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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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 NUMBER 000-50040
---------------
WILTEL COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 01-0744785
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TECHNOLOGY CENTER, TULSA, OKLAHOMA 74103
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(918) 547-6000
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of common stock of Williams Communications
Group, Inc. (the predecessor to the registrant) held by non-affiliates as of the
close of business on June 28, 2002, calculated based on the closing price of OTC
trading, was approximately $10.3 million.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No | |
The number of shares of the registrant's Common Stock outstanding at
February 28, 2003, was 50,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
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WILLIAMS COMMUNICATIONS GROUP, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
WilTel Communications Group, Inc. ("WilTel" or, together with its direct
and indirect subsidiaries and predecessor companies, the "Company") was
incorporated under the laws of the State of Nevada on October 14, 2002. The
principal executive offices of WilTel are located at One Technology Center,
Tulsa, Oklahoma 74103 (telephone 918-547-6000).
WilTel is the holding company for a business that, until October of 2002,
was owned by Williams Communications Group, Inc. ("WCG"). The following is a
brief description of the development of the business as well as a summary of the
bankruptcy reorganization that resulted with WilTel emerging as the successor to
WCG.
UNCERTAINTY IN THE TELECOMMUNICATIONS INDUSTRY
The telecommunications industry has experienced a great deal of
instability during the past several years. During the 1990s, forecasts of very
high levels of future demand brought a significant number of new entrants and
new capital investments into the industry. However, many industry participants
have gone through bankruptcy, those forecasts have not materialized,
telecommunications capacity now far exceeds actual demand, and the resulting
marketplace is characterized by fierce price competition as traditional and next
generation carriers compete to secure market share. Resulting lower prices have
eroded margins and have kept many carriers--including the Company--from
attaining positive cash flow from operations. Many network providers, and their
customers, have and are undergoing reorganizations through bankruptcy,
contemplating bankruptcy, or experiencing significant operating losses while
consuming much of their remaining liquidity.
The Company does not know if and when the current state of aggressive
pricing will end, or whether the current instability in the sector will lead to
industry consolidation. If industry consolidation does occur, it would not
necessarily benefit the Company or ensure that pricing rationality will return
to the industry. However, if consolidation does not occur and new investment
capital continues to flow into telecommunications carriers, pricing pressures
could continue and supply may continue to outpace demand for the foreseeable
future. While the Company will examine opportunities to acquire other carriers
or large blocks of business if such opportunities are presented to the Company,
and even if such transactions could be consummated at prices deemed to be
attractive, no assurance can be given that the Company could successfully
complete such acquisitions or that the Company could obtain the necessary
capital or lender approvals to do so.
The Company has continued to incur losses during the period
subsequent to its emergence from the chapter 11 proceedings and the adoption of
fresh start accounting. The Company expects these losses will continue, in part
because the rates the Company charges for its services have declined, consistent
with industry-wide experience, and downward pricing may continue if current
market conditions do not change. In addition, the Company has experienced a loss
of customers due to customer bankruptcies, industry consolidation and lower
demand. The Company expects it will continue to incur losses until it can grow
the volume of its business or increase the prices it charges for its services.
The projected losses in its current business plan are higher than contemplated
in the bankruptcy plan. Although the Company believes that its current business
plan will enable it to attain profitability in the future, the Company is unable
to predict with certainty if, and when, it will be able to report profitable
results of operations.
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The Company's current focus is to retain its existing business by
providing a high quality of service, to obtain new business if it can be done on
a profitable basis, to reduce its operating expenses to the greatest extent
possible, and to conserve liquidity. At December 31, 2002, the Company had
$291.3 million of cash and cash equivalents to meet its cash requirements, and
believes that it has sufficient liquidity to meet its needs through 2004. The
Company has $375 million of debt due under its Exit Credit Agreement, and
approximately $142 million of debt under the OTC Notes. Approximately $157
million of this debt matures during 2005. Unless the Company is able to generate
significant cash flows from operations through profitable revenue growth,
expense reductions or some combination of both, it is likely that new capital
will have to be raised to meet its maturing debt obligations in 2005.
A BRIEF HISTORY OF THE BUSINESS
In 1985, The Williams Companies, Inc. ("TWC") entered the communications
business by placing fiber-optic cables in pipelines no longer in use. By 1989,
through a combination of construction projects and acquisitions, TWC had
completed the fourth nationwide digital fiber-optic network, consisting of
approximately 9,700 miles. At the time, TWC operated this network business under
the name "WilTel." In January 1995, TWC sold its network business to LDDS
Communications (now WorldCom) except for an approximately 9,700-route mile
network comprised of a single fiber-optic strand and associated equipment along
the original nationwide network. TWC retained a telecommunications equipment
distribution business and a business unit called Vyvx Services. In January 1998,
TWC reentered the communications network business through its wholly-owned
subsidiary, WCG. By the end of 2001, WCG had completed a new network that, at
the time, was a 27,000-mile network. As a result of a series of transactions
begun in 1999, by April 2001 most of WCG's outstanding common stock was publicly
held and TWC retained only 5%.
THE BANKRUPTCY REORGANIZATION
During and subsequent to fourth quarter 2001, due to negative developments
in the telecommunications industry and the lack of progress in negotiations with
the Company's secured lenders, the Company considered various alternatives for
a financial restructuring. By late February 2002, the Company announced that it
was also evaluating restructuring under chapter 11 of title 11 of the United
States Code ("Bankruptcy Code").
On April 22, 2002, WCG along with one of its subsidiaries (CG Austria,
Inc., collectively with WCG referred to as the "Debtors") filed petitions for
relief under the Bankruptcy Code with the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). From April 22, 2002,
through October 15, 2002, the Debtors managed their property as debtors in
possession, subject to the supervision of the Bankruptcy Court and in accordance
with the provisions of the Bankruptcy Code. On September 30, 2002, the
Bankruptcy Court entered an order confirming the Debtors' plan of
reorganization, which became effective on October 15, 2002. For a more
comprehensive overview of the Chapter 11 reorganization, see Item 1(d) "Other
Information--Overview of the Chapter 11 Proceedings" below.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
See Part II, Item 8 "Financial Statements and Supplementary Data."
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(c) NARRATIVE DESCRIPTION OF BUSINESS
Substantially all operations of WilTel are conducted through subsidiaries.
As it is used in this report, the term "WilTel" also includes its operating
subsidiaries where the context requires. Restrictions contained in certain of
WilTel's debt agreements limit the ability of the Company's principal operating
subsidiary, WilTel Communications, LLC ("WCL"), to transfer funds to its parent,
WilTel, except for certain payments permitted under the long-term credit
facility.
WilTel's operating segments include two reportable segments, Network and
Vyvx, the operations of which are described below.
NETWORK
Through its Network segment, WilTel owns or leases and operates a
nationwide inter-city fiber-optic network, extended locally and globally.
WilTel's Network segment is a provider of Internet, data, voice, and video
services to companies that use high capacity communications as an integral part
of their service offerings. WilTel also offers rights of use in dark fiber,
which is fiber that it installs but for which it does not provide communications
transmission services. Network has built networks and entered into strategic
relationships to provide services in the United States and connectivity to Asia,
Australia, New Zealand, Canada, Mexico, and Europe.
WilTel's global network includes ownership interests in or rights to use:
- nearly 30,000 miles of fiber optic cable, of which 28,554 is
currently in service;
- local fiber optic cable networks within 20 of the largest U.S.
cities;
- 120 network centers located in 107 U.S. cities;
- operational border crossings between the U.S. and Mexico in
California and Texas, and between the U.S. and Canada in Washington,
Michigan, and New York; and
- capacity on five major undersea cable systems connecting the
continental U.S. with Europe, Asia, Australia, New Zealand, and
Hawaii.
WilTel also has rights to use dark fiber or wavelengths in Europe
connecting the UK, France, Germany, Belgium, the Netherlands, Norway, Denmark,
Finland, and Sweden. These rights have not been exercised.
REVENUES
Excluding sales made by Network to the Vyvx segment, Network contributed
the following revenue for the past three years:
TOTAL REVENUE PERCENTAGE OF
YEAR (IN THOUSANDS) CONSOLIDATED REVENUES
---- -------------- ---------------------
2002 $ 1,047,626 88%
2001 $ 1,021,199 86%
2000 $ 670,745 80%
WilTel believes it provides customers with a cost-effective foundation
from which to build or expand their businesses. WilTel operates and provides
services through its:
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U.S. voice network. WilTel's functional switching solutions provide the
platform to deliver a broad suite of basic and enhanced voice services across
its multi-service backbone network. WilTel offers its voice network to major
service providers (e.g., Regional Bell Operating Companies (known as "RBOCs"),
foreign governmental or privatized postal, telephone, and telegraph authorities
(known as "PTTs"), voice resellers and other voice service providers).
Optical transport network. WilTel combines optical and electronic
transmission and switching equipment in its network. WilTel's core network
employs optical restorable mesh architecture, and is augmented with regional
SONET (Synchronous Optical Network) rings. This architecture provides the
restorability benefits of a SONET ring architecture, but with greater capacity
efficiency. This enables WilTel to provide its customers with the flexibility to
control their own service on the WilTel network rather than build these
capabilities or networks for themselves.
U.S. enhanced data services network. WilTel's data services network
employs a technology allowing it to interwork multiple protocols of Layer 2 and
Layer 3 data networking technology. This interworking capability enables
customers to independently pick and choose the type of networking technology or
protocols they wish to use on a location-by-location basis.
Internet infrastructure. WilTel's Internet Protocol ("IP") backbone
network allows customer access at more than 120 network centers nationwide,
including access to international connectivity, using the customer's choice of
protocols including Asynchronous Transfer Mode ("ATM"), Frame Relay, Private
Line, SONET, and Ethernet.
Out-source network infrastructure. Network's Managed Services group
designs, builds, and operates network infrastructure for its customers. WilTel
believes it can help customers expand into new markets by building out their
infrastructures and implementing new network services.
International connectivity. WilTel owns or has rights to use capacity in
five undersea cables connecting its domestic network to facilities in the United
Kingdom, Europe, Australia, New Zealand, Asia, and Hawaii. Utilizing its sub-sea
cable capacity and border crossings into Mexico and Canada, WilTel links its
North American network to international facilities. The undersea cables and
border crossings enable WilTel to increase the utilization of its core U.S.
network by providing domestic and global connectivity for WilTel's U.S. and
international customers.
PROPERTIES
U.S. Inter-City Network
MILES IN AVERAGE NO. OF
THE WILTEL NETWORK ROUTE MILES OPERATION FIBERS PER CABLE
------------------ ----------- --------- ----------------
Wholly owned fiber routes, built by WilTel 16,938 15,948 123
Fiber routes jointly owned (1) 1,258 1,258 12
Fiber routes through dark fiber rights (2) 11,348 11,348 17
------ ------
Total (3) 29,544 28,554
(1) This category consists of Network's fiber rights in routes that have been
jointly constructed by FTV Communications, LLC ("FTV"), a limited
liability company in which WilTel shares equal ownership and control with
two other parties. FTV constructed the portion of the route between
Portland and Las Vegas and obtained rights in dark fiber in the portion of
the route between Las Vegas and Los Angeles and in the Detroit-Cleveland
route. FTV owns the right of way over some of the route it constructed,
with each of its members also contributing rights of way. FTV granted
rights in dark fibers on the completed routes to WilTel and its other
members.
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(2) This category consists of rights in dark fiber and conduits that Network
has obtained. Network has obtained approximately 11,348 route miles, all
of which have had fiber-optic cable installed. Network manages the
transmission equipment on the routes it acquired, and it typically pays
for the maintenance of fiber-optic strands and rights of way.
(3) In 2002, WilTel completed a route-by-route audit to verify and update
route mileages for all network segments.
Network also leases capacity from both long-distance and local
telecommunications carriers, including its competitors, in order to meet the
needs of its customers. Leases of capacity are distinguished from rights in dark
fiber in that capacity leases are for only a portion of the fiber capacity and
the lessor supplies and operates the equipment to transmit over the fiber.
Capacity leases are generally for terms of one month to five years, but can be
longer. Network leases from third parties less than one and a half percent of
its U.S. network capacity currently in use. These leases are for areas where
Network does not have on-network capacity, or such capacity is not currently
sufficient to meet the expected near-term demand.
In September 2001, Network acquired two gateway switches from Ameritech
Global Gateway Services ("AGGS"), a subsidiary of SBC Communications, Inc., and
in turn, WilTel assumed the wholesale international long-distance business
conducted by AGGS (now called WilTel Global Voice Services or WGVS). The
gateways allow the company to offer outbound foreign termination and inbound
domestic termination to other carrier customers.
The domestic voice network grew to eighteen switches in 2002.
City-by-city routes. The following table sets forth details about the
operational route miles in Network's completed network.
ROUTE MILES
--------------------------------------------
WHOLLY JOINTLY DARK FIBER TOTAL MILES
FIBER BUILD SEGMENT OWNED OWNED RIGHTS IN OPERATION
- ------------------- ----- ----- ------ ------------
ACI (1) 1,007 -- -- 1,007
Albany - Boston 182 -- -- 182
Atlanta - Jacksonville 357 -- -- 357
Atlanta - Chicago 1,003 -- 30 1,033
Chicago - Cleveland 226 -- -- 226
Cleveland - Washington -- -- 629 629
Chicago - Indianapolis -- -- 304 304
China/Japan Cable: Bandon
Connections 194 -- 93 287
China/Japan Cable: West Coast
Connections 445 -- 240 685
Cleveland - New York City -- 51 701 752
Dallas - Houston -- 21 230 251
Daytona Beach - Tampa 152 -- -- 152
Denver - Dallas -- 15 1,061 1,076
Denver - Salt Lake City 568 -- -- 568
Detroit - Cleveland -- 7 216 223
New York - Washington 250 -- 98 348
Houston - Washington (2) 2,703 -- 85 2,788
Houston - Chicago 1,429 -- -- 1,429
Houston - San Antonio -- 11 702 713
Jacksonville - Miami 358 -- 3 361
Kansas City - Denver 630 -- -- 630
Los Angeles - New York City -- 8 3,635 3,643
Los Angeles - Houston 1,831 -- -- 1,831
San Diego - Anaheim -- 126 -- 126
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(continued from prior page) ROUTE MILES
--------------------------------------------
WHOLLY JOINTLY DARK FIBER TOTAL MILES
FIBER BUILD SEGMENT OWNED OWNED RIGHTS IN OPERATION
- ------------------- ----- ----- ------ ------------
Los Angeles - Anaheim 25 -- -- 25
Los Angeles - Sacramento (2) 740 12 755 1,507
San Francisco - San Jose 48 -- -- 48
San Francisco - Sacramento 121 -- -- 121
Miami - Tallahassee 543 -- -- 543
Minneapolis - Kansas City 453 -- -- 453
Minneapolis - Chicago 425 -- 37 462
Minneapolis - Detroit -- 12 763 775
New Orleans - Tallahassee 471 -- -- 471
New York - Boston (2) 156 -- 416 572
Miscellaneous Metro (Local)
builds 85 -- 2 87
Portland - Seattle (2) 177 1 180 358
Portland - Los Angeles -- 995 330 1,325
Sacramento-Portland (2) 680 -- 680 1,360
Salt Lake City - Sacramento 661 -- -- 661
PAIX Interconnect to San
Francisco 3 -- 2 5
San Diego - Mexico 26 -- -- 26
TAT 14 1 -- 153 154
------ ----- ------ ------
TOTAL (3) 15,950 1,259 11,345 28,554
(1) In September 2000, the Company acquired the long distance network assets
of Ameritech Communications, Inc., a subsidiary of SBC Communications,
Inc. The assets acquired are located in the states of Illinois, Indiana,
Michigan, Ohio and Wisconsin, and include a 1,997-mile fiber optic network
over four routes, indefeasible rights of use in dark fiber and 15 data
centers. 1,007 of the 1,997 route mile network is currently operational.
(2) Each of these segments includes two separate routes; therefore, the route
miles reflected in the table above include mileage for each of the two
separate routes.
(3) In 2002, the Company completed a route-by-route audit to verify and update
route mileages for all network segments.
In 2002, the Company completed six regional SONET rings. Deployment of the
regional rings allows for a fully restorable service to be provided in 92% of
the U.S. cities served on the network. In the event of a network outage,
customers using the rings are expected to have their services restored by means
of traditional SONET approaches.
Network architecture and technology. WilTel's network operating system
includes the following features:
- Multi-service networking -- WilTel's network architecture allows
for the bundling of video, Internet, data, and voice services across an
integrated network platform.
- Optical switching -- Switched optical systems allow WilTel to
deliver reliable network services with differentiated levels of service.
- IP routing -- Internet protocol networks allow for multimedia
traffic delivery and management. Traffic destined for either the public
Internet or internal corporate locations is handled across WilTel's IP
backbone.
- ATM switching -- ATM switching is a packet switching technology,
which provides for the delivery of multiple quality of service levels and
is designed to transfer video, voice, and data in fixed-sized cells.
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- MPLS networking -- Multi-protocol label switching allows for the
interworking of IP, ATM, and optical systems. MPLS facilitates management
of quality of service, traffic administration, and service differentiation
across the network, especially in the IP domain.
- Voice switching -- WilTel employs scalable, functional switching
solutions to deliver basic and enhanced voice services across its
multi-service backbone.
- Multiprotocol media transport -- Broadcast quality video support
is provided over the multi-services network infrastructure with customer
connections to private line, ATM, IP, and satellite networks.
- Flexible metro access services -- WilTel offers access to its
multi-services network via a variety of connectivity mechanisms. Supported
speeds include OC-3 to OC-192, ten megabits per second Ethernet to one
gigabit Ethernet, and DS1/T1 to DS3/T3. Each access can deliver video,
voice, Internet or data services.
- Nationwide Ethernet services -- Beyond the metro access areas,
WilTel provides Ethernet connectivity on both a local and national basis.
With full VLAN (virtual local area network) support, this service offers
connectivity ranging from one megabit per second to a full one gigabit per
second bandwidth in one megabit per second increments.
- Meshed SONET technology -- Optically meshed SONET provides options
for the management and integration of nationwide network implementations.
Complementing SONET ring technology, meshed SONET architecture is a more
efficient utilization of network bandwidth as compared with traditional
SONET architectures.
- DWDM -- Dense wave division multiplexing is a technology that
allows transmission of multiple wavelengths of light over a single
fiber-optic strand, thereby increasing network capacity without additional
fiber builds.
- Closer spacing of transmission electronics and optronics --
Network spaces its transmission electronics and optronics at 40-mile
intervals resulting in a reduction in noise, dispersion, and other factors
inherent with longer intervals.
- Advanced fiber optic cable -- Newer fiber-optic cable, including
Corning's Enhanced LEAF(TM) fiber and Lucent's TruWave(TM) fiber, has a
wider spectral range than previously deployed fibers, enabling a greater
number of wavelengths to be sent over long distances.
Network centers. As of December 31, 2002, Network had 120 network centers
across the U.S. Network centers are environmentally controlled, secure sites
designed to house transmission, routing, and switching equipment and local
operational staff, as well as space and power for collocation customers.
Conduit and fiber-optic cable. The WilTel network was built for
expandability and flexibility and contains multiple conduits along more than 90
percent of the routes it constructed. To construct fiber-optic cable, the
manufacturer places fiber-optic strands inside small plastic tubes, wraps
bundles of these tubes with plastic, and strengthens them with metal. Network
then places these bundles inside a conduit, which is high-density polyethylene
hollow tubing one-and-one-half to two inches in diameter. The conduit is
generally buried approximately 42 inches underground along pipeline or other
rights of way corridors. Network also uses steel casing in high-risk areas,
including railroad crossings and high-population areas, thereby providing
greater protection for the cable. The first conduit contains a cable generally
housing between 96 and 144 fibers, and the second conduit or, where constructed,
third conduit, serves as a spare. The spare conduits allow for future technology
upgrades, potential conduit sales, and expansion of capacity at costs
significantly below the cost of
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new construction. After existing and anticipated leases of dark fiber, Network
generally plans to retain from 8 to 24 fibers throughout the network for its own
use.
Rights of way. The WilTel network was primarily constructed by digging
trenches along rights of way, or rights to use the property of others, which
Network obtained throughout the United States from various landowners.
Generally, where feasible, Network used the rights of way of pipeline companies
that WilTel believed provided greater physical protection of the fiber system
and resulted in lower construction costs than systems built over more public
rights of way. Almost all of its rights of way extend through at least 2018.
Rights of way are generally for terms of at least 20 years, and most cover
distances of less than one mile.
Monitoring. WilTel Communications uses its "One Call Center" to protect
against third-party activity (including activities like construction or
excavation in or near a network right of way) that could disturb the network's
fiber-optic cables. The Company's One Call Center was formed in 2002 and
protects approximately 16,000 miles of WilTel fiber-optic cable, operating in 38
states. The center works directly with state one-call agencies and is capable of
processing over one million tickets per year.
Local Network
As of December 31, 2002, Network had in operation on-net local services in
20 U.S. cities. These cities in which Network has completed local builds are:
Anaheim, Atlanta, Baltimore, Boston, Chicago, Dallas, Houston, Los Angeles,
Miami, Minneapolis, New York, Newark, Philadelphia, Phoenix, San Francisco, San
Jose, Santa Clara, Seattle, St. Louis, and Washington, D.C. The Company has
rights to utilize an additional 30,740 dark fiber miles in the U.S. through a
fiber lease agreement with Metromedia Fiber Network ("MFN"). In addition, under
the terms of this 2002 agreement with MFN, the Company has the right to lease an
additional 54,324 of dark fiber miles anywhere that MFN may construct or
currently owns dark fiber in the U.S. or Europe.
Global Network
Network has built facilities or entered into strategic relationships to
provide connectivity to Asia, Australia, New Zealand, Canada, Mexico, and
Europe. WilTel owns or has rights to use capacity in five undersea cables that
are described below. Sub-sea cable capacity is expressed using the European SDH
(Synchronous Digital Hierarchy) standard in terms of number of STM-1s, which has
a bit rate of approximately 155 million bits per second. It is equivalent to the
North American SONET standard OC-3. Utilizing its sub-sea capacity and border
crossings into Mexico and Canada, WilTel believes it may increase utilization of
its core U.S. network by providing domestic and global connectivity to WilTel's
U.S. and international customers.
China-U.S. cable and Japan-U.S. cable. WilTel acquired SBC's interests in
these two cables in June 2000. Both cables and their respective West Coast
interconnection points were operational at the end of 2001. The China-U.S. cable
is a 16,000-mile system, operating at 80 gigabits per second. The Japan-U.S.
cable is a 13,000 mile system, operating at 300 gigabits per second. WilTel has
14 STM-1s of capacity on China-U.S. and 98 STM-1s of capacity on Japan-U.S.
TAT-14 cable system. Under an agreement with Telia International Carrier
AB ("Telia"), the national communications service provider in Sweden, WilTel
obtained 16 STM-1s of capacity on the TAT-14 cable system, which connects the
United States with the United Kingdom, the Netherlands, Denmark, Germany, and
France. TAT-14 became operational in the fourth quarter of 2001 and operates at
640 gigabits per second.
AC-1 Network. In 1999, WilTel acquired one STM-1 of capacity from the
Atlantic Cable 1 Network connecting the continental U.S. and Europe. This cable
system was operational at the end of 2001 and operates at 40 gigabits per
second.
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Southern Cross Cable Network. WilTel acquired four STM-1s of capacity on
this network in April 2000. Southern Cross is an undersea cable network linking
Australia and New Zealand with Hawaii and the West Coast of the United States.
This cable became operational in November 2000 and operates at 200 gigabits per
second.
Europe. WilTel has the right to use up to approximately 27,000 kilometers
of European dark fiber (about 17,000 miles) or up to 31,000 kilometers of
European wavelengths (about 19,000 miles) from its agreements with Telia. WilTel
has the right to select either wavelengths or fiber strands across Telia's
network, depending on the route and WilTel's needs. The Telia network connects
22 of the largest European cities. Although WilTel has paid for these rights, it
is not using the fiber or wavelengths.
Australia. PowerTel, Ltd., a publicly traded company, operates
communications networks connecting and serving the three Australian cities of
Brisbane, Melbourne, and Sydney. WilTel, while owning a 45 percent economic
interest in PowerTel, consolidates PowerTel's results of operations with its own
because it is entitled to appoint a majority of the members of PowerTel's board
of directors (which, for consolidation purposes, constitutes control over
PowerTel's operations). In February 2003, WilTel's board of directors reviewed
options for the PowerTel investment, including whether or not WilTel should
pursue opportunities to sell its interest in PowerTel. While no firm commitments
have been approved, WilTel is actively engaged in discussions that could result
in a sale. WilTel's carrying value in PowerTel is not significant and any
proceeds received from a sale are not expected to have a significant impact on
WilTel.
Changes in Global Network assets during 2002. During 2002, consistent with
its efforts to streamline operations and focus on improving overall
profitability, WilTel relinquished certain capacity on the Tycom Atlantic cable
and the Asia-Pacific Cable Network (APCN-2) and sold certain capacity on other
sub-sea cable systems.
PRODUCTS AND SERVICES
Current Service Categories
Network's products and services fall into eight categories:
Packet-based data services. These services provide connectivity for
Internet, data, voice, and video networks at variable capacities to connect two
or more points. Specific packet-based data services include ATM, Frame Relay,
and Internet transport services as well as the virtual private network ("VPN")
service first introduced in March 2002. These services are provided over the
WilTel network and enable it to bill based on service features and usage.
Network also developed and provides transparent LAN services via wide-area
Ethernet services over its network.
Private line services. Network provides customers with fixed amounts of
point-to-point capacity. These services are billed on fixed monthly fees,
regardless of usage. Through Network's "Private Line QoS" capabilities,
introduced in 2001, a customer can choose from four different "quality of
service" levels in Network's Private Line service offerings to fit that
customer's applications based on options related to protection (back-up
capacity), service level agreements, pricing, and outage credits. Network has
international private line services over its TAT-14, Japan/US, China/US, and
Southern Cross cable systems, extending the domestic network to major global
demand centers.
Voice services. Network provides wholesale origination, transport, and
termination, as well as calling card, directory assistance, operator assistance,
and toll-free services. Network completes telephone calls to more than 200
countries worldwide.
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Optical wave services. This service is a point-to-point service, which has
no back-up capacity, that allows a customer exclusive use of a portion of the
transmission capacity of a fiber-optic strand rather than the entire fiber
strand. A purchaser of optical wave services installs its own electrical
interface, switching, and routing equipment.
Backhaul services. Network has interconnected international cable landing
stations on the West and East Coasts with fiber optic rings capable of
terminating cable traffic at specified Network centers. These services are made
available to providers that have their own respective undersea cable assets and
need domestic interconnection services only.
Dark fiber and conduit rights. Network sells rights to use dark fiber and
related services. In addition, from time to time, it sells rights to conduit and
installs conduit for its customers. Most of the network built by WilTel includes
two spare conduits and Network may sell rights to use at least one of them.
Purchasers of dark fiber rights install their own electrical and optical
transmission equipment. A purchaser of conduit rights typically installs its own
cable inside the conduit. Related services for both sales of rights for dark
fiber and conduits include collocation of customer equipment at Network's data
centers and other network equipment locations and maintenance of the purchased
fiber or conduit.
Collocation services. Network provides its customers with the opportunity
to reserve space in its network centers to install their own equipment necessary
to connect to the WilTel network. Customers have a variety of options on a
location-by-location basis, including standard collocation, bulk collocation
(either raw or ready-made), and Internet data center space.
Managed Services. Network Managed Services offers customers a single
source provider for end-to-end network solutions through a comprehensive suite
of products and services. Network Managed Services provides customers with an
array of services including, Lifecycle Program Management, Network Design,
Engineering, Implementation Services, Fiber and Facility Construction, Vendor
Support, Equipment Sales and Installation, IT Outsourcing, and Network
Operations including Field Maintenance.
CUSTOMERS
Network's customers currently include regional Bell operating companies,
cable television companies, Internet service providers, application service
providers, data storage service providers, managed network service providers,
digital subscriber line service providers, long distance carriers, local service
providers, utilities, governmental entities, educational institutions,
international carriers, and other communications services providers who desire
high-speed connectivity on a carrier services basis. Sales to SBC accounted for
47 percent of Network's 2002 revenues.
SALES AND MARKETING
Network's sales organization strives to develop strategic relationships
with customers to drive both incremental business and maintain current revenue
streams. Network targets a focused list of what it perceives to be quality
customers that require high volumes of bandwidth to operate. Product knowledge,
product application, pricing, delivery, and performance information are readily
available to provide products and services that are configured to allow the
Company to meet the unique needs of each customer. Sales teams are focused at
customer, channel, and geographic levels that are intended to allow WilTel to
manage the sales cycle effectively. As new network products and services become
available to customers, the sales organization focuses to expand existing
commercial relationships.
In support of WilTel's efforts to deliver an integrated portfolio of
innovative and competitive products to its customers, a centralized marketing
organization has been established to leverage synergies, focus sales and
10
business development efforts, and drive a company-wide approach to marketing and
product management. Key responsibilities of this organization include advanced
market planning and segmentation, product planning and development, product
marketing, lifecycle management, product economics, pricing, and competitive
analysis.
COMPETITION
As previously indicated under "Item 1(a) Uncertainty in the
Telecommunications Industry," the communications industry is highly competitive.
Some competitors in the markets of carrier services and fiber-optic network
providers may have personnel, financial, and other competitive advantages. In
the market for carrier services, Network competes primarily with AT&T, WorldCom,
Sprint, Qwest, Level 3, Global Crossing, 360 Networks, and Broadwing. Network
also competes with numerous other service providers that focus either on a
specific product or set of products or within a geographic region. Network
competes primarily on the basis of price, network reliability, customer service
and support, and transmission quality. Price competition has been fierce in
recent years and continues to be a major obstacle to achieving positive
operating cash flows. Network has only recently begun to offer some of its
services and products and, as a result, it may have fewer and less well
established customer relationships than some of its competitors. Network's
services within local markets in the United States face additional competitors,
including the traditional regional telephone companies and other local telephone
companies.
