<PAGE> 1
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 SEPTEMBER 30, 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 (1) 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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 2000
<S> <C>
CLASS A Common Stock, $0.01 par value 68,227,049 Shares
CLASS B Common Stock, $0.01 par value 395,434,965 Shares
</TABLE>
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
2000 and 1999............................................................................................... 2
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999.................................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2000 and 1999............................................................................................... 4
Notes to Consolidated Financial Statements.................................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................................................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................. 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................................................... 26
ITEM 2. CHANGES IN SECURITIES................................................................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................ 27
</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/A.
1
<PAGE> 3
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 533,773 $ 498,340 $ 1,582,269 $ 1,499,479
Operating expenses:
Cost of sales 461,848 391,338 1,364,930 1,157,080
Selling, general and administrative 145,745 137,732 436,940 402,584
Provision for doubtful accounts 7,600 5,318 28,385 17,128
Depreciation and amortization 60,148 34,226 156,010 96,338
Other 286 444 (1,234) 27,357
------------ ------------ ------------ ------------
Total operating expenses 675,627 569,058 1,985,031 1,700,487
------------ ------------ ------------ ------------
Loss from operations (141,854) (70,718) (402,762) (201,008)
Interest accrued (103,731) (29,601) (264,377) (58,634)
Interest capitalized 51,431 6,953 116,172 15,751
Investing income:
Interest and other 10,572 (33) 50,300 4,729
Equity losses (2,593) (9,465) (9,748) (28,147)
Income from investments 20,210 -- 323,258 --
Minority interest in loss of consolidated
subsidiaries 9,652 7,936 34,979 19,208
Other income (loss), net 131 165 178 (593)
------------ ------------ ------------ ------------
Loss before income taxes and cumulative
effect of change in accounting principle (156,182) (94,763) (152,000) (248,694)
Benefit (provision) for income taxes 6,239 8,850 (98,093) (36,984)
------------ ------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle (149,943) (85,913) (250,093) (285,678)
Cumulative effect of change in accounting principle -- -- (25,377) --
------------ ------------ ------------ ------------
Net loss (149,943) (85,913) (275,470) (285,678)
Preferred stock dividends and amortization of
preferred stock issuance costs (540) -- (540) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (150,483) $ (85,913) $ (276,010) $ (285,678)
============ ============ ============ ============
Basic and diluted loss per share:
Loss available to common stockholders before
cumulative effect of change in accounting $ (.32) $ (.22) $ (.54) $ (.72)
principle
Cumulative effect of change in accounting
principle -- -- (.05) --
------------ ------------ ------------ ------------
Net loss available to common stockholders $ (.32) $ (.22) $ (.59) $ (.72)
============ ============ ============ ============
Weighted average shares outstanding 464,135 395,435 464,058 395,435
</TABLE>
See accompanying notes.
2
<PAGE> 4
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 174,917 $ 494,301
Short-term investments 921,018 1,419,762
Receivables less allowance of $74,901,000 ($44,556,000 in 1999) 745,509 599,713
Costs (and estimated earnings in 1999) in excess of billings 104,446 166,738
Inventories 85,467 86,583
Deferred income taxes 36,008 39,507
Other 34,221 23,967
------------ ------------
Total current assets 2,101,586 2,830,571
Investments 1,475,696 786,046
Property, plant and equipment, net of accumulated depreciation of
$371,334,000 ($265,268,000 in 1999) 4,550,746 2,149,463
Goodwill and other intangibles, net of accumulated amortization of
$123,413,000 ($106,622,000 in 1999) 340,401 358,809
Other assets and deferred charges 341,723 252,978
------------ ------------
Total assets $ 8,810,152 $ 6,377,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 38,185 $ --
Accounts payable 405,195 267,690
Due to affiliates 75,242 44,648
Deferred income 160,965 112,437
Accrued liabilities 584,866 491,937
Billings in excess of costs (and estimated earnings in 1999) 54,758 50,712
Long-term debt due within one year:
Affiliates 27,283 14,404
Other 582 261
------------ ------------
Total current liabilities 1,347,076 982,089
Long-term debt:
Affiliates 961,813 980,754
Other 3,511,753 1,989,890
Deferred income taxes 301,342 109,046
Other liabilities and deferred income 396,507 81,988
Minority interest in consolidated subsidiaries 62,173 121,500
Contingent liabilities and commitments
6.75% redeemable cumulative convertible preferred stock, $0.01 par value, 5.0
million shares and no shares outstanding in 2000 and 1999, respectively,
aggregate liquidation preference of $250,000,000 240,524 --
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 2,662,544 2,659,927
Accumulated deficit (952,331) (676,861)
Accumulated other comprehensive income 274,115 124,898
------------ ------------
Total stockholders' equity 1,988,964 2,112,600
------------ ------------
Total liabilities and stockholders' equity $ 8,810,152 $ 6,377,867
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
WILLIAMS COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (275,470) $ (285,678)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of change in accounting principle 25,377 --
Depreciation 135,027 72,934
Amortization of goodwill and other intangibles 20,983 23,404
Provision for deferred income taxes 95,906 35,805
Provision for doubtful accounts 28,385 17,128
Equity losses 9,748 28,147
Loss on sales of property and other assets 604 26,792
Gain on sales of investments (124,852) --
Gain on conversion of common stock investment (214,732) --
Write-down of investments 20,025 --
Minority interest in loss of consolidated subsidiaries (34,979) (19,208)
Cash provided (used) by changes in:
Receivables (180,414) (194,036)
Costs (and estimated earnings in 1999) in excess of
billings 62,292 20,738
Inventories 754 (47,056)
Other current assets (9,617) (860)
Accounts payable 148,856 47,081
Current deferred income 48,528 68,676
Accrued liabilities (29,103) 1,094
Billings in excess of costs (and estimated earnings
in 1999) 4,046 (865)
Due to/from affiliates 30,594 7,970
Long-term deferred income 190,382 13,374
Other (14,027) 13,339
------------ ------------
Net cash used in operating activities (61,687) (171,221)
FINANCING ACTIVITIES
Proceeds from notes payable 38,185 --
Proceeds from long-term debt 1,633,086 2,377,901
Payments on long-term debt (111,421) (1,246,049)
Proceeds from issuance of common stock, net of expenses 3,157 --
Proceeds from issuance of preferred stock, net of expenses 240,500 --
Debt issue costs (28,664) (21,963)
Capital contributions from parent -- 91,290
Contribution to subsidiary from minority interest -- 35,523
shareholders
Changes in due to/from affiliates (6,062) 169,490
------------ ------------
Net cash provided by financing activities 1,768,781 1,406,192
INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures (2,510,630) (952,477)
Proceeds from sales and dark fiber transactions 21,813 52,048
Purchase of short-term investments (1,140,596) --
Purchase of long-term investments and advances to investees (296,909) (307,049)
Proceeds from sales of short-term investments 1,639,340 --
Proceeds from sales of long-term investments 252,622 --
Proceeds from sale of business -- 49,452
Other 7,882 --
------------ ------------
Net cash used in investing activities (2,026,478) (1,158,026)
------------ ------------
Increase (decrease) in cash and cash equivalents (319,384) 76,945
Cash and cash equivalents at beginning of period 494,301 42,004
------------ ------------
Cash and cash equivalents at end of period $ 174,917 $ 118,949
============ ============
</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/A.
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
September 30, 2000, results of operations for the three and nine months ended
September 30, 2000 and 1999, and cash flows for the nine months ended September
30, 2000 and 1999.
2. SEGMENT REVENUES AND PROFIT (LOSS)
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 The Williams
Companies, Inc. (Williams). Intercompany sales are generally accounted for as if
the sales were to unaffiliated third parties, that is, at current market prices.
The following tables present certain financial information concerning WCG's
reportable segments. 1999 information has been restated to conform to the 2000
presentation due to the realignment of WCG's segments and modification of the
definition of segment profit or loss in the first quarter of 2000.
