<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-15343
WILLIAMS COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1462856
(State of Incorporation) (IRS Employer
Identification Number)
ONE WILLIAMS CENTER 74172
TULSA, OKLAHOMA (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number: (918) 573-2000
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (I) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 28, 2000
CLASS A Common Stock, $0.01 par value 68,204,524 Shares
CLASS B Common Stock, $0.01 par value 395,434,965 Shares
================================================================================
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
Consolidated Statements of Operations for the Three Months Ended March 31,
2000 and 1999............................................................................................... 2
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999....................................... 3
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2000 and 1999............................................................................................... 4
Notes to Consolidated Financial Statements.................................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................................. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................................... 18
</TABLE>
Certain matters discussed in this report, excluding historical
information, include forward-looking statements - statements that discuss
Williams Communications Group, Inc.'s expected future results based on current
and pending business operations. Williams Communications Group, Inc. makes these
forward-looking statements in reliance on the safe harbor protections provided
under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as
"anticipates," "believes," "expects," "planned," "scheduled" or similar
expressions. Although Williams Communications Group, Inc. believes these
forward-looking statements are based on reasonable assumptions, statements made
regarding future results are subject to numerous assumptions, uncertainties and
risks that may cause future results to be materially different from the results
stated or implied in the document. Additional information about issues that
could lead to material changes in performance is contained in Williams
Communications Group, Inc.'s 1999 Form 10-K.
1
<PAGE> 3
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---------- ------------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C>
Revenues (Note 2) $ 533,388 $ 502,161
Operating expenses:
Cost of sales (Note 2) 466,188 389,747
Selling, general and administrative 141,123 122,718
Provision for doubtful accounts 4,668 8,437
Depreciation and amortization 45,436 29,678
Other (166) 301
--------- ---------
Total operating expenses 657,249 550,881
--------- ---------
Loss from operations (Note 2) (123,861) (48,720)
Interest accrued (79,973) (10,536)
Interest capitalized 28,444 4,135
Investing income:
Interest and other 26,744 1,025
Equity losses (3,067) (10,159)
Income from investments (Note 3) 51,722 --
Minority interest in loss of consolidated subsidiaries 12,735 5,836
Other income (loss), net 8 (174)
--------- ---------
Loss before income taxes and cumulative effect of
change in accounting principle (87,248) (58,593)
Provision for income taxes (Note 4) (8,991) (17,448)
--------- ---------
Loss before cumulative effect of change in accounting
principle (96,239) (76,041)
Cumulative effect of change in accounting principle
(Note 5) (25,377) --
--------- ---------
Net loss $(121,616) $ (76,041)
========= =========
Basic and diluted loss per share (Note 6):
Loss before cumulative effect of change in accounting
principle $ (0.21) $ (0.19)
Cumulative effect of change in accounting principle (0.05) --
--------- ---------
Net loss $ (0.26) $ (0.19)
========= =========
Weighted average shares outstanding 463,626 395,435
</TABLE>
See accompanying notes.
2
<PAGE> 4
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 361,990 $ 494,301
Short-term investments 973,024 1,419,762
Receivables less allowance of $53,321,000 ($44,556,000 in 1999) 541,723 599,713
Costs (and estimated earnings in 1999) in excess of billings 143,079 166,738
Inventories 85,609 86,583
Deferred income taxes 38,714 39,507
Other 33,813 23,967
----------- -----------
Total current assets 2,177,952 2,830,571
Investments 1,043,445 786,046
Property, plant and equipment, net of accumulated
depreciation of $289,950,000 ($265,268,000 in 1999) 2,720,814 2,149,463
Goodwill and other intangibles, net of accumulated
amortization of $112,784,000 ($106,622,000 in 1999) 351,123 358,809
Other assets and deferred charges 264,277 252,978
----------- -----------
Total assets $ 6,557,611 $ 6,377,867
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 282,882 $ 267,690
Due to affiliates 52,098 44,648
Deferred income 123,179 112,437
Accrued liabilities 521,126 491,937
Billings in excess of costs (and estimated earnings in 1999) 54,971 50,712
Long-term debt due within one year (Note 7):
Affiliates 20,797 14,404
Other 393 261
----------- -----------
Total current liabilities 1,055,446 982,089
Long-term debt (Note 7):
Affiliates 974,470 980,754
Other 1,990,080 1,989,890
Deferred income taxes 144,450 109,046
Other liabilities and deferred income (Note 3) 254,490 81,988
Minority interest in consolidated subsidiaries 84,417 121,500
Stockholders' equity:
Class A common stock, $0.01 par value, 1 billion
shares authorized, 68.2 million shares outstanding
in 2000 and 1999 682 682
Class B common stock, $0.01 par value, 500 million shares
authorized, 395.4 million shares outstanding in 2000 and 1999 3,954 3,954
Capital in excess of par value 2,661,905 2,659,927
Accumulated deficit (798,477) (676,861)
Accumulated other comprehensive income (Note 8) 186,194 124,898
----------- -----------
Total stockholders' equity 2,054,258 2,112,600
----------- -----------
Total liabilities and stockholders' equity $ 6,557,611 $ 6,377,867
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 5
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(121,616) $ (76,041)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Change in accounting principle 25,377 --
Depreciation 38,387 21,246
Amortization of goodwill and other intangibles 7,049 8,432
Provision for deferred income taxes 7,689 16,486