While it is possible that some of Network's competitors will cease
operations or lose business in the coming year due to the deteriorating economic
conditions and other difficulties that have affected companies throughout the
telecommunications industry, it is likely that a number of other competitors may
gain competitive advantages by successfully completing their respective
restructuring or bankruptcy reorganization processes or through consolidation
activities.
VYVX
Founded in 1989, Vyvx (formerly referred to as the "Emerging Markets"
segment) enables its customers to move media regardless of format (analog or
digital), method (fiber-optics or satellite), or geographic reach (domestic or
international). In 1990, Vyvx launched the first-ever video transmission over a
terrestrial network service offering and carried the first of fourteen
consecutive Super Bowls for the NFL and its broadcasters. For the past fourteen
years, Vyvx has provided high quality, reliable, network-based solutions for
aggregating, managing, and distributing mission-critical content for content
owners and rights holders. Vyvx also offers a fully integrated hybrid
satellite/terrestrial service to support dedicated and occasional requirements
for the distribution of live content for customers like CNN and Fox in their
coverage of breaking news events in remote geographies (e.g., war in the Middle
East).
REVENUES
Excluding sales made by Vyvx to the Network segment, Vyvx contributed the
following revenue for the past three years:
TOTAL REVENUE PERCENTAGE OF
YEAR (IN THOUSANDS) CONSOLIDATED REVENUES
---- -------------- ---------------------
2002 $ 144,037 12%
2001 $ 164,322 14%
2000 $ 168,332 20%
11
Vyvx is currently the media industry's market leader in video transmission
services over fiber. Vyvx offers a suite of services to the media industry for
video transmission of various formats and picture quality. In addition, Vyvx
works with its customers on new services based upon the customers' need.
PRODUCTS AND SERVICES
Vyvx's primary products and services fall into the following categories:
Fiber Optic and Satellite Video Transport Services. Vyvx uses the
following products to provide audio and video feeds over fiber or satellite for
its broadcast and production customers.
Occasional and Dedicated Fiber MPEG-2 Compressed Video. MPEG-2 compressed
video services provide multiple bandwidth choices over a single TV-1 local loop
terminating at a Vyvx video network center or a video-hub facility. The eight
megabits per second service is well suited for news feeds with cameo
appearances, while the 18 megabits per second service is more appropriate for
feeds containing rich content requiring editing and further production work.
Occasional and Dedicated 45 megabits per second Video. This is a 45
megabits per second transmission service between 42 Television Switching Centers
("TSCs") and five Television Centers in the U.S. The occasional service platform
supports news, sports, and special event broadcasting via connectivity to 47 of
the top designated market areas, in excess of 40 production facilities, and 100
sports facilities across the nation. The 45 megabits per second transmission
service includes the Sports Package and the VenueNet(R) options as well as the
First Video(R) Affiliate program.
Sports Package. This service bundles all transmission pieces required by
the sports leagues, providing customers with a centralized environment. Service
includes both local access circuits and phone lines and is available at all NFL,
NBA, MLB, and NHL venues.
VenueNet(R). An enhanced local access demarcation unit available at sports
venues, VenueNet permits advanced digital video transmission signal
capabilities, dual transmission paths to and from the venue, and diversity out
of the venue to the TSC within each city of origin. This service includes DS-3
and/or TV-1 connectivity and continuous monitoring, on-premises equipment rack,
weatherproof demarcation box, and multiple telephone connections.
First Video(R) Affiliates ("FVAs"). Members of this affiliate-marketing
program are full-service production facilities (production, post, and graphics)
that maintain full-time connectivity to the WilTel network. Serving as access
points to the WilTel network, FVAs use a combination of Vyvx services such as 45
megabits per second video, Fiber MPEG-2 Compressed Video, satellite, and
teleport to serve customers including national news organizations, film
production studios, and others requiring multimedia production and distribution.
Teleport and Transponder. Vyvx owns and operates four teleports located in
Atlanta, Denver, Los Angeles, and New Jersey. Transponder services include
commercial relationships with PanAmSat, Loral, and other providers or resellers
of satellite capacity. The Vyvx Teleport and Transponder Services deliver
custom-engineered solutions for Internet, video, and data transmissions via
satellite.
International Video Transmission. By combining the reach and capability of
the WilTel fiber optic network, teleports, and access to satellite transponders,
international video services enable large-capacity and broadcast-quality media
content distribution. Internet distribution is provided via satellite, Internet
peering, local connectivity, and customized telecommunications solutions to
facilitate the expansion of voice and data networks.
12
Advertising and Syndicated Programming Distribution Services
Audio Distribution. Vyvx sends over 470,000 radio spots to stations
annually via electronic and physical distribution. Spots are distributed to over
7,500 stations in North America via the Internet using no proprietary hardware.
Electronically distributed radio spots use a Secure Sockets Layer that ensures a
protected environment for spot transport, preview, and download.
Video Distribution. Through the combination of electronic and physical
distribution, Vyvx is an industry leader in advertising distribution by
delivering in excess of 2.5 million video spots in 2002.
Electronic Distribution. Using dedicated satellite and IP technologies,
Vyvx delivers studio-quality television spots to The Catch Server(TM) units,
located at more than 642 television stations across the United States. The files
are encoded and transmitted as MPEG-2, 4:2:2 format.
Physical Distribution. The Vyvx facility located in Memphis, Tennessee, is
situated within minutes of the FedEx(R) distribution hub, allowing the company
to offer late cut-off options for last-minute distribution.
In addition to the products and services detailed above, Vyvx offered,
until December 31, 2002, a number of services related to content collection,
management and distribution. The market for these products materialized at a
slower rate than expected, resulting in lower returns than had been anticipated.
Therefore, Vyvx decided to exit these business lines through sale of the product
line or discontinuation of the product offering. Affected products which are no
longer offered are as follows: Digital Exchange, Digital Library, Managed
Application Hosting, Managed Web Hosting, Activecast(SM), ActivecastFS(SM),
Talkpoint(SM), Web Content Publishing, and Streaming Distribution.
CUSTOMERS
Vyvx sells to media content service providers and businesses that use
media content as a component of their business. It does not compete with its
media customers for retail end-users. It has over 2,500 customers, including
major broadcast and cable television networks, news services, professional and
collegiate sports organizations, advertising agencies and their advertisers,
television companies, and movie production companies. Approximately 50% of
Vyvx's total revenue for 2002 was derived from its top 10 customers. Fox
Entertainment Group, Inc. and its parent company The News Corporation Limited,
through their various news, sports, and entertainment businesses, accounted for
approximately 14 percent of Vyvx's total revenues in 2002.
SALES AND MARKETING
Vyvx has sales personnel located in offices in 11 cities throughout the
United States who serve both domestic and international customers. The largest
sales office is in New York City, where many of Vyvx's largest clients are
based.
COMPETITION
No single competitor currently exists possessing the comprehensive set of
services being offered by Vyvx. Niche competitors for various services include
the following: Globecast for standard 45 megabit per second video transmission
service as well as Ascent Media and Triumph Communications for compressed video
transmission services. Advertising distribution competitors include Pathfire,
StarNet, LP, and DG Systems, Inc.
13
(d) OTHER INFORMATION
INVESTMENTS
In the past, the Company worked with and invested in technology companies
in their developmental stages to facilitate improvements in its network through
the rapid adoption and deployment of those technologies that offer the ability
to lower costs and increase transmission speeds and capacity. The Company is
currently considering disposing of these investments, which had a carrying
amount of zero at December 31, 2002. While the Company may continue to work with
technology companies in the future if it believes it could result in
improvements to its network, it is unlikely that the Company will be making any
investments of capital.
FOREIGN INVESTMENTS
As of December 31, 2002, the carrying value of the Company's investment in
Manquehue Net, S.A., a high-capacity communications services provider within the
Santiago, Chile metropolitan area, was zero. Additionally, in 2001, the Company
fully impaired its investment in Silica Networks, a network linking the major
Argentine cities with Santiago, Chile. In September 2002, the Company sold all
of its interests in Silica Networks.
STRATEGIC ALLIANCES AND RELATIONSHIPS
WilTel enters into strategic alliances with communications companies to
secure long-term, high-capacity commitments for traffic on the WilTel network
and to enhance its service offerings.
SBC Communications Inc. SBC is a major communications provider in the
United States. SBC currently provides local services in the south central and
Midwest regions of the United States and in California, Nevada, and Connecticut.
SBC is WilTel's largest customer, generating revenue that represents
approximately 43 percent of 2002 consolidated revenues.
WilTel has entered into agreements with SBC that provide that:
- until 2019, WilTel is SBC's preferred provider for domestic voice
and data long distance services and select international wholesale
services, requiring that SBC seek to obtain these services from
WilTel before it obtains them from any other provider; and
- until 2019, SBC is WilTel's preferred provider for select local
exchange and various other services, including platform services
supporting its switched voice services network, requiring that
WilTel seek to obtain these services from SBC before it obtains them
from any other provider.
For the services each must seek to obtain from the other, the prices,
determined separately for each product or service, generally will be equal to
the lesser of the cost of the product or service plus a specified rate of
return, the prices charged to other customers, or, in some circumstances, a
specific rate. If either party can secure lower prices for comparable services
that the other party will not match, then that party is free to utilize the
lowest cost provider.
Both WilTel and SBC can provide services or products to other persons. In
addition to being a preferred provider, each party may also sell or utilize the
products or services purchased from the other to provide products or services to
other persons. However, if SBC establishes a wholesale distribution channel to
resell the network capacity purchased from WilTel to another provider of carrier
services, WilTel has the right to increase the price it charges SBC for the
services SBC resells in this manner. While the terms of these agreements with
SBC are intended to comply with restrictions on SBC's provision of long distance
services, various aspects of these
14
arrangements have not been tested under the Telecommunications Act of 1996;
however, no party has challenged the validity of the arrangement.
WilTel and SBC have also agreed to a mechanism for the development of
projects that would allow the interconnection of the SBC network with the WilTel
network based on the unanimous decision of committees composed of an equal
number of representatives from WilTel and SBC. If a committee does not approve a
project, each of WilTel and SBC have the right, subject to certain exceptions,
to require the other party to develop a project in exchange for payment by the
requesting party of the direct costs and cost of capital required to complete
the project or to pursue the project on its own. In addition, upon SBC receiving
authorization from the FCC to provide long distance services in any state in its
traditional telephone exchange service region (see Item 1(d) "Other
Information--Regulation" below), SBC has the option to purchase from WilTel at
net book value all voice or data switching assets that are physically located in
that state and of which SBC has been the primary user. The option must be
exercised within one year of the receipt of authorization. WilTel then would
have one year after SBC's exercise of the option to migrate traffic to other
switching facilities, install replacement assets, and complete other transition
activities. This purchase option would not permit SBC to acquire any rights of
way that WilTel uses for its network or other transport facilities that it
maintains. This option has not been exercised and is no longer available for
some states where early authorization was received. Upon termination of the
alliance agreements with SBC, SBC has the right in certain circumstances to
purchase voice or data switching assets, including transport facilities, of
which SBC's usage represents 75 percent or more of the total usage of these
assets.
SBC may terminate the provider agreements if any of the following occurs:
- WilTel begins to offer retail long distance voice transport or local
exchange services on its network, except in limited circumstances;
- WilTel materially breaches its agreements with SBC, causing a
material adverse effect on the commercial value of the relationship
to SBC; or
- WilTel has a change of control without SBC's consent.
WilTel may terminate the provider agreements if any of the following occurs:
- SBC has a change of control; or
- there is a material breach by SBC of the agreements, causing a
material adverse effect on the commercial value of the relationship
to WilTel.
Either party may terminate a particular provider agreement if the action
or failure to act of any regulatory authority materially frustrates or hinders
the purpose of that agreement. There is no monetary remedy for such a
termination.
In the event of termination due to its actions, WilTel could be required
to pay SBC's transition costs of up to $200 million. Similarly, in the event of
termination due to SBC's actions, SBC could be required to pay WilTel's
transition costs of up to $200 million, even though WilTel's costs may be
higher.
Since June of 2000, the FCC has authorized SBC to provide long distance
service in Texas, Oklahoma, Kansas, Arkansas, Missouri, and California. SBC has
advised WilTel that it expects to be granted authorization in Michigan and
Nevada during the second quarter of 2003 and in Illinois, Indiana, Ohio and
Wisconsin within the next 12 months.
15
In August 2001, WilTel signed a preferred provider status agreement with
the long-distance telephone affiliate of SBC, SBC Long Distance ("SBC-LD").
WilTel is the preferred provider for SBC-LD's U.S.-originated international
long-distance traffic. In addition, as previously stated, in September 2001,
WilTel acquired two gateway switches from another SBC subsidiary, AGGS, and in
turn, WilTel assumed the wholesale international long-distance business
conducted by AGGS. These gateways allow the Company to offer outbound foreign
termination and inbound domestic termination to other carrier customers.
During 2002, SBC and WilTel negotiated a series of changes to the alliance
agreements that more clearly specify the products and services for which WilTel
is the preferred provider, establish pricing methodologies, and establish
tracking mechanisms and criteria for ensuring performance of both parties under
the agreements. The result of those negotiations were reflected in amendments
entered into on September 25, 2002, when SBC also entered into a stipulation
agreement to resolve issues related to the WCG bankruptcy (see Item 1(d) "Other
Information--Overview of the Chapter 11 Proceedings" below).
Other Strategic Alliances. WilTel has also established strategic alliances
with Telefonos de Mexico, S.A. de C.V., the largest communications provider in
Mexico that provides long distance and local services primarily in Mexico, and
with KDDI Corporation ("KDDI Japan") and KDDI America, Inc. ("KDDI") that are
each wholly owned subsidiaries of DDI Corporation, the largest international
telecommunications company in Japan. WilTel intends to continue to pursue
additional strategic alliances.
EMPLOYEES
As of December 31, 2002, the Company had a total of approximately 2,354
employees, one of whom was covered by a collective bargaining agreement. During
2002, the Company reduced its workforce by over 1,500 employees.
REGULATION
Overview
The Company is subject to federal, state, local, and foreign laws,
regulations, and orders that affect the rates, terms, and conditions of certain
of its service offerings, its costs, and other aspects of its operations.
Regulation of the telecommunications industry varies from state to state and
from country to country, and it changes regularly in response to technological
developments, competition, and government policies. Many regulations to which
the Company is subject are the subject of various judicial proceedings,
legislative hearings and administrative proposals, and may change. The Company
cannot predict what impact, if any, such proceedings or changes may have on its
business or results of operations, nor can it guarantee that domestic or
international regulatory authorities will not raise material issues regarding
its compliance with applicable regulations.
The FCC has jurisdiction over the Company's facilities and services to the
extent those facilities are used in the provision of interstate
telecommunications services (services that originate and terminate in different
states) or international telecommunications services (services that originate in
a foreign country and terminate in the U.S. or that originate in the U.S. and
terminate in a foreign country). State regulatory commissions generally have
jurisdiction over facilities and services to the extent the facilities are used
in intrastate telecommunications services. Foreign laws and regulations apply to
telecommunications that originate or terminate in a foreign country. Generally,
the FCC and state commissions do not regulate Internet, video conferencing, or
certain data services, although the underlying telecommunications services
components of such offerings may be regulated in some instances. The Company's
operations also are subject to a variety of environmental, building, safety,
health, and other governmental laws and regulations.
16
Federal Regulation
The Communications Act of 1934. The Communications Act of 1934, as amended
(the "Communications Act") grants the FCC authority to regulate interstate and
foreign communications by wire or radio. WilTel is regulated by the FCC as a
non-dominant carrier and is subject to less comprehensive regulation than
dominant carriers under the Communications Act, including certain provisions of
Title II of the Communications Act applicable to all common carriers. Pursuant
to Title II, WilTel must offer service upon reasonable request therefor and
pursuant to just and reasonable charges and practices, and may not make any
unjust or unreasonable discrimination in charges or practices. The FCC has
authority to impose more stringent regulatory requirements on non-dominant
carriers.
FCC regulations affect growth opportunities for WilTel and some of its
customers. Various aspects of the regulations are or will be subject to future
FCC and appellate proceedings. Under Section 10 of the Communications Act, the
FCC must not apply any regulation to a telecommunications carrier if it
determines that enforcement is not necessary to ensure that charges, practices,
classifications, and services are just and reasonable, and not unjustly or
unreasonably discriminatory; that enforcement is not necessary to protect
consumers, and that forbearance is consistent with the public interest. In
making this public interest determination, the FCC must consider whether
forbearance will promote competition in the market for telecommunications
services. Under Section 11 of the Communications Act, in every even-numbered
year the FCC must review all rules then in effect that apply to the operations
or activities of any telecommunications service provider, must determine whether
any such rule is no longer necessary in the public interest as the result of
meaningful economic competition between providers of such service, and must
repeal or modify any rule it determines to be no longer in the public interest.
While these provisions may result in diminished regulation over time, WilTel
cannot predict the outcome of any such future proceedings or their impact on
WilTel's business or operations.
WilTel has obtained authority from the FCC to provide international
services between the United States and foreign countries, and has registered
with the FCC as a provider of domestic, interstate long distance services.
WilTel believes that it is in compliance with applicable federal laws and
regulations, but cannot guarantee that the FCC or third parties will not raise
issues regarding its compliance with applicable regulations.
The Telecommunications Act of 1996. The Telecommunications Act of 1996
(the "1996 Act") amended the Communications Act to establish a framework for
fostering competition in the provision of local and long distance
telecommunications services.
Long Distance Regulation. Subject to specified limitations and conditions,
Section 271 of the Communications Act allows incumbent local exchange carriers
("ILECs"), including the RBOCs and their respective affiliates, to petition the
FCC for authority to enter the long distance telecommunications services market
by offering long distance service in any in-region state (defined as any state
in which an RBOC or its affiliate was authorized to provide wireline telephone
exchange service following the breakup of AT&T). The FCC may grant such
authority if it finds that a given RBOC satisfies certain procedural and
substantive requirements, including a fourteen-point competitive checklist set
forth in the 1996 Act, and determines that granting the petition is in the
public interest. The 1996 Act also allows each RBOC immediately to provide long
distance services in any out-of-region state and to own up to ten percent of the
equity of a long distance carrier operating in any in-region state. In a state
where an RBOC has received authority to provide long distance telecommunications
service, Section 272 of the Communications Act requires the RBOC to maintain a
separate affiliate, and to comply with certain structural and operational
safeguards, for its long distance operations. This separate affiliate
requirement expires on a state-by-state basis three years after an RBOC first
obtained approval to provide long distance service in a given state, unless the
FCC extends the three-year period.
To date, the FCC has granted Section 271 authority to SBC in six of its 14
in-region states; to Verizon in each of its fourteen in-region states; to
BellSouth in each of its nine in-region states; and to Qwest in nine of its
fourteen in-region states.
In addition, two of the RBOCs have Section 271 applications pending. SBC
has filed for approval in Michigan and Nevada; the FCC has until April 16, 2003,
and April 19, 2003, respectively, to render decisions on
17
those applications. Qwest has filed for authority to provide long distance
services in New Mexico, Oregon, and South Dakota; the FCC has until April 16,
2003, to render decisions on those applications. The Company expects these RBOCs
to file additional petitions for entry into the long distance market in all of
their remaining in-region states within the next twelve months. The timing of
such approvals depends on many variables and it is impossible to predict with
certainty when the RBOCs will receive such approvals in all states, or the
outcome of any appeals of such approvals.
The Company believes that the RBOCs' and other companies' entry into the
long distance market may provide opportunities for the Company to sell dark
fiber or lease high-volume long distance capacity. However, increased
competition from the RBOCs could have an adverse effect on WilTel's business, as
the RBOCs may be able to offer integrated local and long distance services and
may enjoy significant competitive advantages, but the Company cannot predict at
this time the likelihood or impact, if any, of such competition. In addition,
changes in an RBOC's ability to offer long distance service under the provisions
of Section 271 and Section 272 of the Communications Act are likely to have an
effect on the volume of traffic transported by WilTel for its RBOC customers and
could pose risks to WilTel's business in the future, although the impact of any
such change cannot yet be determined.
Local Service Regulation. In addition to overseeing the entry of the RBOCs
into the long distance market, the FCC was required, pursuant to the 1996 Act,
to establish national rules implementing the local competition provisions of the
1996 Act. More specifically, the 1996 Act imposed duties on all local exchange
carriers, including new entrants (sometimes referred to as competitive local
exchange carriers, or "CLECs") to provide network interconnection, reciprocal
compensation, resale, number portability, and access to rights-of-way. Where
WilTel provides local telecommunications services, it must comply with these
statutory obligations and the FCC's implementing rules.
The 1996 Act imposed additional duties on ILECs, including the duty to
negotiate in good faith with competitors to provide interconnection to their
networks; to permit collocation of competitors' equipment at ILEC premises; to
provide access on an unbundled basis to individual network elements ("UNEs"),
including network facilities, features, and capabilities, on non-discriminatory
and cost-based terms; and to offer their retail services for resale at wholesale
rates. The 1996 Act directed the FCC to prescribe methods for state regulatory
commissions to use in setting rates, and left intact the states' authority to
set rates.
In August 1996, the FCC issued comprehensive regulations implementing the
local competition provisions of the 1996 Act. A series of subsequent appellate
court decisions, including decisions from the Eighth Circuit Court of Appeals
and the United States Supreme Court, resolved that the FCC has jurisdiction to
implement such regulations, including the authority to establish pricing
guidelines and a forward-looking cost methodology referred to as total element
long run incremental cost ("TELRIC"). Although the FCC may revisit the TELRIC
methodology at some point, WilTel cannot predict the outcome of any such a
review or the effect of any resulting regulatory changes.
On February 21, 2003, the FCC adopted an order amending its UNE rules that
require ILECs to make UNEs available to competitors. Although the text of the
order has not yet been released, it has been reported that, among other changes,
the new rules provide a substantial role for state regulators to apply the
statutory "impairment" standard as interpreted by the FCC for purposes of
determining whether dark fiber, local switching, and other network elements must
be unbundled, and eliminate "line sharing" (a mandate to ILECs to unbundled the
high-frequency spectrum of copper loops). WilTel cannot at this time determine
the effect, if any, of the FCC's decision on WilTel's business or operations, or
the timing or outcome of any reconsideration or appellate proceedings.
The FCC's collocation rules generally require ILECs to permit competitors
to collocate, at ILEC premises, equipment used for interconnection and/or access
to UNEs. Changes to those rules, upheld in 2002 by the D.C. Circuit, allow
competitors to collocate multifunctional equipment and require ILECs to
provision cross-connects between collocated carriers. WilTel cannot determine
the effect, if any, of future changes in the FCC's collocation rules upon
WilTel's business or operations.
18
A carrier that seeks to interconnect with ILECs, obtain UNEs, or resell
ILEC services may negotiate its own agreement for interconnection or UNEs. It
may also adopt, in whole or in part, existing agreements approved by the
applicable state regulatory authority. Negotiated or adopted agreements must be
filed with and approved by state regulatory commissions. On February 21, 2003,
the FCC adopted a Notice of Proposed Rulemaking proposing to eliminate the "pick
and choose" rule that generally allows competitors to adopt selected provisions
of an approved interconnection agreement without adopting the entire agreement.
The text of that notice has not yet been released. Either party to a negotiated
agreement has the right to seek arbitration with the state regulatory authority
of any unresolved issues and arbitration decisions involving interconnection
arrangements may be appealed to federal courts. WilTel is not a party to any
interconnection agreement arbitration proceeding. Other interconnection
arbitration agreement proceedings before various state commissions may result in
decisions that could impact WilTel's business, but WilTel cannot at this time
determine the extent of such impact, if any.
To date, WilTel has entered into state-approved interconnection agreements
with ILECs for multiple states, including with Verizon in New York,
Massachusetts, Pennsylvania, Maryland, Virginia, and the District of Columbia;
with BellSouth in Florida and Georgia; and with SBC in California, Illinois,
Michigan, Ohio, Nevada, Missouri, and Texas. WilTel is in the process of
entering into interconnection agreements with Qwest in Arizona, Colorado,
Minnesota, Oregon, and Washington. Upon expiration of its agreements, which
typically are for two- or three-year terms, WilTel may negotiate or adopt a new
agreement, or in some instances an agreement may continue on a month-to-month
basis. WilTel's interconnection agreements contain provisions that allow changes
to the agreements based upon changes in law. The FCC's February 21, 2003, UNE
decision could result in adverse impacts on WilTel's business, but WilTel cannot
determine at this time the effect, if any, of that decision on its existing
interconnection agreements until the complete order is released.
Access Regulation. Federal regulation affects the cost and thus the demand
for long distance services through regulation of interstate access charges,
which are the local telephone companies' charges for use of their exchange
facilities in originating or terminating interstate transmissions. The FCC
regulates the interstate access rates charged to long distance carriers by ILECs
and CLECs for the local origination and termination of interstate long distance
traffic. Those access rates make up a significant portion of the cost of
providing long distance traffic. Since the 1996 Act, the FCC has restructured
the access charge system, resulting in significant downward changes in access
charge rate levels.
On May 31, 2000, the FCC adopted a proposal submitted by a coalition of
long distance companies and RBOCs, referred to as "CALLS," pursuant to which
ILEC access rates must be decreased in stages over five years. At the same time,
the FCC increased non-usage sensitive charges on local lines, eliminated
non-usage sensitive charges on interexchange carriers, modified the productivity
factor used in part to determine price caps on access charges for some local
telephone companies, and created an explicit universal service component to
recover some implicit subsidies in access charges that were effectively
eliminated by the order. On September 10, 2001, the United States Court of
Appeals for the Fifth Circuit upheld most of the FCC's CALLS order, but remanded
for further consideration portions of the order that created a new universal
service fund and that set a factor applied annually to reduce access rates at a
certain pace. WilTel cannot determine at this time the outcome or likely effect,
if any, of that remand proceeding on the business or operations of the Company.
On April 27, 2001, the FCC issued a ruling regarding the interstate access
charges levied by CLECs on long distance carriers. Effective June 20, 2001, CLEC
access charges were required to be reduced over a three-year period to the level
charged by ILECs in the competing area. The FCC-ordered reduction in CLEC access
charge rates has resulted in a substantial reduction in the per-minute rate
CLECs charge for interstate access services.
Over the last several years, the FCC has granted ILECs significant
flexibility in pricing interstate special and switched access services. More
specifically, in August 1999, the FCC granted immediate pricing flexibility to
many ILECs and established a framework for granting greater flexibility in the
pricing of all interstate access services once an ILEC market satisfies certain
prescribed competitive criteria. In February 2001, the D.C. Circuit
19
upheld the FCC's prescribed competitive criteria. To date, the FCC has granted
pricing flexibility in numerous specific markets to Verizon, BellSouth, SBC, and
Qwest. This pricing flexibility may result in ILECs lowering their prices in
high traffic density areas, including areas where WilTel competes or plans to
compete. WilTel anticipates that the FCC will grant ILECs greater pricing
flexibility as the number of actual and potential competitors increases in each
of these markets.
On April 19, 2001, the FCC adopted a Notice of Proposed Rulemaking seeking
to unify its inter-carrier compensation rules. The FCC seeks to address
disparities in rates for access charges and reciprocal compensation (the rates
that carriers pay each other for completing calls exchanged between them). The
FCC's proposal seeks comments on a transition to a "bill and keep" system
pursuant to which carriers would not exchange cash compensation, but would
provide call completion services free of charge. Adoption by the FCC of a
unified inter-carrier compensation regime that adopts a "bill and keep" regime
or that otherwise reduces the rates that carriers may charge for access charges
could significantly reduce WilTel's inter-carrier compensation revenues. WilTel
is unable to determine at this time the outcome of this proceeding or the
resulting impact, if any, on its business.
In a 1998 report to Congress, the FCC suggested, but did not conclude,
that telephone calls using Internet protocol ("IP") could be considered
telecommunications services. More recently, the FCC has been asked to consider,
in a limited fashion, the regulatory implications of such "voice-over-IP"
technology. Certain ILECs have asked the FCC to rule that certain transmission
services, such as calls made over the Internet, are subject to regulation as
telecommunications services including the assessment of interstate switched
access charges and universal service fund assessments. On October 18, 2002, AT&T
filed a petition for declaratory ruling that phone-to-phone IP telephone service
is an enhanced service carried over the same common Internet backbone facilities
as other public Internet traffic, that as such it is a local service exempt from
access charges, and that all other phone-to-phone IP and voice-over-IP telephony
services are exempt from access charges applicable to circuit-switched
interexchange calls unless the FCC prospectively rules otherwise. On February 5,
2003, pulver.com filed a petition for declaratory ruling that a service offering
that uses IP voice communications is neither telecommunications nor a
telecommunications service. The FCC may consider these and related questions,
including the implications for other types of IP technology and numbering, on a
broader scale later this year. As carriers and their customers migrate to IP and
packet-based technologies, the outcome of such proceedings is likely to affect
carrier-carrier and carrier-customer relationships. WilTel is unable to
determine at this time the outcome of any of these proceedings or the impact, if
any, they could have on its business.
