<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 22, 1994
LDDS COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
Georgia 0-11258 58-1521612
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification Number)
Incorporation)
515 East Amite Street
Jackson, Mississippi 39201-2702
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (601) 360-8600
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements of the business to be acquired,
WilTel Network Services, required by this item are contained
in the financial statements and footnotes thereto listed in
the Index on Page F-1 herein.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item are
contained in the financial statements and footnotes thereto
listed in the Index on page F-1.
(c) Exhibits.
See Exhibit Index.
2
<PAGE> 3
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 hereunto duly authorized.
Dated: April 19, 1995
LDDS COMMUNICATIONS, INC.
By: /s/ Scott D. Sullivan
Scott D. Sullivan
Treasurer and Chief Financial Officer
3
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page Numbers
-------------------- ------------
<S> <C>
WilTel Network Services - for the fiscal years ended December 31,
1994 and 1993:
Report of Independent Auditors F-2
Combined Balance Sheets F-3
Combined Statements of Income F-5
Combined Statements of Stockholder's Equity F-6
Combined Statements of Cash Flows F-7
Notes to Combined Financial Statements F-9
LDDS Communications, Inc. - for the fiscal year ended
December 31, 1994:
Pro Forma Combining Financial Statements F-22
Pro Forma Combining Balance Sheet as at
December 31, 1994 F-23
Pro Forma Combining Statement of Operations for
the fiscal year ended December 31, 1994 F-24
Notes to Pro Forma Combining Financial Statements F-25
</TABLE>
F-1
<PAGE> 5
[ERNST & YOUNG LETTERHEAD]
Report of Independent Auditors
The Board of Directors
Williams Telecommunications Group, Inc.
We have audited the accompanying combined balance sheets as of December 31,
1994 and 1993, of the corporations listed in Note 1, and the related combined
statements of income, stockholder's equity, and cash flows for the years then
ended. These financial statements are the responsibility of the corporations'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position at December 31, 1994 and
1993 of the corporations listed in Note 1, and the combined results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 2, 1995
F-2
<PAGE> 6
WilTel Network Services
Combined Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------
(Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,439 $ 4,623
Receivables, less allowance of $9,161 and
$3,605, respectively (Note 12) 81,613 71,583
Accounts receivable - affiliates (Note 7) 1,462 82
Income taxes receivable - affiliates
(Note 3) - 6,993
Deferred income taxes - affiliates
(Note 3) 12,555 6,638
Inventories 164 90
Prepaid expenses and other 3,729 3,638
------------------------
Total current assets 110,962 93,647
Property, plant and equipment - net
(Notes 4 and 7) 786,548 749,443
Goodwill, customer lists and other
intangibles (Notes 2 and 5) 57,854 57,792
Other assets 1,454 1,750
------------------------
Total assets $956,818 $902,632
========================
</TABLE>
F-3
<PAGE> 7
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
-----------------------
(Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and bank overdrafts
(Note 6) $136,409 $ 87,025
Accounts payable - affiliates (Note 7) - 5,205
Accrued liabilities 45,471 45,866
Income taxes payable - affiliates (Note 3) 27,263 -
Deferred revenue 47,919 42,929
Other 2,060 1,354
-----------------------
Total current liabilities 259,122 182,379
Deferred revenue (Note 8) 51,040 57,139
Other liabilities 15,691 18,478
Deferred income taxes - affiliates
(Note 3) 41,323 30,346
Due to affiliates, net (Note 9) 359,590 439,244
Contingent liabilities and commitments
(Notes 11 and 12)
Stockholder's equity:
Common stock 4 3
Capital in excess of par value 168,696 161,998
Retained earnings 61,352 13,045
-----------------------
Total stockholder's equity 230,052 175,046
-----------------------
Total liabilities and stockholder's equity $956,818 $902,632
=======================
</TABLE>
See accompanying notes.
F-4
<PAGE> 8
WilTel Network Services
Combined Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
------------------------
(Thousands)
<S> <C> <C>
Network Services revenues $921,813 $663,785
Costs and expenses:
Network costs:
Switched service costs 301,099 161,227
Leased line and capacity expense
(Note 8) 53,438 51,048
Dedicated access expense 96,275 79,203
Network depreciation 75,134 70,978
Other operating costs
and expenses 108,783 108,643
------------------------
634,729 471,099
Selling, general and administrative
expenses:
Selling 56,221 44,501
General and administrative
(Note 7) 58,993 52,096
Provision (recoveries) for
bad debts 5,665 (2,162)
Depreciation and amortization 9,059 7,906
------------------------
129,938 102,341
------------------------
Operating income 157,146 90,345
Interest accrued (Notes 7 and 9) (69,352) (61,058)
Other income - net 424 3,627
------------------------
Income before income taxes 88,218 32,914
Provision (credit) for income taxes
(Note 3):
Current:
Federal 28,024 1,795
State 6,827 1,533
------------------------
34,851 3,328
Deferred:
Federal 5,752 9,704
State (692) 280
------------------------
5,060 9,984
------------------------
39,911 13,312
------------------------
Net income $ 48,307 $ 19,602
========================
</TABLE>
See accompanying notes.