Provision for doubtful accounts 4,668 8,437
Equity losses 3,067 10,159
Gain on sale of investments (48,023) --
Minority interest in loss of consolidated subsidiaries (12,735) (5,836)
Cash provided (used) by changes in:
Receivables sold -- (33,767)
Receivables (4,213) (809)
Costs (and estimated earnings in 1999)
in excess of billings 23,659 9,194
Inventories 612 (5,910)
Other current assets (9,353) 7,897
Accounts payable 26,583 (44,532)
Current deferred income 2,736 15,051
Accrued liabilities 50,678 (4,822)
Billings in excess of costs (and estimated earnings
in 1999) 4,259 (4,384)
Due to/from affiliates 7,450 29,521
Long-term deferred income 61,142 (384)
Other (12,115) (3,873)
--------- ---------
Net cash provided by (used in) operating activities 55,301 (53,935)
FINANCING ACTIVITIES
Proceeds from long-term debt 572 315,477
Payments on long-term debt (410) (175)
Proceeds from issuance of common stock, net of
expenses 1,978 --
Capital contributions from parent -- 57,020
Contribution to subsidiary from minority interest
shareholders -- 11,000
Changes in due to/from affiliates 109 204,334
Other (163) --
--------- ---------
Net cash provided by financing activities 2,086 587,656
INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures (661,086) (228,332)
Proceeds from sales and dark fiber transactions 12,524 40,804
Purchase of short-term investments (21,355) --
Purchase of long-term investments (197,440) (291,350)
Proceeds from sales of short-term investments 468,093 --
Proceeds from sales of long-term investments 204,772 --
Other 4,794 --
--------- ---------
Net cash used in investing activities (189,698) (478,878)
--------- ---------
Increase (decrease) in cash and cash equivalents (132,311) 54,843
Cash and cash equivalents at beginning of period 494,301 42,004
--------- ---------
Cash and cash equivalents at end of period $ 361,990 $ 96,847
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 6
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying interim consolidated financial statements of Williams
Communications Group, Inc. (WCG) do not include all notes in annual financial
statements and therefore should be read in conjunction with the consolidated
financial statements and notes thereto in WCG's Annual Report on Form 10-K. The
accompanying 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 at March 31,
2000, and its results of operations and cash flows for the three months ended
March 31, 2000 and 1999.
2. SEGMENT REVENUES AND LOSS
During the first quarter 2000, WCG realigned its operating segments into
four segments: Network, Broadband Media, Solutions and Strategic Investments.
Network now also contains PowerTel Limited (PowerTel), a publicly traded
telecommunications company in Australia, and various investments in
network-related companies that were all previously reported in Strategic
Investments. Broadband Media contains Vyvx Services and investments in
broadband media communications companies that were all previously reported in
Strategic Investments. Solutions now also contains Intersys, a data systems
integration and professional development company in Mexico, that was previously
reported in Strategic Investments. Strategic Investments includes certain
domestic and international companies and investments. In addition, as a result
of an assumption of investment management activities within the operating
segments, the definition of segment profit or loss has been modified to include
income or loss from investments resulting from the management of investments in
equity instruments. Prior period information has been restated to conform to
the current period presentation.
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, depreciation and
amortization, and income or loss from investments and excludes allocated
charges from parent. Intercompany sales are generally accounted for as if the
sales were to unaffiliated third parties, that is, at current market prices.
The following table presents certain financial information concerning WCG's
reportable segments.
5
<PAGE> 7
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
BROADBAND STRATEGIC
NETWORK MEDIA SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
--------- --------- --------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Revenues:
External customers:
Dark fiber $ 19,854 $ -- $ -- $ -- $ -- $ 19,854
Capacity and other 99,258 40,830 -- -- -- 140,088
New systems sales and upgrades -- -- 209,466 -- -- 209,466
Maintenance and customer
service orders -- -- 146,603 -- -- 146,603
Other -- -- 15,200 -- -- 15,200
--------- --------- --------- --------- --------- ---------
Total external customers 119,112 40,830 371,269 -- -- 531,211
Affiliates 1,067 -- 1,110 -- -- 2,177
Intercompany 10,098 48 790 -- (10,936) --
--------- --------- --------- --------- --------- ---------
Total segment revenues $ 130,277 $ 40,878 $ 373,169 $ -- $ (10,936) $ 533,388
========= ========= ========= ========= ========= =========
Costs of sales:
Dark fiber $ 13,386 $ -- $ -- $ -- $ -- $ 13,386
Capacity and other 143,165 23,659 -- 4 -- 166,828
New systems sales and upgrades -- -- 162,098 -- -- 162,098
Maintenance and customer service
orders -- -- 80,670 -- -- 80,670
Indirect operating and maintenance -- -- 43,206 -- -- 43,206
Intercompany 48 8,523 2,365 -- (10,936) --
--------- --------- --------- --------- --------- ---------
Total cost of sales $ 156,599 $ 32,182 $ 288,339 $ 4 $ (10,936) $ 466,188
========= ========= ========= ========= ========= =========
Segment loss:
Loss from operations $ (91,978) $ (5,797) $ (24,730) $ (1,356) $ -- $(123,861)
Equity earnings (losses) 360 (660) -- (2,767) -- (3,067)
Income from investments 31,523 -- -- 20,199 -- 51,722
Add back - allocated charges from
parent 1,772 413 2,582 147 -- 4,914
--------- --------- --------- --------- --------- ---------
Total segment profit (loss) $ (58,323) $ (6,044) $ (22,148) $ 16,223 $ -- $ (70,292)
========= ========= ========= ========= ========= =========
Depreciation and amortization $ 24,824 $ 6,857 $ 13,694 $ 61 $ -- $ 45,436
</TABLE>
6
<PAGE> 8
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
BROADBAND STRATEGIC
NETWORK MEDIA SOLUTIONS INVESTMENTS ELIMINATIONS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenues:
External customers:
Dark fiber $ 51,321 $ -- $ -- $ -- $ -- $ 51,321