Universal Service. Pursuant to the 1996 Act, the FCC in 1997 established a
significantly expanded universal service regime to subsidize the cost of
telecommunications services to high-cost areas, to low-income customers, and to
qualifying schools, libraries and rural health care providers. Providers of
interstate and international telecommunications services, and certain other
entities, must pay for these programs. The calculation of whether communications
are interstate typically is based on interstate minutes of use; however, FCC
rules also provide that if more than 10% of traffic carried over a private or
wide area telecommunications service line is interstate, then the revenues and
costs generated by the entire line are classified as interstate. With certain
exceptions, revenues derived from the provision of interstate and international
telecommunications services (including access to interexchange service, special
access, WATS, subscriber toll-free service, 900 services, message telephone
services, private line service, Frame Relay and similar services, telex,
telegraph, video services, satellite services, and resale services) to domestic
end-users, including enhanced services providers, are subject to assessment for
contributions to a Universal Service Fund. Excluded services and revenues
include information services; revenues from carrier billing and collection
services; revenues from the sale, lease, installation, maintenance, or insurance
of customer premises equipment; inside wiring charges; and the sale or lease of
transmission equipment, such as dark fiber, that is not provided as part of a
telecommunications service.
Current rules require contributors to make quarterly and annual filings
reporting their revenues, and the Universal Service Administrative Company
issues monthly bills for the required contribution amounts, based on a quarterly
contribution factor approved by the FCC. The FCC announced assessments for the
first quarter of 2003
20
of 7.28 percent, the same contribution factor used for the last two quarters of
2002. The contribution factor may be higher in future quarters. A portion of
WilTel's gross revenues from the provision of interstate and international
services are subject to these assessments, which may in many cases be recovered
from its customers. Unrecovered assessments increase WilTel's costs.
On December 13, 2002, the FCC issued revised universal service rules, and
proposed further changes to the universal service contribution methodology. The
new rules, which became effective January 29, 2003, and likely will be the
subject of further reconsideration and appellate proceedings, will apply on an
interim basis while the FCC considers additional changes. One such interim rule
requires that, beginning April 1, 2003, contributions will be based on
contributors' projected collected end-user telecommunications revenues, rather
than on historical gross-billed revenues. Contributors will be required to
report both historical gross-billed revenues from the prior quarter, and
projected gross-billed and collected end-user interstate and international
telecommunications revenues for the upcoming quarter. The FCC will continue to
set a quarterly contribution factor.
One change to the universal service contribution methodology the FCC is
considering is whether to adopt a "connection-based" or other system of
contribution. Under a connection-based system, contributions might be assessed
on the basis of a flat monthly fee, capacity, or telephone number assignments,
for residential, single-line and multi-line business, payphone, and mobile
wireless connections, both switched and private line. A change in the
contribution methodology could result in WilTel paying a larger percentage of
its revenues to the universal service fund.
WilTel and other contributors to the federal universal service fund may
recover their contributions in any manner that is equitable and
nondiscriminatory, but, beginning April 1, 2003, may not mark up their federal
universal service recovery above the amount of the contribution factor. Carriers
may recover their contribution costs through their end-user rates, or through a
line item (stated as a flat amount or percentage), provided that the line item
does not exceed the total amount associated with the contribution factor. This
rule is the subject of a petition for reconsideration pending before the FCC,
and, on February 21, 2003, several ILECs petitioned for an interim waiver of the
rule pending resolution of the reconsideration proceeding. The new rules also
allow contributors to renegotiate contract terms that prohibit the pass-through
of universal service recovery charges.
Detariffing. In November 1996, the FCC ordered non-dominant long distance
carriers to cease filing tariffs for domestic, long distance services. Tariffing
is a traditional requirement of telephone companies whereby such companies
publicly submit at state and federal regulatory agencies all terms, conditions,
pricing, and available services governing the sale of all regulated services to
the public. In March 1999, the FCC adopted further rules that, while maintaining
mandatory detariffing, required long distance carriers to make specific public
disclosures on Internet web sites of their rates, terms and conditions for
domestic interstate services. In April 2000, the D.C. Circuit affirmed the FCC's
mandatory detariffing order in its entirety. The FCC subsequently implemented a
transition period to allow carriers to withdraw federal tariffs and move to
contractual relationships with their customers. All carriers, including WilTel,
were required to complete the process of detariffing interstate domestic
commercial (customer-specific) services by January 31, 2001 and to detariff
consumer (mass market) services by July 31, 2001. The FCC further required those
carriers with corporate web sites to post information relating to the rates,
terms, and conditions of such services on their web sites. In March 2001, the
FCC imposed similar detariffing requirements with respect to international
services provided by non-dominant carriers such as WilTel. The detariffing of
international services was required to be completed by January 28, 2002. The FCC
requires carriers providing international interexchange services to adhere to
the same web site posting requirements as those applicable to domestic
detariffing. The FCC's detariffing actions may significantly affect the ability
of non-dominant, interstate and international service providers such as WilTel
to rely on filed rates, terms, and conditions as a means of providing notice to
customers of prices, terms and conditions under which they offer their domestic,
interstate and international services; such carriers instead will have to rely
on individually negotiated agreements with end users.
21
In 2002, a coalition of consumer-protection advocates and state regulatory
commissions filed a petition for expedited rulemaking with the FCC, asking the
FCC to require non-dominant interexchange carriers to give at least 30 days
advance written notice to their presubscribed customers of any material change
to the rates, terms or conditions of a carrier-customer agreement. The coalition
argues that since detariffing took effect, customer agreements generally offered
by large long-distance carriers reserve for the carriers the right to
unilaterally change rates, terms and conditions at any time, thereby preventing
consumers from making informed decisions regarding the terms under which they
acquire service from carriers. To date, the FCC has not instituted such a
proceeding. If adopted, such requirements could constrain the ability of WilTel
to modify its rates, terms and conditions in response to competitive market
pressures.
Broadband Regulation. The FCC to date has treated Internet service
providers as enhanced service providers rather than common carriers. As such,
Internet service providers generally have been exempt from various federal and
state regulations, including the obligation to pay access charges and contribute
directly to universal service funds. On December 20, 2001, the FCC issued a
Notice of Proposed Rulemaking seeking comment on whether ILEC broadband
offerings are telecommunications services subject to Title II jurisdiction or,
as the FCC already has concluded with respect to cable modem service,
information services subject only to Title I jurisdiction. A decision is
expected in the first quarter of 2003. In a separate Notice of Proposed
Rulemaking released February 15, 2002, the FCC sought comment on issues related
to broadband access to the Internet over domestic wireline facilities, including
whether facilities-based broadband Internet access providers should be required
to contribute to support universal service. On October 3, 2001, SBC filed a
petition for forbearance from the application of tariff requirements to its
provision of advanced services. On December 31, 2002, the FCC granted SBC's
petition to the extent it requested forbearance from tariff regulation of
advanced services that SBC provides through its advanced service affiliate,
which provides intraLATA advanced services in SBC's in-region states. The FCC
denied other aspects of the petition without prejudging issues under
consideration in the ILEC broadband rulemaking. WilTel cannot determine at this
time the outcome of these proceedings or the impact, if any, such outcome may
have on its business.
State Regulation
The Communications Act generally prohibits state and local governments
from enforcing any law, rule, or legal requirement that prohibits or has the
effect of prohibiting any person from providing any interstate or intrastate
telecommunications service. As a result, WilTel is free to provide the full
range of local, long distance and data services in all states in which it
currently operates, and in any states into which it may wish to expand. This
regulatory environment both increases WilTel's potential for growth and
increases the amount of competition to which WilTel may be subject. However,
states retain substantial jurisdiction over intrastate matters, and generally
have adopted regulations intended to protect public safety and welfare, ensure
the continued quality of communications services, and safeguard the rights of
consumers. Some states impose assessments for state universal service programs
and for other purposes. To the extent that WilTel provides intrastate
telecommunications services, WilTel is subject to various state laws and
regulations.
Most state public utility and public service commissions require some form
of certificate of authority or registration before offering or providing
intrastate services, including competitive local telecommunications services.
Currently, WilTel or its subsidiary, WilTel Local Network, LLC, hold
authorizations to provide such services, at least to some extent, in 50 states
and the District of Columbia.
In most states, in addition to the requirement to obtain a certificate of
authority, WilTel must request and obtain prior regulatory approval of price
lists or tariffs containing rates, terms and conditions for its regulated
intrastate services. WilTel is required to update or amend these tariffs when it
adjusts its rates or adds new products. WilTel believes that most states do not
regulate its provision of dark fiber. If a state did regulate its provision of
dark fiber, WilTel could be required to provide dark fiber in that state
pursuant to tariffs and at regulated rates.
22
The Company is also subject to various reporting and record-keeping
requirements in states in which it is authorized to provide intrastate services.
Many states also require prior approval for transfers of control of certified
providers, corporate reorganizations, acquisitions of telecommunications
operations, assignment of carrier assets, carrier stock offerings and
undertaking of significant debt obligations. States generally retain the right
to sanction a service provider or to condition, modify, or revoke certification
if a service provider violates applicable laws or regulations. Fines and other
penalties also may be imposed for such violations. While WilTel believes that it
is in compliance with applicable state laws and regulations, it cannot guarantee
that state regulatory authorities or third parties will not raise issues with
regard to its compliance.
State regulatory commissions generally regulate the rates that ILECs
charge for intrastate services, including intrastate access services paid by
providers of intrastate long distance services. WilTel's intrastate services
compete against the regulated rates of these carriers and also utilize certain
ILEC services. State regulatory commissions also regulate the rates ILECs charge
for interconnection of network elements with, and resale of, services by
competitors. As a result of the FCC's February 21, 2003, decision on UNEs,
WilTel expects that state commissions will initiate proceedings that have the
potential to affect the rates, terms and conditions of intrastate services.
WilTel, through its subsidiary WilTel Local Network, LLC, has entered into or is
in the process of entering into interconnection agreements with various ILECs
and the rates, terms, and conditions contained in such agreements will be
affected by such state proceedings.
Local Regulation
Some jurisdictions require WilTel to obtain street use and construction
permits and licenses and/or franchises before installing or expanding its
fiber-optic network using municipal rights-of-way. Termination of, or failure by
WilTel to renew, its existing franchise or license agreements could have a
material adverse effect on its operations. In some municipalities where WilTel
has installed or may construct facilities, it is required to pay license or
franchise fees based on a percentage of gross revenue, a flat annual fee, or a
per linear foot basis. WilTel cannot guarantee that fees will remain at their
current levels following the expiration of existing franchises. In addition,
WilTel could be at a competitive disadvantage if its competitors do not pay the
same level of fees as it does. The Communications Act requires municipalities to
manage public rights of way in a competitively neutral and non-discriminatory
manner and prohibits the imposition of right-of-way fees as a means of raising
revenue. A considerable amount of litigation has challenged right-of-way fees on
the grounds that such fees violate the Communications Act. The outcome of such
litigation may affect WilTel's costs of operations.
Other U.S. Regulation
WilTel's operations are subject to a variety of federal, state, local, and
foreign environmental, safety and health laws, and governmental regulations.
These laws and regulations govern matters such as the generation, storage,
handling, use, and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites, and
endangered species, and the health and safety of employees. WilTel also may be
subject to environmental laws requiring the investigation and cleanup of
contamination at sites it owns or operates or at third-party waste disposal
sites. Such laws often impose liability even if the owner or operator did not
know of, or was not responsible for, the contamination.
WilTel owns or operates numerous sites in connection with its operations.
Although the Company is aware of one instance of alleged liability relating to
contamination at a single site, the Company is not aware of any liability or
alleged liability at any owned or operated sites or third-party waste disposal
sites that would be expected to have a material adverse effect on the Company.
Although WilTel monitors compliance with environmental, safety, and health laws
and regulations, it cannot give assurances that it has been or will be in
complete compliance with these laws and regulations. WilTel may be subject to
fines or other sanctions imposed
23
by governmental authorities if it fails to obtain certain permits or violates
their respective laws and regulations. WilTel's capital or other expenditures
for compliance with laws, regulations, or permits relating to the environment,
safety, and health were not material in 2002.
WilTel has ownership interests in and utilizes certain submarine cable
systems for the provision of telecommunications services. WilTel may be subject
to certain state and federal laws and regulations governing the construction,
maintenance and use of such facilities. Such laws and regulations may include
corridor restrictions, exclusionary zones, undersea cable fees, or right-of-way
use fees for submerged lands. Increased regulation of cable assets or
assessments may affect the cost and ultimately the demand for services provided
over such facilities.
Foreign Regulation
The provision of telecommunications services in the countries in which
WilTel operates is regulated. Telecommunications carriers are generally required
to obtain permits, licenses, or authorizations to initiate or terminate
communications in a country. The regulatory requirements vary from country to
country, although in some significant respects regulation in the Western
European markets is harmonized under the regulatory structure of the European
Union. Many regulatory systems have only recently faced the issues raised by
competition and are still in the process of development. Telecommunications laws
and regulations are changing generally to promote competition and new offerings.
WilTel cannot determine at this time the impact, if any, that such future
regulatory, judicial, or legislative activities may have on the business or
operations of WilTel.
Generally, WilTel must obtain and maintain authorizations from regulatory
bodies in the countries in which it wants to offer telecommunications services.
The number and type of authorizations, if any, depend on whether WilTel
constructs or leases its facilities, and whether it offers dark fiber, switched
voice, private line, data, video, or enhanced services in the countries in which
it plans to operate. WilTel must also comply with environmental, planning, and
property laws in those countries where it constructs and/or operates fiber-optic
systems. Some countries may require WilTel to file and obtain prior regulatory
approval of the rates, terms, and conditions for its services. Authorizations
can generally be conditioned, modified, or revoked by regulators for failure to
comply with applicable laws or regulations. Fines and other penalties also may
be imposed for violations. WilTel has received, and expects to apply for and
acquire, various authorizations to operate its foreign facilities and provide
its telecommunications services though it cannot guarantee that its licenses
will not be delayed or include burdensome conditions.
Authorizations to operate as a new carrier are not available in some
countries, may be available in other countries with limitations on the number
and characteristics of carriers, and may not be required at all in other
countries. In addition, while some countries require complex application
procedures for authorizations, some countries simply require registration with
or notification to the regulatory agency. Within a country, moreover, some
services or activities may require a full authorization while others may require
a simple registration or notification, or no filing at all. Authorizations and
regulations impose a range of restrictions on the carriers' operations,
corporate governance, and shareholders, with penalties for noncompliance,
including loss of license and monetary fines. For example, many countries place
limits on foreign ownership of telecommunications carriers and require
regulatory approval of transfers of control.
In granting authorizations, regulators frequently establish service
obligations for the operator. Typical obligations include nondiscrimination,
build-out or service coverage, and interconnection obligations, as well as
requirements regarding the quality of service provided and the approval of new
service offerings. Many regulators also require licensed carriers to pay certain
fees or charges that, among other things, cover the costs of regulation and to
support the availability of services, and these fees may in some cases be
significant. Many national regulators require interconnection between carriers
and resolve disputes as to the reasonableness of particular interconnection
arrangements and pricing. Many regulators require a dominant carrier in the
market to offer
24
competing carriers interconnection on reasonable and nondiscriminatory terms and
conditions, and a number of regulators also require incumbent carriers to
unbundle their local loops, allowing increasing competition in local services.
In some countries, all telecommunications carriers are required to provide
interconnection to other carriers. WilTel may be required to provide
interconnection to its foreign network as well as access to its facilities for
the installation of other carriers' telecommunications equipment.
Although WilTel does not intend to construct or install fiber-optic
networks in any foreign market, if it decided to do so, it would also be
required to obtain street use and construction permits and licenses and/or
franchises to install and expand its fiber-optic network using public rights of
way. In some countries where it has installed networks, and it may be required
to pay license or franchise fees.
Submarine telecommunications cable systems require national authorizations
from each country in which they land and operate. Cable landing authorizations
typically involve environmental reviews as well as approvals by
telecommunications authorities to provide international telecommunications
facilities and services. In addition, municipal and state permits may be
necessary. Any such authorization may involve burdensome conditions.
Telecommunications carriers using capacity on the cables usually need licenses
from each country in which they operate and may need different licenses to
provide different services. For example, WilTel has received a Public
Telecommunications Operator license in the United Kingdom in order to provide
services over the TAT-14 undersea cable.
Japan
WilTel's Japanese subsidiary, Williams Communications K.K., has obtained a
Type I license to land its interest in an undersea cable and to provide
telecommunications services in Japan over this undersea cable. Under the Type I
license, Williams Communication K.K. must meet several obligations, such as
appointing a chief engineer, reporting about revenues and costs, and meeting
performance specifications.
United Kingdom
WilTel's subsidiary in the United Kingdom, Williams Communications UK
Limited, has received a Public Telecommunications Operator license to provide
telecommunications services in the United Kingdom. This subsidiary intends to
apply to the Office of Telecommunications for "Annex II" interconnection status,
which will give it the right to interconnect with other carriers in the United
Kingdom. The Public Telecommunications Operator license requires WilTel's
subsidiary to comply with a number of conditions, including but not limited to
interconnection with other telecommunications companies and payment of license
fees.
Chile
Chile currently has a highly competitive, multi-carrier system for long
distance and local services. There is no regulatory limit on the number of
concessions that could be granted to companies that would compete against
Manquehue Net S.A. The largest provider of local telecommunications services in
Santiago is Compania de Telecomunicaciones de Chile with approximately 77% of
the local market.
Manquhue Net S.A. holds a Public Telecommunications License to install and
operate a high capacity fiber optic cable network in Santiago and the towns
surrounding it, and provides public switched voice services over that network.
The license is for a renewable 30-year term. The license provided for network
construction to end on December 23, 1998, with service to begin on January 23,
1999. The company requested an extension of these terms, which was granted by
the telecommunications authority and approved by the Republic Comptrollership's
Office for formal amendment of the license. Service was originally required to
begin by April 4, 2002. Manquehue Telecomunicaciones de Larga Distancia S.A. and
Metrocom S.A. are subsidiaries of Manquehue Net S.A. Manquehue
Telecomunicaciones de Larga Distancia S.A. holds an intermediate services
concession to
25
provide long distance services and resells capacity from other carriers.
Metrocom holds an intermediate service concession and provides long distance
services to subscribers.
Neither Manquehue Larga Distancia nor Metrocom nor Manquehue Net are
subject to a maximum rate. The maximum rate structure is determined every five
years and applies to the incumbent only. Local providers must also give long
distance service providers equal access conditions to their network connections.
Hong Kong
WilTel's subsidiary in Hong Kong, Williams Communications (Hong Kong)
Limited, has been granted a Public Non-Exclusive Telecommunications Services
license. The license allows WilTel's subsidiary to provide a range of
international telecommunications services to customers in Hong Kong. The license
is granted subject to a number of conditions, including payments of annual
licensing fees and restrictions on anti-competitive behavior.
Canada
WilTel's subsidiary in Canada, Williams Communications Network, Inc., has
been granted a Class A international telecommunications license. The license
allows WilTel's subsidiary to provide a range of international
telecommunications services in Canada over its own network or over the network
of a third party. The license is subject to several conditions, including
payment of contribution fees on applicable services, compliance with reporting
requirements and restrictions on anti-competitive behavior.
Settlement Costs for International Traffic
International switched long distance traffic between two countries
historically is exchanged under correspondent agreements between carriers, each
owning network transmission facilities in their respective countries.
Correspondent agreements generally provide for, among other things, the
termination of switched traffic in, and return switched traffic to, the
carriers' respective countries at a negotiated accounting rate. Settlement
costs, typically one-half of the accounting rate, are reciprocal fees owed by
one international carrier to another for transporting traffic on its facilities
and terminating that traffic in the other country. The FCC and regulators in
foreign countries may regulate agreements between U.S. and foreign carriers.
The FCC's international settlements policy governs the settlements between
U.S. carriers and their foreign correspondents and prevents foreign carriers
from discriminating among U.S. carriers in bilateral accounting rate
negotiations. The policy requires:
- the equal division of accounting rates;
- non-discriminatory treatment of U.S. carriers; and
- proportionate return of inbound traffic.
Agreements governed under the policy must be filed publicly with and
approved by the FCC. The policy applies only to U.S. carrier arrangements with
certain foreign carriers with market power in their respective countries. For
example, U.S. carrier arrangements with Telefonos de Mexico continue to be
subject to the policy, but U.S. carrier arrangements with a Telefonos de Mexico
competitor in Mexico are not subject to the policy. The FCC also recently
decided to exempt certain foreign routes from the policy, depending upon the
ability of U.S. carriers to terminate traffic on those routes at rates
substantially below benchmarks set by the agency. However, Mexico is not
currently an exempted route. Other countries have policies similar to that of
the FCC.
Provision of switched voice services over international private lines
allows carriers to bypass the settlement rate system, and, therefore, bypass the
need to negotiate accounting rates with foreign carriers with market power and
obtain termination of international traffic in the United States and foreign
countries at substantially reduced
26
rates. The FCC's private line resale policy currently prohibits a carrier from
providing switched voice services over international private lines to or from a
country unless certain conditions are met or unless the carrier provides such
services in conjunction with a non-dominant carrier in that country.
Currently, Mexican carriers other than Telefonos de Mexico can engage in
such resale under FCC rules, but the Mexican regulator has not permitted such
resale. If Mexico approves such resale but the FCC continues to restrict
Telefonos de Mexico from engaging in such resale, competitors of Telefonos de
Mexico would be permitted to engage in low-cost termination of traffic between
the United States and Mexico, but Telefonos de Mexico would be precluded from
doing so.
International Settlements
In October 2002, the FCC issued a Notice of Proposed Rulemaking to
consider further reforms to its International Settlement Policy, International
Simple Resale policy, and benchmark policy, based on increased participation and
competition in the U.S.-international market, decreased settlement and end-user
rates, and increased liberalization and privatization in foreign markets. The
FCC is expected to issue a decision before the end of 2003. The outcome of this
proceeding could result in lower rates for some international services and
increased demand for these services by some of WilTel's customers, with a
resulting increased demand for capacity on WilTel's U.S. facilities, including
its domestic network.
OVERVIEW OF THE CHAPTER 11 PROCEEDINGS
On April 22, 2002, WCG and one of its subsidiaries, CG Austria, Inc.
(collectively, the "Debtors"), filed petitions for relief under chapter 11 of
title 11 of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
On September 30, 2002, the Bankruptcy Court entered an order confirming the
Second Amended Joint Chapter 11 Plan of Reorganization of the Debtors (the
"Plan"), which became effective on October 15, 2002 (the "Effective Date").
A copy of the Plan was filed as Exhibit A to Exhibit 99.2 to WCG's Current
Report on Form 8-K, dated August 13, 2002. Modifications to the Plan were filed
as Exhibit 99.3 to WCG's Current Report on Form 8-K, dated September 30, 2002
(the "Confirmation Date 8-K"). A copy of the Confirmation Order was filed as
Exhibit 99.1 to the Confirmation Date 8-K. All such filings are incorporated
herein by reference.
Described below is a summary of certain significant agreements and
important events that have occurred in and following the bankruptcy
reorganization. The summary should be read in conjunction with and is qualified
in its entirety by reference to the Plan and the material transaction documents
discussed herein and made available as exhibits to WCG's and WilTel's public
filings, including those filed with the SEC.
Plan of Reorganization
On September 30, 2002, the Bankruptcy Court approved and entered an order
confirming the Plan, which had been proposed by the Debtors, the official
committee of unsecured creditors (the "Committee") and Leucadia National
Corporation ("Leucadia"). The Plan was designed to meet the requirements of the
Settlement Agreement (described in greater detail below) and the pre-petition
Restructuring Agreement. By implementing both the Settlement Agreement and the
Restructuring Agreement, the Plan allowed WCG to raise the $150 million new
investment from Leucadia. That additional investment allowed WCG to further
reduce its secured debt without sacrificing working capital (see below for a
discussion of the Escrow Agreement and the ultimate release from escrow of the
$150 million investment).
27
Settlement Agreement
On July 26, 2002, TWC, the Committee, and Leucadia entered into a
settlement agreement (the "Settlement Agreement") that provided for, among other
things, (a) the mutual release of each of the parties, (b) the purchase by
Leucadia of TWC's unsecured claims against WCG (approximately $2.35 billion face
amount) for $180 million, (c) the satisfaction of such TWC claims and a $150
million investment in the Company by Leucadia in exchange for 44% of the
outstanding WilTel common stock, and (d) modification of WCG's sale and
subsequent leaseback transaction covering the WCG headquarters building and
modification of the TWC Continuing Contracts (as defined in the Settlement
Agreement). An order approving the Settlement Agreement was issued on August 23,
2002.
TWC's unsecured claims related to arrangements between WCG and TWC.
Approximately $1.4 billion of those claims related to the Trust Notes, which
were senior secured notes issued by a WCG subsidiary in March 2001. The proceeds
from the sale of the Trust Notes were (i) transferred to WCG in exchange for
WCG's $1.5 billion 8.25% senior reset note due 2008 (the "Senior Reset Note")
and (ii) contributed by WCG as capital to WCL to provide liquidity following the
tax-free spin-off from TWC. Obligations of WCG and its affiliates under the
Trust Notes were secured by the Senior Reset Note and were effectively
guaranteed by TWC. In July 2002, TWC exchanged $1.4 billion of new senior
unsecured notes of TWC (the "New TWC Notes") for all of the outstanding Trust
Notes. TWC, as agent under the Trust Notes indenture, had the right to sell the
Senior Reset Note to achieve the highest reasonably available market price and
the Bankruptcy Court found that the TWC sale of the TWC Assigned Claims to
Leucadia met this requirement.
Approximately $754 million of TWC's unsecured claims arose in connection
with an operating lease agreement covering a portion of the fiber-optic network
referred to as an "asset defeasance program" (the "ADP") that WCG entered into
in 1998. The total cost of the network assets covered by the lease agreement was
$750 million. Pursuant to the ADP, WCG had the option to purchase title to those
network assets at any time for an amount roughly equal to the original purchase
price, and TWC was expressly obligated to pay the purchase price under an
intercreditor agreement entered into by TWC in connection with the then-existing
WCL credit facility. In March 2002, WCG exercised its purchase option and TWC
funded the purchase price of approximately $754. In exchange for this payment
from TWC, the intercreditor agreement provided that TWC was entitled to either
the issuance of WCG equity or WCG unsecured subordinated debt (meaning debt that
was subordinate in priority to WCL's credit facility), each on terms reasonably
acceptable to the lenders under WCL's pre-petition credit facility. On March 29,
2002, WCG tendered an unsecured note to TWC for approximately $754 million that
was not accepted by TWC. Any and all causes of action of TWC or any of its
direct or indirect subsidiaries against a Debtor relating to the ADP were
resolved pursuant to the terms of the Settlement Agreement.
The terms of the Settlement Agreement also resolved "Pre-Spin Services
Claims" of TWC arising from a Services Agreement entered into between WCG and
TWC when WCG was a wholly-owned subsidiary of TWC. Pursuant to this agreement,
TWC and certain of its affiliates performed payroll, administrative, and related
services for WCG and its affiliates. Pre-Spin Services Claims were also resolved
pursuant to the Settlement Agreement.
The Settlement Agreement also resolved WCG's defaults under the sale and
subsequent leaseback transaction (discussed below) as a result of WCG's
bankruptcy filing, thus negating any threat or risk that the Company would be
evicted or otherwise lose possession of its headquarters due to the bankruptcy.
SBC Stipulation
On September 25, 2002, the Bankruptcy Court approved a stipulation
agreement (the "Stipulation Agreement") between the Company and SBC conditioned
upon the consummation of the Plan. The Stipulation Agreement provided for the
necessary SBC approval of the Plan and resolved change-of-control issues that
SBC had raised
28
regarding WCG's spin-off from TWC. At the same time, SBC and WCL executed
amendments to their alliance agreements (see Item 1(d) "Other
Information--Strategic Alliances and Relationships" above).
Purchase of Headquarters Building
In connection with the spin-off of WCG by TWC in 2001, TWC and WCG entered
into a sale and leaseback transaction for WCG's headquarters building and
certain real and personal property, including two corporate aircraft (the
"Building Purchase Assets"), as a result of which TWC purchased the Building
Purchase Assets and leased them back to WCG. Pursuant to an agreement between
WCG and TWC, among others, dated July 26, 2002, (as amended, the "Real Property
Purchase and Sale Agreement"), WCG repurchased the Building Purchase Assets from
TWC for an aggregate purchase price of approximately $145 million (the "Purchase
Price").
The Purchase Price consisted of promissory notes issued by Williams
Technology Center, LLC ("WTC"), the Company, and WCL to TWC (the "OTC Notes").
One note for $100 million is due April 1, 2010; the other note for $44.8 million
is due December 29, 2006. The obligations of WTC, WilTel, and WCL under the OTC
Notes may be subject to reduction, depending on the disposition of certain
aircraft leases described in greater detail in the Real Property Purchase and
Sale Agreement. Obligations of WTC, WilTel, and WCL under the OTC Notes were
secured by, and made pursuant to, a mortgage agreement (the "OTC Mortgage"),
under which WTC granted a first priority mortgage lien and security interest to
TWC in all of its right, title and interest in, to and under the headquarters
building and related real and personal property.
The Settlement Agreement also contemplated that the Lenders would receive
a second priority mortgage lien and security interest in those same assets. The
Real Property Purchase and Sale Agreement also provided that the OTC Notes are
secured in part by a second lien and security interest in the Company's
interests in PowerTel, Ltd., a publicly traded Australian corporation. See Part
II "Notes to Consolidated Financial Statements--Note 15. Debt" for a further
discussion of the terms of the OTC Notes.
The Real Property Purchase and Sale Agreement further provides that if,
within one year after the date of the Settlement Agreement, WTC exchanges or
disposes of or enters into an agreement to exchange or dispose of any or all of
the headquarters building or the related real or personal property for an
aggregate sales price in an amount greater than $150 million, WTC shall be
required to prepay the OTC Notes in full and pay to TWC an amount equal to the
product of (i) 50% multiplied by (ii) the excess of the aggregate sales price
over (A) $150 million less (B) the amount equal to (x) the aggregate
consideration received by TWC in connection with the disposition of certain
aircraft dry leases referred to in the Real Property Purchase and Sale Agreement
or (y) the amount of proceeds received by WCG in connection with the refinancing
of the aircraft currently subject to such aircraft dry leases.