F-5
<PAGE> 9
WilTel Network Services
Combined Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Capital in Retained
Common Excess of Earnings
Stock Par Value (Deficit) Total
-------------------------------------------------------
(Thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1992 $2 $161,008 $ (6,557) $154,453
Capitalization of WilTel
Undersea Cable, Inc. 1 - - 1
Equity contributions - 990 - 990
Net income for 1993 - - 19,602 19,602
-------------------------------------------------------
Balance at December 31, 1993 3 161,998 13,045 175,046
Contribution of Digital
Communications of America,
Inc. by Williams (Note 2) 1 5,225 - 5,226
Equity contributions (including
noncash amounts of $503) - 1,473 - 1,473
Net income for 1994 - - 48,307 48,307
-------------------------------------------------------
Balance at December 31, 1994 $4 $168,696 $61,352 $230,052
=======================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 10
WilTel Network Services
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
-------------------------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 48,307 $ 19,602
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 79,261 73,545
Amortization of goodwill, customer
lists and other intangibles 4,932 5,339
Provision for deferred
income taxes 5,060 9,984
Provision for bad debts, net
of recoveries 5,665 (2,162)
Sale of receivables 45,000 -
Changes in accounts receivable (61,671) (23,235)
Changes in inventories (74) 57
Changes in prepaids and
other current assets (91) 82
Changes in accounts payable
and bank overdrafts 30,210 38,003
Changes in income taxes
payable - affiliates 34,256 3,165
Changes in accrued liabilities (5,372) 4,935
Changes in current deferred revenue 4,990 4,621
Changes in other current liabilities 706 (111)
Amortization of noncurrent
deferred revenue (6,266) (6,271)
Other changes in noncurrent
assets and noncurrent liabilities (1,618) (2,741)
-------------------------
Net cash provided by operating activities 183,295 124,813
FINANCING ACTIVITIES
Principal payments on notes payable (478) (44)
Decrease in amounts due to affiliates (53,194) (38,465)
Equity contributions received 970 991
-------------------------
Net cash used in financing activities (52,702) (37,518)
</TABLE>
F-7
<PAGE> 11
WilTel Network Services
Combined Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
-------------------------
(Thousands)
<S> <C> <C>
INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures $(142,801) $(100,783)
Proceeds from sales 2,039 10,265
Changes in accounts payable and accrued
liabilities 16,985 3,288
-------------------------
Net cash used in investing activities (123,777) (87,230)
-------------------------
Increase in cash and cash equivalents 6,816 65
Cash and cash equivalents at
beginning of year 4,623 4,558
-------------------------
Cash and cash equivalents at
end of year $ 11,439 $ 4,623
=========================
</TABLE>
See accompanying notes.
F-8
<PAGE> 12
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION
The accompanying combined financial statements represent the accounts of the
Network Services operations of Williams Telecommunications Group, Inc.
("Williams Telecommunications") which includes domestic and international
private line and switched long-distance services. Prior to January 5, 1995
Williams Telecommunications was a wholly owned subsidiary of The Williams
Companies, Inc. ("Williams"). Network Services represents a combination of
certain wholly owned subsidiaries of Williams Telecommunications, including
WilTel, Inc., WilTel Undersea Cable, Inc., WilTel International, Inc. and
Digital Communications of America, Inc. ("DCA"). WilTel Network Services
("Network Services") operates approximately 11,000 miles of digital fiber optic
and microwave network, and has access to additional system miles through
high-capacity lease and exchange arrangements with other carriers.
On January 5, 1995 LDDS Communications, Inc. ("LDDS") acquired the outstanding
stock of the corporations comprising WilTel Network Services from Williams for
approximately $2.5 billion in cash. Under terms of the agreement Williams
retained tax assets and liabilities. Receivable and payable amounts due from or
to affiliates were treated as contributions to capital. No adjustments have
been recorded to the accompanying combined financial statements to reflect the
terms of the agreement.
The accompanying combined financial statements do not include other businesses
of Williams Telecommunications such as WilTel Communications Systems, Inc., a
distributor of customer-premise equipment and data transmission equipment,
VYVX, Inc., which provides video transmission links for television networks and
other users, and WilTel Financial Corporation, a financial services company.
All significant intercompany balances and transactions have been eliminated in
the combination.
Network Services has material transactions with its affiliates. Network
Services has various financing arrangements with Williams Telecommunications
(Note 9), is included in Williams benefit plans (Note 10) and is charged by
Williams for certain general and administrative expenses (Note 7).