Capacity and other 53,673 38,626 -- 14,671 -- 106,970
New systems sales and upgrades -- -- 193,610 -- -- 193,610
Maintenance and customer
service orders -- -- 137,720 -- -- 137,720
Other -- -- 7,896 -- -- 7,896
----------- ----------- ----------- ----------- ----------- -----------
Total external customers 104,994 38,626 339,226 14,671 -- 497,517
Affiliates 3,400 -- 1,244 -- -- 4,644
Intercompany 11,640 761 -- 239 (12,640) --
----------- ----------- ----------- ----------- ----------- -----------
Total segment revenues $ 120,034 $ 39,387 $ 340,470 $ 14,910 $ (12,640) $ 502,161
=========== =========== =========== =========== =========== ===========
Costs of sales:
Dark fiber $ 40,804 $ -- $ -- $ -- $ -- $ 40,804
Capacity and other 71,685 21,580 -- 8,840 -- 102,105
New systems sales and upgrades -- -- 141,491 -- -- 141,491
Maintenance and customer service
orders -- -- 73,566 -- -- 73,566
Indirect operating and maintenance -- -- 31,781 -- -- 31,781
Intercompany 133 8,714 2,458 1,335 (12,640) --
----------- ----------- ----------- ----------- ----------- -----------
Total cost of sales $ 112,622 $ 30,294 $ 249,296 $ 10,175 $ (12,640) $ 389,747
=========== =========== =========== =========== =========== ===========
Segment loss:
Loss from operations $ (23,341) $ (7,885) $ (11,196) $ (6,298) $ -- $ (48,720)
Equity losses -- -- -- (10,159) -- (10,159)
Add back - allocated charges from
parent 764 293 2,109 184 -- 3,350
----------- ----------- ----------- ----------- ----------- -----------
Total segment loss $ (22,577) $ (7,592) $ (9,087) $ (16,273) $ -- $ (55,529)
=========== =========== =========== =========== =========== ===========
Depreciation and amortization $ 7,490 $ 8,877 $ 10,740 $ 2,571 $ -- $ 29,678
</TABLE>
<TABLE>
<CAPTION>
TOTAL ASSETS
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Network $ 4,433,017 $ 4,079,803
Broadband Media 287,849 347,959
Solutions 1,272,667 1,537,630
Strategic Investments 564,078 412,475
----------- -----------
Total $ 6,557,611 $ 6,377,867
=========== ===========
</TABLE>
7
<PAGE> 9
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. INCOME FROM INVESTMENTS
In the first quarter 2000, income from investments included a gain of
$31.5 million related to the sale of certain marketable equity securities,
dividends received of $3.7 million and a $16.5 million gain related to the sale
of part of WCG's interest in ATL-Algar Telecom Leste S.A. (ATL) to SBC
Communications, Inc. (SBC), which became a related party in the first quarter
2000. The ATL gain resulted from a series of transactions during the first
quarter 2000 in which WCG sold a portion of its investment in ATL, which had a
carrying value of $30 million, for approximately $168 million in cash. WCG
recognized a gain on the sale of $16.5 million and deferred a gain of
approximately $121 million associated with $150 million of the proceeds which
were subsequently advanced to ATL.
4. PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes for the three months ended March
31, 2000 and 1999 includes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current:
Federal $ 758 $ --
State 25 --
Foreign 519 962
---------- ----------
1,302 962
Deferred:
Federal 7,071 11,202
State 1,823 5,284
Foreign (1,205) --
---------- ----------
7,689 16,486
---------- ----------
Total provision $ 8,991 $ 17,448
========== ==========
</TABLE>
The tax provisions for the three months ended March 31, 2000 and 1999 are
significantly more than the benefit expected from applying the federal
statutory rate to the pre-tax loss primarily due to a valuation allowance
established for uncertainties arising from application of the tax sharing
agreement with The Williams Companies, Inc. (Williams) that may affect the
utilization of loss carryforwards as well as state income taxes and the impact
of net foreign losses not deductible for U.S. tax purposes. For the three
months ended March 31, 2000, these items are partially offset by a tax benefit
from permanent basis differences on certain assets sold during the first
quarter 2000.
5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101),"Revenue Recognition in Financial
Statements." Among other things, SAB 101 clarifies certain conditions regarding
the culmination of an earnings process and customer acceptance requirements in
order to recognize revenue. Historically, WCG's revenue recognition policy has
been to recognize revenues on new systems sales and upgrades under the
percentage of completion method. Revenues on the contracts were initially
recognized upon delivery of equipment with the remaining revenues under the
contract being recognized over the installation period based on the
relationship of incurred labor to total estimated labor. In light of the new
guidance issued in SAB 101, effective January 1, 2000, WCG has changed its
method of accounting for new systems sales and upgrades from the percentage of
completion method to the completed contract method. The provisions of SAB 101
permit WCG to treat this change in accounting principle as a cumulative effect
adjustment consistent with rules issued under Accounting Principles Board
Opinion No. 20. The cumulative effect of the accounting change resulted in a
charge to 2000 operating results of $25.4 million (net of income tax benefits of
$14.9 million and minority interest of $17.2 million). On a pro forma basis,
assuming the completed contract method is applied retroactively, WCG's reported
net loss for the first quarter 1999 would have been increased by $8.1 million,
or $0.02 per share. WCG recognized $138.2 million of revenue in the first
quarter 2000 that was included in the cumulative effect adjustment.
8
<PAGE> 10
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. LOSS PER SHARE
For the periods presented, diluted loss per common share is the same as the
basic calculation as the inclusion of any stock options and non-vested deferred
shares outstanding would be antidilutive. For the three months ended March 31,
2000, stock options of 14.2 million shares and non-vested deferred shares of .4
million have been excluded from the computation of diluted loss per common
share. Inclusion of these shares would be antidilutive. For the three months
ended March 31, 1999, no stock awards were excluded from the computation of
diluted loss per common share as WCG had not granted any WCG common stock
awards during this period.
