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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
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PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 17, 1999
Level 3 Communications, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 47-0210602
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3555 Farnam Street, Omaha, Nebraska 68131
(Address of principal executive (Zip Code)
offices)
402-536-3677
(Registrant's telephone number including area code)
Not applicable
(Former name and former address, if changed since last report)
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Item 5. Other Events
The following factors amend and restate the risk factors disclosed in our
current report on Form 8-K filed with the SEC on December 7, 1998.
We are dependent on our new business plan that relies on internet protocol
technology
The current status of our business plan makes evaluation of its risks and
rewards extremely difficult and speculative. The business plan depends upon a
shift in providing communications services over internet protocol-based
networks instead of the traditional public-switched networks. Our strategy
assumes that we and others will develop technology that solves the problems
currently associated with internet protocol-based applications, and that others
will continue to develop new uses and applications for internet protocol-based
networks. The success of our business plan depends on other assumptions as
well, such as our ability to use open, non-proprietary interfaces in our
network software and hardware that allow us to buy equipment in the future from
multiple vendors. Finally, we must generate substantial traffic volume at
acceptable prices on our network in order to realize the anticipated operating
efficiencies and cost benefits of the network.
Substantial operating losses are expected for the foreseeable future
The development of our business plan requires significant capital
expenditures. We expect to incur a large portion of these capital expenditures
before we receive any significant related revenues from our business plan.
Because of these capital expenditures and the related early operating expenses,
we expect substantial negative operating cash flow and net losses for the
foreseeable future. We may never establish a significant customer base for our
communications and information services business, and even if we do, we may
continue to sustain substantial negative operating cash flow and net losses as
a result of low prices or higher costs.
Since our new business plan is a significant expansion of our communications
and information services business, we believe that our historical financial
results for periods ending prior to January 1, 1998 will not provide investors
with a meaningful indicator of our future financial condition or results of
operations.
A failure to finance our substantial capital requirements could adversely
affect our business plan
The implementation of our business plan and our ability to meet our
projected growth depends on our ability to secure substantial additional
financing. We estimate that the implementation of our business plan, as
currently contemplated, requires between $8 and $10 billion over the 10-year
period of the plan. However, the amount of additional financing we need could
be higher than we currently estimate. The implementation of our business plan
and our future financial results could be adversely affected if we are
unsuccessful in obtaining required financing through:
. raising debt or equity capital at the times we need on terms that we
consider acceptable;
. generating cash flow from our operations; and
. offering others fiber optic capacity on our network or access to our
conduits.
If we fail to obtain the required financing, we may be required to delay or
abandon some of our future expansion or spending plans. Our existing level of
debt and its terms may limit our ability to raise additional capital and
otherwise restrict our activities. In addition, if our operations do not
produce positive cash flow in sufficient amounts to pay our financing
obligations, our future financial results and our ability to implement our
business plan will be materially and adversely affected.
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Difficulties in constructing our network could increase its estimated costs and
delay its scheduled completion
The construction, operation and any upgrading of our network is a
significant undertaking. Administrative, technical, operational and other
problems that could arise may be more difficult to address and solve due to the
significant size and complexity of the planned network. We are also dependent
on timely performance by third-party suppliers and contractors. In addition,
important aspects of our network, such as voice and fax capability, will rely
on technology that is in the development stage or that is largely commercially
unproven. This new technology also may not be compatible with existing
technology. Many of these factors and problems are beyond our control. As a
result, the entire network may not be completed as planned for the costs and in
the time frame that we currently estimate. We may be materially adversely
affected as a result of any significant increase in the estimated cost of the
network or any significant delay in its anticipated completion.
After its initial completion, future expansions and adaptations of our
network's electronic and software components may be necessary in order to
respond to:
. a growing number of customers;
. increased demands by our customers to transmit larger amounts of data;
. changes in our customers' service requirements; and
. technological advances by our competitors.
