
Title: Vice-President & Chief Financial Officer
---------------------------------------------
5
<PAGE> 1
EXHIBIT 10.59
================================================================================
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
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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>
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<TABLE>
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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
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<TABLE>
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<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>
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<TABLE>
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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
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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
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<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
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<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.
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"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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<PAGE> 25
(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
24
<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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"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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"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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<PAGE> 36
(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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(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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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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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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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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(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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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
110
<PAGE> 116
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.
111
<PAGE> 117
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
112
<PAGE> 118
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
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<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.
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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
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........... $(153,931) $(45,110) $(190,826) $(28,005) $(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... $ (93,878) $(16,391) $(146,505) $ 16,937 $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 $155,319,000,
$42,023,000, $209,745,000, $19,897,000, $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. 7 to the Registration Statement on Form S-1 and related
prospectus of Williams Communications Group, Inc. for the registration of its
common stock.
/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. 7 to the
Registration Statement Form S-1, Registration Statement No. 333-76007, and
related Prospectus of Williams Communications Group, Inc. for the registration
of its common stock.
/s/ DELOITTE & TOUCHE LLP
----------------------------------------
DELOITTE & TOUCHE LLP
Toronto, Ontario
September 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
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