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 SEPTEMBER 30, 2000
Revenues:
External customers:
Dark fiber $ 4,515 $ -- $ -- $ -- $ -- $ 4,515
Capacity and other 158,763 39,796 -- -- -- 198,559
New systems sales and upgrades -- -- 173,598 -- -- 173,598
Maintenance and customer
service orders -- -- 136,071 -- -- 136,071
Other -- -- 16,485 -- -- 16,485
------------ ------------ ------------ ------------ ------------ ------------
Total external customers 163,278 39,796 326,154 -- -- 529,228
Affiliates 3,970 -- 575 -- -- 4,545
Intercompany 10,975 212 2,321 -- (13,508) --
------------ ------------ ------------ ------------ ------------ ------------
Total segment revenues $ 178,223 $ 40,008 $ 329,050 $ -- $ (13,508) $ 533,773
============ ============ ============ ============ ============ ============
Costs of sales:
Dark fiber $ 2,736 $ -- $ -- $ -- $ -- $ 2,736
Capacity and other 187,931 21,330 -- 7 -- 209,268
New systems sales and upgrades -- -- 128,633 -- -- 128,633
Maintenance and customer service
orders -- -- 72,554 -- -- 72,554
Indirect operating and maintenance -- -- 48,657 -- -- 48,657
Intercompany 137 11,101 2,270 -- (13,508) --
------------ ------------ ------------ ------------ ------------ ------------
Total cost of sales $ 190,804 $ 32,431 $ 252,114 $ 7 $ (13,508) $ 461,848
============ ============ ============ ============ ============ ============
Segment loss:
Loss from operations $ (105,442) $ (9,441) $ (25,734) $ (1,237) $ -- $ (141,854)
Equity earnings (losses) 2,475 (1,093) -- (3,975) -- (2,593)
Income from investments 20,210 -- -- -- -- 20,210
Add back - allocated charges from
Williams 1,723 401 2,131 144 -- 4,399
------------ ------------ ------------ ------------ ------------ ------------
Total segment loss $ (81,034) $ (10,133) $ (23,603) $ (5,068) $ -- $ (119,838)
============ ============ ============ ============ ============ ============
Depreciation and amortization $ 39,336 $ 6,955 $ 13,817 $ 40 $ -- $ 60,148
</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 SEPTEMBER 30, 1999
Revenues:
External customers:
Dark fiber $ 9,354 $ -- $ -- $ -- $ -- $ 9,354
Capacity and other 73,584 39,483 -- 7,236 -- 120,303
New systems sales and upgrades -- -- 214,688 -- -- 214,688
Maintenance and customer
service orders -- -- 138,505 -- -- 138,505
Other -- -- 10,761 -- -- 10,761
------------ ------------ ------------ ------------ ------------ ------------
Total external customers 82,938 39,483 363,954 7,236 -- 493,611
Affiliates 3,542 -- 1,187 -- -- 4,729
Intercompany 10,629 145 -- 103 (10,877) --
------------ ------------ ------------ ------------ ------------ ------------
Total segment revenues $ 97,109 $ 39,628 $ 365,141 $ 7,339 $ (10,877) $ 498,340
============ ============ ============ ============ ============ ============
Costs of sales:
Dark fiber $ 2,464 $ -- $ -- $ -- $ -- $ 2,464
Capacity and other 95,744 23,314 -- 3,325 -- 122,383
New systems sales and upgrades -- -- 160,442 -- -- 160,442
Maintenance and customer service
orders -- -- 70,114 -- -- 70,114
Indirect operating and maintenance -- -- 35,935 -- -- 35,935
Intercompany 92 7,974 2,488 323 (10,877) --
------------ ------------ ------------ ------------ ------------ ------------
Total cost of sales $ 98,300 $ 31,288 $ 268,979 $ 3,648 $ (10,877) $ 391,338
============ ============ ============ ============ ============ ============
Segment loss:
Income (loss) from operations $ (49,509) $ (8,053) $ (13,277) $ 121 $ -- $ (70,718)
Equity earnings (losses) 127 -- -- (9,592) -- (9,465)
Add back - allocated charges from
Williams 965 247 2,141 (6) -- 3,347
------------ ------------ ------------ ------------ ------------ ------------
Total segment loss $ (48,417) $ (7,806) $ (11,136) $ (9,477) $ -- $ (76,836)
============ ============ ============ ============ ============ ============
Depreciation and amortization $ 15,059 $ 6,845 $ 12,225 $ 97 $ -- $ 34,226
</TABLE>
7
<PAGE> 9
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>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues:
External customers:
Dark fiber $ 37,879 $ -- $ -- $ -- $ -- $ 37,879
Capacity and other 373,912 122,372 -- -- -- 496,284
New systems sales and upgrades -- -- 563,693 -- -- 563,693
Maintenance and customer
service orders -- -- 423,061 -- -- 423,061
Other -- -- 48,596 -- -- 48,596
------------ ------------ ------------ ------------ ------------ ------------
Total external customers 411,791 122,372 1,035,350 -- -- 1,569,513
Affiliates 11,058 -- 1,698 -- -- 12,756
Intercompany 31,283 314 4,514 -- (36,111) --
------------ ------------ ------------ ------------ ------------ ------------
Total segment revenues $ 454,132 $ 122,686 $ 1,041,562 $ -- $ (36,111) $ 1,582,269
============ ============ ============ ============ ============ ============
Costs of sales:
Dark fiber $ 20,767 $ -- $ -- $ -- $ -- $ 20,767
Capacity and other 486,699 67,139 -- 18 -- 553,856
New systems sales and upgrades -- -- 425,229 -- -- 425,229
Maintenance and customer service
orders -- -- 233,015 -- -- 233,015
Indirect operating and maintenance -- -- 132,063 -- -- 132,063
Intercompany 239 29,052 6,820 -- (36,111) --
------------ ------------ ------------ ------------ ------------ ------------
Total cost of sales $ 507,705 $ 96,191 $ 797,127 $ 18 $ (36,111) $ 1,364,930
============ ============ ============ ============ ============ ============
Segment profit (loss):
Loss from operations $ (289,904) $ (21,231) $ (87,189) $ (4,438) $ -- $ (402,762)
Equity earnings (losses) 3,510 (4,640) -- (8,618) -- (9,748)
Income from investments 303,025 -- -- 20,233 -- 323,258
Add back - allocated charges from
Williams 5,034 1,173 6,751 418 -- 13,376
------------ ------------ ------------ ------------ ------------ ------------
Total segment profit (loss) $ 21,665 $ (24,698) $ (80,438) $ 7,595 $ -- $ (75,876)
============ ============ ============ ============ ============ ============
Depreciation and amortization $ 93,095 $ 20,763 $ 41,985 $ 167 $ -- $ 156,010
</TABLE>
8
<PAGE> 10
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>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues:
External customers:
Dark fiber $ 81,281 $ -- $ -- $ -- $ -- $ 81,281
Capacity and other 189,762 118,416 -- 34,743 -- 342,921
New systems sales and upgrades -- -- 618,506 -- -- 618,506
Maintenance and customer
service orders -- -- 409,936 -- -- 409,936
Other -- -- 33,351 -- -- 33,351
------------ ------------ ------------ ------------ ------------ ------------
Total external customers 271,043 118,416 1,061,793 34,743 -- 1,485,995
Affiliates 10,202 -- 3,282 -- -- 13,484
Intercompany 32,576 1,476 -- 663 (34,715) --
------------ ------------ ------------ ------------ ------------ ------------
Total segment revenues $ 313,821 $ 119,892 $ 1,065,075 $ 35,406 $ (34,715) $ 1,499,479
============ ============ ============ ============ ============ ============
Costs of sales:
Dark fiber $ 56,653 $ -- $ -- $ -- $ -- $ 56,653
Capacity and other 243,847 67,349 -- 20,005 -- 331,201
New systems sales and upgrades -- -- 454,681 -- -- 454,681
Maintenance and customer service
orders -- -- 213,619 -- -- 213,619
Indirect operating and maintenance -- -- 100,926 -- -- 100,926
Intercompany 400 23,410 7,848 3,057 (34,715) --
------------ ------------ ------------ ------------ ------------ ------------
Total cost of sales $ 300,900 $ 90,759 $ 777,074 $ 23,062 $ (34,715) $ 1,157,080
============ ============ ============ ============ ============ ============
Segment loss:
Loss from operations $ (104,699) $ (22,059) $ (35,143) $ (39,107) $ -- $ (201,008)
Equity earnings (losses) 127 -- -- (28,274) -- (28,147)
Add back - allocated charges from
Williams 2,828 680 6,278 185 -- 9,971
------------ ------------ ------------ ------------ ------------ ------------
Total segment loss $ (101,744) $ (21,379) $ (28,865) $ (67,196) $ -- $ (219,184)
============ ============ ============ ============ ============ ============
Depreciation and amortization $ 31,505 $ 24,469 $ 35,250 $ 5,114 $ -- $ 96,338
</TABLE>
<TABLE>
<CAPTION>
TOTAL ASSETS
------------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Network $ 6,763,253 $ 4,079,803
Broadband Media 261,521 347,959
Solutions 1,231,723 1,537,630
Strategic Investments 553,655 412,475
-------------- --------------
Total $ 8,810,152 $ 6,377,867
============== ==============
</TABLE>
9
<PAGE> 11
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. 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 that provided 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 that provided closed-circuit video broadcasting
services for businesses. The proceeds from these transactions totaled
approximately $50 million. In the second quarter of 1999, WCG's Strategic
Investments unit recognized a pre-tax loss, included in other operating
expenses, of $26.7 million. This loss consisted of a $22.8 million impairment of
the assets to fair value based on the net sales proceeds and exit costs of $3.9
million consisting of contractual obligations 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 goodwill not deductible
for tax purposes. Losses from operations related to these assets for the three
and nine months ended September 30, 1999 were $0.9 million and $10.2 million,
respectively. WCG recognized an additional $1.7 million impairment charge in
other operating expense in the fourth quarter of 1999.
4. INCOME FROM INVESTMENTS
WCG sold a portion of its investment in certain marketable equity securities
for gains of $40.2 million and $108.3 million for the three and nine months
ended September 30, 2000, respectively. In the third quarter of 2000, WCG
recognized a loss of $20.0 million related to a write-down of certain cost-based
and equity-method investments resulting from management's estimate of the
permanent decline in the value of these investments.