At December 31, 1994 and 1993 WilTel, Inc., WilTel International, Inc. and
WilTel Undersea Cable, Inc. each had 1,000 shares of $1.00 par common stock
outstanding. DCA has 990 shares of $1.00 par common stock outstanding at
December 31, 1994.
F-9
<PAGE> 13
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits, certificates of
deposit, and other highly liquid marketable securities with maturities of three
months or less when acquired. The carrying amount of these short-term
investments approximates fair value, due to the short-term maturity of these
instruments.
INVENTORIES
Inventories consist primarily of materials and supplies. Inventories are stated
at the lower of cost, as determined by the first-in, first-out method, or
market.
REVENUES AND RECEIVABLES
In accordance with industry practice, interexchange services are billed in
advance and revenue is recognized in the period services are provided. Services
billed and not yet earned are included in receivables and current deferred
revenue. Switched services are billed to customers in arrears, based on actual
per minute usage or actual services provided and revenue is recognized as
services are provided.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is provided on
a straight-line basis over estimated useful lives. Gains arising from the 1986
and 1987 sales of leased-back properties are deferred and amortized over the
lives of the leases as a reduction of network costs.
GOODWILL, CUSTOMER LISTS AND OTHER INTANGIBLES
Goodwill is amortized on a straight-line basis over periods ranging from 10 to
40 years. Customer lists and other intangibles are amortized on a straight-line
basis over their estimated useful lives ranging from three to five years.
Network Services periodically evaluates recoverability of all intangibles.
F-10
<PAGE> 14
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Williams Telecommunications is included in Williams' consolidated federal
income tax return. Tax payments between Williams Telecommunications, including
Network Services, and Williams are governed by a tax-sharing agreement. The
provision for income taxes in the accompanying financial statements is computed
based on such tax-sharing agreement as if Network Services filed consolidated
tax returns. Tax payments from Network Services to Williams Telecommunications
are recorded as additions to due to affiliates - net.
Provision is made for deferred income taxes applicable to temporary differences
between financial and taxable income.
2. ACQUISITION
In June 1994, Williams exchanged 185,000 shares of its common stock with a
total value of $5,226,000 (based on market value at the exchange date) for all
the common shares of DCA. The stock of DCA was contributed to Network Services.
The transaction was accounted for as a purchase and contribution to Network
Services. The transaction resulted in approximately $5 million of intangible
assets.
3. INCOME TAXES
Deferred income taxes, accounted for under Financial Accounting Standards No.
109, result from temporary differences in the recognition and measurement of
assets, liabilities, revenues and expenses for tax and financial statement
purposes.
F-11
<PAGE> 15
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
3. INCOME TAXES (CONTINUED)
Significant components of deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
----------------------
(Thousands)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $85,430 $88,846
Other 3,310 2,177
----------------------
Total deferred tax liabilities 88,740 91,023
Deferred tax assets:
Deferred revenue 28,063 30,465
Accrued liabilities 4,664 5,914
State deferred taxes 1,945 2,187
Minimum tax credits 7,242 16,790
Other 18,058 11,959
----------------------
Total deferred tax assets 59,972 67,315
----------------------
Net deferred tax liabilities $28,768 $23,708
======================
</TABLE>
Reconciliation from the provision for income taxes at the statutory rate to the
actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
----------------------
(Thousands)
<S> <C> <C>
Provision at statutory rate $30,876 $11,520
Increases in taxes resulting from:
State income taxes 4,014 1,178
Amortization of goodwill 1,138 707
Cumulative effect of rate
increase - 899
Other 3,883 (992)
----------------------
Provision for income taxes $39,911 $13,312
======================
</TABLE>
F-12
<PAGE> 16
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
3. INCOME TAXES (CONTINUED)
Network Services has alternative minimum tax credits of approximately $7.2
million at December 31, 1994. All minimum tax credits have been utilized
financially to reduce deferred income taxes.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
--------------------------
(Thousands)
<S> <C> <C>
Cable $ 380,276 $ 401,108
Circuit equipment 390,846 320,009
Rights-of-way 101,415 101,716
Buildings and leasehold improvements 56,856 55,985
Other network assets 87,007 76,676
General office furniture and equipment 48,037 35,191
Construction-in-progress 83,919 62,133
--------------------------
1,148,356 1,052,818
Accumulated depreciation and amortization 361,808 303,375
--------------------------
$ 786,548 $ 749,443
==========================
</TABLE>
F-13
<PAGE> 17
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
5. GOODWILL, CUSTOMER LISTS AND OTHER INTANGIBLES
A summary of goodwill, customer lists and other intangibles is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------
(Thousands)
<S> <C> <C>
Goodwill attributable to the acquisition of
Williams Telecommunications' minority
interest $49,971 $49,971
Goodwill attributable to the 1991 acquisition
of Telesphere 14,916 14,916
Goodwill attributable to the acquisition of DCA 4,994 -
Customer lists attributable to the 1991
acquisition of Telesphere - 4,600
Other customer lists and intangibles - 4,452
----------------------
69,881 73,939
Less amortization 12,027 16,147
----------------------
$57,854 $57,792
======================
</TABLE>
Customer lists and other intangibles were fully amortized during 1994.