As described below, consummation of the transactions contemplated by the
Real Property Purchase and Sale Agreement were conditioned upon satisfaction of
the terms of the Escrow Agreement (as defined below).
Transactions on the Effective Date
On the Effective Date, pursuant to the Plan and the confirmation order,
WilTel emerged as the successor to WCG and issued an aggregate of 22,000,000
shares of WilTel common stock to Leucadia and an aggregate of 27,000,000 shares
of WilTel common stock to a grantor trust (the "Residual Trust") among WCG,
WilTel, and Wilmington Trust Corporation, as trustee (the "Residual Trustee") on
behalf of certain creditors of WCG. An additional 1,000,000 shares of WilTel
common stock were issued to WCG in connection with a "channeling injunction"
that could potentially benefit securities holders involved in a class action
proceeding against WCG.
WilTel issued shares of its common stock to Leucadia under the Plan in two
distributions. First, pursuant to a Purchase and Sale Agreement, dated as of
July 26, 2002, between Leucadia and TWC (amended on October 15,
29
2002), Leucadia acquired from TWC certain claims that TWC had against WCG (the
"TWC Assigned Claims") for a purchase price of $180 million paid in the form of
a letter of credit issued by Fleet Bank (the "TWC Letter of Credit") and WilTel
issued 11,775,000 shares of its common stock to Leucadia in satisfaction of such
claims in accordance with the Plan.
Second, pursuant to an Investment Agreement by and among Leucadia, WCG,
and WCL, dated as of July 26, 2002 (amended on October 15, 2002), on the
Effective Date Leucadia invested $150 million in the Company in exchange for
10,225,000 shares of WilTel common stock (the "New Investment"). Leucadia paid
$1,000 of the purchase price in cash to WilTel and delivered the remainder, in
the form of a letter of credit issued by JP Morgan Chase Bank (the "Company
Letter of Credit").
Leucadia delivered the TWC Letter of Credit and the Company Letter of
Credit into an escrow account established pursuant to an Escrow Agreement (the
"Escrow Agreement") dated as of October 15, 2002, among the Company, Leucadia,
TWC, and The Bank of New York as Escrow Agent. The Escrow Agreement provided for
the release of the Letters of Credit (and documents related to the Real Property
Purchase and Sale Agreement) upon receipt, prior to February 28, 2003, of
approval from the FCC for the transfer of control to the Company of the licenses
that had been temporarily issued to WCL prior to the Effective Date. Failure to
obtain FCC approval by February 28, 2003, in accordance with the terms of the
Escrow Agreement would have resulted in an "unwind" of the New Investment and
the purchase of the TWC Assigned Claims. However, following receipt of the FCC
approval on November 25, 2002, the proceeds of the Company Letter of Credit were
paid to the Escrow Agent for disbursement to the Company in accordance with the
terms of the Escrow Agreement, and the proceeds of the TWC Letter of Credit were
paid to the Escrow Agent for disbursement to TWC and the Real Estate Property
Purchase and Sale Agreement documents were released from escrow.
WCG continues to exist as a separate corporate entity, formed in the State
of Delaware, in order to liquidate any residual assets and wind up its affairs.
On the Effective Date, WCG transferred substantially all of its assets to
WilTel. The other Debtor, CG Austria, continues to exist as a separate corporate
entity, incorporated in the State of Delaware, and owned solely by WCL.
The Exit Credit Agreement
On the Effective Date, WCL and the lenders under its credit facility (the
"Lenders") entered into a credit agreement (the "Exit Credit Agreement") that
combined the term loans under the previous credit facility into one loan for
$375 million (paid down throughout the bankruptcy from a pre-petition balance of
$975 million). The Exit Credit Agreement loan will be repaid in installments
beginning in June 2005 through September 2006 and currently bears interest at
either the Prime rate plus a margin of 3.50% or the LIBOR plus a margin of
4.50%, at the Company's option. The Exit Credit Agreement provides a
first-priority security interest in all of the domestic assets of the Company
with the exception of a second-priority mortgage lien on the assets secured in
connection with the OTC Notes.
Pursuant to the Exit Credit Agreement, the Company must meet certain
defined financial targets and stay within aggregate dollar limitations on
certain activities such as indebtedness, investments and capital expenditures.
Although the Company expects to be able to comply with its covenants under the
Exit Credit Agreement, the Company cannot provide assurance that it will stay in
compliance with such covenants due in part to the currently distressed
telecommunications market.
Capitalization, Corporate Governance, and Leucadia Agreements
Pursuant to the Plan and a Stockholders Agreement, dated October 15, 2002,
between Leucadia and the Company (the "Stockholders Agreement"), the Company's
Board of Directors is comprised of four members designated by Leucadia--Ian M.
Cumming, Alan J. Hirschfield, Jeffrey C. Keil and Joseph S. Steinberg; four
members designated by the Official Committee of Unsecured Creditors of WCG--J.
Patrick Collins, William H.
30
Cunningham, Michael Diament and Michael P. Ressner; and the Chief Executive
Officer of the Company, Jeff K. Storey, who was elected as Chief Executive
Officer of the Company and became a member of the Board of Directors on October
31, 2002. Pursuant to the Stockholders Agreement, so long as Leucadia
beneficially owns at least 20% of the outstanding common stock of WilTel, it
will be entitled to nominate four members of the Board of Directors. If Leucadia
beneficially owns less than 20% but more than 10% of the outstanding common
stock of WilTel, it will be entitled to nominate one member to the Board of
Directors. In addition, the Stockholders Agreement provides that, until October
15, 2004, Leucadia will vote all of its shares of WilTel common stock in favor
of Committee designees to the Board. Until October 15, 2004, any replacement of
a Committee designee will occur through a nominating process detailed at Section
3.4 of the Stockholders Agreement.
Pursuant to the Stockholders Agreement, for a period of five years from
the Effective Date of the Plan, Leucadia may not acquire or agree to acquire any
of the Company's securities except (a) with prior approval by a majority of the
members of the Board of Directors that are independent or by holders of a
majority of the Company voting securities that are not owned by Leucadia voting
together as a single class, (b) in connection with certain other acquisitions,
so long as Leucadia would not hold in excess of 49% of the Company's voting
securities following such acquisition or (c) a Permitted Investor Tender Offer
(as defined in the Stockholders Agreement).
The WilTel articles of incorporation (the "Charter") provide that 200
million shares of common stock are authorized for issuance (of which 50 million
shares were issued under the Plan and are outstanding), and 100 million shares
of preferred stock are authorized for issuance (of which no shares are issued
and outstanding).
Leucadia has entered into a Registration Rights Agreement with the Company
by which the Company has granted Leucadia certain rights to obligate the Company
to register for sale under the Securities Act of 1933, the shares owned by
Leucadia or its affiliates, including the shares issued pursuant to the Plan.
Leucadia and the Company have entered into a Stockholder Rights and
Co-Sale Agreement (the "Co-Sale Agreement") by which, among other things,
certain WilTel holders (any of the approximately 2,500 holders who submitted an
affidavit within 90 days after the Effective Date, or their Permitted Transferee
under the Co-Sale Agreement, who maintain beneficial ownership of at least 100
shares of common stock received pursuant to the Plan) will be eligible to
participate in (i) issuances of Securities (as defined in the Co-Sale Agreement)
to Leucadia until the fifth anniversary of the Effective Date and (ii) any
transfer (other than transfers to affiliates of Leucadia and Exempt Transactions
(as defined in the Co-Sale Agreement)) by Leucadia of shares of WilTel common
stock representing 33% or more of the WilTel common stock outstanding. In
addition, two such holders each paid $25,000 to the Company (with the submission
of the affidavit referred to above) to be eligible to participate in proposed
issuances or actual issuances of Other Securities (as defined in the Co-Sale
Agreement) to Leucadia until the fifth anniversary of the Effective Date.
The "Five-Percent Limitation" on Stock Ownership
As required by the Plan, the Charter imposes certain restrictions on the
transfer of "Corporation Securities" (as defined in the Charter, including
common stock, preferred stock, and certain other interests) with respect to
persons who are, or become, five-percent shareholders of the Company, as
determined in accordance with applicable tax laws and regulations (the
"Five-percent Ownership Limitation"). The Five-percent Ownership Limitation
provides that any transfer of, or agreement to transfer, Corporation Securities
prior to the end of the effectiveness of the restriction (as described below)
shall be prohibited if either (y) the transferor holds five percent or more of
the total fair market value of the Corporation Securities (a "Five-percent
Shareholder") or (z) to the extent that, as a result of such transfer (or any
series of transfers of which such transfer is a part), either (1) any person or
group of persons shall become a Five-percent Shareholder, or (2) the holdings of
any Five-percent Shareholder shall be increased, excluding issuances of WilTel
common stock under the Plan and certain other
31
enumerated exceptions. Each certificate representing shares of WilTel common
stock bears a legend that re-states the applicable provisions of the Charter.
The Five-percent Ownership Limitation will not apply to: (i) certain
transactions approved by the WilTel Board, (ii) an acquisition by Leucadia of
shares of the Corporation Securities that, as a percentage of the total shares
outstanding, is not greater than the difference between 49% and the percentage
of the total shares outstanding acquired by Leucadia or any of its subsidiaries
in the Plan, plus any additional Corporation Securities acquired by Leucadia and
its subsidiaries, and (iii) certain other transactions specified in the Charter
if, prior to the transaction, the WilTel Board or a duly authorized committee
thereof determines in good faith upon request of the transferor or transferee
that the transaction meets certain specified criteria.
The Charter also prohibits the issuance of non-voting equity securities.
Additional Effective Date Transactions
In addition, the following transactions, among others, occurred on the
Effective Date pursuant to the Plan (capitalized terms used but not defined
herein have the meaning ascribed to them in the Plan):
- - All of the Restated Credit Documents were executed and delivered and
became effective, and $350 million was paid to the Lenders thereunder.
- - Each of the transactions that comprise the TWC Settlement occurred or were
implemented and became binding and effective in all respects (subject to
the Escrow Agreement), including:
- documents to effect the sale by Williams Headquarters Building
Company of the Building Purchase Assets to WTC pursuant to the Real
Property Purchase and Sale Agreement were deposited into escrow with
The Bank of New York, as Escrow Agent, and subsequently delivered
when the $330 million proceeds of the Leucadia New Investment and
purchase of TWC Assigned Claims were released to the Company and
TWC, respectively, pursuant to the terms of the Escrow Agreement;
- all of the releases contemplated by the TWC Settlement became
binding and effective, including releases whereby WCG, WCG's current
and former directors and officers, and the Committee released TWC
and its current and former directors, officers, and agents; in
addition, TWC released WCG and WCG's current and former directors
and officers, including the claims that TWC had alleged against
WCG's non-debtor subsidiaries; and
- all other transactions contemplated under the TWC Settlement were
consummated.
- - As contemplated by the Settlement Agreement, the confirmation order
provided an injunction with respect to (a) channeling all personal claims
of WCG's unsecured creditors against TWC and deeming them satisfied from
the consideration provided by TWC under the Settlement Agreement; and (b)
channeling all remaining securities actions against WCG's officers and
directors to a "fund" consisting of up to 2% of WilTel's common stock and
the right to collect under WCG's director and officer liability insurance
policies.
- - Pursuant to the Settlement Agreement, TWC transferred to WCG all of its
rights in the "WilTel" and "WilTel Turns Up Worldwide" marks, and in
exchange WCG agreed to amend the term of the Trademark License Agreement,
dated April 23, 2001, between TWC and WCG, to two years following the
Effective Date, at which time the Company would no longer have the right
to use the "Williams" mark, the "Williams Communications" mark, and
certain other "Williams" related marks. The transfer of these rights was
32
effectuated through an Assignment of Rights Agreement between Williams
Information Services Corporation ("WISC") and WCL pursuant to which WISC
agreed to grant, sell, and convey to WCL all of its right, title, and
interest in the United States and Canada to the trademarks "WilTel" and
"WilTel Turns Up Worldwide."
- - WCG has various administrative service and support contracts with TWC. The
Settlement Agreement provides for the continuation of only those contracts
between WCG and the TWC entities that WCG views as favorable (the "TWC
Continuing Contracts"), as well as modification to certain of those TWC
Continuing Contracts to waive any rights to an unfavorable alteration of
contract terms due to the New Investment or the transactions contemplated
by the Plan.
- - All other payments, deliveries and other distributions to be made pursuant
to the Plan or the Restated Credit Documents on or as soon as practicable
after the Effective Date were made or duly provided for.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include "forward-looking statements," which are statements that
discuss the expected future results of the Company based on current and pending
business operations. The Company 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 the Company believes these forward-looking statements are based
on reasonable assumptions, statements made regarding future results are subject
to a number of risks, assumptions, and uncertainties that could cause the
Company's actual results to differ materially from those projected. Also note
that projections are necessarily speculative in nature, and it is often the case
that one or more significant assumptions in projections do not materialize.
Therefore, projections should not be relied upon as fact.
In addition to risk factors set forth in the Company's other filings with
the SEC, the following important factors could cause actual results to differ
materially from any results projected, forecasted, estimated, or budgeted:
A default in the Exit Credit Agreement could result in lenders seizing the
Company's assets.
The Company could default on its obligations under the Exit Credit
Agreement (see Part II "Notes to Consolidated Financial Statements-Note 15.
Debt," below). An event of default could include failing to achieve certain
financial covenants required by the Exit Credit Agreement. Since the Exit Credit
Agreement represents debt secured by assets of the Company, if the Company is
not able to comply with the financial covenants contained in the Exit Credit
Agreement or obtain a waiver for the failure to comply with such covenants from
the Company's lenders, a default could potentially result in the Company's
assets being seized by its lenders.
The Company may continue to operate at a loss.
The Company has historically operated at a loss. The Company may continue
to incur negative operating cash flow and net losses as a result of low prices
or higher costs and may not be able to realize revenues from products and
services that exceed its operating costs. Factors that may impact the Company's
profitability include its ability to manage cash, make capital expenditures,
generate operating cash flow, raise capital in a cost-effective way, meet debt
obligations, and manage operating costs and capital spending without limiting
revenue growth.
33
Continuing weakness in the economy and the telecommunications industry may
impact the Company.
The continuation of the downturn in the United States economy and, in
particular, the telecommunications industry, may have a significant impact on
the Company. Several of the Company's competitors and customers have recently
filed for protection under the bankruptcy laws and the Company may be unable to
collect receivables due to bankruptcies and business difficulties among its
customers. Oversupply of capacity and an ongoing downward trend in bandwidth
prices may continue if the Company's competitors do not successfully
consolidate. Even if they do successfully consolidate, they may do so to the
detriment of the Company. Competitors who successfully complete restructuring or
bankruptcy reorganization processes or who introduce new product offerings may
put the Company at a competitive disadvantage.
The Company may not be able to adapt to changes in the industry or with
customers.
The Company relies on advanced technology in its business and, as a
result, faces multiple risks. The Company may not be able to introduce new
products or technologies to keep up with rapid and significant changes and
developments in the telecommunications industry. The Company may not be able to
adequately adapt to such developments or the cost of adapting to such
developments may not be economically justifiable for the Company.
The Company may not be able to deploy sophisticated technologies on a
local-to-global basis or to expand and enhance the network in response to
customer demands and industry changes. In addition, the introduction of new
products or technologies may reduce the cost or increase the supply of certain
services similar to those that the Company provides or plans to provide.
The Company may not be able to adapt to regulatory or other governmental
conditions.
The Company is subject to significant regulation at the federal, state,
local and international levels. Changes or uncertainties in the regulations
applicable to the Company and the telecommunications industry or delays in
receiving required regulatory approvals may result in higher costs and lower
revenue for the Company. Regulatory constraints, especially in light of the
unavailability of capital, may further hinder "last mile" development and slow
the growth in demand for bandwidth at the retail level, negatively impacting the
Company's ability to sell bandwidth at the wholesale level. Further, changes in
communications, trade, monetary, fiscal and tax policies in the United States
and in foreign markets, including Asia, Europe and South America, may negatively
impact the Company's results of operations.
A significant portion of the Company's revenues is derived from a small
number of high volume customers.
The Company relies on a small number of high-volume customers to generate
revenues and the loss of such customers could have adverse consequences for the
Company. The Company could lose its existing customers to competitors or to
business failures. In particular, the strategic alliance with SBC is a
significant source of revenue for the Company (see Item 1(c) "Narrative
Description of Business--Strategic Alliances and Relationships" above). Loss of
this strategic alliance, pricing pressures, or SBC's inability to obtain
regulatory approval to provide long-distance telecommunications services within
markets in which it currently provides local services would be extremely
detrimental to the Company.
The Company is dependent on a limited number of suppliers and on other
capacity providers.
The Company currently depends on critical services and equipment from a
small number of suppliers. As a result, the loss of even a single supplier could
have a material adverse effect on its business. There is no guarantee that these
suppliers will continue to offer the services and equipment required by the
Company (which
34
may result in an increase in the Company's capital requirements) or that they
will continue to do business with the Company. If the Company cannot obtain
adequate replacement equipment or services from its suppliers or acceptable
alternate vendors, the Company could experience a material impact on its
financial condition and operating results. In addition, the Company relies on
other providers for network capacity beyond what it provides over its own
network and there is a risk that current capacity providers may cease to provide
capacity at economically justifiable rates.
Network failure and delays may result in loss of customers or potential
liability to the Company.
The Company's network uses a collection of communications equipment,
software, operating protocols, and proprietary applications for the
transportation of data among multiple locations. Given the complexity of the
network, it is possible that there could be material disruptions in the
Company's ability to timely turn up service requests, minimize service
interruptions, and meet requirements of customer service level agreements.
Network failures and delays may also result from natural disasters and power
outages. Network failures or delays in data delivery could cause service
interruptions resulting in possible losses to the Company's customers. Such
failures or delays may expose the Company to claims by its customers and may
result in the loss of customers.
The loss of highly qualified personnel may negatively affect the Company's
results of operations.
The Company relies on its key personnel and skilled employees and there is
a risk that the loss of a significant number of key personnel could have
negative effects on the Company's results of operations. The Company may not be
able to attract and hire highly skilled personnel necessary to carry out its
business plan. There is also a risk that management may not be able to adopt an
organizational structure that meets its objectives, including managing costs and
attracting and retaining key employees.
Current and future legal proceedings may have a material impact on the
Company.
Current and future legal and administrative claims and proceedings against
the Company may have severe negative effects on the Company (for a discussion of
current claims, see Item 3. "Legal Proceedings," below). In addition, the
Company may be unable to collect proceeds from the sale of the Solutions
business, especially in light of ongoing disputes with Platinum Equity (see Item
3. "Legal Proceedings," below).
The Company may not be able to execute its business plan.
The respective operating segments of the Company may be unable to
successfully implement key systems, such as order entry systems and service
delivery systems, within currently estimated time frames and budgets, which may
negatively affect the Company's business and profitability. The Company may not
be able to successfully market capacity on its network or, if it is successful
at marketing its capacity, the Company may not be able to derive adequate
revenues.
Terrorist attacks or war may adversely affect the Company's financial
condition and operating results.
The occurrence of terrorist attacks or armed conflicts may directly impact
the Company's facilities or the facilities of the Company's suppliers or
customers. In addition, such attacks or conflicts may result in increased
volatility in the United States and global financial markets. Any of these
occurrences could potentially have a material impact on the Company's financial
condition and operating results.
The Company may not be able to maintain adequate insurance.
Insurance rates and the standards for underwriting may be influenced by
numerous factors outside of the Company's control. For instance, there has been
an increase in insurance rates as a result of the September 11,
35
2001, terrorist attacks and related events. It is possible that the Company may
not be able to maintain, at economically justifiable rates, its existing
policies of insurance. It is also possible that the Company may be unable to
obtain new policies of insurance that are deemed necessary to manage its risks.
The Company may be unable to acquire or maintain rights-of-way necessary
for its network.
The utilization of the Company's network depends on maintaining
rights-of-way from third parties. The Company may be unable to maintain, in a
cost-effective manner, the necessary rights-of-way for its network, resulting in
the loss of a substantial number of rights-of-way or the incurrence of
significant future expenditures to remove facilities and find viable
alternatives upon expiration or termination of such rights-of-way.
Uncertainty or negative publicity may negatively affect the Company's
business.
There is a possibility that uncertainty or adverse publicity concerning
the Company's recent bankruptcy, or negative perceptions about the industry as a
whole, could hinder the Company's ability to obtain new customers or undermine
its commercial relationship with existing customers. Despite a successful
reorganization, current and potential customers may associate the Company's
bankruptcy with negative business implications and misunderstand (or fail to
recognize) the state of the Company's finances and future prospects.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Accordingly, it files periodic
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information may be obtained by visiting the SEC
Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. For more
information about the Public Reference Room, call the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site (http://www.sec.gov) that contains
reports, proxy and information statements, and other information that the
Company files electronically.
You can access financial and other information on WilTel's Internet site
(http://www.wiltelcommunications.com). Through that site, WilTel makes
available, free of charge, copies of its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC.
ITEM 2. PROPERTIES
The WilTel network and its component assets are the principal properties
that WilTel currently operates (see Item 1(c) "Narrative Description of
Business--Network-Properties" for a description of these properties).
The installed fiber-optic cable on the WilTel network is laid under
various rights of way. WilTel has agreements in place for substantially all of
the rights for its network. Almost all of its rights of way extend through at
least 2018.
WilTel owns or leases sites in approximately 200 U.S. cities and towns in
which it locates or plans to locate transmission, routing and switching
equipment. These operational facilities and the sales and administrative office
locations range in size from 2,000 square feet to 750,000 square feet and total
approximately 3,800,000 square feet, including the headquarters building (One
Technology Center) in Tulsa, Oklahoma. One Technology Center provides
approximately 750,000 square feet of office space.
36
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various types of litigation in connection with
its business and operations.
Right of Way Class Action Litigation
A number of suits attempting to achieve class action status seek damages
and other relief from the Company based on allegations that the Company
installed portions of its fiber-optic cable without all necessary landowner
consents. These allegations relate to the use of rights of way licensed by
railroads, state departments of transportation and others controlling
pre-existing right-of-way corridors. The putative members of the class in each
suit are those owning the land underlying or adjoining the right-of-way
corridors. Similar actions have been filed against all major carriers with
fiber-optic networks. It is likely that additional actions will be filed. The
Company believes it obtained sufficient rights to install its cable. It also
believes that the class action suits are subject to challenge on procedural
grounds.
The Company and other major carriers are seeking to settle the class
action claims referenced above relating to the railroad rights of way through an
agreed class action. These companies initially sought approval of a settlement
in a case titled Zografos et al. vs. Qwest Communications Corp., et al., filed
in the U.S. District Court for the District of Oregon on January 31, 2002. On
July 12, 2002, the Oregon Court dismissed the action. Thereafter, on September
4, 2002, an existing case titled Smith, et al., vs. Sprint, et al., pending in
the U.S. District Court for the Northern District of Illinois, was amended to
join the Company and two other telecommunications companies as defendants. On
that same day, the plaintiffs and defendants jointly asked the Court to
preliminarily approve a nationwide class action settlement agreement. The Court
has entered a scheduling order and a hearing on the motion for preliminary
approval has been scheduled for April 7, 2003. If approved, the settlement would
settle the majority of the putative nationwide and statewide class actions
referenced above.
Platinum Equity Dispute
In March 2001, the Company sold its Solutions segment to Platinum Equity
LLC for a sales price that was subject to adjustment based upon a computation of
the net working capital of the business as of March 31, 2001. On August 28,
2001, Platinum Equity LLC sent formal notice that it believes the Company owes
it approximately $47 million arising from a recalculation of the net working
capital of the domestic, Mexican, and Canadian professional services operations
of the Solutions segment. Pursuant to the provisions of the sale agreement, the
parties submitted the dispute to binding arbitration before an independent
public accounting firm. Both parties have completed submission of information to
the arbitrator and are awaiting the arbitrator's decision. The amount currently
in dispute is approximately $55 million. The Company does not believe that a
material adjustment to the net working capital calculation is required. A final
decision is expected by mid-2003.
In September 2002, Platinum Equity filed suit in the District Court of
Oklahoma County, State of Oklahoma, against the Company alleging various
breaches of representations and warranties related to the sale of the Solutions
segment and requesting declaratory action with respect to its right to set-off
its damages for such breaches against the approximate sum of $57 million that it
owes the Company under the terms of a promissory note issued by Platinum Equity
when it purchased the Solutions business. Platinum Equity failed to make the
payment that was due September 30, 2002, and, in October 2002, the Company
notified Platinum Equity that it was in default for its non-payment to the
Company. The Company filed a counterclaim in the lawsuit alleging breach of
contract, breach of guaranty, and conversion. Although the court dismissed the
Company's claim for conversion, the court allowed the Company to plead a claim
for tortious breach of contract. Discovery in this suit is ongoing.
37
Thoroughbred Technology and Telecommunications, Inc. vs. WCL
Thoroughbred Technology and Telecommunications, Inc. ("TTTI") filed suit
on July 24, 2001, against WCL in a case titled Thoroughbred Technology and
Telecommunications, Inc. vs. Williams Communications, LLC f/k/a Williams
Communications, Inc., Civil Action No. 1:01-CV-1949-RLV, pending in the U.S.
District Court for the Northern District of Georgia, Atlanta Division. TTTI
alleged claims that included breach of contract with respect to a fiber-optic
installation project that TTTI was constructing for itself and other parties,
including WCL, with respect to certain conduit segments including a
three-conduit segment between Cleveland, Ohio and Boyce, Virginia. TTTI sought
specific performance to require that WCL take title to the Cleveland-Boyce
segment and pay TTTI in excess of $36 million plus pre-judgment interest for
such purchase. WCL alleged various defenses, including significant warranty and
breach of contract claims against TTTI.
On May 9, 2002, the trial court determined that WCL did not have the right
to terminate the contract with respect to the Cleveland-Boyce segment, but
deferred ruling on TTTI's remedy until a later time. In a series of rulings on
January 27, 2003, the court ordered, among other things, (1) that WCL's claims
against TTTI for breach of contract and construction deficiencies for certain of
the telecommunications routes constructed by TTTI be heard by an arbitration
panel; and (2) that WCL close the purchase of the Cleveland-Boyce segment and
pay TTTI the sum of $36,264,750 plus pre-judgment interest for such purchase.
The court denied WCL's motion for a stay of the proceedings while the
construction claims against TTTI were adjudicated through arbitration and
further denied the Company's request to stay closing on the Cleveland-Boyce
segment pending an appeal of the trial court's decision. WCL sought and obtained
a stay of the trial court's order compelling a closing of the Cleveland-Boyce
segment from the United States Court of Appeals for the 11th Circuit thereby
staying WCL's obligation to close the transaction until the appeal is decided
and further conditioned on the posting of an appropriate supersedeas bond by the
Company. Subsequently, the trial court approved the requested bond in the
approximate amount of $44.1 million. The Company has posted the bond, which was
docketed by the trial court on March 13, 2003. WCL will proceed with its appeal
of the trial court's decision while pursuing its claims of construction defects
against TTTI through arbitration. WCL's arbitrable claims against TTTI aggregate
approximately $70 million although the timetable for arbitration of the claims
remains uncertain. The Company intends to pursue its claims vigorously; however,
the ultimate outcome of this matter cannot be predicted with certainty.
StarGuide
On October 12, 2001, StarGuide Digital Networks ("StarGuide") sued WCG in
the United States District Court for Nevada for infringement of three patents
relating to streaming transmission of audio and video content. Subsequently,
StarGuide added WCL as a party to the action. StarGuide seeks compensation for
past infringement, an injunction against infringing use, and treble damages due
to willful infringement. On July 1, 2002, StarGuide initiated a second patent
suit against WCL with respect to a patent that is a continuation of the patents
at issue in the prior litigation. The two actions have been consolidated. The
Company believes that it has not infringed the patents at issue and intends to
defend its interest vigorously. The Company has also raised various defenses,
including patent invalidity. The parties were engaged in court-sponsored
mediation, but those negotiations failed to result in a settlement. The parties
are proceeding with discovery.
Other Matters
The Company is a party to various other claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
management, upon the advice of legal counsel, the ultimate resolution of all
claims, legal actions, and complaints, after consideration of amounts accrued,
insurance coverage, or other indemnification arrangements, is not expected to
have a materially adverse effect upon the Company's future financial position or
results of operations, although unfavorable outcomes in the items discussed
above could significantly impact the Company's liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
38
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Until March 2002, WCG's Class A common stock was listed on the New York
Stock Exchange ("NYSE"). In March 2002, WCG was delisted from the NYSE due to
the low trading price relative to the NYSE requirements. The stock last traded
on the NYSE on February 28, 2002 at a price of $0.13 per share. WCG began
trading on the over-the-counter bulletin board in March 2002. Pursuant to the
Plan, all outstanding shares of WCG Class A common stock were cancelled and
WilTel issued 50,000,000 shares of WilTel common stock. WilTel's common stock
traded on the over-the-counter bulletin board after emergence until December 4,
2002. Effective December 5, 2002, WilTel's common stock began trading on The
Nasdaq Stock Market, Inc. ("Nasdaq"). At the close of business on February 28,
2003, there were 7,890 beneficial holders of WilTel common stock.
The Company's current debt agreements prohibit the Company from paying
cash dividends on its common stock. No common stock cash dividends were paid in
2002, 2001, or 2000, and management does not expect to pay cash dividends on
common stock in the foreseeable future. It is management's intention to retain
future earnings, if any, to finance the operation and development of its
business. Future dividends, if any, will be determined by the Board of Directors
and will depend on the success of operations, capital needs, financial
conditions, restrictions on the payment of dividends contained in the Company's
debt agreements and other such factors as the Board of Directors may consider.