In the second quarter of 2000, WCG recognized a gain of $214.7 million
(before a deferred tax provision impact of $82.1 million) from the conversion of
WCG's shares of common stock of Concentric Network Corporation into shares of
common stock of XO Communications, Inc. pursuant to a merger of those companies
completed in June of 2000.
In the first quarter of 2000, WCG recognized 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., which became a related party in the first quarter of 2000.
The gain resulted from a series of transactions during the first quarter of 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.
5. PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes for the three and nine months ended
September 30, 2000 and 1999 includes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ 758 $ --
State 32 175 118 185
Foreign 156 (1,797) 1,311 994
---------- ---------- ---------- ----------
188 (1,622) 2,187 1,179
Deferred:
Federal (6,626) (2,685) 85,934 29,633
State 1,948 (4,543) 18,616 6,172
Foreign (1,749) -- (8,644) --
---------- ---------- ---------- ----------
(6,427) (7,228) 95,906 35,805
---------- ---------- ---------- ----------
Total provision (benefit) $ (6,239) $ (8,850) $ 98,093 $ 36,984
========== ========== ========== ==========
</TABLE>
10
<PAGE> 12
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The tax benefit for the three months ended September 30, 2000 is
significantly less than applying the federal statutory rate to the pre-tax loss
primarily due to a valuation allowance established for uncertainties that may
affect the utilization of loss carryforwards arising from application of the tax
sharing agreement with Williams as well as state income taxes and the impact of
net foreign losses not deductible for U.S. tax purposes.
The tax provision for the nine months ended September 30, 2000 is
significantly more than the benefit expected from applying the federal statutory
rate to pre-tax loss primarily due to a valuation allowance established for
uncertainties that may affect the utilization of loss carryforwards arising from
application of the tax sharing agreement with Williams as well as state income
taxes and the impact of net foreign losses not deductible for U.S. tax purposes.
The tax provision is partially offset by a tax benefit from permanent basis
differences on certain assets sold during the first quarter of 2000.
The tax benefit for the three months ended September 30, 1999 is
significantly less than applying the federal statutory rate to the pre-tax loss
primarily due to tax losses allocated solely to Williams under the tax sharing
agreement and the impact of net foreign losses not deductible for U.S. tax
purposes.
The tax provision for the nine months ended September 30, 1999 is
significantly more than the benefit expected from applying the federal statutory
rate to the pre-tax loss primarily due to tax losses being allocated solely to
Williams under the tax sharing agreement as well as state income taxes and the
impact of goodwill not deductible for tax purposes related to assets impaired
during the second quarter of 1999.
6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101,"Revenue Recognition in Financial Statements."
Among other things, SAB No. 101 clarifies certain conditions regarding the
culmination of an earnings process and customer acceptance requirements in order
to recognize revenue. Prior to January 1, 2000, WCG's revenue recognition policy
had been to recognize revenues on new systems sales and upgrades under the
percentage of completion method. A portion of the 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 No. 101, effective January 1, 2000, WCG 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 No.
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 the first quarter of 2000 operating results of $25.4 million (net of
income tax benefits of $14.9 million and minority interest of $17.2 million).
WCG recognized $7.3 million and $208.7 million of revenue for the three and nine
months ended September 30, 2000, respectively, for contracts completed in 2000
that were previously reported under the percentage of completion method.
Pro forma amounts, assuming the completed contract method is applied
retroactively, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------------------- ---------------------------
Pro forma Reported Pro forma Reported
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss (thousands) $ (86,354) $ (85,913) $ (289,738) $ (285,678)
Basic and diluted loss per share $ (.22) $ (.22) $ (.73) $ (.72)
</TABLE>
7. 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 convertible
preferred stock would be antidilutive. Therefore, for the three and nine months
ended September 30, 2000, stock options and convertible preferred stock of 10.7
million shares and 5.0 million shares, respectively, have been excluded from the
computation of diluted loss per common share. For the three and nine months
ended September 30, 1999, no stock awards or convertible preferred stock were
excluded from the computation of diluted loss per common share as WCG had not
granted any WCG common stock awards during this period and preferred stock was
not issued until September 2000.
11
<PAGE> 13
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable
In the third quarter of 2000, PowerTel entered into a 70 million Australian
dollar bridge financing facility agreement which translates to U.S. $38.2
million as of September 30, 2000. As of September 30, 2000, the facility
agreement, which bears interest at a fixed-rate of 9.70% and is due in January
2001, has been fully utilized.
Long-Term Debt
Affiliates
Long-term debt due to affiliates as of September 30, 2000 and December 31,
1999 consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Williams note $ 981,860 $ 988,110
Other 7,236 7,048
-------------- --------------
989,096 995,158
Less current maturities (27,283) (14,404)
-------------- --------------
Long-term debt $ 961,813 $ 980,754
============== ==============
</TABLE>
Outstanding borrowings from Williams currently bear interest at LIBOR plus
2.25% (9.00% as of September 30, 2000). Of the total borrowings from Williams,
$25 million has been classified as current at September 30, 2000, as quarterly
principal payments began in July 2000, with no less than $25 million payable in
each full fiscal year.
Third parties
Long-term debt (excluding amounts due to affiliates) as of September 30,
2000 and December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Senior redeemable notes, 10.70% - 11.875%, due
2007 - 2010 $ 2,986,385 $ 1,988,883
Credit facility 525,000 --
Other 950 1,268
-------------- --------------
3,512,335 1,990,151
Less current maturities (582) (261)
-------------- --------------
Long-term debt $ 3,511,753 $ 1,989,890
============== ==============
</TABLE>
In August 2000, WCG issued approximately $1.0 billion of senior redeemable
notes in a private placement. The senior redeemable notes consist of $575.0
million of 11.70% and $425.0 million of 11.875% fixed-rate senior redeemable
notes due August 1, 2008 and August 1, 2010, respectively. Interest on the notes
is payable in arrears on February 1 and August 1 each year beginning February 1,
2001. WCG may prepay the notes at varying redemption premiums or make-whole
prices, as defined.
WCG has a $1.05 billion commitment under its credit facility. WCG's credit
facility consists of a $525 million seven-year multi-draw amortizing term loan
facility and a $525 million six-year senior reducing revolving credit facility.
In September 2000, WCG borrowed the $525 million term loan under the credit
facility, which otherwise would have expired on September 7, 2000. Outstanding
borrowings under the credit facility currently bear interest at LIBOR plus 2.25%
(9.02%
12
<PAGE> 14
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
at September 30, 2000). WCG may borrow under the revolving credit facility
throughout its six-year term. During the first quarter of 2000, Williams was
removed as a guarantor under the credit facility.
9. REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
In September 2000, WCG issued 5,000,000 shares of 6.75% redeemable
cumulative convertible preferred stock in a private placement at a liquidation
preference of $50.00 per share for proceeds of approximately $240.5 million, net
of issuance costs of $9.5 million. Each share of preferred stock is convertible
into 1.7610 shares of common stock, based on a conversion price of $28.39. WCG
may redeem all or any part of the shares of preferred stock at any time on or
after October 15, 2005 and, under specified circumstances, before that date. The
preferred stock will be subject to mandatory redemption on October 15, 2012. The
issuance costs are being amortized over the life of the preferred stock.
Dividends on the preferred stock are cumulative from the date of issue and
will be payable on January 15, April 15, July 15, and October 15 of each year,
beginning on January 15, 2001, at the annual rate of 6.75%. The terms of WCG's
credit facility and senior redeemable notes currently restrict it from paying
cash dividends. During any periods when WCG is restricted from paying cash
dividends, it expects to pay preferred stock dividends by delivering shares of
its common stock to the transfer agent for the preferred stock, which will
resell those shares of common stock. The proceeds from the sale of its common
stock will then be used to pay cash dividends to the holder of shares of
preferred stock.
10. COMPREHENSIVE LOSS
Comprehensive loss for the three and nine months ended September 30, 2000
and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss $ (149,943) $ (85,913) $ (275,470) $ (285,678)
Other comprehensive income (loss):
Unrealized gain (loss) on securities 275,031 (102,505) 614,895 23,169
Less: reclassification adjustment for gains
realized in net loss (40,235) -- (323,050) --
---------- ---------- ---------- ----------
Net unrealized gain (loss) 234,796 (102,505) 291,845 23,169
Foreign currency translation adjustments (14,158) 7,808 (29,057) (13,761)
---------- ---------- ---------- ----------
Other comprehensive income (loss) before
taxes 220,638 (94,697) 262,788 9,408
Income tax benefit (provision) on other
comprehensive income (loss) (91,336) 39,874 (113,571) (11,308)
---------- ---------- ---------- ----------
Comprehensive loss $ (20,641) $ (140,736) $ (126,253) $ (287,578)
========== ========== ========== ==========
</TABLE>
WCG has entered into derivative instruments which will expire by the fourth
quarter of 2001. These derivative instruments are designed to hedge WCG's
exposure to changes in the price of its investments in certain marketable equity
securities. Changes in the fair value of the hedged marketable equity securities
and the impact of the associated derivative instruments are reflected in
accumulated other comprehensive income. The derivative instruments impact
realized gains or losses from the sale of the hedged marketable equity
securities.