6. ACCOUNTS PAYABLE
Williams Telecommunications, including Network Services, has a centralized cash
management program. Certain cash accounts of Network Services reflect credit
balances to the extent checks written have not been presented for payment. The
amounts of these credit balances included in accounts payable are $16.3 million
and $17.3 million at December 31, 1994 and 1993, respectively.
7. RELATED PARTY TRANSACTIONS
Williams Telecommunications and Network Services have financing arrangements in
connection with various operating and investing activities (see Note 9).
F-14
<PAGE> 18
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
7. RELATED PARTY TRANSACTIONS (CONTINUED)
Williams charges its subsidiaries for certain corporate general and
administrative expenses which are directly traceable or allocable to the
subsidiaries and other general corporate expenses based on the relationship of
property, revenues, and payroll to those of other Williams' subsidiaries.
Details of such charges in the accompanying financial statements are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993
----------------------
(Thousands)
<S> <C> <C>
Charges based on specific rates:
Data processing $13,594 $11,406
Legal 2,078 2,178
Directly allocable costs 3,973 3,479
Allocated general corporate expense 6,968 6,103
</TABLE>
The majority of the above costs are reflected in selling, general and
administrative expenses. Portions of certain costs, particularly data
processing, are included in other expense accounts or capitalized. Williams
Telecommunications, including Network Services, had various other transactions
with Williams and its subsidiaries in the ordinary course of business.
Prior to 1994, Network Services provided telecommunications and video
transmission capacity to VYVX resulting in revenues of $15.1 million for 1993.
Such capacity, for video transmission services, was provided at an arbitrary
internal transfer price of 3.5 cents per circuit per route mile subject to
certain minimum charges, installation fees and other factors.
Recognizing the unique nature of fiber optic capacity usage for video
transmission, throughout the first half of 1994, Network Services developed the
framework for conveying network capacity to VYVX. In June 1994, Network
Services signed an agreement with VYVX, conveying to VYVX one restricted optic
fiber strand throughout the entire Network Services fiber optic network, for
video and radio transmission applications only, along with an interest in
related optronics equipment, effective January 1, 1994. The sale price was
approximately $30.6 million, based on an allocation of Network Services'
historical cost net book value for the fiber and other network assets as of
January 1, 1994 and the historical net book value of specific optronics
equipment
F-15
<PAGE> 19
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
7. RELATED PARTY TRANSACTIONS (CONTINUED)
sold as of January 1, 1994. The net book value cost allocation of the fiber and
other network assets was made based on a ratio of fiber strand miles. Also
considered in determining the sale price was VYVX's obligation to provide
excess capacity to Network Services for the purpose of protection switching and
redundancy free of charge, and at a rate of $0.01 per V&H VGE mile per month
for resale purposes. The sale price was settled by a reduction of amounts due
to affiliates.
Network Services continues to service and maintain the fiber strand and
optronics owned by VYVX pursuant to a Service and Maintenance Agreement. VYVX
pays Network Services for such system service and maintenance a fee of
$1,604,000 annually, such fee to be adjusted for technology advances and every
third year for inflation. VYVX is also responsible for paying its "one fiber
strand equivalent share" of Network Services' annual lease payments under
certain lease obligations for telecommunication facilities, including the
sale/leaseback transactions discussed in Note 8. VYVX is entitled to
participate in any lease renewal options and purchase options at the expiration
of such lease terms to the extent of its "one fiber strand equivalent share" in
such sale/leaseback transactions.
Network Services also has provided telecommunication services to Williams and
its other operating businesses under numerous agreements the amounts of which
have not been significant to Network Services' operations in the past.
Network Services provided telecommunication services to LDDS and its
subsidiaries representing revenues of approximately $50 million and $41 million
in 1994 and 1993, respectively.
8. LEASES
In prior years, Network Services completed three sale/leaseback transactions.
Portions of the network with a net book value totaling $97 million were sold to
institutional investors for an aggregate of $200 million and leased back over
primary lease terms ranging from 15 to 20 years. The leases have fixed renewal
options of from one to two and one-half years followed by ten-year fair market
value renewal options. The leases contain purchase options at various times
through 1999, or at the expiration of the primary term or any renewal term
based upon fair market sale value. Williams has guaranteed payment of and
performance under all three sale/leaseback transactions and maintains a letter
of credit which, as of December 31, 1994, totaled approximately $28 million.
F-16
<PAGE> 20
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
8. LEASES (CONTINUED)
These sale/leaseback transactions were accounted for as operating leases with
the resulting gains recorded as deferred revenue and amortized over the initial
lease terms. Amortization totaled $6.2 million for each of the years ended 1994
and 1993. This amortization has been netted against facility rentals which are
included in leased line and capacity expense.