Any expansion or adaptation of our network will require substantial
additional financial, operational and managerial resources. If we are unable to
expand or adapt our network to respond to these developments on a timely basis
and at a commercially reasonable cost, then our business will be materially
adversely affected.
A failure to develop or acquire satisfactory voice or fax technology for
internet protocol networks could adversely affect our business
We are in the process of developing technology that we believe will avoid
the need for customers on an internet protocol-based network to dial access
codes or follow other special procedures to initiate a voice or fax call. We do
not believe that this technology is currently commercially available. Our
efforts to develop or acquire this technology in a timely manner and at an
acceptable cost may not be successful. Our failure to develop or acquire this
technology in a timely and cost efficient manner could have a material adverse
effect on us. To date, internet protocol voice telephony has also had
significant problems with quality, latency, reliability and security. Until we
begin commercially deploying our voice or fax telephony services, we cannot
predict whether our plans for solving these problems will work.
Our business plan requires the development of effective business support
systems to implement customer orders and to provide and bill for services
Our business plan depends on our ability to develop sophisticated business
support systems. This is a complicated undertaking requiring significant
resources and expertise and support from third-party vendors. Business support
systems are needed for:
. implementing customer orders for services;
. provisioning, installing and delivering these services; and
. monthly billing for these services.
Since our business plan provides for rapid growth in the number and volume
of products and services we offer, we need to develop these business support
systems on a schedule sufficient to meet our proposed service rollout dates. In
addition, we will require these business support systems to expand and adapt
with our rapid growth. The failure to develop effective business support
systems could have a material adverse effect on our ability to implement our
business plan.
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We may be unable to hire and retain sufficient qualified personnel; the loss of
any of our key executive officers could adversely affect us
We believe that our future success will depend in large part on our ability
to attract and retain highly skilled, knowledgeable, sophisticated and
qualified managerial, professional and technical personnel. To implement our
business plan, we need to have a substantial number of additional employees. We
have experienced significant competition in attracting and retaining personnel
who possess the skills that we are seeking. As a result of this significant
competition, we may experience a shortage of qualified personnel. Our
businesses are managed by a small number of key executive officers,
particularly James Q. Crowe, Chief Executive Officer, R. Douglas Bradbury,
Chief Financial Officer, and Kevin J. O'Hara, Chief Operating Officer. The loss
of any of these key executive officers could have a material adverse effect on
us.
Inability to manage effectively our planned rapid expansion could adversely
affect our operations
Our business plan contemplates rapid expansion of our business for the
foreseeable future. This growth will increase our operating complexity and
require that we, among other things, rapidly:
. expand our employee base with highly skilled personnel;
. develop, introduce and market new products and services;
. integrate any acquired operations and joint ventures;
. develop financial and management controls and systems; and
. control expenses related to our business plan.
The significant size and complexity of our planned network and planned rate
of expansion will make it more difficult to satisfy these requirements. Our
failure to satisfy any of these requirements, or otherwise manage our growth
effectively, could have a material adverse effect on us.
If we were to make strategic investments, acquisitions or joint ventures,
our resources and management time could be diverted and we may be unable to
integrate them successfully with our existing network and services.
Burdensome peering and transit arrangements result in higher costs
Currently, due to the absence of peering agreements with two of the largest
internet access providers, we are required to make transit payments with
respect to most of our internet traffic. Peering agreements with internet
service providers allow us to access the internet and exchange transit for free
with these providers. Recently, many internet service providers that previously
offered peering have reduced or eliminated peering relationships or are
establishing new, more restrictive criteria for peering. If we cannot enter
into peering agreements on satisfactory terms and therefore must continue to
make transit payments, the costs could have a material adverse effect on our
margins for our products that require internet access.