7. LONG-TERM DEBT
Affiliates
Long-term debt due to affiliates as of March 31, 2000 and December 31, 1999
consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Williams note $ 988,110 $ 988,110
Other 7,157 7,048
-------------- --------------
995,267 995,158
Less current maturities (20,797) (14,404)
-------------- --------------
Long-term debt $ 974,470 $ 980,754
============== ==============
</TABLE>
At March 31, 2000, the interest rate on outstanding borrowings from
Williams was LIBOR plus 2.25%, or 8.18%. Of the total borrowings from Williams,
$18.8 million has been classified as current at March 31, 2000, as quarterly
principal payments begin July 1, 2000, with no less than $25 million payable in
any fiscal year.
Third parties
Long-term debt (excluding amounts due to affiliates) as of March 31, 2000
and December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
10.875% Senior redeemable notes, due
October 1, 2009, (less unamortized discount
of $10,956,000 and $11,117,000 for
March 31, 2000 and December 31, 1999,
respectively) $ 1,489,044 $ 1,488,883
10.7% Senior redeemable notes, due October 1, 2007 500,000 500,000
Other 1,429 1,268
----------- -----------
1,990,473 1,990,151
Less current maturities (393) (261)
----------- -----------
Long-term debt $ 1,990,080 $ 1,989,890
=========== ===========
</TABLE>
During the first quarter 2000, Williams was removed as a guarantor under
the $1.05 billion credit facility.
9
<PAGE> 11
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. COMPREHENSIVE LOSS
Comprehensive loss for the three months ended March 31, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net loss $ (121,616) $ (76,041)
Other comprehensive income:
Unrealized gains on securities 140,575 114,657
Less: reclassification adjustment for gains
realized in net loss (31,523) --
------------ ------------
Net unrealized gains 109,052 114,657
Foreign currency translation adjustments (5,335) (23,194)
------------ ------------
Other comprehensive income before taxes 103,717 91,463
Income tax provision on other comprehensive
income (42,421) (46,896)
------------ ------------
Comprehensive loss $ (60,320) $ (31,474)
============ ============
</TABLE>
During the first quarter 2000, WCG entered into a derivative instrument
which will expire in various stages throughout the remainder of 2000 and is
designed to hedge the exposure to changes in the price of its investment in
certain marketable equity securities. Changes in the fair value of the hedged
marketable equity security and the impact of its associated derivative
instrument are reflected in accumulated other comprehensive income. The
derivative instrument will impact realized gains or losses from the sale of
the hedged marketable equity security.
9. CONTINGENCIES
WCG and Williams Communications, Inc. (WCI), a wholly-owned operating
subsidiary of WCG, are named as defendants in various putative nationwide class
actions brought on behalf of all landowners on whose property the plaintiffs
have alleged WCG installed fiber-optic cable without the permission of the
landowner. WCG believes that installation of the cable containing the single
fiber network that crosses over or near the putative class members' land does
not infringe on their property rights. WCG also does not believe that the
plaintiffs have sufficient basis for certification of a class action.
It is likely that WCG will be subject to other putative class action
suits challenging its railroad or pipeline rights of way. WCG cannot quantify
the impact of all such claims at this time. Thus, WCG cannot be certain that
the plaintiffs' purported class action or other purported class actions, if
successful, will not have a material adverse effect.
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.
10. RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard, as amended, will be
effective for WCG beginning January 1, 2001. This standard requires that all
derivatives be recognized as assets or liabilities in the balance sheet and that
those instruments be measured at fair value. The effect of this standard on
WCG's results of operations and financial position is being evaluated.
The FASB issued Interpretation No. 43, "Real Estate Sales, an
interpretation of SFAS No. 66," in June 1999. This interpretation considers dark
fiber as 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 is not appropriate for indefeasable rights of use, or IRUs,
since IRUs generally do not transfer title to the fibers under lease to the
lessee. 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 3, 1999. The effect of this interpretation on the
first quarter 2000 results was to decrease revenues by $3.7 million and increase
net loss by $1.5 million.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The table below summarizes WCG's consolidated results from operations for
the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Network $ 130,277 $ 120,034
Broadband Media 40,878 39,387
Solutions 373,169 340,470
Strategic Investments -- 14,910
Eliminations (10,936) (12,640)
----------- -----------
Total revenues 533,388 502,161
Operating costs:
Cost of sales 466,188 389,747
Selling, general and administrative 141,123 122,718
Provision for doubtful accounts 4,668 8,437
Depreciation and amortization 45,436 29,678
Other (166) 301
----------- -----------
Total operating expenses 657,249 550,881
----------- -----------
Loss from operations $ (123,861) $ (48,720)
=========== ===========
</TABLE>
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Consolidated results
WCG experienced a net loss of $121.6 million for the three months ended
March 31, 2000 compared to a net loss of $76.0 million for the same period in
1999, an increase of $45.6 million from the prior period. The increase in net
loss included an increase in loss from operations of $75.1 million, an increase
in net interest expense of $45.1 million and a cumulative effect of a change in
accounting principle of $25.4 million. These increases to net loss were
partially offset by an increase in investing income of $84.5 million, a change
in minority interest results of $6.9 million and a decrease of $8.4 million to
the tax provision.
WCG's network unit accounted for $68.6 million of the increase in loss from
operations, and WCG's solutions unit accounted for $13.5 million of the
increase in loss from operations. WCG's broadband media unit's and strategic
investments unit's loss from operations decreased by $2.1 million and $4.9
million, respectively.