11. CONTINGENCIES
WCG and Williams Communications, Inc. (WCI), a wholly owned operating
subsidiary of WCG, are named as defendants in various lawsuits brought on behalf
of all landowners on whose property the plaintiffs have alleged WCG installed
fiber-optic cable without the permission of the landowner. In each lawsuit, the
plaintiff seeks to bring a nationwide class action on behalf of all landowners
on whose property WCG has 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
13
<PAGE> 15
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
members' land does not infringe on their property rights. WCG also does not
believe that the plaintiffs have sufficient basis for certification of a
nationwide class action.
It is likely that WCG will be subject to other putative class action suits
challenging its nationwide rights of way. WCG cannot quantify the impact of all
such claims at this time. Thus, WCG cannot be certain that the plaintiffs'
putative class action or other putative class actions, if successful, will not
have a material adverse effect upon its future financial position, results of
operations or cash flows.
On September 7, 2000, All-Phase Utility Corp. amended its complaint in a
matter originally filed June 28, 1999 against WCI in the United States District
Court for Oregon. In the amended complaint, All-Phase alleges actual damages of
at least $236.5 million plus punitive damages of an additional amount equal to
double the amount of actual damages. All-Phase alleges that a portion of WCI's
Eugene, Oregon to Bandon, Oregon route is based on confidential information
developed by All-Phase and that WCG breached its non-disclosure agreement with
All-Phase and violated the Oregon Trade Secrets Act by using it. All-Phase also
alleges that WCG misrepresented its plans for the route and that, as a result,
All-Phase lost the opportunity to build its own line along the same route.
All-Phase alleges that its damages include loss of profit from the construction
it believes it would have performed for WCI and lost revenue from leases of
fiber-optic cable and conduits. WCI intends to refute the allegations and to
vigorously defend this lawsuit. WCG does not believe that the ultimate
resolution of this matter will have a material adverse effect upon its future
financial position, results of operations or cash flows.
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.
12. RELATED PARTY TRANSACTIONS
In June 2000, WCG acquired SBC's interests in undersea communications cables
between the United States and China, and between the United States and Japan,
for a purchase price of approximately $111.4 million.
In September 2000, WCG acquired the long distance network assets of
Ameritech Communications, Inc., a subsidiary of SBC, for a purchase price of
$145 million. These assets are located in the states of Illinois, Indiana,
Michigan, Ohio and Wisconsin and include a 2,200 mile fiber-optic network over
four routes, indefeasible rights of use in dark fiber and 15 data centers.
SBC purchases domestic voice and data long distance and local transport
services from WCG. For the three and nine months ended September 30, 2000,
revenues from SBC were $39.9 million and $76.4 million, respectively and $0.6
million and $0.8 million for the three and nine months ended September 30, 1999,
respectively. WCG purchases local transport services, platform services such as
toll-free, operator, calling card and directory assistance services and
international services such as transport and switched-voice services from SBC.
These purchases from SBC were $14.1 million and $30.1 million, respectively for
the three and nine months ending September 30, 2000 and $3.3 million and $9.4
million for the three and nine months ending September 30, 1999, respectively.
13. RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS 137, which deferred the effective date of SFAS 133. This was followed in
June 2000 by the issuance of SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends SFAS 133. SFAS 133 and
138 establishes accounting and reporting standards for derivative financial
instruments. The standards require that all derivative financial instruments be
recorded on the balance sheet at their fair value. Changes in fair value of
derivatives will be recorded each period in earnings if the derivative is not a
hedge. If a derivative is a hedge, changes in the fair value of the derivative
will either be recognized in earnings offset against the change in fair value of
the hedged asset, liability or firm commitment also recognized in earnings or
recognized in other comprehensive income until the hedged item is recognized in
14
<PAGE> 16
WILLIAMS COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
earnings. The ineffective portion of a derivative's change in fair value will be
recognized immediately in earnings. WCG will adopt these standards effective
January 1, 2001.
WCG has substantially completed its implementation efforts as of September
30, 2000. The derivatives identified to date in the implementation process
consist of cashless collars hedging certain of its marketable equity securities
portfolio. Based on the derivative positions and market condition at September
30, 2000, WCG believes that the impact of adopting the standards would be
immaterial to its financial position, earnings and other comprehensive income.
However, changing market conditions and the possibility of entering into new
derivatives in the fourth quarter of 2000 could cause the adoption of the
standards to have a material impact on WCG's financial position, earnings and
other comprehensive income.
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 are being 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. The effect of this interpretation on three
and nine months ended September 30, 2000 results was to decrease revenues by
$44.8 million and $115.4 million, respectively, and increase net loss by $13.9
million and $38.1 million, respectively. However, WCG notes that authoritative
guidance on accounting for dark fiber leases is still evolving.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." This interpretation modifies the current practice
of accounting for certain stock award agreements and was generally effective
beginning July 1, 2000. The initial impact of this interpretation on WCG's
results of operations and financial position was not material.
15
<PAGE> 17
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 and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Network $ 178,223 $ 97,109 $ 454,132 $ 313,821
Broadband media 40,008 39,628 122,686 119,892
Solutions 329,050 365,141 1,041,562 1,065,075
Strategic investments -- 7,339 -- 35,406
Eliminations (13,508) (10,877) (36,111) (34,715)
------------ ------------ ------------ ------------
Total revenues 533,773 498,340 1,582,269 1,499,479
Operating expenses:
Cost of sales 461,848 391,338 1,364,930 1,157,080
Selling, general and administrative 145,745 137,732 436,940 402,584
Provision for doubtful accounts 7,600 5,318 28,385 17,128
Depreciation and amortization 60,148 34,226 156,010 96,338
Other 286 444 (1,234) 27,357
------------ ------------ ------------ ------------
Total operating expenses 675,627 569,058 1,985,031 1,700,487
------------ ------------ ------------ ------------
Loss from operations $ (141,854) $ (70,718) $ (402,762) $ (201,008)
============ ============ ============ ============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Consolidated results
WCG experienced a net loss available to common stockholders of $150.5
million for the three months ended September 30, 2000 compared to a net loss
available to common stockholders of $85.9 million for the same period in 1999,
an increase of $64.6 million from the prior period. The change in net loss
available to common stockholders included an increase in loss from operations of
$71.2 million, an increase in net interest expense of $29.7 million, a decrease
of $2.7 million to the tax benefit and $0.5 million in preferred stock dividends
and amortization of the preferred stock issuance costs. These items were
partially offset by an increase in investing income of $37.7 million and a
change in minority interest results of $1.8 million.
WCG's network unit, solutions unit, broadband media unit and strategic
investments unit accounted for $55.9 million, $12.6 million, $1.4 million and
$1.3 million of the increase in losses from operations, respectively.
16
<PAGE> 18
WCG's network unit
The table below summarizes WCG's network unit's results from operations for
the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Dark fiber $ 4,515 $ 9,354 $ 37,879 $ 81,281
Capacity and other 154,231 62,510 357,866 159,365
PowerTel 4,532 11,074 16,046 30,397
Affiliates 3,970 3,542 11,058 10,202
Intercompany 10,975 10,629 31,283 32,576
------------ ------------ ------------ ------------
Total revenues 178,223 97,109 454,132 313,821
Operating expenses:
Cost of sales 190,804 98,300 507,705 300,900
Selling, general and administrative 50,644 32,709 140,866 85,523
Provision for doubtful accounts 2,299 558 3,080 598
Depreciation and amortization 39,336 15,059 93,095 31,505
Other 582 (8) (710) (6)
------------ ------------ ------------ ------------
Total operating expenses 283,665 146,618 744,036 418,520
------------ ------------ ------------ ------------
Loss from operations $ (105,442) $ (49,509) $ (289,904) $ (104,699)
============ ============ ============ ============
Equity earnings $ 2,475 $ 127 $ 3,510 $ 127
============ ============ ============ ============
Income from investments $ 20,210 $ -- $ 303,025 $ --
============ ============ ============ ============
</TABLE>
WCG's network unit's revenues increased $81.1 million, or 84%, to $178.2
million for the three months ended September 30, 2000 from $97.1 million for the
same period in 1999. The increase in revenues is primarily due to an $86.5
million increase related to data and voice services provided to the network
unit's customers as the network unit continues to build its customer base and
increase traffic on its network. Network design and operational support revenues
and colocate and maintenance revenues contributed $5.8 million to the increased
revenues. The increase in revenues is partially offset by $4.9 million lower
revenues from dark fiber transactions entered into prior to June 30, 1999 and
accordingly accounted for as sales-type leases. PowerTel revenues decreased $6.6
million in 2000 as a result of the sale of its mobile phone business in the
second quarter of 2000 and the change in focus from the reseller services arena
to developing and serving facilities-based carriers which typically yields
higher margins.