Future minimum annual rentals under all noncancelable operating leases at
December 31, 1994 are payable as follows:
<TABLE>
<CAPTION>
Telecommunication
Tulsa Facilities
Corporate ----------------------------
Office Sale/
Space Leasebacks Other Other Total
------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C> <C> <C>
1995 $ 2,740 $ 20,677 $ 52,377 $ 4,428 $ 80,222
1996 2,715 22,008 29,103 3,349 57,175
1997 2,693 22,008 18,094 1,893 44,688
1998 2,691 23,509 16,516 1,397 44,113
1999 2,643 20,508 14,213 996 38,360
Thereafter 27,014 91,300 57,483 1,449 177,246
------------------------------------------------------------------------
Total minimum annual
rentals $40,496 $200,010 $187,786 $13,512 $441,804
========================================================================
</TABLE>
As a result of the June 1994 single fiber strand conveyance, VYVX assumed its
pro rata share of certain telecommunication facilities rental obligations noted
above.
Prior to a sale in 1987 to an unrelated third party, the corporate office
facilities in Tulsa, Oklahoma were owned by a Williams affiliate. Williams and
its major subsidiaries entered into long-term leases for continued occupancy in
such facilities. Network Services Tulsa corporate office space requirements
have expanded in recent periods and involve lease terms extending through 2000-
2014.
Total rent expense (net of amortization of deferred revenue) was $68.3 million
and $57.0 million for the years 1994 and 1993, respectively. These amounts
include rent of $1.8 million rebilled by Williams based on its cost from third
parties in 1994 and 1993, respectively.
F-17
<PAGE> 21
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
9. DUE TO AFFILIATES - NET
Network Services' net amounts due to affiliates consist of unsecured payables
and receivables with its parent, Williams Telecommunications. The payables are
a result of business acquisition indebtedness which bears interest as noted
below. The receivables consist of (1) noninterest bearing receivables resulting
from the transfer of cash to its parent to be used to help finance its other
business operations and (2) an interest bearing demand note from its parent
resulting from the transfer of proceeds received in the sale of accounts
receivable to its parent and (3) the amount resulting from the VYVX fiber
conveyance, see Note 7. Interest income and expense are recorded as additions
to the appropriate notes receivable or payable. Interest accrued, net of
interest income, was $65.0 million and $55.7 million for the years 1994 and
1993, respectively.
A summary of these payables and receivables follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------------------------------------
Interest Interest
Rate Amount Rate Amount
---------------------------------------------------------
(Thousands)
<S> <C> <C> <C> <C>
Note payable, including accumu-
lated accrued interest, resulting
from the 1989 LIGHTNET
acquisition at a fixed interest
rate 11.25% $555,322 11.25% $496,495
Note payable, including
accumulated accrued
interest, resulting from
the 1987 LDX acquisi-
tion at a prime interest rate 8.5% 140,274 6.00% 130,497
Demand note receivable,
including accumulated
accrued interest, resulting
from accounts receivable sale
at a 90-day commercial paper
interest rate plus 25 basis points 6.62% (88,147) 3.91% (39,693)
Due from affiliates - Intercompany
financing advances - no interest - (217,220) - (148,055)
Amount due from affiliate for
conveyance - see Note 7 - (30,639) - -
---------- ----------
Net due to affiliates $359,590 $439,244
========== ==========
</TABLE>
F-18
<PAGE> 22
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
9. DUE TO AFFILIATES - NET (CONTINUED)
There are no provisions nor priority for repayment of any of the above payables
or receivables except, as mentioned in Note 1, the treatment of such items as
contributed capital as a result of LDDS' acquisition of WNS. As of December 31,
1994 and 1993, the estimated fair value of the above net amounts due to
affiliates exceeds book value by $149.2 million and $135.6 million,
respectively. For purposes of determining fair value, amortization of the above
net amounts was assumed on a straight-line basis over a ten-year period
discounted at a rate equal to the ten-year Treasury note rate plus 125 basis
points. This rate approximates Williams Telecommunications' interest cost for
an issue of unsecured ten-year notes.
10. EMPLOYEE BENEFIT PLANS
Network Services is included in Williams' noncontributory defined benefit
pension plan. Actual benefits are based on years of service and average final
compensation. Pension costs are funded to satisfy minimum requirements
prescribed by the Employee Retirement Income Security Act of 1974. Pension
expense of Network Services was $4,608,000 and $2,728,000 in 1994 and 1993,
respectively.
Network Services is included in Williams' defined contribution plans covering
substantially all employees. Contributions are based on employees' compensation
and, in part, match employee contributions with investments in Williams' common
stock. Network Services' contributions to these plans totaled $3,038,000 and
$2,656,000 in 1994 and 1993, respectively.