11
<PAGE> 13
WCG's network unit
The table below summarizes WCG's network unit's results from operations for
the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Dark fiber $ 19,854 $ 51,321
Capacity and other 91,903 42,131
Intercompany 10,098 11,640
Affiliates 1,067 3,400
PowerTel 7,355 11,542
----------- -----------
Total revenues 130,277 120,034
Operating costs:
Cost of sales 156,599 112,622
Selling, general and administrative 40,541 23,220
Provision for doubtful accounts 324 10
Depreciation and amortization 24,824 7,490
Other (33) 33
----------- -----------
Total operating expenses 222,255 143,375
----------- -----------
Loss from operations $ (91,978) $ (23,341)
=========== ===========
Equity earnings $ 360 $ --
=========== ===========
Income from investments $ 31,523 $ --
=========== ===========
</TABLE>
WCG's network unit's revenues increased $10.3 million, or 9%, to $130.3
million for the three months ended March 31, 2000 from $120.0 million for the
same period in 1999. The increase in revenues is primarily due to a $30.1
million increase related to data services and a $17.6 million increase related
to voice services provided to customers of the Williams network. This increase
is partially offset by $31.5 million lower revenues from dark fiber leases from
transactions entered into prior to June 30, 1999 and accordingly accounted for
as sales-type leases and $4.2 million lower revenues from PowerTel. Revenues
for PowerTel were higher in 1999 as a result of focusing efforts in the
reseller services arena, as opposed to 2000 efforts, which are focused more in
the area of developing and serving facilities-based carriers which typically
yield higher margins.
WCG's network unit's costs of sales increased $44.0 million, or 39%, to
$156.6 million for the three months ended March 31, 2000 from $112.6 million
for the same period in 1999. The increase in costs of sales is primarily due to
a $36.6 million increase related to costs in support of the data and voice
services revenue increase described above, $12.2 million of lease expense
attributable to WCG's operating lease agreement covering a portion of WCG's
fiber-optic network, $19.4 million of higher operating and maintenance expenses
in anticipation of and support of future revenue streams and $3.2 million of
higher ad valorem tax accruals, reflecting the increased asset base associated
with the network build-out. These increases were partially offset by $27.4
million lower construction costs associated with the reduced level of dark
fiber leases accounted for as sales-type leases.
WCG's network unit's selling, general and administrative expenses increased
$17.3 million, or 75%, to $40.5 million for the three months ended March 31,
2000 from $23.2 million for the same period in 1999 due primarily to an
increase in the number of employees and the expansion of the infrastructure to
support the network currently under construction.
WCG's network unit's depreciation and amortization increased $17.3 million,
or 231%, to $24.8 million for the three months ended March 31, 2000 from $7.5
million for the same period in 1999 as a result of placing an additional seven
thousand route miles of fiber in operation since March 31, 1999.
WCG's network unit's income from investments increased $31.5 million
related to the sale of certain marketable equity securities in the first
quarter 2000.
12
<PAGE> 14
WCG's broadband media unit
The table below summarizes WCG's broadband media unit's results from
operations for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues $ 40,878 $ 39,387
Operating costs:
Cost of sales 32,182 30,294
Selling, general and administrative 7,644 7,852
Provision for doubtful accounts 6 249
Depreciation and amortization 6,857 8,877
Other (14) --
----------- -----------
Total operating expenses 46,675 47,272
----------- -----------
Loss from operations $ (5,797) $ (7,885)
=========== ===========
Equity losses $ (660) $ --
=========== ===========
</TABLE>
WCG's broadband media unit's revenues increased $1.5 million, or 4%, to
$40.9 million for the three months ended March 31, 2000 from $39.4 million for
the same period in 1999. The increase is primarily due to a $1.6 million
increase in revenues from Vyvx Services due to increased news coverage for
millennium and Year 2000 backup services, presidential campaigns and primaries,
and increased sports coverage.
WCG's broadband media unit's gross margin decreased to $8.7 million for the
three months ended March 31, 2000 from $9.1 million for the same period in
1999. Costs of sales increased $1.9 million, or 6%, to $32.2 million for the
three months ended March 31, 2000 from $30.3 million for the same period in
1999. The increase is primarily due to Vyvx Services' cost of sales, which
reflect the costs associated with increased revenues and increased transponder
costs.
WCG's broadband media unit's selling, general and administrative expenses
decreased $.3 million, or 3%, to $7.6 million for the three months ended March
31, 2000 from $7.9 million for the same period in 1999, reflecting little
change in this area of business. WCG's broadband media unit's depreciation and
amortization decreased $2.0 million, or 23%, to $6.9 million for the three
months ended March 31, 2000 from $8.9 million for the same period in 1999.
13
<PAGE> 15
WCG's solutions unit
The table below summarizes WCG's solutions unit's results from operations
for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
New systems sales and upgrades $ 209,466 $ 193,610
Maintenance and customer service orders 146,603 137,720
Other 15,200 7,896
Affiliates 1,110 1,244
Intercompany 790 --
------------ ------------
Total revenues 373,169 340,470
Operating costs:
Cost of sales 288,339 249,296
Selling, general and administrative 91,647 83,367
Provision for doubtful accounts 4,338 8,079
Depreciation and amortization 13,694 10,740
Other (119) 184
------------ ------------
Total operating expenses $ 397,899 $ 351,666
------------ ------------
Loss from operations $ (24,730) $ (11,196)
============ ============
</TABLE>
WCG's solutions unit's revenues increased $32.7 million, or 10%, to $373.2
million for the quarter ended March 31, 2000 from $340.5 million for the same
period in 1999. The increased revenues were attributable to a $15.9 million
increase in new systems sales and upgrades, a $8.9 million increase in
maintenance and customer service orders and a $7.9 million increase in all other
revenues. On a pro forma basis, revenues for the first quarter 1999 under the
completed contract method would have decreased $28.6 million to $311.9 million.
Accordingly, on a pro forma basis, revenues under the completed contract method
would have increased $61.3 million to $373.2 million for the quarter ended March
31, 2000 from $311.9 million for the same period in 1999.