WCG's network unit's cost of sales exceeded revenues by $12.6 million and
$1.2 million for the three months ended September 30, 2000 and 1999,
respectively. WCG's network unit's costs of sales increased $92.5 million, or
94%, to $190.8 million for the three months ended September 30, 2000 from $98.3
million for the same period in 1999. The increase in cost of sales is primarily
due to a $59.8 million increase related to data and voice off-net capacity and
local access connection costs in support of the revenue increase described
above, $18.4 million of higher operating and maintenance expenses to support the
increased revenues and future revenue streams, $13.5 million of lease expense
attributable to WCG's operating lease agreement covering a portion of WCG's
fiber optic network and $5.6 million of higher ad valorem taxes, reflecting the
increased asset base associated with the network build-out. The increase in cost
of sales is partially offset by $6.7 million lower costs from PowerTel.
WCG's network unit's selling, general and administrative expenses increased
$17.9 million, or 55%, to $50.6 million for the three months ended September 30,
2000 from $32.7 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 provision for doubtful accounts increased $1.7 million
to $2.3 million for the three months ended September 30, 2000 from $.6 million
for the same period in 1999 due primarily to a specific reserve analysis of its
outstanding accounts receivable balance as of September 30, 2000.
WCG's network unit's depreciation and amortization increased $24.2 million
to $39.3 million for the three months ended September 30, 2000 from $15.1
million for the same period in 1999 primarily as a result of placing an
additional 6,000 route miles of fiber in operation since September 30, 1999.
17
<PAGE> 19
WCG's network unit's equity earnings increased $2.4 million to $2.5 million
for the three months ended September 30, 2000 from $.1 million for the same
period in 1999 due primarily to earnings from investments acquired in the fourth
quarter of 1999 and increased earnings primarily related to a fiber-optic
construction joint venture.
WCG's network unit's income from investments increased $20.2 million related
to gains of $40.2 million from sales of certain marketable equity securities
partially offset by a loss of $20.0 million related to a write-down of certain
cost-based and equity-method investments resulting from management's estimate of
the permanent decline in the value of these investments.
WCG's broadband media unit
The table below summarizes WCG's broadband media unit's results from
operations for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 40,008 $ 39,628 $ 122,686 $ 119,892
Operating expenses:
Cost of sales 32,431 31,288 96,191 90,759
Selling, general and administrative 9,574 9,446 26,309 26,155
Provision for doubtful accounts 501 109 702 583
Depreciation and amortization 6,955 6,845 20,763 24,469
Other (12) (7) (48) (15)
------------ ------------ ------------ ------------
Total operating expenses 49,449 47,681 143,917 141,951
------------ ------------ ------------ ------------
Loss from operations $ (9,441) $ (8,053) $ (21,231) $ (22,059)
============ ============ ============ ============
Equity losses $ (1,093) $ -- $ (4,640) $ --
============ ============ ============ ============
</TABLE>
WCG's broadband media unit's results from operations reflect little change
in this area of business. The increase in revenues reflects higher revenues from
both media distribution and video transmission services, partially offset by a
decrease in transponder revenues of $2.1 million. The increase in cost of sales
reflects these increased revenues as well as increased headcount to support
these services.
WCG's broadband media unit's equity losses of $1.1 million for the three
months ended September 30, 2000 were due to WCG applying the equity method of
accounting to an investment beginning in the first quarter of 2000 as WCG's
ownership percentage fell below 50 percent and WCG no longer exercised control
over the operations. WCG consolidated this investment in 1999.
18
<PAGE> 20
WCG's solutions unit
The table below summarizes WCG's solutions unit's results from operations
for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
New systems sales and upgrades $ 173,598 $ 214,688 $ 563,693 $ 618,506
Maintenance and customer service orders 136,071 138,505 423,061 409,936
Other 16,485 10,761 48,596 33,351
Affiliates 575 1,187 1,698 3,282
Intercompany 2,321 -- 4,514 --
------------ ------------ ------------ ------------
Total revenues 329,050 365,141 1,041,562 1,065,075
Operating expenses:
Cost of sales 252,114 268,979 797,127 777,074
Selling, general and administrative 84,339 92,297 265,511 271,830
Provision for doubtful accounts 4,800 4,595 24,603 15,710
Depreciation and amortization 13,817 12,225 41,985 35,250
Other (286) 322 (475) 354
------------ ------------ ------------ ------------
Total operating expenses 354,784 378,418 1,128,751 1,100,218
------------ ------------ ------------ ------------
Loss from operations $ (25,734) $ (13,277) $ (87,189) $ (35,143)
============ ============ ============ ============
</TABLE>
WCG's solutions unit's revenues decreased $36.0 million, or 10%, to $329.1
million for the three months ended September 30, 2000 from $365.1 million for
the same period in 1999. The decreased revenues were attributable to a $41.1
million reduction in new systems sales and upgrades, a $2.4 million reduction in
maintenance and customer service orders, partially offset by a $7.5 million
increase in all other revenues. Effective January 1, 2000, WCG changed its
method of accounting for its solutions unit's new systems sales and upgrades
from the percentage of completion method to the completed contract method. On a
pro forma basis, revenues for the three months ended September 30, 1999 under
the completed contract method would have decreased $2.7 million to $362.4
million. The $33.3 million decrease in revenues for the three months ended
September 30, 2000 compared to the pro forma revenues for the same period in
1999 is primarily due to lower sales activity consistent with voice equipment
industry trends.
WCG's solutions unit's cost of sales decreased $16.9 million, or 6%, to
$252.1 million for the three months ended September 30, 2000 from $269.0 million
for the same period in 1999. WCG's solutions unit's gross profit decreased to
$77.0 million for the three months ended September 30, 2000 from $96.1 million
for the same period in 1999. On a pro forma basis, gross profit under the
completed contract method for the three months ended September 30, 1999 would
have decreased $1.0 million to $95.1 million and gross margin as a percentage of
revenue would have been 26%. The decrease in pro forma gross margin as a
percentage of revenue from the pro forma 26% for the three months ended
September 30, 1999 to 23% for the three months ended September 30, 2000, is due
primarily to increased installation and service costs and competitive pressures.
WCG's solutions unit's selling, general and administrative expenses
decreased $8.0 million, or 9%, to $84.3 million for the three months ended
September 30, 2000 from $92.3 million for the same period in 1999. The decrease
in selling, general and administrative expenses is primarily due to a $2.8
million decrease in payroll related expenses including a decrease in commissions
associated with lower revenues and the absence of a $1.6 million charge in 2000
from the conversion and vesting of employee stock options from Williams to WCG
stock options at the time of the WCG initial public offering in the third
quarter of 1999.
WCG's solutions unit's depreciation and amortization increased $1.6 million,
or 13%, to $13.8 million for the three months ended September 30, 2000 from
$12.2 million for the same period in 1999. The increase is primarily
attributable to depreciation on systems implemented in the third quarter of 1999
and new computers purchased in 2000.
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WCG's strategic investments unit
The table below summarizes WCG's strategic investments unit's results from
operations for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ -- $ 7,339 $ -- $ 35,406
Operating expenses:
Cost of sales 7 3,648 18 23,062
Selling, general and administrative 1,188 3,280 4,254 19,076
Provision for doubtful accounts -- 56 -- 237
Depreciation and amortization 40 97 167 5,114
Other 2 137 (1) 27,024
------------ ------------ ------------ ------------
Total operating expenses 1,237 7,218 4,438 74,513
------------ ------------ ------------ ------------
Income (loss) from operations $ (1,237) $ 121 $ (4,438) $ (39,107)
============ ============ ============ ============
ATL and other equity losses $ (3,975) $ (9,592) $ (8,618) $ (28,274)
============ ============ ============ ============
Income from investments $ -- $ -- $ 20,233 $ --
============ ============ ============ ============
</TABLE>
WCG's strategic investments unit sold its audio and video conferencing
services and closed-circuit video broadcasting services business in the third
quarter of 1999 for which WCG recognized a pre-tax loss of $26.7 million,
included in other operating expense, in the second quarter of 1999. The
remaining portion of WCG's learning content business was also sold in the fourth
quarter of 1999. This unit also abandoned a business that provided wireless
remote monitoring and meter reading equipment and related services to industrial
and commercial customers in the fourth quarter of 1999. As a result, for the
three months ended September 30, 2000, WCG's strategic investments unit had no
revenues or cost of sales and significantly reduced selling, general and
administrative expenses and depreciation and amortization expenses. The costs
incurred in the 2000 period represent costs associated with managing WCG's
equity investments in this business unit.
WCG's strategic investments unit's equity losses decreased $5.6 million, or
59%, to $4.0 million for the three months ended September 30, 2000 from $9.6
million for the same period in 1999 primarily due to a decreased equity
ownership of ATL.
Consolidated non-operating items
WCG's net interest expense for the three months ended September 30, 2000
increased $29.7 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 $2.6 billion from
September 30, 1999 to September 30, 2000, which primarily reflects the $2.0
billion principal amount of senior redeemable notes issued in October 1999, $1.0
billion principal amount of senior redeemable notes issued in August 2000, and
the borrowing of the $525.0 million term loan under the credit facility in
September 2000. The increase in debt is partially offset by the use of a portion
of proceeds from the October 1999 offerings to pay off a 1999 credit facility.