Network Services is included in Williams' health care plan that provides
postretirement medical benefits to retirees who are participants in the
Williams pension plan, were employed full time, hired prior to January 1, 1992,
have worked five years, and attained age 55 while in service with Williams.
Postretirement medical expense was $1,587,000 and $1,500,000 in 1994 and 1993,
respectively.
In November 1992, the FASB issued FAS No. 112, "Employers' Accounting for
Postemployment Benefits." The statement establishes standards of financial
accounting for the estimated cost of benefits provided by an employer to former
or inactive employees after employment, but before retirement. The effect of
adopting this statement effective January 1, 1994 on Network Services'
financial position or results of operations was not significant.
F-19
<PAGE> 23
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prior to May 1994 Williams Telecommunications had an incentive compensation
plan which provided for deferred cash awards to certain employees based upon
operating results. These awards had been accrued during the appropriate
periods. In May 1994 the plan was terminated with Williams entering into
agreements with the prior plan participants for the granting of deferred shares
of Williams common stock. The cash awards from the previous plan were paid in
late 1994. The deferred shares were to be amortized to expense over vesting
periods from three to five years. The acquisition of WilTel Network Services by
LDDS on January 5, 1995 resulted in full vesting of the deferred shares along
with the granting of additional shares to the participants as a result of the
value realized by Williams from such sale. Such accelerated vesting and
additional shares represent a continuing obligation of Williams.
11. CONTINGENT LIABILITIES AND COMMITMENTS
On January 8, 1992, an individual purporting to represent a class of landowners
in Illinois, and potentially in other states, filed a class action suit in
Illinois against Williams Pipe Line Company ("WPL") and WTG-West, Inc. (a
predecessor to WilTel, Inc.) alleging that WTG-West installed its fiber optic
telecommunication system without first securing a proper easement. On April 15,
1994, a similar class action suit was filed in Missouri against WPL and
WTG-West and on April 27, 1994, a similar class action suit was filed in Iowa
against WPL and WTG-West. A settlement in these cases was reached during 1994
which will require total payments of approximately $5 million which have been
capitalized as right-of-way cost.
On February 10, 1993, AT&T filed an action in U.S. District Court in
Washington, D.C. against Williams Telecommunications seeking damages resulting
from business allegedly lost by AT&T due to Williams Telecommunications'
failure to file tariffs or adhere to tariffs that were filed and to require
Williams Telecommunications to file lawful tariffs. On March 5, 1993, WilTel,
Inc. brought an action in U.S. District Court in Tulsa, Oklahoma, challenging
AT&T's tariffing and marketing practices, including AT&T's mail campaign
directed to WilTel, Inc.'s customers in which AT&T claimed that WilTel, Inc.'s
contracts with its customers were unlawful and unenforceable. The latter action
was transferred to the U.S. District Court for the district of the District of
Columbia and both cases have been stayed pending action by the FCC in
proceedings involving other carriers regarding whether such carriers are liable
for damages allegedly resulting from failure to file tariffs.
F-20
<PAGE> 24
WilTel Network Services
Notes to Combined Financial Statements
December 31, 1994 and 1993
11. CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)
In connection with its 1992 settlement with a major customer the Company gave a
credit guaranty of payment by the customer for $6 million to an equipment
vendor in exchange for ownership in equipment, software and licenses previously
owned by the vendor and utilized by the Company and the customer. The guaranty
supports a note payable on which the customer is required to make monthly
payments through mid-1997. The guaranty is secondary to an unconditional
guaranty of payment obligations provided by an affiliate of the customer. As of
December 31, 1994 the guaranty has declined to $3.7 million as a result of
payments made by the customer. The Company believes that it will not have to
perform under this guaranty.
Williams Telecommunications, including its subsidiaries, is a party to various
other claims, legal actions, and complaints arising in the ordinary course of
business. In the opinion of management after consultation with counsel, 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 material adverse financial effect upon Network
Services.
Williams Telecommunications is committed under various long-term contracts for
the purchase and sale of services necessary for the normal conduct of business.
These commitments approximate $24 million at December 31, 1994.
12. OTHER FINANCIAL INFORMATION
Williams Telecommunications, including Network Services, is a party to
transactions and arrangements that involve financial investments and have
off-balance-sheet risk.
During 1991 Network Services sold, with limited recourse, certain receivables
and received proceeds of approximately $35 million. No net proceeds were
received in 1993. During 1994 a new facility was entered into which increased
the aggregate limit to $80 million. At December 31, 1994, $80 million of
receivables had been sold. At December 31, 1994 the purchaser owns a 76.7%
undivided interest in a $191.0 million pool of receivables which includes the
$80 million of receivables sold as of that date.
As a general policy, collateral is not required for receivables, however, the
financial condition and creditworthiness of customers are routinely evaluated.