The high and low sales price ranges (composite transactions) for the WCG
Class A common stock traded on the NYSE under the symbol "WCG" are listed for
the period from January 1, 2002 to February 28, 2002 and the four quarters of
2001.
HIGH LOW
------- --------
January 1, 2002 to February 28, 2002 $ 2.42 $ 0.12
2001
First Quarter ...................... $ 20.63 $ 8.80
Second Quarter ..................... $ 9.35 $ 2.35
Third Quarter ...................... $ 3.24 $ 1.12
Fourth Quarter ..................... $ 3.10 $ 1.11
The high and low sales price ranges (composite transactions) for the WCG
Class A common stock traded on the over-the-counter bulletin board under the
symbol "WCGr" or "WCGrq" for March 11, 2002 to October 15, 2002.
HIGH LOW
------- --------
March 11, 2002 to March 28, 2002 ... $ 0.22 $ 0.13
Second Quarter 2002 ................ $ 0.24 $ 0.01
Third Quarter 2002 ................. $ 0.16 $ 0.01
October 1, 2002 to October 15, 2002 $ 0.02 $ 0.01
The high and low sales price ranges (composite transactions) for WilTel's
common stock traded on the over-the-counter bulletin board under the symbol
"WTELV" or "WTEL" from October 2, 2002 to December 4, 2002.
HIGH LOW
------- --------
October 2, 2002 to December 4, 2002 $ 15.75 $ 6.85
The high and low sales price ranges (composite transactions) for WilTel's
common stock traded on Nasdaq under the symbol "WTEL" are listed for December 5,
2002 to December 31, 2002.
HIGH LOW
------- --------
December 5, 2002 to December 31, 2002 $ 16.77 $ 11.65
39
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data from the audited
consolidated financial statements of the Company for the two months ended
December 31, 2002, the ten months ended October 31, 2002 and for each of the
years ended December 31, 2001, 2000, 1999 and 1998. The information set forth
below is qualified in its entirety by reference to, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included in Item 7 of this Report, the consolidated
financial statements and notes thereto, which have been audited by Ernst & Young
LLP, independent auditors, included in Item 8 of this Report, as well as the
rest of this Report.
The Company's emergence from the chapter 11 proceedings resulted in a new
reporting entity with no retained earnings or accumulated deficit as of October
31, 2002. Accordingly, the Company's consolidated financial statements for
periods prior to November 1, 2002 are not comparable to consolidated financial
statements presented on or subsequent to October 31, 2002. The 2002 financial
results have been separately presented under the label "Predecessor Company" for
periods prior to October 31, 2002 and "Successor Company" for the two-month
period ended December 31, 2002 as required by Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code."
For details on fresh start accounting in connection with the Company's emergence
from the chapter 11 proceedings, see Item 7 of this Report and Note 3 to the
consolidated financial statements.
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------------------------------------
FOR THE TWO FOR THE
MONTHS TEN MONTHS
ENDED ENDED FOR THE YEAR ENDED DECEMBER 31,
DECEMBER 31, OCTOBER 31, --------------------------------------------------------
2002 2002 2001 2000 1999 1998
------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Revenues ................................. $ 191,656 $ 1,000,007 $ 1,185,521 $ 839,077 $ 601,456 $ 375,339
Loss from operations (1) ................. (55,072) (570,491) (3,544,366) (448,671) (246,495) (141,164)
Income (loss) from continuing
operations (1, 2, 3) .................... (61,049) 1,331,195 (3,810,357) (277,688) (328,312) (146,579)
Loss from discontinued
operations (4) .......................... -- -- -- (540,000) (31,389) (39,150)
Cumulative effect of change in
accounting principle (5) ................ -- (8,667) -- -- -- --
Net income (loss) ........................ (61,049) 1,322,528 (3,810,357) (817,688) (359,701) (185,729)
Preferred stock dividends and
amortization of preferred
stock issuance costs .................... -- (5,473) (17,568) (4,956) -- --
Net income (loss) attributable
to common stockholders .................. (61,049) 1,317,055 (3,827,925) (822,644) (359,701) (185,729)
Basic and diluted earnings
(loss) per share:
Income (loss) from continuing
operations attributable to
common stockholders (2, 3) ............ (1.22) 2.66 (7.86) (.61) (.79) (.37)
Loss from discontinued operations (4) ... -- -- -- (1.16) (.08) (.10)
Cumulative effect of change in
accounting principle (5) ............... -- (.01) -- -- -- --
Net income (loss) attributable to common
stockholders ........................... (1.22) 2.65 (7.86) (1.77) (.87) (.47)
Common dividends paid per share .......... -- -- -- -- -- --
Total assets (1, 6) ...................... 2,062,273 5,992,026 7,409,285 6,057,703 2,022,136
Long-term debt (2, 3, 7) ................. 517,986 5,838,779 4,526,706 2,965,385 615,352
Redeemable cumulative
convertible preferred stock (2) ......... -- 242,338 240,722 -- --
Total stockholders' equity
(deficit) (6, 7) ........................ 689,731 (1,449,042) 1,213,272 2,112,600 1,007,682
F-1
(1) See Item 7 of this Report and Note 7 to the consolidated financial
statements for a discussion of asset impairments and restructuring
charges.
(2) See Note 4 to the consolidated financial statements for a discussion of
reorganization items incurred by WCG of $2.1 billion of income for the ten
months ended October 31, 2002 as a result of commencing chapter 11
proceedings.
(3) See Note 15 to the consolidated financial statements for a discussion of
WCG's gain related to the purchase of a portion of its senior redeemable
notes in the open market in 2001 totaling $296.9 million. This gain was
originally reported as an extraordinary gain in 2001 and reclassified to
continuing operations in 2002 based on the early adoption of Statement of
Financial Accounting Standards No. 145, "Recission of Financial Accounting
Standards Board Statement No. 4, 44, and 64, Amendment of Financial
Accounting Standards Board No. 13, and Technical Corrections," (see Note 1
to the consolidated financial statements).
(4) See Note 5 to the consolidated financial statements for a discussion of
WCG's sale of the Solutions segment in first quarter 2001. The sale was
accounted for as a disposal of a business segment with the associated
operating results and financial position of the segment segregated and
reported as discontinued operations for the prior periods.
(5) See Note 14 to the consolidated financial statements for a discussion of
the cumulative effect of change in accounting principle associated with
the adoption of Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations."
(6) See Item 7 of this Report and Note 3 to the consolidated financial
statements for a discussion of fresh start accounting under the provisions
of Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code."
(7) See Note 16 to the consolidated financial statements for a discussion of
the agreement entered into with The Williams Companies, Inc. that, among
other things, resulted in the conversion of approximately $1.2 billion of
debt for WCG's equity in 2001.
F-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Accounting standards require information in financial statements about the
accounting principles and methods used and the risks and uncertainties inherent
in significant estimates. The Company believes that its financial statements and
footnote disclosures present fairly, in all material respects, an accurate
application of generally accepted accounting principles ("GAAP"). In addition,
disclosures are required about the accounting policies that management believes
are the most critical; that is, the accounting policies that are both most
important to the portrayal of the Company's financial condition and results and
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company believes that the following are among the most
critical judgment areas in the application of its accounting policies.
Adoption of fresh start accounting
The Company emerged from the chapter 11 proceedings in October 2002 and
implemented fresh start accounting under the provisions of Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code," effective October 31, 2002. Under SOP 90-7, the reorganization
value of the Company was allocated to its assets and liabilities, its
accumulated deficit was eliminated and the Company recorded the value of the new
equity issued pursuant to the Plan. In addition, changes in accounting
principles that would be required in the financial statements within twelve
months following emergence from the chapter 11 proceedings were adopted in the
Company's fresh start financial statements.
In conjunction with formulating the Plan, the Company was required to
determine its post-confirmation reorganization value. The Company's financial
advisors assisted in the valuation utilizing methodologies that were based upon
the cash flow projections and business plan as contemplated by the Predecessor
Company. These methodologies incorporated discounted cash flow techniques, a
comparison of the Company and its projected performance to market values of
comparable companies and a comparison of the Company and its projected
performance to values of past transactions involving comparable entities. The
cash flow valuations utilized five-year projections discounted at a weighted
average cost of capital of approximately 27.5%, including a terminal value equal
to a multiple of projected fifth year operating results, together with the net
present value of the five-year projected cash flows. Based upon these analyses,
upon emergence from the chapter 11 proceedings, the reorganization value for the
Company was estimated to be approximately $1.3 billion. This reorganization
value was reflected in the Company's consolidated balance sheet upon emergence
from the chapter 11 proceedings as post-emergence debt of approximately $573
million and an equity value of $750 million.
The allocation of net reorganization value to assets and liabilities
required significant judgment and assumptions. For example, the fair value
adjustment to reflect the new carrying value for deferred revenue of
approximately $253 million required a determination of fair value for
transactions having limited activity in the current telecommunications market
environment. The fair value adjustment considered market indicators related to
pricing, quotes from third parties, pricing for comparable transactions and the
legal obligation of the Company to provide future services. In addition, an $84
million liability, on a net present value basis, was recorded for unfavorable
long-term commitments that are either above the current market rates for similar
transactions (net of certain contracts that are below current market rates) or
for telecommunications capacity that is not required based on the Company's
revised business plans. These commitments primarily consist of real estate
leases and domestic and international capacity contracts. The accrual for these
unfavorable commitments includes significant assumptions pertaining to future
market prices, future capacity utilization, the ability to enter into subleasing
arrangements and that the commitments will not be terminated prior to their
expiration dates. The accrued liability will be amortized on a straight-line
basis over the life of the commitments.
F-3
The Company hired an appraiser to assist in the determination of the fair
value of its long-lived assets and to allocate its reorganization value to the
various asset classes. The appraiser considered several factors, such as the
replacement cost of equivalent property, adjusted for functional obsolescence
factors, the remaining expected useful life of the assets and estimates of
future network capacity utilization. The fair value allocation of the Company's
long-lived assets to various asset classifications also required significant
judgments and assessments by management and the appraiser.
The implementation of Statement of Financial Accounting Standards ("SFAS")
No. 143 at the time of adopting fresh start accounting also required significant
judgment and assumptions, primarily related to the cost and timing of cash flows
required to satisfy the Company's future legal obligations. In addition,
judgment was required in determining the appropriate discount rate to use in
establishing the liability on a net present value basis.
Actual results in the future that differ from assumptions used in
developing the fair value adjustments at the time of adopting fresh start
accounting and at the time of recording the asset retirement obligation under
the provisions of SFAS 143 will impact future results of operations and the
financial position of the Company.
Impairments of long-lived assets
Accounting standards require the Company to evaluate and test
recoverability of long-lived assets or asset groups, including goodwill and
other intangibles whenever events or changes in circumstances indicate that its
carrying value amount may not be recoverable. Whenever these "impairment
indicators" are present, the Company must estimate the future cash flows
attributable to the assets and determine whether or not future cash flows, net
of direct cash flows attributable to the generation of those revenues, result in
recovery of the Company's basis in those assets. If so, there is no impairment.
If not, then the Company must record an impairment charge equal to the
difference between its basis in the assets and the fair value of the assets. The
rules further require the Company to determine whether it plans to use the
assets or hold the assets for sale.
During the first three quarters of 2002, the Company compared estimated
future net cash flows associated with its long-lived assets with the remaining
basis of such long-lived assets on a going concern basis, and determined its
remaining basis in its long-lived assets was recoverable through future cash
flows. Estimates of future net cash flows used for potential impairment analysis
were consistent with estimates used by the Company's financial advisors to
arrive at the Company's reorganization value and included assumptions regarding
decreased prices for the Company's products and services, significant increases
in sales quantities in periods beyond 2002 and that the Company would continue
to have adequate liquidity. The adoption of fresh start accounting resulted in a
reduction in the carrying value of the Company's long-lived assets by
approximately $2.4 billion. The reduction was the result of the allocation of
the Company's reorganization value to its assets and liabilities, which was
based on a discounted cash flow methodology, as required, whereas the impairment
test utilized undiscounted cash flows, as required. As a result, no impairment
was necessary during the first three quarters of 2002, and a reduction in the
carrying value of long-lived assets was necessary at the adoption of fresh start
accounting. The Company will continue to evaluate and test the recoverability of
its long-lived assets as facts and circumstances warrant.
Covenant compliance
Upon emerging from the chapter 11 proceedings, the Company's debt
consisted primarily of the Exit Credit Agreement, OTC Notes and PowerTel
Limited's bank facility (see Notes 2 and 15 of the consolidated financial
statements). The Company's ability to classify the non-current portion of these
obligations as long-term is dependent on its ability to meet the covenant
requirements contained in its debt agreements or to obtain waivers or amendments
in the event the Company is unable to comply with its covenants. As of December
31, 2002, the Company was in compliance with its Exit Credit Agreement and OTC
Notes covenants; however, as discussed below, PowerTel was not in compliance
with a fourth quarter 2002 covenant.
F-4
As of December 31, 2002, PowerTel Limited ("PowerTel"), a consolidated
subsidiary, had an outstanding balance under its bank facility of 78.5 million
Australian dollars (or $44.4 million). Subsequent to December 31, 2002, PowerTel
informed its bank group that it was in violation of its covenants. WilTel has
entered into discussions with a third party, pursuant to which the third party
would purchase WilTel's ownership interest in PowerTel and provide additional
funding to PowerTel. In addition, PowerTel is in discussion with its bank group
to modify its covenant requirements prospectively. PowerTel's bank group is not
currently pursuing any remedies for failing to comply with the covenant
violations and has waived the covenant breaches. However, since there is no
assurance that this possible sale will be consummated or that PowerTel will be
able to renegotiate its bank facility on satisfactory terms or secure additional
funding, WilTel has classified the PowerTel bank facility as short-term debt as
of December 31, 2002. Even though WilTel consolidates PowerTel, it is not
legally obligated to provide additional funding to PowerTel and has no current
intention to do so.
With the exception of PowerTel, the Company believes it will stay in
compliance with its covenants in 2003, although no assurance can be given that
it will be able to do so. The most significant covenant requires achieving
certain operating targets, defined as EBITDA targets in the Exit Credit
Agreement. If the Company does not meet these EBITDA targets, or other
covenants, it would need to obtain a waiver from its bank group for the covenant
violation. If the Company was not successful in obtaining a waiver, the
principal and accrued and unpaid interest under the Exit Credit Agreement
($375.0 million as of December 31, 2002) would become immediately due and
payable.
Collections on notes receivable
As of December 31, 2002, the Company has notes receivable outstanding of
approximately $54 million, plus accrued interest, primarily related to the 2001
sale of the domestic, Mexican and Canadian professional services operations of
the Company's former Solutions segment to Platinum Equity LLC ("Platinum
Equity"). In April 2002, Platinum Equity paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001. On August 28, 2001, Platinum Equity sent formal
notice to the Company that it believes the Company owes it approximately $47
million arising from a recalculation of the net working capital related to the
sale. Pursuant to the provisions of the sale agreement, the parties submitted
the dispute to binding arbitration before an independent public accounting firm.
Both parties have completed submission of information to the arbitrator and are
in the process of responding to the arbitrator's final questions. The amount
currently in dispute has increased to approximately $55 million. The Company
does not believe that a material adjustment to the net working capital
calculation is required. A final decision is expected by mid-2003.
In September 2002, Platinum Equity filed suit against the Company alleging
various breaches of representations and warranties related to the sale of the
Solutions segment and requesting declaratory action with respect to its right to
set-off its damages for such breaches against the approximate sum of $57 million
that it owes the Company under the terms of a promissory note issued by Platinum
Equity when it purchased the Solutions business. Platinum Equity failed to make
the payment that was due September 30, 2002, and, in October 2002, the Company
notified Platinum Equity that it was in default for its non-payment to the
Company. The Company intends to vigorously pursue the collection of the entire
unpaid note balance from Platinum Equity. While the Company cannot provide
assurance with respect to the ultimate resolution with Platinum Equity, the
Company believes its future expense exposure to these issues relative to its
carrying value as of December 31, 2002 is between zero and $30 million.
Revenue recognition/collectibility of receivables
The Company recognizes capacity revenues monthly as services are provided
or as revenues are earned. As a result of accounting rules that became effective
in June 1999, revenues from the Company's dark fiber indefeasible rights of use
("IRU") transactions are accounted for as operating leases and recognized over
the life of the agreement. The Company has recognized one-time dark fiber IRU
revenues only to the extent that title was transferred or to the extent that the
fulfillment of the order was pursuant to an obligation that existed prior to
June 1999.
F-5
As part of the Company's strategy to be the low cost provider in its
industry, the Company has entered into transactions such as buying, selling,
swapping, and/or exchanging capacity, conduit, and fiber to complete and
compliment its network. The Company does not recognize or record one-time
capacity or service revenues from these transactions. Depending upon the terms
of the agreement, certain transactions are accounted for as pure asset swaps
with no revenue and no cost recognition, while certain other transactions are
accounted for as both revenue and cost over the corresponding length of time for
each agreement. If the exchange is not essentially the culmination of an earning
process, accounting for an exchange of a nonmonetary asset is based on the
recorded amount of the nonmonetary asset relinquished, and therefore no revenue
and cost is recorded in accordance with Accounting Principles Board ("APB")
Opinion No. 29. Examples of transactions cited by APB Opinion No. 29 that are
not the culmination of the earnings process include exchange of productive
assets for similar productive assets or for an equivalent interest in similar
productive assets.
The Company recognizes revenues when collectibility is reasonably assured.
In the current distressed telecom environment, significant judgment and
assumptions are required in order to determine whether or not collectibility is
reasonably assured. In addition to the normal factors a company considers, the
Company also makes judgments regarding the likelihood of customers meeting
covenants or obtaining financing. In addition, the Company assesses, in some
cases, the likelihood of customers filing chapter 11 proceedings and the outcome
of bankruptcy filings once they occur. The Company believes it has the
appropriate reserves recorded for exposures resulting from these uncertainties.
As of December 31, 2002, the Company's gross accounts receivable was $230.1
million and the allowance for doubtful accounts was $49.4 million.
Contingencies
The Company accrues for contingent losses in accordance with SFAS No. 5,
"Accounting for Contingencies," which states that an estimated loss should be
accrued if the contingent loss is probable and the amount of loss can be
reasonably estimated. Significant judgment is required to estimate the ultimate
outcome of the contingency in determining the appropriate amount to accrue. The
Company's contingencies are discussed in Note 21 to the consolidated financial
statements, and the Company has accrued estimated liabilities of $93.1 million
as of December 31, 2002 related to these contingencies.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Management discusses the development and disclosure of significant
estimates with the Audit Committee of the Board of Directors. No material
changes were made to the Company's critical accounting estimates for the periods
presented other than as discussed herein.
TRANSACTIONS WITH SBC
SBC is the Company's largest customer and was a related party due to the
membership of an officer of SBC on the Company's Board of Directors. In first
quarter 2002, the officer of SBC resigned his membership on the Company's Board
of Directors. SBC purchases domestic voice and data long-distance and local
transport services from the Company. Revenues from SBC were approximately $515
million, $402 million and $169 million in 2002, 2001 and 2000, respectively,
representing 47%, 37% and 24% of Network's revenues in 2002, 2001 and 2000,
respectively. The Company 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.
Purchases from SBC were approximately $180 million, $150 million and $52 million
in 2002, 2001 and 2000, respectively.
F-6
SBC may terminate the provider agreements if any of the following occurs:
- the Company begins to offer retail long distance voice transport or
local exchange services on its network, except in limited
circumstances;
- the Company materially breaches its agreements with SBC, causing a
material adverse effect on the commercial value of the relationship
to SBC; or
- the Company has a change of control without SBC's consent.
On September 25, 2002, the Bankruptcy Court approved a stipulation
agreement (the "Stipulation Agreement") between the Company and SBC conditioned
upon the consummation of the Plan. The Stipulation Agreement provided for the
necessary SBC approval of the Plan and resolved change-of-control issues that
SBC had raised regarding WCG's spin-off from TWC. At the same time, SBC and the
Company executed amendments to their provider agreements that more clearly
specify the products and services for which the Company is the preferred
provider, establish pricing methodologies, and establish tracking mechanisms and
criteria for ensuring performance of both parties under the agreements. SBC
notified the Company prior to the Effective Date that it believed the conditions
to the Stipulation Agreement may not have been satisfied because, among other
things, the terms of the Escrow Agreement (described in Item 1 of this Report
and Note 2 - Bankruptcy Proceedings - Transactions on the Effective Date) may
have constituted a material modification of the Plan. In December 2002, the
terms of the Escrow Agreement were satisfied. Therefore, the Company believes
all conditions to effectiveness of the Stipulation Agreement have been satisfied
and that the Company and SBC will be able to continue their business
relationship as contemplated under the amendments to the provider agreement.
The provider agreements state that upon SBC receiving authorization from
the FCC to provide long distance services in any state in its traditional
telephone exchange service region, SBC has the option to purchase from WilTel at
net book value all voice or data switching assets that are physically located in
that state and of which SBC has been the primary user. The option must be
exercised within one year of the receipt of authorization. WilTel then would
have one year after SBC's exercise of the option to migrate traffic to other
switching facilities, install replacement assets and complete other transition
activities. This purchase option would not permit SBC to acquire any rights of
way that WilTel uses for its network or other transport facilities it maintains.
This option has not been exercised and is no longer available for some states
where early authorization was received. Upon termination of the provider
agreements with SBC, SBC has the right in certain circumstances to purchase
voice or data switching assets, including transport facilities, of which SBC's
usage represents 75 percent or more of the total usage of these assets.
The Company may terminate the provider agreements if either of the
following occurs:
- SBC has a change of control; or
- there is a material breach by SBC of the agreements, causing a
material adverse effect on the commercial value of the relationship
to the Company.
Either party may terminate a particular provider agreement if the action
or failure to act of any regulatory authority materially frustrates or hinders
the purpose of that agreement. There is no monetary remedy for such a
termination. In the event of termination due to its actions, the Company could
be required to pay SBC's transition costs of up to $200 million. Similarly, in
the event of termination due to SBC's actions, SBC could be required to pay the
Company's transition costs of up to $200 million, even though the Company's
costs may be higher.
CORPORATE GOVERNANCE AND MANAGEMENT CHANGES
Pursuant to the Plan, the Company has a new, nine member Board of
Directors. Leucadia and the Official Committee of Unsecured Creditors of WCG
each designated four members, while the ninth seat was allocated to
F-7
the Chief Executive Officer. As of October 31, 2002, Jeff K. Storey was elected
as Chief Executive Officer of the Company. In addition, upon emergence from the
chapter 11 proceedings, the officer positions titled Chief Financial and
Corporate Services Officer and Chief Operating Officer positions were
eliminated, and the officer positions titled Principal Financial Officer,
General Counsel and Treasurer positions were replaced (see Item 10 of this
Report).
RESULTS OF OPERATIONS
The Company emerged from the chapter 11 proceedings on October 15, 2002
and adopted fresh start accounting as of October 31, 2002 to coincide with its
normal monthly financial closing cycle. The effect of the Company emerging from
bankruptcy and the adoption of fresh start accounting include:
- The Company recorded a $2.4 billion reduction in the book
value of property, plant and equipment and reduced the
estimated useful lives of these assets. The effect of these
adjustments will result in materially lower depreciation and
amortization expense in future periods as compared to periods
prior to the adoption of fresh start accounting. Depreciation
and amortization expense averaged approximately $46 million
per month for the ten months ended October 31, 2002 compared
to an average of approximately $22 million per month for the
two months ended December 31, 2002, a decline of 52%.
- The Company recorded a new carrying value for deferred revenue
of approximately $253 million. As a result of this adjustment,
revenues recognized by the Successor Company will decrease by
approximately $11 million in 2003.
- The Company recorded an $84 million liability for unfavorable
long-term commitments that are not representative of the
current market rates for similar transactions or for
telecommunications capacity that is not required based on the
Company's revised business plans. As a result of this
adjustment, operating expense recorded by the Successor
Company will decrease by approximately $9 million in 2003.
- The Company's debt decreased from approximately $5.9 billion
as of December 31, 2001 to approximately $573 million upon
emergence from the chapter 11 proceedings. This reduction is
primarily due to the discharge of $4.6 billion of debt as part
of the chapter 11 proceedings and prepayments of $600 million
on the credit facility as part of the restructuring plan. The
Company's interest expense will significantly decrease as a
result of these factors and is expected to approximate $30
million a year at current interest rates and debt levels.
The Company had workforce reductions and attrition in excess of 1,500
employees in 2002 as part of a restructuring of its operations and staffing
levels. The Company has also managed to reduce other non-employee expenses
which, when aggregated with the impact of the workforce reductions, will result
in lower operating costs in 2003 as compared to operating costs at the beginning
of 2002 and earlier years.
Despite the reduction in the Company's costs described above, the Company
has continued to incur losses during the period subsequent to its emergence from
the chapter 11 proceedings and the adoption of fresh start accounting. The
Company expects these losses will continue, in part because the rates the
Company charges for its services have declined, consistent with industry-wide
experience, and downward pricing may continue if current market conditions do
not change. In addition, the Company has experienced a loss of customers due to
customer bankruptcies, industry consolidation and lower demand. The Company
expects it will continue to incur losses until it can grow the volume of its
business or increase the prices it charges for its services. The projected
losses in its current business plan are higher than contemplated in the
bankruptcy plan. Although the Company believes that its current business plan
will enable it to attain profitability in the future, the Company is unable to
predict with certainty if, and when, it will be able to report profitable
results of operations.
F-8
The following discussion is presented on a separate basis for the
Predecessor and Successor Companies. The Company's emergence from the chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of October 31, 2002. Accordingly, the Company's
consolidated financial statements for periods prior to October 31, 2002 are not
comparable to consolidated financial statements presented on or subsequent to
October 31, 2002. The results of operations for the "Predecessor Company" for
periods prior to November 1, 2002 and the "Successor Company" for the two-month
period ended December 31, 2002 are presented and discussed separately, as
presented in Item 8 - Financial Statements and Supplementary Data.
The table below summarizes the Company's consolidated results from
operations:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------ ----------- --------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS)
Revenues:
Network ................................... $ 173,667 $ 911,599 $ 1,077,840 $ 705,020
Vyvx ...................................... 23,061 121,145 164,702 168,761
Eliminations .............................. (5,072) (32,737) (57,021) (34,704)
----------- ----------- ----------- -----------
Total revenues ......................... 191,656 1,000,007 1,185,521 839,077
Operating expenses:
Cost of sales ............................. 171,605 862,405 1,029,455 823,272
Selling, general and administrative ....... 27,712 179,321 285,771 270,071
Provision for doubtful accounts ........... 787 20,118 26,020 9,959
Depreciation and amortization ............. 44,294 460,989 467,118 185,024
Asset impairments and restructuring charges 8,572 28,483 2,979,925 --
Other expense (income), net ............... (6,242) 19,182 (58,402) (578)
----------- ----------- ----------- -----------
Total operating expenses ............... 246,728 1,570,498 4,729,887 1,287,748
----------- ----------- ----------- -----------
Loss from operations ........................ (55,072) (570,491) (3,544,366) (448,671)
Net interest expense ........................ (7,221) (195,602) (454,724) (221,116)
Investing income (loss):
Interest and other ......................... 511 20,327 47,829 59,434
Equity losses .............................. -- (2,710) (35,522) (20,297)
Income (loss) from investments ............. -- 1,575 (95,722) 294,136
Minority interest in loss of
consolidated subsidiary .................... 802 12,530 25,533 24,492
Gain on the purchase of long-term debt ...... -- -- 296,896 --
Other income (loss), net .................... (66) 564 (160) 227
Reorganization items, net ................... -- 2,066,032 -- --
----------- ----------- ----------- -----------
Income (loss) before income taxes ........... (61,046) 1,332,225 (3,730,236) (311,795)
Benefit (provision) from income taxes ....... (3) (1,030) (50,121) 34,107
----------- ----------- ----------- -----------
Income (loss) from continuing operations .... (61,049) 1,331,195 $(3,810,357) $ (277,688)
=========== =========== =========== ===========
CONSOLIDATED RESULTS
TWO MONTHS ENDED DECEMBER 31, 2002 - SUCCESSOR COMPANY
The Company's loss from continuing operations of $61.0 million was
primarily attributable to loss from operations of $55.1 million and net interest
expense of $7.2 million. Network and Vyvx accounted for $50.7 million and $4.4
million, respectively, of the loss from operations. As discussed above, the
Company is
F-9
continuing to experience losses subsequent to the emergence from the chapter 11
proceedings and expects these losses will continue until it can grow the volume
of its business or increase the prices it charges for its services.
TEN MONTHS ENDED OCTOBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 -
PREDECESSOR COMPANY
The Company's income from continuing operations was $1.3 billion for the
ten months ended October 31, 2002 primarily as a result of a net gain for
reorganization items of $2.1 billion partially offset by a loss from operations
of $570.5 million, and net interest expense of $195.6 million. Included in the
loss from operations for the ten months ended October 31, 2002 are restructuring
charges of $28.5 million primarily related to severance expense. Interest
expense includes interest on the Company's credit facility and other
miscellaneous debt for the entire year and interest on the debt that was
discharged with the chapter 11 proceedings through April 22, 2002. The Company
ceased accruing interest expense upon commencing the chapter 11 proceedings on
$4.6 billion of pre-petition debt that was later discharged. The Company's loss
from continuing operations was $3.8 billion for the year ended December 31, 2001
primarily as a result of asset impairments and restructuring charges of $3.0
billion, loss from operations, excluding asset impairment and restructuring
charges, of $564.4 million and net interest expense of $454.7 million, partially
offset by a gain on the purchase of long-term debt of $296.9 million.