WCG's interest and other investing income increased $10.6 million due to
interest earned on short-term investments which were purchased with proceeds
from the issuance of senior redeemable notes in August 2000 and the borrowing of
the term loan under the credit facility.
The change in minority interest increased $1.8 million for the three months
ended September 30, 2000 compared to the same period in 1999 of which $1.2
million is attributable to the solutions unit and $0.6 million is attributable
to PowerTel. In September 2000, the cumulative losses attributable to Solutions
LLC exceeded WCG's minority interest liability in this consolidated subsidiary.
As a result, WCG has suspended recording minority interest related to this
subsidiary.
WCG recorded a tax benefit of $6.2 million for the three months ended
September 30, 2000 compared to a $8.9 million tax benefit for the same period in
1999, resulting in a decrease in the benefit of $2.7 million. The decrease is
due primarily to the application of the tax sharing agreement with Williams as
well as state income taxes and the impact of net foreign losses not deductible
for U.S. tax purposes.
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Preferred stock dividends and amortization of the preferred stock issuance
costs increased $0.5 million for the three months ended September 30, 2000
compared to the same period in 1999 due to the issuance of 5,000,000 shares of
6.75% redeemable cumulative convertible preferred stock in a private placement.
Dividends on the preferred stock are cumulative from the date of issue and will
be payable on a quarterly basis beginning January 15, 2001 at an annual rate of
6.75%.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Consolidated results
WCG experienced a net loss available to common stockholders of $276.0
million for the nine months ended September 30, 2000 compared to a net loss
available to common stockholders of $285.7 million for the same period in 1999,
an improvement of $9.7 million from the prior period. The change in net loss
available to common stockholders included an increase in investing income of
$387.2 million and a change in minority interest results of $15.8 million. These
items were partially offset by an increase in loss from operations of $201.8
million, an increase in net interest expense of $105.3 million, an increase of
$61.1 million to the tax provision, a cumulative effect of a change in
accounting principle of $25.4 million, and preferred stock dividends and
amortization of preferred stock issuance costs of $0.5 million.
WCG's network unit accounted for $185.2 million and WCG's solutions unit
accounted for $52.1 million of the increase in losses from operations. WCG's
broadband media unit's and strategic investments unit's losses from operations
decreased by $0.8 million and $34.7 million, respectively.
WCG's network unit
WCG's network unit's revenues increased $140.3 million, or 45%, to $454.1
million for the nine months ended September 30, 2000 from $313.8 million for the
same period in 1999. The increase in revenues is primarily due to a $181.9
million increase related to data and voice services provided to the network
unit's customers as the network unit continues to build its customer base and
increase traffic on its network. Network design and operational support revenues
and colocate and maintenance revenues contributed $15.6 to the increased
revenues. The increase in revenues is partially offset by $43.4 million lower
revenues from dark fiber transactions entered into prior to June 30, 1999 and
accordingly accounted for as sales-type leases. PowerTel revenues decreased
$14.4 million in 2000 as a result of the sale of its mobile phone business in
the second quarter of 2000 and the change in focus from the reseller services
arena to developing and serving facilities-based carriers which typically yields
higher margins.
WCG's network unit's cost of sales exceeded its revenues by $53.6 million
for the nine months ended September 30, 2000. For the same period in 1999, WCG's
network unit had a gross profit of $12.9 million. WCG's network unit's cost of
sales increased $206.8 million, or 69%, to $507.7 million for the nine months
ended September 30, 2000 from $300.9 million for the same period in 1999. The
increase in cost of sales is due primarily to a $149.1 million increase related
to data and voice off-network capacity and local access connection costs in
support of the revenue increase described above, $53.0 million of higher
operating and maintenance expenses to support the increased revenues and future
revenue streams, $38.6 million of lease expense attributable to WCG's operating
lease agreement covering a portion of WCG's fiber-optic network and $12.2
million of higher ad valorem taxes, reflecting the increased asset base
associated with the network build-out. These increases were partially offset by
$35.9 million lower cost of sales associated with the reduced level of dark
fiber transactions accounted for as sales-type leases and $12.8 million lower
costs from PowerTel.
WCG's network unit's selling, general and administrative expenses increased
$55.4 million, or 65%, to $140.9 million for the nine months ended September 30,
2000 from $85.5 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 provision for doubtful accounts increased $2.5 million
to $3.1 million for the three months ended September 30, 2000 from $.6 million
for the same period in 1999 due primarily to a specific reserve analysis of its
outstanding accounts receivable balance as of September 30, 2000.
WCG's network unit's depreciation and amortization increased $61.6 million
to $93.1 million for the nine months ended September 30, 2000 from $31.5 million
for the same period in 1999 as a result of placing an additional 6,000 route
miles of fiber in operation since September 30, 1999.
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WCG's network unit's equity earnings increased $3.4 million to $3.5 million
for the three months ended September 30, 2000 from $.1 million for the same
period in 1999 due primarily to earnings from investments acquired in the fourth
quarter of 1999 and increased earnings primarily related to a fiber-optic
construction joint venture.
Income from investments for the nine months ended September 30, 2000
includes a gain of $214.7 million (before a tax provision impact of $82.1
million) from the conversion of WCG's shares of common stock of Concentric
Network Corporation into shares of common stock of XO Communications, Inc.
pursuant to a merger of those companies completed in June 2000 and gains of
$108.3 million related to the sales of certain marketable equity securities
partially offset by a loss of $20.0 million related to a write-down of certain
cost-based and equity-method investments resulting from management's estimate of
the permanent decline in the value of these investments.
WCG's broadband media unit
WCG's broadband media unit's results from operations reflect little change
in this area of business. The increase in revenues reflects higher revenues from
both media distribution and video transmission services, partially offset by a
decrease in transponder revenues of $4.3 million. The increase in cost of sales
reflects these increased revenues as well as increased headcount to support
these services.
WCG's broadband media unit's equity losses of $4.6 million for the three
months ended September 30, 2000 were due to WCG applying the equity method of
accounting to an investment beginning in the first quarter of 2000 as WCG's
ownership percentage fell below 50 percent and WCG no longer exercised control
over the operations. WCG consolidated this investment in 1999.
WCG's solutions unit
WCG's solutions unit's revenues decreased $23.5 million, or 2%, to $1,041.6
million for the nine months ended September 30, 2000 from $1,065.1 million for
the same period in 1999. The decreased revenues were attributable to a $54.8
million decrease in new systems sales and upgrades partially offset by a $13.2
million increase in maintenance and customer service orders and a $18.1 million
increase in other revenues. On a pro forma basis, revenues for the nine months
ended September 30, 1999 under the completed contract method would have
decreased $32.5 million to $1,032.6 million. The $9.0 million increase in
revenues for the nine months ended September 30, 2000 compared to pro forma
revenues for the same period in 1999 is due to improvements in the billing cycle
process relating to customer service orders and the status and timing of
completed work orders partially offset by lower sales activity consistent with
voice equipment industry trends.
WCG's solutions unit's cost of sales increased $20.0 million, or 3%, to
$797.1 million for the nine months ended September 30, 2000 from $777.1 million
for the same period in 1999. WCG's solutions unit's gross profit decreased to
$244.5 million for the nine months ended September 30, 2000 from $288.0 million
for the same period in 1999. On a pro forma basis, gross profit under the
completed contract method for the nine months ended September 30, 1999 would
have decreased $9.2 million to $278.8 million and gross margin as a percentage
of revenue would have been 27%. The decrease in gross margin as a percentage of
revenue from the pro forma 27% for the nine months ended September 30, 1999 to
23% for the nine months ended September 30, 2000, is due primarily to increased
installation and service costs and competitive pressures.
WCG's solutions unit's selling, general and administrative expenses
decreased $6.3 million, or 2%, to $265.5 million for the nine months ended
September 30, 2000 from $271.8 million for the same period in 1999. The decrease
in selling, general and administrative expenses is primarily due to a $6.5
million decrease in payroll related expenses including a decrease in commissions
associated with lower revenues, a $2.6 million decrease in Williams-wide stock
performance incentives and the absence of a $1.6 million charge in 2000 from the
conversion and vesting of employee stock options from Williams to WCG stock
options at the time of the WCG initial public offering in 1999, partially offset
by an increase of $2.5 million related to brand advertising.
WCG's solutions unit's provision for doubtful accounts increased $8.9
million, or 57%, to $24.6 million for the nine months ended September 30, 2000
from $15.7 million for the same period in 1999. The increase reflects increased
aging in receivables. Collections on current billings are improving due to
various initiatives underway to address these issues.
WCG's solutions unit's depreciation and amortization increased $6.7 million,
or 19%, to $42.0 million for the nine months ended September 30, 2000 from $35.3
million for the same period in 1999. The increase is primarily attributable to
depreciation on systems implemented in the third quarter 1999 and new computers
purchased in 2000.