F-21
<PAGE> 25
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following unaudited Pro Forma Combining Balance Sheet as of
December 31, 1994 and the unaudited Pro Forma Combining Statement of Operations
for the year ended December 31, 1994 illustrate the effect of LDDS' acquisition
of Williams Telecommunications Group, Inc. ("WilTel") for $2.5 billion in cash
(the "WilTel Acquisition") and the financing thereof. Pursuant to the terms of
the acquisition agreement, LDDS acquired WilTel for cash payments of
approximately $2.5 billion on January 5, 1995. The WilTel Acquisition is
accounted for as a purchase.
These Pro Forma Combining Financial Statements should be read in
conjunction with the historical financial statements of LDDS and the network
services operations of WilTel, which are set forth elsewhere herein.
The Pro Forma Combining Financial Statements are presented for
comparative purposes only and are not intended to be indicative of actual
results had the transactions occurred as of the dates indicated above nor do
they purport to indicate results which may be attained in the future.
F-22
<PAGE> 26
LDDS COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA COMBINING BALANCE SHEETS (1)
As of December 31, 1994
(In Thousands of Dollars)
<TABLE>
<CAPTION>
LDDS/Wiltel
LDDS WilTel Pro Forma Pro Forma
Historical (2) Historical (2) Adjustments Combined
-------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Current assets $ 589,426 $ 110,962 $ (12,555) (3) $ 686,371
(1,462) (3)
Property and equipment, net 626,667 786,548 1,413,215
Excess of cost over net tangible assets acquired,
net of accumulated amortzation 2,070,709 57,854 1,969,830 (4) 4,098,393
Other assets 143,390 1,454 45,000 (5) 189,844
-------------- ---------------- --------------- ----------------
Total assets $ 3,430,192 $ 956,818 $ 2,000,813 $ 6,387,823
============== ================ =============== ================
Current liabilities $ 710,655 $ 259,122 $ (27,263) (3) $ 942,514
Long-term debt 788,005 359,590 (359,590) (3) 3,447,046
2,659,041 (6)
Deferred taxes - 41,323 (41,323) (3) -
Other liabilities 104,362 66,731 171,093
Shareholders' investment:
Series 1 preferred stock 109 - 109
Series 2 preferred stock 20 - 20
Common stock 1,596 4 (4) (7) 1,596
Additional paid-in capital 1,772,882 168,696 (168,696) (7) 1,772,882
Retained earnings 52,563 61,352 (61,352) (7) 52,563
-------------- ---------------- --------------- ----------------
Total shareholders' investment 1,827,170 230,052 (230,052) 1,827,170
-------------- ---------------- --------------- ----------------
Total liabilities and shareholders' investment $ 3,430,192 $ 956,818 $ 2,000,813 $ 6,387,823
============== ================ =============== ================
</TABLE>
F-23
<PAGE> 27
LDDS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (1)
(In Thousands, Except Per Share Data)
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
LDDS/Wiltel
LDDS WilTel Pro Forma Pro Forma
Historical (2) Historical (2) Adjustments Combined
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 2,220,765 $ 921,813 $ (74,584) (8) $ 3,067,994
--------------- ----------------- ---------------- -----------------
Operating expenses:
Line costs 1,447,633 450,812 (74,584) (8) 1,823,861
Selling, general and administrative 432,360 229,662 - 662,022
Depreciation and amortization 163,828 84,193 50,000 (9) 305,521
7,500 (10)
Provision to reduce carrying value of certain assets 48,500 - - 48,500
Direct merger costs 15,002 - - 15,002
Restructuring and other charges 43,704 - - 43,704
--------------- ----------------- ---------------- -----------------
Total 2,151,027 764,667 (17,084) 2,898,610
--------------- ----------------- ---------------- -----------------
Operating income 69,738 157,146 (57,500) 169,384
Other income (expense):
Interest expense (47,303) (69,352) 69,352 (11) (222,568)
(184,269) (12)
9,004 (13)
Shareholder litigation settlement (76,000) - - (76,000)
Miscellaneous 5,223 424 - 5,647
--------------- ----------------- ---------------- -----------------
Income before income taxes (48,342) 88,218 (163,413) (123,537)
Provision for income taxes 73,816 39,911 (62,097) (14) 51,630
--------------- ----------------- ---------------- -----------------
Net income (loss) before extraordinary item (122,158) 48,307 (101,316) (175,167)
Extraordinary item (net of income taxes ) - - - -
--------------- ----------------- ---------------- -----------------
Net income (loss) (122,158) 48,307 (101,316) (175,167)
--------------- ----------------- ---------------- -----------------
Preferred dividend requirement 27,766 - - 27,766
--------------- ----------------- ---------------- -----------------
Net income applicable to common shareholders $ (149,924) $ 48,307 $ (101,316) $ (202,933)
=============== ================= ================ =================
Earnings per common share:
Primary $ (0.95) $ (1.29)
=============== =================
Fully Diluted $ (0.95) $ (1.29)
=============== =================
Shares Outstanding:
Primary 157,805 157,805
Fully Diluted 157,805 157,805
</TABLE>
F-24
<PAGE> 28
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENTS
1. The pro forma financial data do not give effect to any potential cost
savings and synergies that could result from the WilTel Acquisition.