We must obtain and maintain permits and rights-of-way to develop our network
To acquire and develop our network, we must obtain many local franchises and
other permits. We also must obtain rights to use underground conduit and aerial
pole space and other rights-of-way and fiber capacity. The process of obtaining
these franchises, permits and rights is time consuming and burdensome. If we
are unable, on acceptable terms and on a timely basis, to obtain and maintain
the franchises, permits and rights needed to implement our business plan, the
buildout of our network could be materially adversely affected. In addition,
the cancellation or non-renewal of the franchises, permits or rights we do
obtain could materially adversely affect us.
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Termination of relationships with key suppliers could cause delay and costs
Until we complete the company-owned portion of our network, we will lease
substantially all of our intercity communications capacity in North America,
Europe and possibly elsewhere. As a result, we will be dependent on the
providers of this capacity. In addition, we intend to lease a significant
amount of capacity from local exchange carriers to connect our customers to our
gateway sites. We are also dependent on third-party suppliers for substantial
amounts of fiber, conduit, computers, software, switches/routers and related
components that we will assemble and integrate into our network. If any of
these relationships is terminated or a supplier fails to provide reliable
services or equipment and we are unable to reach suitable alternative
arrangements quickly, we may experience significant delays and additional
costs. If that happens, we could be materially adversely affected.
Our industry is highly competitive with participants that have greater
resources and existing customers
Our industry, the communications and information services industry, is
highly competitive. Many of our existing and potential competitors have
financial, personnel, marketing and other resources significantly greater than
ours. Many of these competitors have the added competitive advantage of an
existing customer base. Significant new competitors could arise as a result of:
. increased consolidation and strategic alliances in the industry
resulting from recent Congressional and FCC actions;
. allowing foreign carriers to compete in the U.S. market;
. further technological advances; and
. further deregulation and other regulatory initiatives.
If we are unable to compete successfully, our business could be materially
adversely affected.
Rapid technological changes can lead to further competition
The communications and information services industry is subject to rapid and
significant changes in technology. In addition, the introduction of new
products or technologies may reduce the cost or increase the supply of certain
services similar to those that we plan to provide. As a result, our most
significant competitors in the future may be new entrants to the communications
and information services industry. These new entrants may not be burdened by an
installed base of outdated equipment. Technological changes and the resulting
competition on our operations could have a material adverse effect on us.
Increased industry capacity and other factors could lead to lower prices for
our products and services
There are currently three U.S. long distance fiber optic networks that are
owned by each of AT&T, MCI WorldCom and Sprint, as well as numerous local
networks. Others, including Qwest Communications International Inc., IXC
Communications, Inc. and The Williams Companies, Inc., are deploying additional
networks that use advanced technology similar to that of our network. These
networks offer significantly more capacity than is currently available in the
marketplace. This additional capacity may cause significant decreases in the
prices for services. Prices may also decline due to capacity increases
resulting from technological advances and strategic alliances, such as long
distance capacity purchasing alliances among regional Bell operating companies.
These price declines may be particularly severe if recent trends causing
increased demand for capacity, such as internet usage, change. Rapid growth in
the use of the internet is a recent phenomenon, and may not continue at the
same rate.
We are subject to significant regulation that could change in an adverse manner
Communications services are subject to significant regulation at the
federal, state, local and international levels. These regulations affect us and
our existing and potential competitors. Delays in receiving required regulatory
approvals, completing interconnection agreements with incumbent local exchange
carriers or the enactment of new and adverse regulations or regulatory
requirements may have a material adverse effect on us. In addition, future
legislative, judicial, and regulatory agency actions could have a material
adverse effect on us.
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Recent federal legislation provides for a significant deregulation of the
U.S. telecommunications industry, including the local exchange, long distance
and cable television industries. This legislation remains subject to judicial
review and additional FCC rulemaking. As a result, we can not predict the
legislation's effect on our future operations. Many regulatory actions are
under way or are being contemplated by federal and state authorities regarding
important items. These changes could have a material adverse effect on us.