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WCG's strategic investments unit
WCG's strategic investments unit sold its audio and video conferencing
services and closed-circuit video broadcasting services business in the third
quarter of 1999 for which WCG recognized a pre-tax loss of $26.7 million,
included in other operating expense, in the second quarter of 1999. The
remaining portion of WCG's learning content business was also sold in the fourth
quarter of 1999. This unit also abandoned a business that provided wireless
remote monitoring and meter reading equipment and related services to industrial
and commercial customers in the fourth quarter of 1999. As a result, for the
nine months ended September 30, 2000, WCG's strategic investments unit had no
revenues or cost of sales and significantly reduced selling, general and
administrative expenses and depreciation and amortization expenses. The costs
incurred in the 2000 period represent costs associated with managing WCG's
equity investments in this business unit.
WCG's strategic investments unit's equity losses decreased $19.7 million, or
70%, to $8.6 million for the nine months ended September 30, 2000 from $28.3
million for the same period in 1999. The decrease is primarily due to WCG's
decreased equity ownership of ATL, which contributed $17.3 million to the
decrease in equity losses, and lower losses from ATL operations, which
contributed an additional $2.7 million.
WCG's strategic investments unit's income from investments increased $20.2
million as a result of a $16.5 million gain related to the sale of part of its
interest in ATL and receipt of a $3.7 million dividend. The ATL gain resulted
from a series of transactions during the first quarter of 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.
Consolidated non-operating items
WCG's net interest expense for the nine months ended September 30, 2000
increased $105.3 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 $2.6 billion from
September 30, 1999 to September 30, 2000, which primarily reflects the $2.0
billion principal amount of senior redeemable notes issued in October 1999, $1.0
billion principal amount of senior redeemable notes issued in August 2000, and
the borrowing of the $525.0 million term loan under the credit facility in
September 2000. The increase in debt is partially offset by the use of a portion
of proceeds from the October 1999 offerings to pay off a 1999 credit facility.
WCG's interest and other investing income increased $45.6 million to $50.3
million for the nine months ended September 30, 2000 from $4.7 million for the
same period in 1999. This increase is due to interest earned on short-term
investments, which were purchased with proceeds from the October 1999 offerings
and concurrent investments, the August 2000 debt offering and the borrowing of
the term loan under the credit facility in September 2000.
The change in minority interest increased $15.8 million for the nine months
ended September 30, 2000 compared to the same period in 1999 of which $16.2
million is attributable to the solutions unit, partially offset by a $0.4
million decrease attributable to PowerTel. In September 2000 the cumulative
losses attributable to Solutions LLC exceeded WCG's minority interest liability
in this consolidated subsidiary. As a result, WCG has suspended recording
minority interest related to this subsidiary.
WCG recorded a tax provision of $98.1 million for the nine months ended
September 30, 2000 compared to a $37.0 million provision for the same period in
1999, resulting in an increase in the provision of $61.1 million. The increase
is due primarily to a deferred tax provision of $82.1 million relating to the
gain recognized on the conversion of WCG's shares of common stock of Concentric
Network Corporation into shares of common stock of XO Communications, Inc.
pursuant to a merger of those companies completed in June 2000, partially offset
by a tax benefit from permanent basis differences on certain assets sold during
the first quarter of 2000.
The cumulative effect of a change in accounting principle of $25.4 million
in 2000 results from WCG's solutions unit's change in revenue recognition policy
from the percentage of completion method to the completed contract method.
Preferred stock dividends and amortization of the preferred stock issuance
costs increased $0.5 million for the nine months ended September 30, 2000
compared to the same period in 1999 due to the issuance of 5,000,000 shares of
6.75% redeemable cumulative convertible preferred stock in a private placement.
Dividends on the preferred stock are cumulative from the date of issue and will
be payable on a quarterly basis beginning January 15, 2001 at an annual rate of
6.75%.
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LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $61.7 million for the nine months
ended September 30, 2000 which includes cash received from dark fiber
transactions of $188.6 million. WCG anticipates that, excluding the impact of
dark fiber transactions, its operating activities will not result in positive
cash flows until the end of 2001 and that capital expenditures, debt service
obligations and other cash needs will continue to exceed cash from operations as
WCG completes, expands and enhances its network.
Cash sources
As of September 30, 2000, WCG has approximately $1.1 billion of cash and
short-term investments. During the third quarter of 2000, WCG received net
proceeds from the sale of senior redeemable notes in a private placement in
August 2000 and the sale of preferred stock in a private placement in September
2000 of approximately $970.6 million and $240.5 million, respectively. WCG also
borrowed the $525 million term loan under its long-term credit facility in
September 2000.
In addition, WCG has $525 million remaining on its $1.05 billion commitment
under its credit facility which consists of a $525 million seven-year multi-draw
amortizing term loan facility and a $525 million six-year senior reducing
revolving credit facility. As discussed above, WCG borrowed the $525 million
term loan under its credit facility in September 2000. WCG may borrow under the
revolving portion of its credit facility throughout its six-year term. However,
WCG's ability to borrow under the credit facility is dependent upon compliance
with specified covenants and conditions. Although WCG's revolving portion of its
credit facility provides for a total commitment of $525 million, based on its
ratio of total debt, net of excess cash, to contributed capital of approximately
0.65 to 1.00 as of September 30, 2000, WCG estimates that only $152 million
could be borrowed and utilized without issuing additional equity or amending its
long-term credit facility.
Also included on WCG's balance sheet is a long-term investment portfolio
which totals $1.5 billion at September 30, 2000. Included in this portfolio are
marketable equity securities classified as available for sale with a market
value of approximately $834.6 million as of September 30, 2000, some of which
may be disposed of from time to time.
In July 2000, Williams announced that its board of directors had authorized
its management to pursue a course of action that, if successful, would lead to a
complete separation of WCG from Williams' energy business. In August 2000,
Williams announced that the Internal Revenue Service (IRS) had issued a
favorable ruling on a proposed tax-free distribution of WCG's Class B common
stock to Williams' stockholders. In order for Williams and its stockholders to
receive the benefit of the ruling, a spin-off must be completed by August 2001,
unless the IRS consents to an extension of time. The terms of WCG's long-term
credit facility require Williams to hold at least 75% of the voting power of
WCG's outstanding voting stock or at least 65% of WCG's issued and outstanding
capital. Accordingly, depending upon the course and timing of action taken that
results in the separation of the businesses, WCG may be required to seek the
consent of its lenders.
As a result of the announcement by Williams of its intention to separate its
businesses, Standard & Poor's downgraded WCG's corporate credit and bank loan
rating from "BB" to "BB-minus" and WCG's senior unsecured debt rating from
"BB-minus" to "B-plus" in July 2000. In addition, Moody's Investor Service
announced in July 2000 that, due to WCG's intention to increase its capital
expenditure program and WCG's expectation that WCG will turn EBITDA positive in
2001, rather than in 2000, combined with the heightened leverage associated with
the issuance of the senior redeemable notes in August 2000, it has revised its
outlook for WCG to stable from positive.
Cash uses
WCG's primary anticipated cash need is funding capital expenditures for its
network unit. WCG currently estimates to spend approximately $5.6 billion for
capital expenditures in 2000 and 2001 primarily to construct and light its
34,000 mile nationwide intercity network, enhance the capacity and functionality
of this network, provide local access services, expand its domestic network and
provide connectivity for overseas customers to its domestic network. For the
nine months ending September 30, 2000, WCG has spent $2.5 billion on capital
expenditures and expects to spend approximately $0.8 billion in the fourth
quarter of 2000.
In the third quarter of 2000, PowerTel entered into a 70 million Australian
dollar bridge financing facility agreement which translates to U.S. $38.2
million as of September 30, 2000. As of September 30, 2000, the facility
agreement, which bears interest at a fixed-rate of 9.70% and is due January
2001, has been fully utilized. PowerTel is considering various
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<PAGE> 26
financing arrangements to replace the bridge financing facility agreement. These
financing arrangements currently under consideration could require WCG to
provide additional capital contributions.
ATL is seeking a credit facility to finance its operations. Although ATL
endeavors to obtain financing without loans, credit support or additional
contributions from WCG, financing arrangements currently under consideration
would require WCG to provide limited credit support.
Under its asset defeasance program, WCG is obligated to make annual lease
payments totaling approximately $50 million during 2000, of which approximately
$39 million has been paid as of September 30, 2000.
At September 30, 2000, WCG's outstanding long-term debt consisted of $981.9
million principal amount under the Williams note, $3.0 billion principal amount
of its 10.70% to 11.875% senior redeemable notes due 2007 to 2010 and $525
million term loan under its credit facility due 2006. Scheduled principal
payment obligations under the Williams note total $12.5 million in 2000, of
which approximately $6.3 million has been paid as of September 30, 2000.
Scheduled interest payment obligations under the Williams note, its 10.70% and
10.875% senior redeemable notes and the credit facility total approximately $337
million in 2000, of which approximately $181.7 million has been paid as of
September 30, 2000. There are no scheduled principal payment obligations on the
10.70% and 10.875% senior redeemable notes in 2000. There are no scheduled
interest or principal payment obligations on the 11.70% and 11.875% senior
redeemable notes in 2000 and interest is payable semi-annually beginning
February 1, 2001. WCG estimates debt service payments of approximately $492
million for 2001.