The pro forma data are not necessarily indicative of the operating
results or financial position that would have occurred had the WilTel
Acquisition been consummated at the dates indicated, nor necessarily
indicative of future operating results or financial position.
2. These columns represent the historical results of operations.
3. These adjustments represent the elimination of certain assets and
liabilities of WilTel that LDDS did not acquire as part of the WilTel
Acquisition as set forth in the acquisition agreement. The assets and
liabilities excluded include tax asset and liability accounts with
affiliates, accounts payable to affiliates and amounts due from
affiliates, which consist of unsecured payables and receivables of
WilTel with Williams.
4. This adjustment reflects the excess of cost over net tangible assets
acquired in the WilTel Acquisition. For purposes of allocating the
acquisition costs among the various assets acquired, LDDS has
considered the carrying value of the acquired assets to approximate
their fair value, with all of the excess of such acquisition costs
being attributed to goodwill.
5. This adjustment reflects the capitalization of fees incurred to obtain
the new credit facilities (see Note 6).
6. This adjustment represents the incremental borrowings under the $3.41
billion credit facility for the purpose of financing the WilTel
Acquisition and its related costs, including the estimated capital
expenditure adjustment and current ratio adjustment which will be
computed as per the acquisition agreement.
7. These adjustments represent the elimination of WilTel's shareholders
investment accounts.
8. These adjustments eliminate the revenues and corresponding line costs
attributable to the intercompany traffic between LDDS and WilTel.
9. This adjustment reflects amortization over 40 years of the excess of
cost over net tangible assets acquired in the WilTel Acquisition (see
Note 4).
10. This adjustment reflects the amortization over 6 years of capitalized
fees incurred to obtain the new credit facilities (see Note 5).
11. These adjustments represent interest savings to LDDS, as it did not
acquire any of WilTel's debt in the WilTel Acquisition (see Note 3).
F-25
<PAGE> 29
12. This adjustment represents the recognition of interest expense on the
additional borrowing of LDDS to fund the WilTel Acquisition and
related costs (see Note 6). The interest expense was calculated at an
assumed rate of interest of approximately 6.7%. A change of 1/8% in
the assumed rate would affect interest expense by $3.5 million for the
year ended December 31, 1994.
13. This adjustment reflects the interest savings resulting from the
replacement of LDDS' $123.0 million Senior Notes with the new credit
facilities (see Note 5).
14. These adjustments represent the tax effect of adjustments due to
inclusion of the acquired operations. The tax provisions were
calculated at a combined federal and state rate of 38% applied to
items impacting taxable income.
15. Pro forma per share data are calculated using the pro forma net loss
applicable to the common shareholders divided by the pro forma
weighted average common shares outstanding. Common equivalent shares
were not considered in the calculation of pro forma per share data, as
their inclusion would be anti-dilutive.
F-26
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<S> <C> <C>
2.1 Stock Purchase Agreement by and among LDDS, The Williams Companies, Inc. and
WTG Holdings, Inc., dated as of August 22, 1994 (incorporated herein by
reference to Exhibit 2.2 to the Quarterly Report on Form 10-Q filed by LDDS
(File No. 0-11258) for the quarter ended September 30, 1994)*
2.2 Amendment Number 1 to the Stock Purchase Agreement by and among LDDS, The
Williams Companies, Inc. and WTG Holdings, Inc., dated as of December 27,
1994 (incorporated herein by reference to Exhibit 2.3 to LDDS' Current
Report on Form 8-K dated December 30, 1994 (File No. 0-11258))
23.1 Consent of Ernst & Young LLP
</TABLE>
_______________
* The Registrant hereby agrees to furnish supplementally a copy of any
omitted schedules to this Agreement to the Securities Exchange Commission
upon its request.
4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following registrations
statements on Form S-3 and related prospectuses and in the following
registration statements on Form S-8 of LDDS Communications, Inc. of our reports
dated July 29, 1994 and February 2, 1995, with respect to the combined
financial statements of WilTel Network Services included in the Current Report
on Form 8-K dated August 22, 1994 and Current Report on Form 8-K/A dated August
22, 1994 of LDDS Communications, Inc.
<TABLE>
<S> <C>
Form S-3: Registration No. 33-63810; Registration No. 33-67340;
Registration No. 33-71510; Registration No. 33-87514;
Registration No. 33-77964; Registration No. 33-69122;
Registration No. 33-71516; Registration No. 33-87516
Form S-8: Registration No. 33-52168; Registration No. 33-69322;
Registration No. 33-71450; Registration No. 33-89072
</TABLE>
ERNST & YOUNG LLP
Tulsa, Oklahoma
April 19, 1995