Excluding asset impairment and restructuring charges, Network and Vyvx
accounted for $457.5 million and $74.5 million, respectively, of the loss from
operations for the ten months ended October 31, 2002 and $496.4 million and
$65.7 million, respectively, of the loss from operations for the year ended
December 31, 2001.
NETWORK
The table below summarizes Network's results from operations:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------ ----------- --------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS)
Revenues:
Capacity and other ........................ $ 168,615 $ 879,011 $ 1,021,199 $ 670,745
Intercompany .............................. 5,052 32,588 56,641 34,275
----------- ----------- ----------- -----------
Total revenues ......................... 173,667 911,599 1,077,840 705,020
Operating expenses:
Cost of sales ............................. 159,725 783,567 932,714 726,125
Selling, general and administrative ....... 22,297 141,879 241,463 221,281
Provision for doubtful accounts ........... 592 18,838 24,394 8,752
Depreciation and amortization ............. 41,589 415,422 433,032 154,288
Asset impairments and restructuring charges 6,423 19,689 2,928,648 --
Other expense (income), net ............... (6,241) 9,394 (57,316) (526)
----------- ----------- ----------- -----------
Total operating expenses ............... 224,385 1,388,789 4,502,935 1,109,920
----------- ----------- ----------- -----------
Loss from operations ........................ $ (50,718) $ (477,190) $(3,425,095) $ (404,900)
=========== =========== =========== ===========
TWO MONTHS ENDED DECEMBER 31, 2002 - SUCCESSOR COMPANY
Network revenues of $173.7 million for the two months ended December 31,
2002 included data and voice services provided to SBC of approximately $73
million.
Network's gross margin was $13.9 million (or 8%) for the two months ended
December 31, 2002 and $128.0 million (or 14%) for the ten months ended October
31, 2002. The reduction in gross margin as a percentage of revenue was due to
lower data margins.
F-10
Network's selling, general and administrative expenses were $22.3 million
for the two months ended December 31, 2002 (or 13% as a percentage of revenues)
compared to selling, general and administrative expense for the ten months ended
October 31, 2002 of $141.9 million (or 16% as a percentage of revenues). The
reduction as a percentage of revenues is primarily due to workforce reductions
and attrition that occurred through 2002, although the full effect of workforce
reductions that occurred in late 2002 will not be reflected in results until
2003.
Network's depreciation and amortization expense was $41.6 million for the
two months ended December 31, 2002. The Company established a new basis for its
fixed assets and shortened the lives of certain of its assets. The Company
depreciates its long-lived assets on a straight-line basis over estimated useful
lives ranging from 2 to 30 years.
Network's restructuring charges for the two months ended December 31, 2002
consisted of severance related expenses.
Network's other income for the two months ended December 31, 2002
primarily included a settlement gain related to the termination of an agreement
of $6.0 million.
TEN MONTHS ENDED OCTOBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 -
PREDECESSOR COMPANY
Network revenues of $911.6 million for the ten months ended October 31,
2002 included data and voice services provided to SBC of approximately $442
million and $158.6 million attributable to the September 28, 2001 acquisition of
Ameritech Global Gateway Services ("AGGS"), of which $61.4 million related to
SBC and is included in the SBC revenues amount above. On an annualized basis,
Network's revenues for the ten months ended October 31, 2002 would have been
$1.1 billion, which is comparable to the year ended December 31, 2001 revenue.
Increases in revenue are primarily attributable to higher data and voice
services provided to SBC and an increase attributable to the acquisition of
AGGS. These increases were offset by significant customer disconnects which were
primarily the result of customer bankruptcies, consolidation and lower demand.
In addition, further reductions in revenue resulted from lower pricing for new
circuit turn-ups, lower revenues from Vyvx due to price re-rates to reflect
current market conditions and the absence of revenues from dark fiber
transactions entered into prior to June 30, 1999 and accordingly accounted for
as sales type leases.
Network's gross margin was $128.0 million (or 14%) for the ten months
ended October 31, 2002 compared to $145.1 million (or 13%) for the year ended
December 31, 2001. Gross margins as a percentage of revenues stayed relatively
flat due to the absence of lease costs associated with ADP (see Note 2 to the
consolidated financial statements), lower ad valorem taxes as a result of
changes in fair values of the associated assets, increased margin attributable
to the acquisition of AGGS and reduced payroll related expenses as a result of
workforce reductions in 2002, partially offset by lower data revenues as a
result of customer disconnects, lower margins from services provided to Vyvx and
the absence of margins from dark fiber transactions treated as sales type
leases.
Network's selling, general and administrative expenses were $141.9 million
(or 16% as a percentage of revenues) for the ten months ended October 31, 2002
compared to $241.5 million (or 22% as a percentage of revenues) for the year
ended December 31, 2002. This decrease as a percentage of revenue is primarily
due to reduced payroll related expenses from workforce reductions in 2002 and
reduced incentive expense. The decrease is also due to the absence of costs
associated with the spin-off from TWC in April 2001, in addition to certain
corporate costs from TWC, partially offset by charges incurred for retention
bonus agreements with former executive officers (see Note 20 to the consolidated
financial statements).
F-11
Network's provision for doubtful accounts was $18.8 million for the ten
months ended October 31, 2002 compared to $24.4 million the year ended December
31, 2001. The ten months ended October 31, 2002 included a bad debt provision of
$6 million relating to a settlement agreement between the Company and a former
officer (see Note 20 to the consolidated financial statements). Excluding the $6
million provision, bad debt as a percentage of revenues was 1% for the ten
months ended October 31, 2002 compared to 2% for the year ended December 31,
2001. The reduction as a percentage of revenues is primarily due to the onset of
significant increases in provisions in third quarter of 2001 associated with
general depressed market conditions in the telecommunications industry.
Network's depreciation and amortization was $415.4 million for the ten
months ended October 31, 2002. On an annualized basis for the ten months ended
October 31, 2002, Network's depreciation and amortization would have been $498.5
million compared to $433.0 million for the year ended December 31, 2001. The
increase is primarily a result of assets placed in service throughout 2001 and
the addition of $750 million of assets associated with the ADP, partially offset
by the impairment of long-lived assets recorded in fourth quarter of 2001.
Network's restructuring charges for the ten months ended October 31, 2002
primarily consisted of severance related expenses. Network's asset impairments
and restructuring charges for the year ended December 31, 2001 consisted of the
following impairments to long-lived assets: dark fiber and conduit
(approximately $1.9 billion), optronics equipment (approximately $336 million),
international assets and undersea cable (approximately $256 million), wireless
capacity, net (approximately $215 million), abandoned projects and other
(approximately $211 million) and goodwill and other intangible assets
(approximately $35 million).
Network's other expense for the ten months ended October 31, 2002
primarily included a $40.8 million accrual for contingent liabilities, partially
offset by settlement gains of $26.2 million related to the termination of
various agreements. Network's other income for the year ended December 31, 2001
primarily included $46.1 million related to the sale of its single strand of lit
fiber to WorldCom, Inc. and settlement gains of $28.7 million related to the
termination of various agreements, partially offset by expenses related to a
loss provision on notes receivable of $12.0 million.
VYVX
The table below summarizes Vyvx's results from operations:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------ ----------- --------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS)
Revenues .................................... $ 23,061 $ 121,145 $ 164,702 $ 168,761
Operating expenses:
Cost of sales ............................. 16,952 111,575 153,762 131,851
Selling, general and administrative ....... 5,415 37,391 41,155 42,033
Provision for doubtful accounts ........... 195 1,280 1,626 1,207
Depreciation and amortization ............. 2,705 45,567 33,607 30,269
Asset impairments and restructuring charges 2,149 8,363 51,277 --
Other expense (income), net ............... (1) (139) 206 (48)
----------- ----------- ----------- -----------
Total operating expenses ............... 27,415 204,037 281,633 205,312
----------- ----------- ----------- -----------
Loss from operations ........................ $ (4,354) $ (82,892) $ (116,931) $ (36,551)
=========== =========== =========== ===========
F-12
TWO MONTHS ENDED DECEMBER 31, 2002 - SUCCESSOR COMPANY
Vyvx's revenues of $23.1 million for the two months ended December 31,
2002 primarily includes revenues relating to the transmission of news and
sporting events (approximately 50% of total revenues) and advertising and
syndicated programming distribution services (approximately 35% of total
revenues). Remaining revenues were comprised of revenues relating to satellite
and content collection, management and distribution product lines. Subsequent to
December 31, 2002, the Company exited the content collection, management and
distribution product lines of Vyvx, which had revenues and a gross margin loss
for the two months ended December 31, 2002 of $1.3 million and $1.6 million,
respectively.
Vyvx's gross margin was $6.1 million (or 26%) for the two months ended
December 31, 2002 and $9.6 million (or 8%) for the ten months ended October 31,
2002. The increase as a percentage of revenues is primarily due to the absence
of costs associated with the early termination of long-term satellite
agreements, lower costs associated with the acquisition and integration of iBEAM
and reduced payroll related expenses as a result of workforce reductions in
2002.
Vyvx's selling, general and administrative expenses were $5.4 million (or
23% as a percentage of revenues) for the two months ended December 31, 2002
compared to $37.4 million (or 31% as a percentage of revenues) for the ten
months ended October 31, 2002. The reduction as a percentage of revenues is
primarily due to lower costs associated with the acquisition and integration of
iBEAM and lower payroll related expenses from workforce reductions in 2002.
Vyvx's depreciation and amortization expense was $2.7 million for the two
months ended December 31, 2002. The Company established a new basis for its
fixed assets in connection with fresh start accounting.
Vyvx's restructuring charges for the two months ended December 31, 2002
consisted of severance related expenses.
TEN MONTHS ENDED OCTOBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 -
PREDECESSOR COMPANY
Vyvx's revenues were $121.1 million for the ten months ended October 31,
2002. On an annualized basis, Vyvx's revenues for the ten months ended October
31, 2002 would have been $145.4 million compared to $164.7 million for the year
ended December 31, 2001. The reduction in revenues is primarily due to a
decrease in the transmission of news events and a decrease in satellite
business, partially offset by higher content collection, management and
distribution product lines as a result of the iBEAM acquisition in December
2001. The decrease in revenues associated with news events is primarily a result
of migrating certain significant customers beginning in third quarter 2002 to a
new lower-priced compressed service in line with industry trends, higher
revenues in 2001 from coverage of the terrorist attacks and the loss of business
during WCG's bankruptcy proceedings.
Vyvx's gross margin was $9.6 million (or 8%) for the ten months ended
October 31, 2002 compared to $10.9 million (or 7%) for the year ended December
31, 2001. Gross margins as a percentage of revenues stayed relatively flat
primarily due to lower costs from Network because of price re-rates to reflect
current market conditions, reduced payroll as a result of workforce reductions
in 2002 and lower costs from exiting long-term transponder lease commitments.
These improvements to margin are partially offset by the decrease in the
transmission of news event revenues discussed above, costs associated with early
termination of long-term satellite lease agreements and costs associated with
the acquisition and integration of iBEAM. Subsequent to December 31, 2002, the
Company exited the content collection, management and distribution product lines
of Vyvx, which had revenues and a gross margin loss for the ten months ended
October 31, 2002 of $12.5 million and $11.3 million, respectively.
F-13
Vyvx's selling, general and administrative expenses were $37.4 million (or
31% as a percentage of revenues) for the ten months ended October 31, 2002
compared to $41.2 million (or 25% as a percentage of revenues) for the year
ended December 31, 2001. This increase as a percentage of revenues is primarily
a result of higher costs associated with the acquisition and integration of
iBEAM, partially offset by lower payroll related expenses from workforce
reductions in 2002.
Vyvx's depreciation and amortization expense was $45.6 million for the ten
months ended October 31, 2002. On an annualized basis for the ten months ended
October 31, 2002, Vyvx's depreciation and amortization expense would have been
$54.7 million compared to $33.6 million for the year ended December 31 2001.
This increase is primarily due to assets placed in service in 2002 relating to
content collection, management and distribution product lines and as a result of
the acquisition of iBEAM, partially offset by the absence of amortization
expense as the Company fully impaired its satellite and advertising distribution
operations goodwill in 2001.
Vyvx's asset impairments and restructuring charges for the ten months
ended October 31, 2002 primarily consisted of severance related expenses and
$2.2 million from the early termination of a satellite lease agreement. Vyvx's
asset impairments and restructuring charges for the year ended December 31, 2001
represented an impairment of goodwill associated with its satellite and
advertising distribution operations of $11.3 million and $40.0 million,
respectively.
CONSOLIDATED NON-OPERATING COSTS
TWO MONTHS ENDED DECEMBER 31, 2002 - SUCCESSOR COMPANY
The Company's net interest expense was $7.2 million for the two months
ended December 31, 2002 and represents interest expense relating to its credit
facility and other miscellaneous debt.
TEN MONTHS ENDED OCTOBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 -
PREDECESSOR COMPANY
The Company's net interest expense was $195.6 million for the ten months
ended October 31, 2002. On an annualized basis for the ten months ended October
31, 2002, net interest expense would have been $234.7 million compared to $454.7
million for the year ended December 31, 2001. The decrease is primarily due to
the Company ceasing the accrual of interest expense on liabilities discharged in
the chapter 11 proceedings as discussed in Note 2 to the consolidated financial
statements partially offset by a significant decrease in capitalized interest
due to the completion of assets under construction.
The Company's interest and other investing income was $20.3 million for
the ten months ended October 31, 2002. On an annualized basis for the ten months
ended October 31, 2002, interest and other investing income would have been
$24.4 million compared with $47.8 million for the year ended December 31, 2001.
The decrease in interest and other investing income is primarily due to a
reduction in short-term interest rates and lower average short-term investment
balances in 2002 compared to 2001.
The Company's equity losses were $2.7 million for the ten months ended
October 31, 2002. The Company's equity losses were $35.5 million for the year
ended December 31, 2001, which primarily represents $20.0 million of equity
losses related to an investment the Company entered into with iBEAM in third
quarter 2001 and equity losses relating to the Company's economic interest in
Algar Telecom Leste, S. A. ("ATL") which was sold in July 2001.
Income from investments for the ten months ended October 31, 2002 of $1.6
million included $0.9 million in dividends received from a cost-based investment
and gains from sales of certain marketable equity securities. Loss from
investments in 2001 of $95.7 million included a loss of $207.6 million related
to write-downs of
F-14
certain investments resulting from management's determination that the decline
in the value of these investments was other than temporary. This loss was
partially offset by a gain of $45.1 million from the sale of the Company's
remaining economic interest in ATL to America Movil, S.A. de C.V., gains of
$40.9 million realized from the termination of cashless collars on certain
marketable equity securities and net gains of $23.2 million from sales of
certain marketable equity securities.
In the second half of 2001, a wholly owned subsidiary of the Company
purchased $551.0 million of the Company's senior redeemable notes in the open
market at an average price of 43% of face value. The purchase resulted in a gain
of $296.9 million including the recognition of deferred costs and debt discounts
related to the purchased senior redeemable notes.
The Company's reorganization items for the ten months ended October 31,
2002 of $2.1 billion includes a gain on debt discharged of $4.3 billion and a
gain recognized from the forgiveness of interest related to the Trust Notes of
$73.9 million. These gains were partially offset by fresh start valuation
adjustments of $2.2 billion, the write-off of unamortized debt issuance costs,
preferred stock issuance costs and debt discounts of $102.4 million,
professional fees of $65.3 million, retention bonus agreements with former
officers of $12.9 million and retention incentive expense of $12.1 million.
The Company's tax provision for the ten months ended October 31, 2002 is
significantly less than the provision expected from applying the federal
statutory rate to pre-tax income primarily because the book gain recorded from
the debt discharged in the chapter 11 proceedings is not taxable. Reductions
during 2002 and 2001 in the fair value of marketable equity securities reduced
the associated deferred tax liabilities creating $1 million and $50 million of
net deferred tax assets, respectively, for which a valuation allowance was
recorded and reflected in the tax provision above. The Company has fully
reserved its net deferred tax asset as of October 31, 2002 and December 31, 2001
since its recoverability from future taxable income has not been demonstrated.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
CONSOLIDATED RESULTS
The Company's loss from continuing operations increased $3.5 billion due
to an increase in loss from operations of $3.1 billion, a decrease in investing
income of $416.7 million, an increase in net interest expense of $233.6 million
and an increase of $84.2 million related to the tax provision, partially offset
by the gain on the purchase of the Company's long-term debt of $296.9 million.
Excluding asset impairments and restructuring charges of $3.0 billion in
2001, Network and Vyvx accounted for $91.5 million and $29.1 million,
respectively, of the increase in loss from operations while Other decreased $4.9
million. Other included various foreign and domestic equity and cost-based
investments and the costs to manage these investments.
NETWORK
Network revenues increased $372.8 million, or 53%, primarily attributable
to data and voice services provided to SBC of approximately $402 million in 2001
compared to approximately $169 million in 2000 and an increase of $47.4 million
attributable to the acquisition of AGGS as of September 28, 2001, of which $14.5
million related to SBC and is included in the SBC revenues amount above. The
remaining increase is attributable to sales to new customers as well as expanded
sales to existing customers, both domestic and international, partially offset
by price re-rates to reflect current market conditions, customer disconnects and
$53.3 million lower revenues from dark fiber transactions entered into prior to
June 30, 1999 and accordingly accounted for as sales type leases.
Network had a gross profit of $145.1 million in 2001 while Network's costs
of sales exceeded revenues by
F-15
$21.1 million in 2000. The continued improvement in Network's gross profit was
primarily a result of revenue growth described above and greater on-net
utilization, partially offset by increased payroll related expenses.
Network's selling, general and administrative expenses increased $20.2
million, or 9%, primarily due to an increase in payroll related expenses.
Network's selling, general and administrative expenses decreased to 22% in 2001
as a percentage of revenues from 31% in 2000. Network's provision for doubtful
accounts increased $15.6 million primarily due to the growth in its customer
base and general market conditions in the telecommunications industry.
Network's depreciation and amortization increased $278.7 million primarily
as a result of assets placed in service since December 31, 2000, as well as in
fourth quarter 2000.
Network's asset impairments and restructuring charges in 2001 were $2.9
billion consisting of the following categories: dark fiber and conduit
(approximately $1.9 billion), optronics equipment (approximately $336 million),
international assets and undersea cable (approximately $256 million), wireless
capacity, net (approximately $215 million), abandoned projects and other
(approximately $211 million) and goodwill and other intangible assets
(approximately $35 million).
Network's other income increased $56.8 million primarily related to the
sale of the single strand of lit fiber, which WCG had retained when it sold the
majority of its predecessor network to WorldCom in 1995, of $46.1 million and
settlement gains of $28.7 million related to the termination of various
agreements, partially offset by expenses related to a loss provision on notes
receivable of $12.0 million.
VYVX
Vyvx's revenues decreased $4.1 million, or 2%, primarily due to a decrease
in satellite business, partially offset by higher revenues from content,
collection, management and distribution product lines and the transmission of
broadcast news events.
Vyvx's gross profit decreased to $10.9 million in 2001 from $36.9 million
in 2000. Gross margin decreased to 7% in 2001 from 22% in 2000. The decrease in
gross profit is primarily due to costs associated with the development of the
content collection, management and distribution product lines and a lower gross
profit relating to its satellite business.
Vyvx's selling, general and administrative expenses decreased $0.9
million, or 2%, due primarily to lower expenses in existing Vyvx activities
partially offset by an increase in payroll related and professional services
expenses associated with the development of content collection, management and
distribution product lines.
Vyvx's depreciation and amortization expense increased $3.3 million, or
11%, due primarily to assets placed in service since December 31, 2000 relating
to content collection, management and distribution product lines.
Vyvx's asset impairments and restructuring charges in 2001 represents an
impairment of goodwill associated with its satellite and advertising
distribution operations of $11.3 million and $40.0 million, respectively.
CONSOLIDATED NON-OPERATING COSTS
The Company's net interest expense increased $233.6 million as a result of
increased borrowings, some at higher interest rates, to finance operations and
capital expenditures and decreased interest capitalized primarily due to fewer
assets under construction. In addition to the $750 million obligation under the
asset defeasance program included in the Company's consolidated balance sheet as
of December 31, 2001, the Company's total debt also increased $634.6 million
from December 31, 2000 to December 31, 2001, which primarily reflects the $1.4
billion principal amount of the Trust Notes issued in March 2001, borrowings of
$450.0 million under the Company's credit facility in April 2001 and the sale
and subsequent leaseback of the Company's headquarters
F-16
building and other ancillary assets for $276.0 million in September 2001. These
items are partially offset by the exchange of the $975.6 million TWC note for
WCG's equity in February 2001 and the purchase by the Company of $551.0 million
of its senior redeemable notes in third and fourth quarter 2001.
The Company's interest and other investing income in 2001 decreased $11.6
million due to a reduction in short-term interest rates partially offset by
higher average short-term investment balances in 2001 compared to 2000.
The Company's equity losses in 2001 increased $15.2 million due primarily
to $20.0 million of equity losses related to its equity investment in iBEAM in
third quarter 2001, which was acquired out of bankruptcy in December 2001. This
increase is partially offset by a decrease of $10.5 million in equity losses
related to the Company's share of cumulative losses attributable to an equity
method investment exceeding its investment balance in fourth quarter 2000. As a
result, the Company suspended recording equity losses related to the investment
with the exception of any additional financing activity.
Loss from investments in 2001 of $95.7 million includes a loss of $207.6
million related to write-downs of certain investments resulting from
management's determination that the decline in the value of these investments
was other than temporary. This loss was partially offset by a gain of $45.1
million from the sale of the Company's remaining economic interest in ATL to
America Movil, S.A. de C.V., gains of $40.9 million realized from the
termination of cashless collars on certain marketable equity securities and net
gains of $23.2 million from sales of certain marketable equity securities.
Income from investments in 2000 of $294.1 million includes a gain of
$214.7 million from the conversion of shares of common stock of Concentric
Network Corporation owned by the Company into shares of common stock of XO
Communications, Inc. pursuant to a merger of those companies completed in June
2000 and net gains of $93.7 million related to the sales of certain marketable
equity securities. In addition, there were gains of $16.5 million related to the
partial sale of the Company's interest in ATL and receipt of a $3.7 million
dividend from a cost-based investment, partially offset by $34.5 million of
write-downs of certain investments resulting from management's determination
that the decline in the value of these investments was other than temporary.
In the second half of 2001, a wholly-owned subsidiary of the Company
purchased $551.0 million of the Company's senior redeemable notes in the open
market at an average price of 43% of face value. The purchase resulted in a gain
of $296.9 million including the recognition of deferred costs and debt discounts
related to the purchased senior redeemable notes.
The Company's tax provision in 2001 is significantly different than the
benefit expected from applying the federal statuary rate to pre-tax losses
primarily due to a valuation allowance established for its net deferred tax
assets. The valuation allowance fully reserves the Company's net deferred tax
assets. Reductions during 2001 in the fair value of marketable equity securities
reduced the associated deferred tax liabilities, creating a $50 million net
deferred tax asset for which a valuation allowance was recorded and reflected in
the tax provision above. The Company recorded a $34.1 million tax benefit in
2000 primarily due to changes in various temporary differences including changes
in deferred revenue balances that resulted in a fully reserved net deferred tax
asset as of December 31, 2000.
F-17
LIQUIDITY AND CAPITAL RESOURCES
ACTIVITY THROUGH DECEMBER 31, 2002
As of December 31, 2002, the Company had $291.3 million of cash and cash
equivalents compared to $1 billion (including short-term investments) as of
December 31, 2001.
Cash used in operating activities was $134.5 million for the year ended
December 31, 2002. Included in this amount are interest payments of
approximately $125 million relating to the Company's long-term debt and payments
of approximately $100 million relating to severance, retention bonus agreements
and professional services provided to the Company as a result of its chapter 11
proceedings.
In February 2002, America Movil prepaid its non-interest bearing note of
$90 million from the sale of ATL by paying a discounted amount of $88.8 million.
In addition, in April 2002, Platinum Equity paid $30 million ($21 million in
principal and $9 million in interest) on its $75 million promissory note from
the sale of Solutions in 2001. The cash received from both of these note
receivables is included in the cash used in operating activities amount
discussed above. The remaining balance of approximately $54 million in principal
and approximately $3 million in interest from Platinum Equity was due September
2002 and has not yet been received. The Company cannot provide assurance that it
will collect this amount due to the dispute discussed in Item 4 of this Report
and Note 21 to the consolidated financial statements.
Cash used in financing activities was $469.7 million for the year ended
December 31, 2002. Under the terms of the Interim Amendment to the Company's
credit facility, the Company prepaid $200 million in April 2002 and $50 million
in July 2002. Under the terms of Exit Credit Agreement, the Company prepaid $350
million upon emergence from its chapter 11 proceedings. In addition, principal
payments relating to the headquarters building and other ancillary assets along
with other debt and capital lease obligations of approximately $37 million were
made during the year ended December 31, 2002. These payments were partially
offset by $150 million of cash proceeds received in December 2002 from Leucadia
for its investment in WilTel common stock.
In February 2002, the Company advanced PowerTel 16 million Australian
dollars (or $8.3 million) in the form of a subordinated loan to satisfy certain
conditions of the restructuring plan with PowerTel's bank group due to
PowerTel's violation of two covenant requirements for the three months ended
December 31, 2001. Subsequent to December 31, 2002, PowerTel informed its bank
group that it was in violation of its financial covenants for the three months
ended December 31, 2002. WilTel has entered into discussions with a third party,
pursuant to which the third party would purchase WilTel's ownership interest in
PowerTel. In addition, PowerTel is in discussion with its bank group to modify
its covenant requirements prospectively. PowerTel's bank group is currently not
pursuing any remedies for failing to comply with the covenant violations and has
waived the covenant breaches. However, since there is no assurance that this
possible sale will be consummated or that PowerTel will be able to renegotiate
its bank facility on satisfactory terms or secure additional funding, WilTel has
classified the PowerTel bank facility as short-term as of December 31, 2002.
Even though WilTel consolidates PowerTel, it is not legally obligated to provide
additional funding to PowerTel and has no current intention to do so. Any
proceeds from a sale are not expected to significantly impact the Company's
liquidity position or results of operations.
Capital expenditures of $83.3 million were incurred for the year ended
December 31, 2002 along with payments on accrued liabilities associated with
capital expenditures, partially offset by proceeds received from tax refunds,
settlements and asset sales of $49.6 million.
Debt Discharged from Chapter 11
As discussed in Note 2 to the consolidated financial statements, on
October 15, 2002, the Company emerged from chapter 11 proceedings under the
Bankruptcy Code. As part of the Plan, approximately $4.6 billion in debt
F-18
was discharged, comprised of approximately $2.4 billion principal on its Senior
Redeemable Notes, approximately $1.4 billion principal amount under the Trust
Notes, and approximately $754 million related to the ADP claims. Interest relief
with these obligations approximated $420 million on an annual basis. In
addition, approximately $243 million of accrued interest related to the
discharged debt and other general unsecured claims were discharged as part of
the Plan.
FUTURE CASH REQUIREMENTS
2003 and 2004
The Company's current focus is to retain its existing business by
providing a high quality of service, to obtain new business if it can be done on
a profitable basis, to reduce its operating expenses to the greatest extent
possible, and to conserve liquidity. As of December 31, 2002, the Company had
$291.3 million of cash and cash equivalents to meet its cash requirements and
believes that it has sufficient liquidity to meet its needs through 2004. The
Company has $375 million of debt under its Exit Credit Agreement and
approximately $142 million of debt under the OTC Notes. Approximately $157
million of this debt matures during 2005. Unless the Company is able to generate
significant cash flows from operations through revenue growth, expense
reductions or some combination of both, it is likely that new capital will have
to be raised to meet its maturing debt obligations in 2005.
The Company expects cash requirements for 2003 and 2004 to total
approximately $145 million consisting of the following:
- capital expenditures of approximately $130 million;
- debt service obligations, including interest, of approximately $71
million; and
- remaining restructuring-related payments of approximately $24
million; partially offset by
- cash expected to be generated from its operating and investing
activities, including cash from asset sales, dark fiber transactions
and other capacity sales of approximately $80 million.
The Company currently estimates it will spend approximately $65 million
for capital expenditures in both 2003 and 2004 primarily to enhance and expand
products and service offerings. Actual expenditures may be different from the
Company's estimates if business requirements vary from those currently
contemplated in the Company's business plan. In addition, the acquisition of new
customers or the expansion of the business activities of existing customers
could significantly impact the Company's estimated capital expenditure
requirements.
Debt service obligations consist of interest and principal payments
relating to the Exit Credit Agreement and OTC Notes, along with other debt and
capital lease obligations. Interest payments of approximately $30 million are
scheduled in both 2003 and 2004 and principal payment obligations of
approximately $7 million and $4 million are scheduled for 2003 and 2004,
respectively. Since WilTel is not legally required to provide additional funding
to PowerTel and has no intention to do so as discussed in the Critical
Accounting Policies section above, the debt service obligations relating to
PowerTel are excluded from these amounts.
Projected restructuring related payments primarily include remaining
payments for retention bonus agreements with former officers and retention
incentive awards discussed in Note 20 to the consolidated financial statements
and severance payments related to fourth quarter 2002 workforce reductions.
The Company's net operating and investing activities consists of a
projected use of cash of approximately $10 million in 2003 and a projected
source of cash of $90 million in 2004. Included in these amounts is cash
expected from asset sales, dark fiber transactions and other capacity sales of
$35 million in both 2003 and 2004.
F-19
As discussed elsewhere in this Report and in Note 21 to the consolidated
financial statements, on January 27, 2003, the court in which the Thoroughbred
Technology and Telecommunications, Inc. ("TTTI") litigation is pending, ordered
the Company to pay $36.3 million plus pre-judgment interest (approximately $40.8
million in total) in connection with that litigation discussed elsewhere in this
Report and in Note 21 to the consolidated financial statements. This order is
currently on appeal to the 11th Circuit Court of Appeals. The Company has posted
a $44 million bond, which covers the full amount of the judgment, plus interest,
plus an additional $3.3 million to cover one full year of interest pending the
outcome of the Company's appeal. In addition, the Company has filed its demand
for arbitration related to its claims against TTTI for construction deficiencies
and intends to pursue the appeal and its arbitration claims vigorously.