Canadian law currently does not permit us to offer services in Canada
Ownership of facilities that originate or terminate traffic in Canada is
currently limited to Canadian carriers. This restriction will block our entry
into the Canadian market unless appropriate arrangements can be made to address
these restrictions.
Potential regulation of internet service providers could adversely affect our
operations
The FCC has to date treated internet service providers as enhanced service
providers. Enhanced service providers are currently exempt from federal and
state regulations governing common carriers, including the obligation to pay
access charges and contribute to the universal service fund. The FCC is
currently examining the status of internet service providers and the services
they provide. If the FCC were to determine that internet service providers, or
the services they provide, are subject to FCC regulation, including the payment
of access charges and contribution to the universal service funds, it could
have a material adverse effect on us.
The FCC has also been considering whether local carriers are obligated to
pay compensation to each other for the transport and termination of calls to
internet service providers when a local call is placed from an end user of one
carrier to an internet service provider served by the competing local exchange
carrier. If the FCC were to determine that reciprocal compensation does not
apply and carriers may be unable to recover their costs or will be compensated
at a significantly lower rate, it could have a material adverse effect on us.
Network failure or delays and errors in transmissions expose us to potential
liability
Our network will use a collection of communications equipment, software,
operating protocols and proprietary applications for the high speed
transportation of large quantities of data among multiple locations. Given the
complexity of our proposed network, it may be possible that data will be lost
or distorted. Delays in data delivery may cause significant losses to a
customer using our network. Our network may also contain undetected design
faults and software bugs that, despite our testing, may be discovered only
after the network has been installed and is in use. The failure of any
equipment or facility on the network could result in the interruption of
customer service until we effect necessary repairs or install replacement
equipment. Network failures, delays and errors could also result from natural
disasters, power losses, security breaches and computer viruses. These
failures, faults or errors could cause delays, service interuptions, expose us
to customer liability or require expensive modifications that could have a
material adverse effect on our business.
Intellectual property and proprietary rights of others could prevent us from
using necessary technology to provide internet protocol voice services
While we do not know of any technologies that are patented by others that we
believe are necessary for us to provide internet protocol voice services, this
necessary technology may in fact be patented by other parties either now or in
the future. If this technology were held under patent by another person, we
would have to negotiate a license for the use of that technology. We may not be
able to negotiate such a license at a price that is acceptable to us. The
existence of such a patent, or our inability to negotiate a license for any
such technology on acceptable terms, could force us to cease using the
technology and offering products and services incorporating the technology.
Our Year 2000 compliance efforts may not succeed, and PKS Systems may have
liability from its Year 2000 customer projects
We are conducting a review of our computer systems, including the computer
systems used in our computer outsourcing business, to identify systems that
could be affected by the Year 2000 computer issue. We are also developing and
implementing a plan to resolve the issue. If any required plan to resolve the
Year 2000
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problem is unsuccessful, however, that result could have a material adverse
effect on us. Until our review is completed and our plans are developed and
completed, we cannot predict with certainty whether the cost of resolving the
Year 2000 issue will be material.
Our significant suppliers and customers, including those of our computer
outsourcing business, may not be Year 2000 compliant in a timely manner and any
noncompliance of these systems could have a material adverse effect on us.
PKS Information Services, Inc., derives a substantial portion of its revenue
from projects that its subsidiary, PKS Systems Integration LLC, conducts
involving Year 2000 assessment and renovation services. These activities of PKS
Systems expose us to potential risks that may include problems with services
provided by PKS Systems to its customers and the potential for claims arising
under PKS Systems' customer contracts. PKS Systems' attempts to contractually
limit its exposure to liability for Year 2000 compliance issues may not be
effective.