WCG's solutions unit's cost of sales increased $39.0 million, or 16%, to
$288.3 million for the three months ended March 31, 2000 from $249.3 million for
the same period in 1999. WCG's solutions unit's gross margin decreased to $84.8
million for the three months ended March 31, 2000 from $91.2 million for the
same period in 1999. On a pro forma basis, gross margin under the same completed
contract method for the first quarter 1999 would have decreased $8.1 million to
$83.1 million and gross margin a percentage of revenue would have been 26.6%.
The decrease in pro forma gross margin as a percentage of revenue from 26.6% to
22.7% for the quarters ended March 31, 1999 and 2000, respectively, is due
primarily to increased installation and service costs and competitive pressures.
WCG's solutions unit's selling, general and administrative expenses
increased $8.2 million, or 10%, to $91.6 million for the three months ended
March 31, 2000 from $83.4 million for the same period in 1999. The increase in
selling, general and administrative expenses is primarily due to a $.9 million
increase related to payroll expense, a $1.3 million increase related to facility
relocations, a $1.7 million increase related to branding advertising and a $6.1
million increase related to higher technological and infrastructure support
costs associated with business integration issues and the implementation of new
systems.
WCG's solutions unit's provision for doubtful accounts decreased $3.8
million, or 46%, to $4.3 million for the three months ended March 31, 2000 from
$8.1 million for the same period in 1999. The higher amounts for the quarter
ended March 31, 1999 reflect adjustments for significant billing and collection
issues experienced in the prior year.
WCG's solutions unit's depreciation and amortization increased $3.0
million, or 28%, to $13.7 million for the three months ended March 31, 2000
from $10.7 million for the same period in 1999. The increase is attributable to
depreciation on systems implemented in the third quarter 1999, furniture and
fixtures depreciation due to facility upgrades and depreciation related to
customer premise equipment.
14
<PAGE> 16
WCG's strategic investments unit
The table below summarizes WCG's strategic investments unit's results from
operations for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues $ -- $ 14,910
Operating costs:
Cost of sales 4 10,175
Selling, general and administrative 1,291 8,279
Provision for doubtful accounts -- 99
Depreciation and amortization 61 2,571
Other -- 84
------------ ------------
Total operating expenses 1,356 21,208
------------ ------------
Loss from operations $ (1,356) $ (6,298)
============ ------------
ATL and other equity losses $ (2,767) $ (10,159)
============ ============
Income from investments $ 20,199 $ --
============ ============
</TABLE>
WCG's strategic investments unit's revenues decreased $14.9 million, or
100%, to zero for the three months ended March 31, 2000 from $14.9 million for
the same period in 1999. The decrease in revenues is due primarily to a $13.2
million decrease of revenues as a result of the sale of the audio and video
conferencing services and closed-circuit video broadcasting services businesses
in the third quarter 1999. In addition, revenues decreased by $1.5 million
following the sale of the remaining portion of the learning content business in
the fourth quarter 1999 and by $.2 million as a result of the abandonment of the
business involved in providing wireless remote monitoring and meter reading
equipment and related services to industrial and commercial customers in the
fourth quarter 1999.
WCG's strategic investments unit's costs of sales decreased $10.2 million,
or 100%, to $4 thousand for the three months ended March 31, 2000 from $10.2
million for the same period in 1999. This decrease is primarily due to a $9.0
million decrease of costs related to the audio and video conferencing services
and closed-circuit video broadcasting services businesses and a $1.1 million
decrease of costs related to the learning content business.
WCG's strategic investments unit's selling, general and administrative
expenses decreased $7.0 million, or 84%, to $1.3 million for the three months
ended March 31, 2000 from $8.3 million for the same period in 1999 primarily
due to a $5.9 million decrease related to the audio and video conferencing
services and closed-circuit video broadcasting services businesses, a $1.5
million decrease related to the learning content business and a $.7 million
decrease related to the business involved in providing wireless remote
monitoring and meter reading equipment and related services to industrial and
commercial customers. The costs incurred in 2000 represent costs associated
with managing WCG's equity investments in this business unit.
WCG's strategic investments unit's depreciation and amortization decreased
$2.5 million, or 98%, to $.1 million for the three months ended March 31, 2000
from $2.6 million for the same period in 1999 primarily due to a $2.5 million
decrease related to the audio and video conferencing services and
closed-circuit video broadcasting services businesses.
WCG's strategic investments unit's equity losses decreased $7.4 million, or
73%, to $2.8 million for the three months ended March 31, 2000 from $10.2
million for the same period in 1999 primarily due to lower losses from ATL
operations. Additionally, WCG's decreased equity ownership of ATL contributed
$1.7 million to the decrease in equity losses.
WCG's strategic investments unit's income from investments increased $20.2
million related to dividends received of $3.7 million and a $16.5 million gain
related to the sale of part of WCG's interest in ATL to SBC. The ATL gain
resulted from a series of transactions during the first quarter 2000 in which
WCG sold a portion of its investment in ATL, which had a carrying value of $30
million, for approximately $168 million in cash. WCG recognized a gain on the
sale of $16.5 million and deferred a gain of approximately $121 million
associated with $150 million of the proceeds which were subseqently advanced to
ATL.
15
<PAGE> 17
Consolidated non-operating items
WCG's net interest expense for the three months ended March 31, 2000
increased $45.1 million from the same period in 1999 as a result of increased
borrowings at higher interest rates to finance operations and capital
expenditures, partially offset by increased interest capitalized related to
assets under construction. WCG's total debt has increased $1.8 billion from
March 31, 1999 to March 31, 2000, which reflects the $2.0 billion of high-yield
public debt offering issued in connection with WCG's initial public offering in
October 1999.