As discussed elsewhere in this Report and in Note 21 to the consolidated
financial statements, the Company is in a dispute with Platinum Equity regarding
the 2001 sale of the domestic, Mexican and Canadian professional services
operations of the Company's former Solutions segment to Platinum Equity.
Platinum Equity has asserted that the Company owes it approximately $55 million
arising from a required recalculation of net working capital. Pursuant to the
provisions of the sale agreement, the parties submitted this dispute to binding
arbitration before an independent public accounting firm and are awaiting the
arbitrator's decision. The Company does not believe that a material adjustment
to the net working capital calculation is required.
Platinum Equity also has filed suit against the Company alleging various
breaches of representations and warranties related to the sale of the Solutions
segment and requesting declaratory action with respect to its right to set-off
its damages for such breaches against the approximate sum of $57 million that it
owes the Company under the terms of a promissory note issued by Platinum Equity
when it purchased the Solutions business. Platinum Equity failed to make the
payment that was due September 30, 2002, and, in October 2002, the Company
notified Platinum Equity that it was in default for its non-payment to the
Company. The Company intends to vigorously pursue the collection of the entire
unpaid note balance from Platinum Equity.
In the aggregate, the projected cash requirements assume that the ultimate
resolution of the Platinum Equity, TTTI and other contingencies will not result
in a material use or source of funds in 2003 and 2004. However, unfavorable
outcomes related to these contingencies could increase the Company's projected
cash requirements by $40 million in 2003.
Factors which could impact the Company's ability to have sufficient
liquidity to conduct its business are its ability to generate sufficient sales
to new and existing customers, changes in the competitive environment of the
markets that it serves and changes in technology. In addition, the ultimate
resolution of certain contingencies, including the TTTI litigation and the
Platinum Equity dispute referred to above and described in Part 1 of this Report
and in Note 21 to the consolidated financial statements, and the Company's
ability to successfully generate liquidity through asset and capacity sales
could have a potential adverse impact on the Company's liquidity position.
Contractual Cash Obligations
Contractual cash obligations of $1.1 billion as of December 31, 2002
consisted of the following:
TOTAL 2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
(IN MILLIONS)
Long-term debt ........................ $ 521.9 $ 4.7 $ 3.0 $ 157.0 $ 265.6 $ 1.6 $ 90.0
Capital lease obligations ............. 3.2 2.4 .6 .1 .1 -- --
Operating lease obligations ........... 491.0 59.2 51.0 49.3 40.4 38.1 253.0
Asset purchase obligations ............ 33.7 32.1 1.6 -- -- -- --
Operations and maintenance obligations 48.8 12.7 4.8 3.3 2.8 2.8 22.4
Other long-term contractual obligations 25.3 19.5 2.0 1.9 1.9 -- --
-------- -------- -------- -------- -------- -------- --------
Total contractual cash obligations .... $1,123.9 $ 130.6 $ 63.0 $ 211.6 $ 310.8 $ 42.5 $ 365.4
======== ======== ======== ======== ======== ======== ========
F-20
Long-term debt consists primarily of obligations under the Exit Credit
Agreement of $375.0 million and the OTC Notes of $141.7 million. Since WilTel is
not legally required to provide additional funding to PowerTel and has no
current intention to do so as discussed above and in the Critical Accounting
Policies section above, the PowerTel debt service obligations were excluded from
the table above. Capital lease obligations consist primarily of equipment
leases. The Company's operating lease obligations consist primarily of
telecommunications property and rights of way leases for the domestic network.
Asset purchase obligations relate primarily to network equipment and capacity on
sub-sea cable systems. Operations and maintenance obligations relate primarily
to equipment maintenance and maintenance on purchased fiber routes that are used
in operations. Other long-term contractual obligations relate primarily to the
Company's retention bonus agreements, employee incentive program and outstanding
severance payments.
The Company has no off-balance sheet arrangements.
The Company believes that its estimates of cash requirements for 2003 and
2004 are based on estimates and assumptions that are reasonable and that its
contractual cash obligations can be satisfied based on these estimates and
assumptions. However, any estimate of future results is inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control. No representations can be or are
made that the Company's actual results will not be significantly different from
the Company's estimates.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's market risk arises principally from interest rate risk on
its debt, consisting primarily of the Exit Credit Agreement and the OTC Notes.
The Company's remaining outstanding debt balance as of December 31, 2002
consists of approximately $419 million (or 74%) in variable rate debt and
approximately $150 million (or 26%) in fixed rate debt. The variable rate debt
primarily consists of a $375.0 million long-term variable rate credit facility
which bears interest at either the Prime rate plus a margin of 3.5% or LIBOR
plus a margin of 4.5%, at the Company's option, and will be repaid in
installments beginning in June 2005 through September 2006. In July 2004, the
margin, in each case, will increase by 1%.
None of the Company's market risk sensitive instruments require it to
manage or hedge the risks related to interest rate movements, and the Company
currently does not mitigate the risk through the use of interest rate swaps or
other derivative instruments. However, in the future the Company may choose to
manage its risk associated with interest rate movements through an appropriate
balance of fixed- and variable-rate obligations. To maintain an effective
balance of fixed- and variable-rate obligations, the Company may elect to enter
into specific interest rate swaps or other derivative instruments as deemed
necessary.
F-21
The following tables provide information as of December 31, 2002 and 2001
about the Company's market rate risk sensitive instruments. The table presents
principal cash flows and weighted-average interest rates by expected maturity
dates. The table below excludes the PowerTel bank facility due to the reasons
discussed above as well as the effect of paid in kind interest of $29.6 million
in 2006 related to the OTC Notes as discussed in Note 15 to the consolidated
financial statements.
FAIR VALUE
DECEMBER 31,
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
------ ------ ------ ------ ------ ---------- ------- ------------
(DOLLARS IN MILLIONS)
LIABILITIES
Variable rate long-term debt,
including current portions .. $ -- $ -- $ 156 $ 219 $ -- $ -- $ 375 $ 375
Average interest rate ..... PRIME PRIME PRIME PRIME
+3.5 +4.5 +4.5 +4.5
or or or or
LIBOR LIBOR LIBOR LIBOR
+4.5 +5.5 +5.5 +5.5
Fixed rate long-term debt,
including current portions... $ 7 $ 4 $ 1 $ 47 $ 1 $ 90 $ 150 $ 150
Average interest rate ....... 7.9% 8.6% 9.2% 9.9% 7.00% 7.00%
FAIR VALUE
DECEMBER 31,
2002 2003 2004 2005 2006 THEREAFTER TOTAL 2001
------ ------ ------ ------ ------ ---------- ------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Short-term investments,
excluding marketable
equity securities ......... $ 894 $ -- $ -- $ -- $ -- $ -- $ 894 $ 894
Average interest rate ....... 4.1%
Notes receivable, net ....... $ 179 $ -- $ -- $ -- $ -- $ -- $ 179 $ 179
Average interest rate ....... 8.8%
LIABILITIES
Fixed rate long-term debt,
including current portions
High yield public debt .... $ -- $ -- $ -- $ -- $ -- $2,449 $2,449 $1,026
Average interest rate ....... 11.1% 11.1% 11.1% 11.1% 11.1% 11.1%
Bank debt .................. $ -- $ -- $1,400 $ -- $ -- $ -- $1,400 $ 1,400
Average interest rate ....... 8.25% 8.25% 8.25%
Variable rate long-term debt,
including current portions
Long-term credit facility . $ 37 $ 171 $ 256 $ 292 $ 219 $ -- $ 975 $ 670
Average interest rate ..... LIBOR LIBOR LIBOR LIBOR LIBOR
+3.00 +3.00 +3.00 +3.00 +3.00
Asset defeasance program ...... $ -- $ -- $ -- $ -- $ -- $ 750 $ 750 $ 750
Average interest rate (1)
Sale and subsequent leaseback . $ 29 $ 29 $ 26 $ 18 $ 17 $ 150 $ 269 $ 269
Average interest rate ..... LIBOR LIBOR LIBOR LIBOR LIBOR LIBOR
+2.75 +2.75 +2.75 +2.75 +2.75 +2.75
(1) Interest was primarily based on average daily commercial paper rates
F-22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Auditors ...................................... F-24
Consolidated Balance Sheets as of December 31, 2002 (Successor Company) and 2001
(Predecessor Company) .............................................................. F-25
Consolidated Statements of Operations for the two months ended December 31, 2002
(Successor Company), the ten months ended October 31, 2002 (Predecessor Company) and
the years ended December 31, 2001 and 2000 (Predecessor Company) ................... F-26
Consolidated Statements of Stockholders' Equity (Deficit) for the two months ended
December 31, 2002 (Successor Company), the ten months ended October 31, 2002
(Predecessor Company) and the years ended December 31, 2001 and 2000 (Predecessor
Company) ........................................................................... F-27
Consolidated Statements of Cash Flows for the two months ended December 31, 2002
(Successor Company), the ten months ended October 31, 2002 (Predecessor Company) and
the years ended December 31, 2001 and 2000 (Predecessor Company) ................... F-29
Notes to Consolidated Financial Statements ............................................. F-31
Quarterly Financial Data (Unaudited) ................................................... F-73
F-23
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
WilTel Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of WilTel
Communications Group, Inc. as of December 31, 2002 (Successor Company) and 2001
(Predecessor Company), and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the period from November 1,
2002 to December 31, 2002 (Successor Company), and for the period from January
1, 2002 to October 31, 2002 and years ended December 31, 2001 and 2000
(Predecessor Company). Our audits also included the financial statement
schedules listed in the Index at Item 15a. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and 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 consolidated financial position of WilTel
Communications Group, Inc. at December 31, 2002 (Successor Company) and 2001
(Predecessor Company), and the consolidated results of its operations and its
cash flows for the period from November 1, 2002 to December 31, 2002 (Successor
Company), and for the period from January 1, 2002 to October 31, 2002 and the
years ended December 31, 2001 and 2000 (Predecessor Company), in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the financial statement schedules when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 14 to the consolidated financial statements,
effective October 31, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143, Asset Retirement Obligations.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 14, 2003
F-24
WILTEL COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
AS OF DECEMBER 31,
-----------------------------
2002 2001
----------- -----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 291,288 $ 116,038
Short-term investments ................................................. -- 904,813
Receivables less allowance of $49,379,000 ($41,362,000 in 2001) ........ 180,768 243,075
Notes receivable less allowance of $2,424,000 ($12,000,000 in 2001) .... 55,114 178,601
Net assets held for sale ............................................... -- 20,659
Prepaid assets and other ............................................... 25,525 21,768
----------- -----------
Total current assets .................................................... 552,695 1,484,954
Investments ............................................................. -- 11,555
Property, plant and equipment, net ...................................... 1,460,010 4,353,213
Other assets and deferred charges ....................................... 49,568 142,304
----------- -----------
Total assets ............................................................ $ 2,062,273 $ 5,992,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ....................................................... $ 184,759 $ 363,670
Deferred income ........................................................ 61,312 75,286
Accrued liabilities .................................................... 235,782 373,119
Long-term debt due within one year ..................................... 51,503 72,488
----------- -----------
Total current liabilities ............................................... 533,356 884,563
Long-term debt .......................................................... 517,986 5,838,779
Long-term deferred income ............................................... 178,978 401,546
Other liabilities ....................................................... 136,932 28,935
Minority interest in consolidated subsidiary ............................ 5,290 44,907
Contingent liabilities and commitments
WCG 6.75% redeemable cumulative convertible preferred stock; $0.01 par
value per share; 500.0 million shares authorized; 5.0 million shares
outstanding in 2001; aggregate liquidation preference of $250,000,000 in
2001.................................................................... -- 242,338
Stockholders' equity (deficit):
WCG Class A common stock, $0.01 par value, 1 billion shares authorized,
491.0 million shares outstanding in 2001 ............................. -- 4,910
WilTel common stock, $0.01 par value, 200 million shares authorized, 50
million shares outstanding in 2002 ................................... 500 --
Capital in excess of par value ......................................... 749,500 3,862,465
Accumulated deficit .................................................... (61,049) (5,304,906)
Accumulated other comprehensive income (loss) .......................... 780 (11,511)
----------- -----------
Total stockholders' equity (deficit) .................................... 689,731 (1,449,042)
----------- -----------
Total liabilities and stockholders' equity (deficit) .................... $ 2,062,273 $ 5,992,026
=========== ===========
See accompanying notes.
F-25
WILTEL COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, OCTOBER 31, -----------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues .................................................... $ 191,656 $ 1,000,007 $ 1,185,521 $ 839,077
Operating expenses:
Cost of sales ............................................ 171,605 862,405 1,029,455 823,272
Selling, general and administrative ...................... 27,712 179,321 285,771 270,071
Provision for doubtful accounts .......................... 787 20,118 26,020 9,959
Depreciation and amortization ............................ 44,294 460,989 467,118 185,024
Asset impairments and restructuring charges .............. 8,572 28,483 2,979,925 --
Other expense (income), net .............................. (6,242) 19,182 (58,402) (578)
----------- ----------- ----------- -----------
Total operating expenses .............................. 246,728 1,570,498 4,729,887 1,287,748
----------- ----------- ----------- -----------
Loss from operations ........................................ (55,072) (570,491) (3,544,366) (448,671)
Interest accrued ............................................ (7,221) (199,202) (525,850) (387,816)
Interest capitalized ........................................ -- 3,600 71,126 166,700
Investing income (loss):
Interest and other ....................................... 511 20,327 47,829 59,434
Equity losses ............................................ -- (2,710) (35,522) (20,297)
Income (loss) from investments ........................... -- 1,575 (95,722) 294,136
Minority interest in loss of consolidated subsidiary ........ 802 12,530 25,533 24,492
Gain on the purchase of long-term debt ...................... -- -- 296,896 --
Other income (loss), net .................................... (66) 564 (160) 227
Reorganization items, net ................................... -- 2,066,032 -- --
----------- ----------- ----------- -----------
Income (loss) before income taxes ........................... (61,046) 1,332,225 (3,760,236) (311,795)
Benefit (provision) from income taxes ....................... (3) (1,030) (50,121) 34,107
----------- ----------- ----------- -----------
Income (loss) from continuing operations .................... (61,049) 1,331,195 (3,810,357) (277,688)
Loss from discontinued operations ........................... -- -- -- (540,000)
Cumulative effect of change in accounting principle -- (8,667) -- --
----------- ----------- ----------- -----------
Net income (loss) ........................................... (61,049) 1,322,528 (3,810,357) (817,688)
Preferred stock dividends and amortization of preferred stock
issuance costs ........................................... -- (5,473) (17,568) (4,956)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (61,049) $ 1,317,055 $(3,827,925) $ (822,644)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations attributable to
common stockholders .................................... $ (1.22) $ 2.66 $ (7.86) $ (.61)
Loss from discontinued operations ........................ -- -- -- (1.16)
Cumulative effect of change in accounting principle ...... -- (.01) -- --
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders .... $ (1.22) $ 2.65 $ (7.86) $ (1.77)
=========== =========== =========== ===========
Weighted average shares outstanding ...................... 50,000 497,621 487,048 464,145
See accompanying notes.
F-26
WILTEL COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF ACCUMULATED COMPREHENSIVE
STOCK PAR VALUE DEFICIT INCOME (LOSS) TOTAL
----------- ----------- ----------- ------------- -----------
(IN THOUSANDS)
PREDECESSOR COMPANY:
Balance, December 31, 1999 ..................... $ 4,636 $ 2,659,927 $ (676,861) $ 124,898 $ 2,112,600
Net loss ...................................... -- -- (817,688) -- (817,688)
Other comprehensive loss:
Net unrealized depreciation of marketable
equity securities, net of reclassification
adjustment for net gains realized in net loss -- -- -- (51,609) (51,609)
Foreign currency translation adjustments ..... -- -- -- (29,240) (29,240)
-----------
Comprehensive loss ............................. (898,537)
Stock award transactions ....................... -- 4,877 -- -- 4,877
Preferred stock dividends and amortization of
preferred stock issuance costs .............. -- (4,956) -- -- (4,956)
Other ........................................ -- (712) -- -- (712)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 ..................... 4,636 2,659,136 (1,494,549) 44,049 1,213,272
Net loss ...................................... -- -- (3,810,357) -- (3,810,357)
Other comprehensive income (loss):
Net unrealized depreciation of marketable
equity securities, net of reclassification
adjustment for net losses realized in net
loss ........................................ -- -- -- (83,012) (83,012)
Foreign currency translation adjustments,
net of reclassification adjustment for losses
realized in net loss ......................... -- -- -- 27,452 27,452
-----------
Comprehensive loss ............................. (3,865,917)
Agreement with The Williams Companies,
Inc. (see Note 16) ........................... 243 1,201,660 -- -- 1,201,903
Stock award transactions ....................... 4 5,367 -- -- 5,371
Preferred stock dividends and amortization of
preferred stock issuance costs ................ -- (17,568) -- -- (17,568)
Common stock issued to pay preferred stock
dividends ..................................... 27 13,830 -- -- 13,857
Other .......................................... -- 40 -- -- 40
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 ..................... 4,910 3,862,465 (5,304,906) (11,511) (1,449,042)
Net income .................................... -- -- 1,322,528 -- 1,322,528
Other comprehensive income (loss):
Net unrealized depreciation of marketable
equity securities, net of reclassification
adjustment for gains realized in net income .. -- -- -- (7,401) (7,401)
Foreign currency translation adjustments ...... -- -- -- 2,440 2,440
-----------
Comprehensive income .......................... 1,317,567
Agreement with The Williams Companies,
Inc. (see Note 16) .......................... -- 42,937 -- -- 42,937
Stock award transactions ...................... 3 5,953 -- -- 5,956
Preferred stock dividends and amortization of
preferred stock issuance costs .............. -- (5,473) -- -- (5,473)
Common stock issued to pay preferred stock
dividends ................................... 19 4,142 -- -- 4,161
Preferred stock converted to common stock ..... 29 83,865 -- -- 83,894
Reorganization adjustments .................... (4,961) (3,993,889) 3,982,378 16,472 --
----------- ----------- ----------- ----------- -----------
Balance, October 31, 2002 ...................... -- -- -- -- --
See accompanying notes.
F-27
WILTEL COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF ACCUMULATED COMPREHENSIVE
STOCK PAR VALUE DEFICIT INCOME (LOSS) TOTAL
--------- ---------- ----------- ------------- ---------
(IN THOUSANDS)
SUCCESSOR COMPANY:
Issuance of WilTel common stock ......... 500 749,500 -- -- 750,000
Net loss ................................ -- -- (61,049) -- (61,049)
Other comprehensive income (loss):
Foreign currency translation adjustments -- -- -- 780 780
---------
Comprehensive loss ...................... -- -- -- -- (60,269)
--------- --------- --------- --------- ---------
Balance, December 31, 2002 ............... $ 500 $ 749,500 $ (61,049) $ 780 $ 689,731
========= ========= ========= ========= =========
See accompanying notes.
F-28
WILTEL COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ---------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
------------ ----------- -----------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Income (loss) from continuing operations ............. $ (61,049) $ 1,331,195 $(3,810,357) $ (277,688)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................... 44,294 460,989 467,118 185,024
Provision (benefit) from deferred income taxes ..... -- 1,005 50,057 (36,134)
Non-cash asset impairments and restructuring items . -- -- 2,957,004 --
Non-cash reorganization items:
Gain on the discharge of liabilities ............. -- (4,339,342) -- --
Fresh start valuation of assets and liabilities .. -- 2,154,464 -- --
Write-off of deferred financing costs and debt
discounts ....................................... -- 102,446 -- --
Gain on forgiveness of interest .................. -- (65,649) -- --
Provision for loss on investments .................. -- -- 204,887 34,515
Provision for doubtful accounts .................... 787 20,118 26,020 9,959
Equity losses ...................................... -- 2,710 35,522 20,297
(Gain) loss on sales of property and other assets .. -- (2,731) (45,519) 730
Gain on sales of investments ....................... -- (666) (109,243) (110,220)
Gain on conversion of common stock investment ...... -- -- -- (214,732)
Gain on purchase of long-term debt ................. -- -- (296,896) --
Minority interest in loss of consolidated subsidiary (802) (12,530) (25,533) (24,492)
Cash provided by (used in) changes in:
Receivables .................................... 9,001 204,344 (174,213) (183,021)
Prepaid and other current assets ............... 26,607 (30,489) (9,389) (6,685)
Accounts payable ............................... 18,091 (48,719) (63,200) 196,296
Current deferred income ........................ (9,536) 16,595 (15,634) 53,511
Accrued liabilities ............................ (33,385) 103,297 88,442 (68,146)
Long-term deferred income ...................... (2,986) (17,747) 190,001 267,228
Other ........................................... (3,181) (1,654) 14,228 (23,375)
----------- ----------- ----------- -----------
Net cash used in operating activities ................ (12,159) (122,364) (516,705) (176,933)
FINANCING ACTIVITIES
Proceeds from long-term debt ......................... -- 12,586 2,487,683 1,670,588
Payments on and purchase of long-term debt ........... (3,900) (633,180) (570,989) (110,000)
Investment by Leucadia National Corporation .......... 150,000 -- -- --
Proceeds from issuance of common stock, net of
expenses ........................................... -- 9,452 18,904 4,166
Proceeds from issuance of preferred stock, net of
expenses ........................................... -- -- -- 240,500
Debt issue costs ..................................... -- (531) (42,743) (28,701)
Preferred stock dividends paid ....................... -- (4,161) (18,076) --
Contribution to subsidiary from minority interest
shareholders ....................................... -- -- 31,694 --
Changes in due to/from The Williams Companies, Inc. .. -- -- -- (12,500)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities .. 146,100 (615,834) 1,906,473 1,764,053
See accompanying notes.
F-29
WILTEL COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
------------ ----------- --------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS)
INVESTING ACTIVITIES
Property, plant and equipment:
Capital expenditures ................................. (6,434) (76,903) (1,389,294) (3,390,276)
Proceeds from net tax refunds, settlements and sales . 1,130 48,473 165,625 34,453
Changes in accrued liabilities ....................... (5,585) (82,484) (138,498) 85,306
Purchase of investments ................................ -- (220,209) (2,479,988) (1,472,432)
Proceeds from sales of investments ..................... 630 1,121,796 2,157,029 2,908,015
Acquisition of businesses (primarily property, plant and
equipment) ........................................... -- -- (38,687) --
Other .................................................. -- (907) 3,455 8,869
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities .... (10,259) 789,766 (1,720,358) (1,826,065)
DISCONTINUED OPERATIONS
Net cash provided by operating activities .............. -- -- 17,719 9,362
Net cash provided by (used in) investing activities .... -- -- 215,021 (40,382)
----------- ----------- ----------- -----------
Net cash provided by (used in) discontinued operations . -- -- 232,740 (31,020)
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ....... 123,682 51,568 (97,850) (269,965)
Cash and cash equivalents at beginning of period ....... 167,606 116,038 213,888 483,853
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ............. $ 291,288 $ 167,606 $ 116,038 $ 213,888
=========== =========== =========== ===========
See accompanying notes.
F-30
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On April 22, 2002, Williams Communications Group, Inc. ("WCG") and CG
Austria, Inc. (collectively, the "Debtors") commenced proceedings under chapter
11 of title 11 of the United States Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). As discussed in Note 2, pursuant to the terms of a plan of
reorganization, WilTel Communications Group, Inc. ("WilTel" and, together with
its direct and indirect subsidiaries, the "Company") emerged on October 15, 2002
as the successor to WCG.
WCG was a non-operating holding company whose principal asset was 100% of
the membership interest in Williams Communications, LLC ("WCL"), which changed
its name to WilTel Communications, LLC in January 2003. In connection with the
consummation of the Plan (as defined in Note 2), WCG transferred substantially
all of its assets to WilTel on October 15, 2002. WCL is an operating company,
which owns or leases and operates a nationwide inter-city fiber-optic network,
extended locally and globally, to provide Internet, data, voice and video
services. Information on WilTel's operations by segment and geographic area is
included in Note 6. In addition, WCL is the direct or indirect parent of all the
remaining subsidiaries of the Company, including CG Austria, Inc., a
non-operating holding company with direct and indirect interest in certain
foreign subsidiaries of the Company. WCL was not included in the chapter 11
proceedings.
The Company became subject to the provisions of Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code," upon commencement of the chapter 11 proceedings. SOP 90-7
requires, among other things, that pre-petition liabilities that are subject to
compromise be segregated in the consolidated balance sheet. In addition,
revenues, expenses, realized gains and losses and provisions for losses
resulting from the reorganization and restructuring of the Company are reported
separately as reorganization items in the consolidated statement of operations.
Interest expense on liabilities subject to compromise and preferred stock
dividends ceased to accrue upon commencement of the chapter 11 proceedings.
In conjunction with formulating the Plan (as defined in Note 2), the
Company was required to estimate its post-confirmation reorganization value. The
Company's financial advisors assisted in the valuation utilizing methodologies
that were based upon the cash flow projections and business plan as contemplated
by the Predecessor Company. These methodologies incorporated discounted cash
flow techniques, a comparison of the Company and its projected performance to
market values of comparable companies and a comparison of the Company and its
projected performance to values of past transactions involving comparable
entities. The cash flow valuations utilized five-year projections discounted at
a weighted average cost of capital of approximately 27.5%, including a terminal
value equal to a multiple of projected fifth year operating results, together
with the net present value of the five-year projected cash flows. Based upon
these analyses, upon emergence from the chapter 11 proceedings, the
reorganization value for the Company was estimated to be approximately $1.3
billion. This reorganization value was reflected in the Company's consolidated
balance sheet upon emergence from the chapter 11 proceedings as post-emergence
debt of approximately $573 million and an equity value of $750 million.
The Company emerged from the chapter 11 proceedings in October 2002 and
implemented fresh start accounting under the provisions of SOP 90-7 effective
October 31, 2002 to coincide with its normal monthly financial closing cycle.
Under SOP 90-7, the net reorganization value of the Company was allocated to its
assets and liabilities, its accumulated deficit was eliminated and new equity
was issued according to the Plan (as defined in Note 2). The Company recorded a
$2.2 billion reorganization charge to adjust the historical carrying value of
its assets and liabilities to fair value reflecting the allocation of the
Company's reorganization value of approximately $1.3 billion. The Company also
recorded a $4.3 billion gain on the discharge of debt pursuant to the Plan (as
defined in Note 2). In addition, changes in accounting principles that would be
required in the
F-31
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
financial statements within twelve months following emergence from the chapter
11 proceedings were adopted in the Company's fresh start financial statements
(see discussion below in recent accounting standards). See Note 3 for a
presentation of the impact of implementing fresh start accounting on WCG's
consolidated balance sheet as of October 31, 2002.
The Company's current focus is to retain its existing business by
providing a high quality of service, to obtain new business if it can be done on
a profitable basis, to reduce its operating expenses to the greatest extent
possible, and to conserve liquidity. As of December 31, 2002, the Company had
$291.3 million of cash and cash equivalents to meet its cash requirements and
believes that it has sufficient liquidity to meet its needs through 2004. The
Company has $375 million of debt under its Exit Credit Agreement and
approximately $142 million of debt under the OTC Notes (see Note 15).
Approximately $157 million of this debt matures during 2005. Unless the Company
is able to generate significant cash flows from operations through revenue
growth, expense reductions or some combination of both, it is likely that new
capital will have to be raised to meet its maturing debt obligations in 2005.
The Company's emergence from the chapter 11 proceedings resulted in a new
reporting entity with no retained earnings or accumulated deficit as of October
31, 2002. Accordingly, the Company's consolidated financial statements for
periods prior to October 31, 2002 are not comparable to consolidated financial
statements presented on or subsequent to October 31, 2002. The 2002 financial
results have been separately presented under the label "Predecessor Company" for
periods prior to November 1, 2002 and "Successor Company" for the two-month
period ended December 31, 2002 as required by SOP 90-7. The Predecessor Company
is also referred to as "WCG" and the Successor Company is also referred to as
"WilTel".
Prior to April 2001, The Williams Companies, Inc. ("TWC") owned 100% of
WCG's outstanding Class B common stock which gave TWC approximately 98% of the
voting power of WCG. In March 2001, TWC's Board of Directors approved a tax-free
spin-off of WCG to TWC's shareholders. On April 23, 2001, TWC distributed
approximately 95% of the WCG common stock it owned to holders of TWC common
shares on a pro rata basis (see Note 16).
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiaries and a subsidiary that it controls but owns less
than 50% of the voting common stock. Entities that the Company does not control
and owns 20% to 50% of the voting common stock, or otherwise has the ability to
exercise significant influence over the operating and financial policies of the
entities, are accounted for under the equity method of accounting.
The Company has a 45% interest in PowerTel Limited ("PowerTel"), a
publicly-traded Australian telecommunications company, which is accounted for
under the principles of consolidation. The Company consolidates PowerTel as it
has control over PowerTel's operations despite its less than 50% ownership
because the Company is entitled to appoint a majority of the members of
PowerTel's Board of Directors and thereby exercises control over its operations.
See Note 15 for further discussion of management's plans related to PowerTel.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-32
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
REVENUE RECOGNITION
Network
Capacity and other services revenues are recognized monthly as the
services are provided or revenues are earned. Amounts billed in advance of the
service month are recorded as deferred income. Payments received for the
installation of conduit under joint build construction contracts are generally
recorded as a recovery of the applicable construction costs. Revenues under
multiple element contracts are recognized based on the respective fair values of
each individual element within the multiple element contract. Revenues from
conduit and duct sales are recognized at time of delivery and acceptance and
when all significant contractual obligations have been satisfied and collection
is reasonably assured.