The cost of completing, expanding and enhancing WCG's fiber-optic network,
as well as operating its business, depends on a variety of factors. Actual costs
may vary from expected amounts, and such variances could be material. Factors
that could cause a variance include WCG's ability to successfully negotiate
construction contracts, its ability to generate sufficient sales to customers,
changes in the competitive environment of the markets that it serves, and
changes in technology. Any variation could impact WCG's future capital
requirements.
In order to meet its future cash requirements, WCG may issue additional debt
or equity securities, secure additional credit facilities, sell or dispose of
existing businesses or investments, sell or lease dark fiber or access to its
conduits, or seek funds from other sources. WCG may not be able to secure any
such financing, if and when it is needed, on terms acceptable to WCG or at all.
If WCG is unable to obtain the necessary funds, it may be forced to scale back
or defer its planned capital expenditures, which could result in a reduction of
the scope of its planned operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
WCG's interest rate risk exposure associated with the $1.4 billion of the
short-term investments at December 31, 1999 was reduced as a result of the sale
of those investments throughout the year to fund its capital expenditures
program and operations. However, in August 2000, WCG received net proceeds from
the sale of senior redeemable notes of approximately $1.0 billion which were
invested primarily in similar short-term debt securities. At September 30, 2000,
short-term investments totaled $921.0 million.
Interest rate risk exposure, as it relates to the debt portfolio, was
impacted by new debt issuances in the third quarter of 2000. WCG borrowed the
$525.0 million term loan under its long-term credit facility. The interest rate
under the credit facility is currently based on LIBOR plus 2.25%. WCG also
issued approximately $1.0 billion of fixed-rate senior redeemable notes which
will help to mitigate the impact of fluctuations in interest rates under the
credit facility. The senior redeemable notes consist of $575.0 million of 11.70%
and $425.0 million of 11.875% fixed-rate senior redeemable notes due August 1,
2008 and August 1, 2010, respectively.
FOREIGN CURRENCY RISK
In the first quarter of 2000, WCG advanced approximately $150 million to
ATL, denominated in Brazilian reais, which subjects WCG to foreign currency
fluctuations. The value of the advance is $141.8 million based on the current
exchange rate of the Brazilian real to the U.S. dollar at September 30, 2000.
Management has historically not utilized derivatives 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
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consider the use of derivative financial instruments or employment of other
investment alternatives if cash flows or investment returns so warrant.
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 nine percent and five percent of WCG's total assets at
September 30, 2000 and December 31, 1999, respectively. These investments have
the potential to impact WCG's financial position due to movements in the price
of these equity securities. Prior to January 1, 2000, WCG had not utilized
derivatives or other financial instruments to hedge the risk associated with the
movement in the price of these equity securities. However, WCG has entered into
derivative instruments which will expire by the fourth quarter of 2001 and are
designed to hedge the exposure to changes in the price of certain marketable
equity securities. Approximately 29% of WCG's marketable equity securities
portfolio is hedged at September 30, 2000. 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 September 30, 2000, which is included in investments in the
Consolidated Balance Sheet, would increase or decrease by approximately $231
million or $195 million, respectively.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 7, 2000, All-Phase Utility Corp. amended its complaint in a
matter originally filed June 28, 1999 against WCI in the United States District
Court for Oregon. In the amended complaint, All-Phase alleges actual damages of
at least $236.5 million plus punitive damages of an additional amount equal to
double the amount of actual damages. All-Phase alleges that a portion of WCI's
Eugene, Oregon to Bandon, Oregon route is based on confidential information
developed by All-Phase and that WCG breached its non-disclosure agreement with
All-Phase and violated the Oregon Trade Secrets Act by using it. All-Phase also
alleges that WCG misrepresented its plans for the route and that, as a result,
All-Phase lost the opportunity to build its own line along the same route.
All-Phase alleges that its damages include loss of profit from the construction
it believes it would have performed for WCI and lost revenue from leases of
fiber-optic cable and conduits. WCI intends to refute the allegations and to
vigorously defend this lawsuit. WCG does not believe that the ultimate
resolution of this matter will have a material adverse effect upon its future
financial position, results of operations or cash flows.
For information regarding other legal proceedings, see WCG's Annual Report
on Form 10-K/A for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES
On September 19, 2000, WCG issued 5,000,000 shares of 6.75% Redeemable
Cumulative Convertible Preferred Stock with an aggregate liquidation preference
of $250,000,000, less underwriting fees and commissions of $7,500,000 and
offering expenses of approximately $2,000,000. The initial purchasers were
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Smith Barney Inc.
The shares of preferred stock and common stock issuable upon conversion of the
preferred stock issued to pay a dividend on the shares of preferred stock have
not been registered under the Securities Act pursuant to Rule 144A under the
Securities Act. Each share of preferred stock is convertible into 1.7610 shares
of common stock, based on a conversion price of $28.39. WCG may redeem all or
any shares of preferred stock at any time on or after October 15, 2005 and,
under specified circumstances, before that date. The preferred stock will be
subject to mandatory redemption on October 15, 2012. Preferred stock dividends
and amortization of preferred stock issuance costs for the nine months ended
September 30, 2000 were $0.5 million.
The terms of WCG's credit facility and senior redeemable notes currently
restrict it from paying cash dividends. During any periods when WCG is
restricted from paying cash dividends, it expects to pay preferred stock
dividends by delivering shares of its common stock to the transfer agent for the
preferred stock, which will resell those shares of common stock. The proceeds
from the sale of its common stock will then be used to pay cash dividends to the
holder of shares of preferred stock.
26
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed as part of this report
3 Restated Certificate of Incorporation of the Company dated
September 24, 1999; Certificate of Designation of Series A
Junior Participating Preferred Stock dated September 30,
1999; and Certificate of Designation of 6.75% Redeemable
Cumulative Convertible Preferred Stock dated September 18,
2000
4.1 Indenture dated as of August 8, 2000 between the Company
and The Bank of New York, as trustee relating to the
11.70% Senior Redeemable Notes due 2008 and the 11.875%
Senior Redeemable Notes due 2010 (previously filed with
the Securities and Exchange Commission as Exhibit 4.1 to
the Registration Statement on Form S-4 dated October 12,
2000)
4.2 Registration Rights Agreement dated as of September 19,
2000 between the Company and the initial purchasers
(relating to the 6.75% Redeemable Cumulative Convertible
Preferred Stock)
10 Amended and Restated Credit Agreement dated as of
September 1, 2000 to the Credit Agreement dated as of
September 8, 1999 among WCI, the Company, the lenders
party thereto and Bank of America, N.A., The Chase
Manhattan Bank, Bank of Montreal and The Bank of New York,
as agents thereunder (previously filed with the Securities
and Exchange Commission as Exhibit 10.63 to the
Registration Statement on Form S-4 dated October 12, 2000)
12 Computations of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividend Requirements
27.1 Financial Data Schedule - Nine Months Ended September 30,
2000 (EDGAR version only)
27.2 Restated Financial Data Schedule - Nine Months Ended
September 30, 1999 (EDGAR version only)
(b) During the third quarter of 2000, WCG filed a Form 8-K on July 17,
2000; August 2, 2000; and September 14, 2000 which reported
significant events under Item 5 of the Form and included the
exhibits required by Item 7 of the Form.
27
<PAGE> 29
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/ Ken Kinnear
-----------------------------------
Ken Kinnear
Controller
(Duly Authorized Officer and
Principal Accounting Officer)
November 8, 2000
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3 Restated Certificate of Incorporation of the Company dated
September 24, 1999; Certificate of Designation of Series A
Junior Participating Preferred Stock dated September 30,
1999; and Certificate of Designation of 6.75% Redeemable
Cumulative Convertible Preferred Stock dated September 18,
2000
4.1 Indenture dated as of August 8, 2000 between the Company
and The Bank of New York, as trustee relating to the
11.70% Senior Redeemable Notes due 2008 and the 11.875%
Senior Redeemable Notes due 2010 (previously filed with
the Securities and Exchange Commission as Exhibit 4.1 to
the Registration Statement on Form S-4 dated October 12,
2000)
4.2 Registration Rights Agreement dated as of September 19,
2000 between the Company and the initial purchasers
(relating to the 6.75% Redeemable Cumulative Convertible
Preferred Stock)
10 Amended and Restated Credit Agreement dated as of
September 1, 2000 to the Credit Agreement dated as of
September 8, 1999 among WCI, the Company, the lenders
party thereto and Bank of America, N.A., The Chase
Manhattan Bank, Bank of Montreal and The Bank of New York,
as agents thereunder (previously filed with the Securities
and Exchange Commission as Exhibit 10.63 to the September
2000 S-4)
12 Computations of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividend Requirements
27.1 Financial Data Schedule - Nine Months Ended September 30,
2000 (EDGAR version only)
27.2 Restated Financial Data Schedule - Nine Months Ended
September 30, 1999 (EDGAR version only)
</TABLE>