WCG's interest and other investing income increased $25.7 million to $26.7
million for the three months ended March 31, 2000 from $1.0 million for the
same period in 1999. This increase is due to interest earned on short-term
investments, which were purchased with proceeds generated by the initial debt
and equity offerings in October 1999.
The change in minority interest increased $6.9 million for the three months
ended March 31, 2000 compared to the same period in 1999 of which $5.5 million
is attributable to the solutions unit and $1.4 million is attributable to
PowerTel.
WCG recorded a tax provision of $9.0 million for the three months ended
March 31, 2000 compared to a $17.4 million provision for the same period in
1999, resulting in a decrease in the provision of $8.4 million. The decrease is
due primarily to a tax benefit from permanent basis differences on certain
assets sold during the first quarter 2000.
The cumulative effect of a change in accounting principle of $25.4 million
in 2000 results from Solutions' change in revenue recognition policy from the
percentage of completion method to the completed contract method.
LIQUIDITY AND CAPITAL RESOURCES
Cash sources
WCG has approximately $1.3 billion in cash and short-term investments on
hand as of March 31, 2000. Additionally, WCG has available, through WCI, its
wholly-owned subsidiary, a $1.05 billion credit facility. As of March 31, 2000,
there were no borrowings outstanding under this facility. When combined with
the ability to monetize its marketable equity securities and the expected
proceeds from dark fiber sales, WCG's capital availability exceeds $2.8
billion.
Cash uses
Capital expenditures - WCG's primary anticipated cash need is funding
capital expenditures for its network unit including the purchase and deployment
of fiber-optic cable, equipment costs, capitalized interest and other costs.
WCG's network construction contracts typically cover all or a portion of a
cable construction project. While WCG's network may use the same contractors on
different projects, it has no long-term construction agreements. WCG's network
has long-term equipment purchase contracts with Nortel, Sycamore and several
other equipment vendors. WCG estimates that during the remainder of 2000, it
will spend a total of approximately $2.3 billion in capital expenditures,
including $2.1 billion on its network.
Payments for wireless capacity - As of March 31, 2000, WCG had payments of
approximately $215 million remaining on its $400 million commitment under an
agreement with Winstar. The payments required during the remainder of 2000 will
be approximately $75.6 million.
Debt service payments - WCG estimates that during the remainder of 2000 it
will pay approximately $240.3 million in interest, based on a weighted-average
rate of interest of 10.8% on the notes and average LIBOR over this period of
6.2%. WCG also estimates that it will repay approximately $12.5 million in
principal under its Williams note during this period.
Lease payments under asset defeasance program - WCG expects that during the
remainder of 2000 it will pay approximately $39.9 million in lease payments
under the asset defeasance program.
Other - Cash also will also be used to fund net operating deficits, for
working capital and for other general corporate purposes.
WCG believes that the cash and short-term investments on hand, borrowings
under bank facilities, monetization of marketable equity securities, proceeds
from grants of dark fiber rights and internally generated cash will be
sufficient to satisfy anticipated cash requirements through the end of 2000.
16
<PAGE> 18
WCG is considering various business plans under which cash requirements
could be between $4 and $5 billion over the course of the next five years.
WCG's ability to implement the business plan and meet its projected growth is
dependent upon its ability to secure additional financing in the future. In
order to meet these levels of future cash requirements, WCG may issue
additional debt or equity securities, secure additional credit facilities, sell
or dispose of existing businesses or investments, or seek funds from other
capital markets. There is no assurance that such financing will be available,
if and when it is needed, or that such financing will be on terms acceptable to
WCG.
The forward-looking statements set forth above with respect to the
estimated cash requirements relating to capital expenditures, WCG's ability to
meet such cash requirements and its ability to service debt are based on
certain assumptions as to future events. Important assumptions, which, if not
met, could adversely affect WCG's ability to achieve satisfactory results,
include: (a) there will be no significant delays with respect to WCG's network
expansion; (b) WCG's contractors and partners will perform their obligations;
and (c) WCG will increase traffic on its network.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
WCG's interest rate risk exposure relates primarily to its short-term
investments.
Short-term investments of $973 million at March 31, 2000 consist primarily
of short-term debt securities, such as commercial paper, asset-backed and
corporate bonds, a mutual fund investing in short-term debt securities and
money market instruments that are managed by financial institutions. WCG's
investing income is subject to interest rate risk resulting from potential
future increases in interest rates on comparable investment securities. To
mitigate the impact of fluctuations in interest rates, WCG instructs the
managing financial institutions to invest only in highly liquid instruments
with short-term maturity dates. These investments were purchased with a portion
of the proceeds from the debt and equity offerings in October 1999. The
decrease in the short-term investments balance since December 31, 1999 is due
primarily to WCG converting some investments to cash in order to fund the
network build-out project.
EQUITY PRICE RISK
Equity price risk primarily arises from investments in publicly traded
telecommunications-related companies. These investments are carried at fair
value and approximate six percent and five percent of WCG's total assets at
March 31, 2000 and December 31, 1999, respectively. These investments do have
the potential to impact WCG's financial position due to movements in the price
of these equity securities. WCG historically has not utilized derivatives or
other financial instruments to hedge the risk associated with the movement in
the price of these equity securities. However, during the first quarter 2000,
WCG entered into a derivative instrument which will expire in various stages
throughout the remainder of 2000 and is designed to hedge the exposure to
changes in the price of its investment in certain marketable equity securities.
It is reasonably possible that the prices of the equity securities in WCG's
marketable equity securities portfolio could experience a 30% increase or
decrease in the near term. Assuming a 30 % increase or decrease in prices, the
value of WCG's marketable equity securities portfolio at March 31, 2000, which
is included in investments in the Consolidated Balance Sheet, would increase or
decrease by approximately $102.0 million or $109.0 million, respectively.