Foreign currency exchange rate fluctuations or repatriation could result in
losses
Our international expansion will cause our results of operations and the
value of our assets to be affected by the exchange rates between the U.S.
dollar and the currencies of the additional countries in which we have
operations and assets. In some of these countries, prices of our products and
services will be denominated in a currency other than the U.S. dollar. As a
result, we may experience economic losses solely as a result of foreign
currency exchange rate fluctuations, including a foreign currency's devaluation
against the dollar. We may also in the future acquire interests in companies
that operate in countries where the removal or conversion of currency is
restricted. In addition, these restrictions could be imposed in countries where
we conduct business after we begin our operations.
Environmental liabilities from our historical operations could be material
Our operations and properties are subject to a wide variety of laws and
regulations relating to environmental protection, human health and safety.
These laws and regulations include those concerning the use and management of
hazardous and non-hazardous substances and wastes. We have made and will
continue to have to make significant expenditures relating to our environmental
compliance obligations. There may be times when we are not in compliance with
all these requirements.
In connection with certain historical operations, we are a party to, or
otherwise involved in, legal proceedings under state and federal law involving
investigation and remediation activities at approximately 110 contaminated
properties. We could be held liable, jointly and severally, and without regard
to our own fault, for such investigation and remediation. The discovery of
additional environmental liabilities related to our historical operations or
changes in existing environmental requirements could have a material adverse
effect on us.
Significant future declines in cash flow from coal operations
More than half of our net revenues for 1998 were attributable to our coal
mining operations. The level of cash flows generated in recent periods by our
coal operations will not continue after the year 2000. These cash flow levels
will decrease because the delivery requirements under our current long-term
contracts decline significantly after that date. Moreover, without those
contracts, our coal mining operations would not be able to operate profitably
by selling their production on the spot markets. A substantial majority of our
coal mining revenues are provided by three customer contracts.
Potential liabilities and claims arising from our coal operations could be
significant
Our coal operations are subject to extensive laws and regulations that
impose stringent operational, maintenance, financial assurance, environmental
compliance, reclamation, restoration and closure requirements.
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These requirements include those governing air and water emissions, waste
disposal, worker health and safety, benefits for current and retired coal
miners, and other general permitting and licensing requirements. We may not at
all times be in compliance with all of these requirements. Liabilities or
claims associated with this non-compliance could require us to incur material
costs or suspend production. Mine reclamation costs that exceed our reserves
for these matters also could require us to incur material costs.
Anti-takeover provisions in our charter and by-laws could limit our share price
and delay a change of management
Our certificate of incorporation and by-laws contain provisions that could
make it more difficult or even prevent a third party from acquiring the company
without the approval of our incumbent board of directors. These provisions,
among other things:
. divide our board of directors into three classes, with members of each
class to be elected in staggered three-year terms;
. prohibit stockholder action by written consent in place of a meeting;
. limit the right of stockholders to call special meetings of
stockholders;
. limit the right of stockholders to present proposals or nominate
directors for election at annual meetings of stockholders; and
. authorize our board of directors to issue preferred stock in one or more
series without any action on the part of stockholders.
These provisions could limit the price that investors might be willing to
pay in the future for shares of our common stock and significantly impede the
ability of the holders of our common stock to change management. In addition,
we have adopted a poison pill rights plan, which has anti-takeover effects. Our
rights plan, if triggered, will cause substantial dilution to a person or group
that attempts to acquire our company on terms not approved by our board of
directors. Provisions and agreements that inhibit or discourage takeover
attempts could reduce the market value of our common stock.
These risk factors could cause our actual results to differ materially from the
results anticipated in our forward-looking statements
The reports that we file with the SEC and our other communications may
contain forward-looking statements that involve risks and uncertainties. We
consider a forward-looking statement to be those statements that describe our
intentions, beliefs, and current expectations with respect to our future
operating performance. Our actual results could differ materially from those
anticipated in our forward-looking statements as a result of certain factors.
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SIGNATURES
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.
Level 3 Communications, Inc.
By: /s/ Neil J. Eckstein
Neil J. Eckstein, Vice President
February 17, 1999
Date
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