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of WCG's registration statements relating to its initial
public offering of Class A Common Stock and Senior Redeemable Notes, filed on
Form S-1 under the Securities Act of 1933 (Nos. 333-76007 and 333-76877,
respectively), was September 30, 1999. The managing underwriters for both
securities were Salomon Smith Barney, Lehman Brothers and Merrill Lynch & Co.
Under the equity offering, WCG registered 34,040,000 shares of Class A
common stock (29,600,000 of which were issuable to the public and 4,440,000 of
which were issuable only to the underwriters to cover over allotments). WCG
sold the 29,600,000 shares of Class A common stock at $23.00 per share. The
4,440,000 over allotment shares were sold to the underwriters at $21.68 per
share. Additionally, in separate private placements exempt from registration
pursuant to Section 4 (2) of the Securities Act of 1933, SBC, Intel Corporation
and Telefonos de Mexico S.A. de C.V. (Telmex) each purchased a portion of WCG's
Class A common stock. SBC acquired 20,226,812 shares of Class A common stock
for an investment of approximately $438.5 million; Intel Corporation invested
$200 million to acquire 9,225,093 shares of Class A common stock; and Telmex
invested $100 million to acquire 4,612,546 shares of Class A common stock. The
sale of the shares of Class A common stock generated aggregate gross proceeds
of approximately $1.52 billion for WCG. The aggregate net proceeds of the
common stock were approximately $1.47 billion, after deducting underwriting
discounts and commissions of $44.9 million and expenses of the offering of $7.9
million.
Separate from the equity offering, WCG sold an aggregate of $2 billion of
debt securities. The sale of the debt securities generated aggregate gross
proceeds of $1.99 billion for WCG after a debt discount of $11.3 million. The
aggregate net proceeds of the debt securities were approximately $1.94 billion,
after deducting underwriting discounts and commissions of $50 million and
expenses of the offering of $2.0 million.
Of the net equity and debt proceeds, WCG has used approximately $2.27
billion of which $1.13 billion was used to repay borrowings under credit
facilities. An additional $1.14 billion was used for capital expenditures,
working capital and other general corporate purposes. The remaining $1.14
billion of the net proceeds are expected to be used primarily for capital
expenditures related to the construction of the Williams network. The amounts
actually expended for such purposes may vary significantly and will depend on a
number of factors, including WCG's future revenues and cash generated by
operations and other factors.
An additional 36,000,000 shares of Class A common stock were registered on
Form S-8 (No. 333-88339), and amendment thereto, effective October 1, 1999,
which are issuable by WCG pursuant to the WCG 1999 Stock Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed as part of this report
12 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule - Three Months Ended March 31, 2000
(EDGAR version only)
27.2 Financial Data Schedule - Three Months Ended March 31, 1999
(EDGAR version only)
(b) During the first quarter 2000, WCG filed a Form 8-K on March 6,
2000 which reported a significant event under Item 5 of the Form
and included the exhibits required by Item 7 of the Form.
18
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS COMMUNICATIONS GROUP, INC.
-----------------------------------
(Registrant)
/s/ SCOTT E. SCHUBERT
-----------------------------------
Scott E. Schubert
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
May 12, 2000
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
12 Computation of Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule - Three Months Ended March 31, 2000
(EDGAR version only)
27.2 Financial Data Schedule - Three Months Ended March 31, 1999
(EDGAR version only)
</TABLE>
<PAGE> 1
EXHIBIT 12
WILLIAMS COMMUNICATIONS GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Earnings:
Loss before income taxes and cumulative effect of
change in accounting principle $ (87,248) $ (58,593)
Add:
Interest expense-- net 51,529 6,401
Rental expense representative of interest factor 37,436 16,900
Minority interest loss of consolidated subsidiaries (12,735) (5,836)
Equity losses 3,067 10,159
----------- -----------
Total loss as adjusted plus fixed charges (7,951) (30,969)
=========== ===========
Combined fixed charges:
Interest expense-- net $ 51,529 $ 6,401
Capitalized interest 28,444 4,135
Rental expense representative of interest factor 37,436 16,900
----------- -----------
Total fixed charges $ 117,409 $ 27,436
=========== ===========
Ratio of earnings to fixed charges (a) (a)
=========== ===========
</TABLE>
- -----------------------
(a) Earnings were inadequate to cover fixed charges by $125,360,000 and
$58,405,000 for March 31, 2000 and 1999, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 361,990
<SECURITIES> 973,024
<RECEIVABLES> 595,044
<ALLOWANCES> 53,321
<INVENTORY> 85,609
<CURRENT-ASSETS> 2,177,952
<PP&E> 3,010,764
<DEPRECIATION> 289,950
<TOTAL-ASSETS> 6,557,611
<CURRENT-LIABILITIES> 1,055,446
<BONDS> 2,964,550
0
0
<COMMON> 4,636
<OTHER-SE> 2,049,622
<TOTAL-LIABILITY-AND-EQUITY> 6,557,611
<SALES> 0
<TOTAL-REVENUES> 533,388
<CGS> 0
<TOTAL-COSTS> 511,624
<OTHER-EXPENSES> (166)
<LOSS-PROVISION> 4,668
<INTEREST-EXPENSE> 79,973
<INCOME-PRETAX> (87,248)
<INCOME-TAX> 8,991
<INCOME-CONTINUING> (96,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (25,377)
<NET-INCOME> (121,616)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
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0
0
<COMMON> 0
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<SALES> 0
<TOTAL-REVENUES> 502,161
<CGS> 0
<TOTAL-COSTS> 419,425
<OTHER-EXPENSES> 301
<LOSS-PROVISION> 8,437
<INTEREST-EXPENSE> 10,536
<INCOME-PRETAX> (58,593)
<INCOME-TAX> 17,448
<INCOME-CONTINUING> (76,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,041)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