Grants of indefeasible rights of use, or IRUs, of constructed but unlit
fiber, or dark fiber, in exchange for cash, are accounted for as leases. IRUs
are evaluated for sales-type lease accounting, which results in certain lease
transactions being accounted for as sales at the time of acceptance of the fiber
by the customer. IRUs that do not meet the criteria for a sales-type lease are
accounted for as an operating lease, and the cash received is recognized as
revenue over the term of the IRU. In accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 43, "Real Estate Sales, an
interpretation of Statement of Financial Accounting Standards ("SFAS") No. 66,"
issued in June 1999, dark fiber is considered integral equipment and accordingly
title must transfer to a lessee in order for a lease transaction to be accounted
for as a sales-type lease. After June 30, 1999, the effective date of FASB
Interpretation No. 43, sales-type lease accounting is not appropriate for IRUs
since the Company's IRUs generally do not transfer title to the fibers under
lease to the lessee. Therefore, these transactions are 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 Company has entered into transactions such as buying, selling,
swapping and/or exchanging capacity, conduit and fiber to complete and
compliment its network. Depending upon the terms of the agreement, certain
transactions are accounted for as pure asset swaps with no revenue and no cost
recognition while certain transactions are accounted for as both revenue and
cost over the corresponding length of time for each agreement. If the exchange
is not essentially the culmination of an earning process, accounting for an
exchange of a nonmonetary asset is based on the recorded amount of the
nonmonetary asset relinquished, and therefore no revenue and cost is recorded in
accordance with Accounting Principles Board ("APB") Opinion No. 29. Examples of
transactions cited by APB Opinion No. 29 that are not the culmination of the
earnings process include exchange of productive assets for similar productive
assets or for an equivalent interest in similar productive assets.
Revenues that have been deferred for long-term service contracts are
amortized using the straight-line method over the life of the related contract.
The Company classifies as current the amount of deferred revenue that will be
recognized into revenue over the next twelve months.
Revenues that have been deferred for long-term service contracts that are
subsequently terminated or included as part of an overall settlement agreement
have historically been recognized in other operating income.
Vyvx
Transmission and video services revenues are recognized monthly as the
services are provided. Amounts billed in advance of the service month are
recorded as deferred income.
F-33
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits, certificates
of deposit and other marketable securities that are readily convertible to known
amounts of cash and so near maturity that it presents insignificant risk of
changes in value because of changes in interest rates.
INVESTMENTS
Debt and equity securities are classified as available-for-sale and the
carrying amount of these investments is reported at fair value with net
unrealized appreciation or depreciation reported as a component of other
comprehensive income. The amount of debt and equity securities as of December
31, 2002 was zero.
The cost of investments sold is based on the specific identification
method with gross realized gains and losses included in income from investments.
For investments with declines in fair value below their cost basis that are
determined to be other than temporary, the cost basis of the investment is
written down to its fair value, with the realized loss included in income from
investments.
DERIVATIVE INSTRUMENTS
Derivative financial instruments are recorded on the balance sheet at
their fair value. Changes in fair value of derivatives are 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 are either recognized in earnings to
offset the changes in fair value of the hedged asset, liability or firm
commitment that is also recognized in earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a change in fair value of a derivative accounted for as a
hedge is recognized immediately in earnings. As of December 31, 2002, the
Company had no derivative financial instruments.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
computed primarily on the straight-line method over estimated useful lives with
the exception of assets acquired through capital leases, which are depreciated
over the lesser of the estimated useful lives or the term of the lease. In
accordance with fresh start accounting, the book value of property, plant and
equipment was adjusted to its fair value and the Company also established new
useful lives.
GOODWILL AND OTHER INTANGIBLES
Through December 31, 2001, goodwill and other intangibles were amortized
on a straight-line basis over the estimated period of benefit ranging from five
to twenty years. As of December 31, 2001, the Company fully impaired its
goodwill and other intangibles. Effective January 1, 2002, goodwill and certain
indefinite lived intangible assets, if any, would no longer be amortized as
provided by SFAS No. 142, "Goodwill and Other Intangible Assets," which is
discussed below in recent accounting standards. As of December 31, 2002, the
Company had no intangible assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets, including related
intangibles, of identifiable business activities for impairment when events or
changes in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable. The determination of whether an
impairment has occurred is based on management's estimate of undiscounted future
cash flows attributable to the assets as compared to the carrying value of the
assets. If an impairment has occurred, the amount of the impairment recognized
is determined by estimating the fair value for the assets and recording a
provision for loss if the carrying value is greater than fair value.
F-34
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to sell to
determine if an impairment is required. Until the assets are disposed of, an
estimate of the fair value is redetermined when related events or circumstances
change.
FINANCING COSTS
Costs incurred to obtain financing through the issuance of the Company's
long-term debt were included in other assets and deferred charges and amortized
over the life of the debt. In accordance with fresh start accounting, the
Company wrote off its deferred financing costs. Costs incurred in conjunction
with the Company's restructuring efforts were expensed as incurred.
INCOME TAXES
Prior to the spin-off of WCG from TWC in April 2001, WCG's operations were
included in TWC's consolidated federal income tax return. A tax sharing
agreement existed between WCG and TWC to allocate and settle among themselves
the consolidated federal income tax liability (see Note 9). Deferred income
taxes were allocated from TWC using the liability method and were provided on
all temporary differences between the financial basis and allocated tax basis of
WCG's assets and liabilities. Valuation allowances were established to reduce
deferred tax assets to an amount that was more likely than not to be realized.
Effective with the spin-off of WCG from TWC, the existing tax sharing
agreement with TWC was amended to address pre spin-off tax attributes. Under the
amendment, TWC retained all rights and obligations with respect to tax
attributes of WCG for all periods prior to WCG's initial public offering. In the
event of any final determination with respect to a WCG tax attribute that arose
from the time of WCG's initial public offering to the date of the spin-off of
WCG from TWC, WCG would pay TWC for any determination resulting in a detriment
as compared to previous amounts filed and TWC would pay WCG for any
determination resulting in favorable tax consequences as compared to amounts
filed. The tax sharing agreement was further amended in July 2002 by the Tax
Cooperation Agreement, which provides that, upon emergence from chapter 11
proceedings, the Company has no responsibility for indemnification of TWC for
pre-spinoff tax items.
LOSS PER SHARE
The Company's basic loss per share is based on the sum of the average
number of common shares outstanding and deferred shares, if any. Diluted loss
per share includes any dilutive effect of stock options and convertible
preferred stock. For WCG, 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. Stock options and convertible preferred stock of
7.6 million shares, 10.6 million shares and 4.6 million shares for the ten
months ended October 31, 2002 and for the years ended December 31, 2001 and
2000, respectively, have been excluded from the computation of diluted loss per
common share. For WilTel, the basic and diluted loss per share is the same as it
does not have any dilutive securities outstanding.
STOCK OPTIONS
Prior to emergence from bankruptcy, the Company's employee stock-based
awards were accounted for under the provisions of APB Opinion No. 25 and related
interpretations. The Company's fixed plan common stock options generally did not
result in compensation expense because the exercise price of the stock options
equaled the market price of the underlying stock on the date of grant. Upon
emergence and as of December 31, 2002, WilTel did not have any stock-based
awards outstanding.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the U.S. dollar. Generally, the
functional currency of the Company's foreign operations is the applicable local
currency for each foreign subsidiary and equity method
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WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
investee. Assets and liabilities of foreign subsidiaries and equity investees
are translated at the spot rate in effect at the applicable reporting date, and
the combined statements of operations and the Company's share of the results of
operations of its equity affiliates are translated at the average exchange rates
in effect during the applicable period. The resulting cumulative translation
adjustment is recorded as a separate component of other comprehensive income.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses,
which are reflected in the statement of operations.
RECENT ACCOUNTING STANDARDS
Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, adoption of SFAS No. 142 is required in fiscal
years beginning after December 15, 2001. As of December 31, 2001, the Company
fully impaired its goodwill and other intangible assets. As a result, there was
no impact from adopting this statement on WCG's results of operations and
financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires companies to record the fair
value of a liability for asset retirement obligations in the period in which the
legal or contractual removal obligation is incurred. The Company adopted this
statement as of October 31, 2002 as part of implementing fresh start accounting
as required by SOP 90-7 (see Note 14).
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144, effective for fiscal
years beginning after December 15, 2001, provides a single accounting model for
long-lived assets to be disposed of and replaces SFAS No. 121, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The Company's approach for
impairment under SFAS No. 121 is consistent with the provisions under SFAS No.
144. Accordingly, there was no impact of adopting this statement on the
Company's results of operations and financial position.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other things, SFAS No. 145 rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, any gains and losses from the extinguishment of debt will
now be classified as extraordinary only if they meet the criteria in APB Opinion
No. 30. In addition, any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB Opinion No. 30 for a classification as an extraordinary
item shall be reclassified. The Company early adopted this statement in April
2002 and reported the gain relating to the forgiveness of interest on its Trust
Notes as continuing operations versus extraordinary gain (see Note 4). In
addition, the Company reclassified the extraordinary gain reported in 2001 of
$296.9 million (or $0.61 per share) resulting from the purchase of its senior
redeemable notes (see Note 15) to continuing operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146's requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a
F-36
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as generally defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. There was no impact on the Company's results of
operations and financial position upon adopting this statement effective October
31, 2002 as required by SOP 90-7.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that changes to the fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion No. 28, "Interim Financial
Reporting" to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. There was no impact on the Company's
results of operations, financial position and disclosures required upon adopting
this statement effective October 31, 2002 as required by SOP 90-7 since WilTel
did not have any stock-based compensation outstanding.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current period presentation.
2. BANKRUPTCY PROCEEDINGS
OVERVIEW OF THE CHAPTER 11 Proceedings
On April 22, 2002, the Debtors filed petitions for relief under the
Bankruptcy Code in the Bankruptcy Court. On September 30, 2002, the Bankruptcy
Court entered an order confirming the Second Amended Joint Chapter 11 Plan of
Reorganization of the Debtors (the "Plan"), effective on October 15, 2002 (the
"Effective Date"). The confirmation order was subject to certain conditions
including gaining necessary FCC regulatory approvals to transfer control of
licenses from WCG to the Company. Prior to the Effective Date, WCG, WCL, and the
Company applied to and received from the FCC special temporary authority to
transfer control of all licenses to the Company. The granting of the special
temporary authority from the FCC allowed the Company to emerge from the chapter
11 proceedings on the Effective Date subject to an escrow agreement discussed
below.
A copy of the Plan was filed as Exhibit A to Exhibit 99.2 to WCG's Current
Report on Form 8-K, dated August 13, 2002. Modifications to the Plan were filed
as Exhibit 99.3 to WCG's Current Report on Form 8-K, dated September 30, 2002
(the "Confirmation Date 8-K"). A copy of the Confirmation Order was filed as
Exhibit 99.1 to the Confirmation Date 8-K.
Described below is a summary of certain significant agreements and
important events that have occurred in and following the bankruptcy
reorganization. The summary should be read in conjunction with and is qualified
in its entirety by reference to the Plan and the material transaction documents
discussed herein and made available as exhibits to WCG's and WilTel's public
filings, including those filed with the SEC.
Plan of Reorganization
On September 30, 2002, the Bankruptcy Court approved and entered an order
confirming the Plan, which had been proposed by the Debtors, the official
committee of unsecured creditors (the "Committee") and Leucadia National
Corporation ("Leucadia"). The Plan was designed to meet the requirements of the
Settlement Agreement (described in greater detail below) and the pre-petition
Restructuring Agreement. By implementing both the Settlement Agreement and the
Restructuring Agreement, the Plan allowed WCG to raise the $150 million new
investment from Leucadia. That additional investment allowed WCG to further
reduce its secured debt without
F-37
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
sacrificing working capital (see below for a discussion of the Escrow
Agreement and the ultimate release from escrow of the $150 million investment).
Settlement Agreement
On July 26, 2002, TWC, the Committee, and Leucadia entered into a
settlement agreement (the "Settlement Agreement") that provided for, among other
things, (a) the mutual release of each of the parties, (b) the purchase by
Leucadia of TWC's unsecured claims against WCG (approximately $2.35 billion face
amount) for $180 million, (c) the satisfaction of such TWC claims and a $150
million investment in the Company by Leucadia in exchange for 44% of the
outstanding WilTel common stock, and (d) modification of WCG's sale and
subsequent leaseback transaction covering the WCG headquarters building and
modification of the TWC Continuing Contracts (as defined in the Settlement
Agreement). An order approving the Settlement Agreement was issued on August 23,
2002.
TWC's unsecured claims of $2.35 billion related to arrangements between
WCG and TWC and primarily consisted of the following:
Senior Reset Note Claim: Approximately $1.4 billion of those claims
related to the Trust Notes, which were senior secured notes issued by a WCG
subsidiary in March 2001. The proceeds from the sale of the Trust Notes were (i)
transferred to WCG in exchange for WCG's $1.5 billion 8.25% senior reset note
due 2008 (the "Senior Reset Note") and (ii) contributed by WCG as capital to WCL
to provide liquidity following the tax-free spin-off from TWC. Obligations of
WCG and its affiliates under the Trust Notes were secured by the Senior Reset
Note and were effectively guaranteed by TWC. In July 2002, TWC exchanged $1.4
billion of new senior unsecured notes of TWC (the "New TWC Notes") for all of
the outstanding Trust Notes. TWC, as agent under the Trust Notes indenture, had
the right to sell the Senior Reset Note to achieve the highest reasonably
available market price and the Bankruptcy Court found that the TWC sale of the
TWC Assigned Claims to Leucadia met this requirement.
ADP Claims: In 1998, WCG entered into an operating lease agreement
covering a portion of its fiber-optic network referred to as an asset defeasance
program ("ADP"). The total cost of the network assets covered by the lease
agreement was $750 million. Pursuant to the ADP, WCG had the option to purchase
title to those network assets at any time for an amount roughly equal to the
original purchase price, and TWC was expressly obligated to pay the purchase
price under an intercreditor agreement entered into by TWC in connection with
the then-existing WCL credit facility. In March 2002, WCG exercised its purchase
option, and TWC funded the purchase price of approximately $754 million. In
exchange for this payment from TWC, the intercreditor agreement provided that
TWC was entitled to either the issuance of WCG equity or WCG unsecured
subordinated debt (meaning debt that was subordinate in priority to WCL's
pre-petition credit facility), each on terms reasonably acceptable to the
lenders under WCL's pre-petition credit facility. On March 29, 2002, WCG
tendered an unsecured note to TWC for approximately $754 million that was not
accepted by TWC. Any and all causes of action of TWC or any of its direct or
indirect subsidiaries against a Debtor relating to the ADP were resolved
pursuant to the terms of the Settlement Agreement.
Pre-Spin Services Claims: The terms of the Settlement Agreement also
resolved "Pre-Spin Services Claims" of TWC arising from a Services Agreement
entered into between WCG and TWC when WCG was a wholly-owned subsidiary of TWC.
Pursuant to this agreement, TWC and certain of its affiliates performed payroll,
administrative, and related services for WCG and its affiliates. Pre-Spin
Services Claims were also resolved pursuant to the Settlement Agreement.
The Settlement Agreement also resolved WCG's defaults under the sale and
subsequent leaseback transaction (discussed below) as a result of WCG's
bankruptcy filing, thus negating any threat or risk that the Company would be
evicted or otherwise lose possession of its headquarters due to the bankruptcy.
F-38
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SBC Stipulation
On September 25, 2002, the Bankruptcy Court approved a stipulation
agreement (the "Stipulation Agreement") between the Company and SBC conditioned
upon the consummation of the Plan. The Stipulation Agreement provided for the
necessary SBC approval of the Plan and resolved change-of-control issues that
SBC had raised regarding WCG's spin-off from TWC. At the same time, SBC and WCL
executed amendments to their alliance agreements.
Purchase of Headquarters Building
In connection with the spin-off of WCG by TWC in 2001, TWC and WCG entered
into a sale and leaseback transaction for WCG's headquarters building and
certain real and personal property, including two corporate aircraft (the
"Building Purchase Assets"), as a result of which TWC purchased the Building
Purchase Assets and leased them back to WCG. Pursuant to an agreement between
WCG and TWC, among others, dated July 26, 2002, (as amended, the "Real Property
Purchase and Sale Agreement"), WCG repurchased the Building Purchase Assets from
TWC for an aggregate purchase price of approximately $145 million (the "Purchase
Price").
The Purchase Price consisted of promissory notes issued by Williams
Technology Center, LLC ("WTC"), the Company, and WCL to TWC (the "OTC Notes").
One note for $100 million is due April 1, 2010; the other note for $44.8 million
is due December 29, 2006. The obligations of WTC, WilTel, and WCL under the OTC
Notes may be subject to reduction, depending on the disposition of certain
aircraft leases described in greater detail in the Real Property Purchase and
Sale Agreement. Obligations of WTC, WilTel, and WCL under the OTC Notes were
secured by, and made pursuant to, a mortgage agreement (the "OTC Mortgage"),
under which WTC granted a first priority mortgage lien and security interest to
TWC in all of its right, title and interest in, to and under the headquarters
building and related real and personal property.
The Settlement Agreement also contemplated that the Lenders would receive
a second priority mortgage lien and security interest in those same assets. The
Real Property Purchase and Sale Agreement also provided that the OTC Notes are
secured in part by a second lien and security interest in the Company's
interests in PowerTel. See Note 15 for a further discussion of the terms of the
OTC Notes.
The Real Property Purchase and Sale Agreement further provides that if,
within one year after the date of the Settlement Agreement, WTC exchanges or
disposes of or enters into an agreement to exchange or dispose of any or all of
the headquarters building or the related real or personal property for an
aggregate sales price in an amount greater than $150 million, WTC shall be
required to prepay the OTC Notes in full and pay to TWC an amount equal to the
product of (i) 50% multiplied by (ii) the excess of the aggregate sales price
over (A) $150 million less (B) the amount equal to (x) the aggregate
consideration received by TWC in connection with the disposition of certain
aircraft dry leases referred to in the Real Property Purchase and Sale Agreement
or (y) the amount of proceeds received by WCG in connection with the refinancing
of the aircraft currently subject to such aircraft dry leases.
As described below, consummation of the transactions contemplated by the
Real Property Purchase and Sale Agreement were conditioned upon satisfaction of
the terms of the Escrow Agreement (as defined below).
Transactions on the Effective Date
On the Effective Date, pursuant to the Plan and the confirmation order,
WilTel emerged as the successor to WCG and issued an aggregate of 22,000,000
shares of WilTel common stock to Leucadia and an aggregate of 27,000,000 shares
of WilTel common stock to a grantor trust (the "Residual Trust") among WCG,
WilTel, and Wilmington Trust Corporation, as trustee (the "Residual Trustee") on
behalf of certain creditors of WCG. An additional 1,000,000 shares of WilTel
common stock were issued to WCG in connection with a "channeling injunction"
that could potentially benefit securities holders involved in a class action
proceeding against WCG.
F-39
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
WilTel issued shares of its common stock to Leucadia under the Plan in two
distributions. First, pursuant to a Purchase and Sale Agreement, dated as of
July 26, 2002, between Leucadia and TWC (amended on October 15, 2002), Leucadia
acquired from TWC certain claims that TWC had against WCG (the "TWC Assigned
Claims") for a purchase price of $180 million paid in the form of a letter of
credit issued by Fleet Bank (the "TWC Letter of Credit") and WilTel issued
11,775,000 shares of its common stock to Leucadia in satisfaction of such claims
in accordance with the Plan.
Second, pursuant to an Investment Agreement by and among Leucadia, WCG,
and WCL, dated as of July 26, 2002 (amended on October 15, 2002), on the
Effective Date Leucadia invested $150 million in the Company in exchange for
10,225,000 shares of WilTel common stock (the "New Investment"). Leucadia paid
$1,000 of the purchase price in cash to WilTel and delivered the remainder, in
the form of a letter of credit issued by JP Morgan Chase Bank (the "Company
Letter of Credit").
Leucadia delivered the TWC Letter of Credit and the Company Letter of
Credit into an escrow account established pursuant to an Escrow Agreement (the
"Escrow Agreement") dated as of October 15, 2002, among the Company, Leucadia,
TWC, and The Bank of New York as Escrow Agent. The Escrow Agreement provided for
the release of the Letters of Credit (and documents related to the Real Property
Purchase and Sale Agreement) upon receipt, prior to February 28, 2003, of
approval from the FCC for the transfer of control to the Company of the licenses
that had been temporarily issued to WCL prior to the Effective Date. Failure to
obtain FCC approval by February 28, 2003, in accordance with the terms of the
Escrow Agreement would have resulted in an "unwind" of the New Investment and
the purchase of the TWC Assigned Claims. However, following receipt of the FCC
approval on November 25, 2002, the proceeds of the Company Letter of Credit were
paid to the Escrow Agent for disbursement to the Company in accordance with the
terms of the Escrow Agreement, and the proceeds of the TWC Letter of Credit were
paid to the Escrow Agent for disbursement to TWC.
WCG continues to exist as a separate corporate entity, formed in the State
of Delaware, in order to liquidate any residual assets and wind up its affairs.
On the Effective Date, WCG transferred substantially all of its assets to
WilTel. The other Debtor, CG Austria, continues to exist as a separate corporate
entity, incorporated in the State of Delaware, and owned solely by WCL.
The Exit Credit Agreement
On the Effective Date, WCL and the lenders under its credit facility (the
"Lenders") entered into a credit agreement (the "Exit Credit Agreement") that
combined the term loans under the previous credit facility into one loan for
$375 million (paid down throughout the bankruptcy from a pre-petition balance of
$975 million). See Note 15 for a further discussion of the terms of the Exit
Credit Agreement.
Capitalization, Corporate Governance, and Leucadia Agreements
Pursuant to the Plan and a Stockholders Agreement, dated October 15, 2002,
between Leucadia and the Company (the "Stockholders Agreement"), the Company's
Board of Directors is comprised of four members designated by Leucadia, four
members designated by the Official Committee of Unsecured Creditors of WCG, and
the Chief Executive Officer of the Company, Jeff K. Storey, who was elected as
Chief Executive Officer of the Company and became a member of the Board of
Directors on October 31, 2002. Pursuant to the Stockholders Agreement, so long
as Leucadia beneficially owns at least 20% of the outstanding common stock of
WilTel, it will be entitled to nominate four members of the Board of Directors.
If Leucadia beneficially owns less than 20% but more than 10% of the outstanding
common stock of WilTel, it will be entitled to nominate one member to the Board
of Directors. In addition, the Stockholders Agreement provides that, until
October 15, 2004, Leucadia will vote all of its shares of WilTel common stock in
favor of Committee designees to the Board. Until October 15, 2004, any
replacement of a Committee designee will occur through a nominating process
detailed at Section 3.4 of the Stockholders Agreement.
F-40
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pursuant to the Stockholders Agreement, for a period of five years from
the Effective Date of the Plan, Leucadia may not acquire or agree to acquire any
of the Company's securities except (a) with prior approval by a majority of the
members of the Board of Directors that are independent or by holders of a
majority of the Company voting securities that are not owned by Leucadia voting
together as a single class, (b) in connection with certain other acquisitions,
so long as Leucadia would not hold in excess of 49% of the Company's voting
securities following such acquisition or (c) a Permitted Investor Tender Offer
(as defined in the Stockholders Agreement).
The WilTel articles of incorporation (the "Charter") provide that 200
million shares of common stock are authorized for issuance (of which 50 million
shares were issued under the Plan and are outstanding), and 100 million shares
of preferred stock are authorized for issuance (of which no shares are issued
and outstanding).
Leucadia has entered into a Registration Rights Agreement with the Company
by which the Company has granted Leucadia certain rights to obligate the Company
to register for sale under the Securities Act of 1933, the shares owned by
Leucadia or its affiliates, including the shares issued pursuant to the Plan.
Leucadia and the Company have entered into a Stockholder Rights and
Co-Sale Agreement (the "Co-Sale Agreement") by which, among other things,
certain WilTel holders (any of the approximately 2,500 holders who submitted an
affidavit within 90 days after the Effective Date, or their Permitted Transferee
under the Co-Sale Agreement, who maintain beneficial ownership of at least 100
shares of common stock received pursuant to the Plan) will be eligible to
participate in (i) issuances of Securities (as defined in the Co-Sale Agreement)
to Leucadia until the fifth anniversary of the Effective Date and (ii) any
transfer (other than transfers to affiliates of Leucadia and Exempt Transactions
(as defined in the Co-Sale Agreement)) by Leucadia of shares of WilTel common
stock representing 33% or more of the WilTel common stock outstanding. In
addition, two such holders each paid $25,000 to the Company (with the submission
of the affidavit referred to above) to be eligible to participate in proposed
issuances or actual issuances of Other Securities (as defined in the Co-Sale
Agreement) to Leucadia until the fifth anniversary of the Effective Date.
On October 28, 2002, Leucadia purchased in a private transaction 1.7
million shares of WilTel's common stock as reported on Schedule 13-D filed on
October 30, 2002, which brings Leucadia's ownership interest in WilTel to 47.4%.
The "Five-Percent Limitation" on Stock Ownership
As required by the Plan, the Charter imposes certain restrictions on the
transfer of "Corporation Securities" (as defined in the Charter, including
common stock, preferred stock, and certain other interests) with respect to
persons who are, or become, five-percent shareholders of the Company, as
determined in accordance with applicable tax laws and regulations (the
"Five-percent Ownership Limitation"). The Five-percent Ownership Limitation
provides that any transfer of, or agreement to transfer, Corporation Securities
prior to the end of the effectiveness of the restriction (as described below)
shall be prohibited if either (y) the transferor holds five percent or more of
the total fair market value of the Corporation Securities (a "Five-percent
Shareholder") or (z) to the extent that, as a result of such transfer (or any
series of transfers of which such transfer is a part), either (1) any person or
group of persons shall become a Five-percent Shareholder, or (2) the holdings of
any Five-percent Shareholder shall be increased, excluding issuances of WilTel
common stock under the Plan and certain other enumerated exceptions. Each
certificate representing shares of WilTel common stock bears a legend that
re-states the applicable provisions of the Charter.
The Five-percent Ownership Limitation will not apply to: (i) certain
transactions approved by the WilTel Board, (ii) an acquisition by Leucadia of
shares of the Corporation Securities that, as a percentage of the total shares
outstanding, is not greater than the difference between 49% and the percentage
of the total shares outstanding acquired by Leucadia or any of its subsidiaries
in the Plan, plus any additional Corporation Securities
F-41
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
acquired by Leucadia and its subsidiaries, and (iii) certain other transactions
specified in the Charter if, prior to the transaction, the WilTel Board or a
duly authorized committee thereof determines in good faith upon request of the
transferor or transferee that the transaction meets certain specified criteria.
The Charter also prohibits the issuance of non-voting equity securities.
Additional Effective Date Transactions
In addition, the following transactions, among others, occurred on the
Effective Date pursuant to the Plan (capitalized terms used but not defined
herein have the meaning ascribed to them in the Plan):
- All of the Restated Credit Documents were executed and delivered and
became effective, and $350 million was paid to the Lenders
thereunder.
- Each of the transactions that comprise the TWC Settlement occurred
or were implemented and became binding and effective in all respects
(subject to the Escrow Agreement), including:
- documents to effect the sale by Williams Headquarters Building
Company of the Building Purchase Assets to WTC pursuant to the
Real Property Purchase and Sale Agreement were deposited into
escrow with The Bank of New York, as Escrow Agent, and
subsequently delivered when the $330 million proceeds of the
Leucadia New Investment and purchase of TWC Assigned Claims
were released to the Company and TWC, respectively, pursuant
to the terms of the Escrow Agreement;
- all of the releases contemplated by the TWC Settlement became
binding and effective, including releases whereby WCG, WCG's
current and former directors and officers, and the Committee
released TWC and its current and former directors, officers,
and agents; in addition, TWC released WCG and WCG's current
and former directors and officers, including the claims that
TWC alleged it had against WCG's non-debtor subsidiaries; and
- all other transactions contemplated under the TWC Settlement
were consummated.
- As contemplated by the Settlement Agreement, the confirmation order
provided an injunction with respect to (a) channeling all personal
claims of WCG's unsecured creditors against TWC and deeming them
satisfied from the consideration provided by TWC under the
Settlement Agreement; and (b) channeling all remaining securities
actions against WCG's officers and directors to a "fund" consisting
of up to 2% of WilTel's common stock and the right to collect under
WCG's director and officer liability insurance policies.
- Pursuant to the Settlement Agreement, TWC transferred to WCG all of
its rights in the "WilTel" and "WilTel Turns Up Worldwide" marks,
and in exchange WCG agreed to amend the term of the Trademark
License Agreement, dated April 23, 2001, between TWC and WCG, to two
years following the Effective Date, at which time the Company would
no longer have the right to use the "Williams" mark, the "Williams
Communications" mark, and certain other "Williams" related marks.
The transfer of these rights was effectuated through an Assignment
of Rights Agreement between Williams Information Services
Corporation ("WISC") and WCL pursuant to which WISC agreed to grant,
sell, and convey to WCL all of its right, title, and interest in the
United States and Canada to the trademarks "WilTel" and "WilTel
Turns Up Worldwide."
- WCG has various administrative service and support contracts with
TWC. The Settlement Agreement provides for the continuation of only
those contracts between WCG and the TWC entities that WCG views as
favorable (the "TWC Continuing Contracts"), as well as modification
to certain of those TWC
F-42
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Continuing Contracts to waive any rights to an unfavorable
alteration of contract terms due to the New Investment or the
transactions contemplated by the Plan.
- All other payments, deliveries and other distributions to be made
pursuant to the Plan or the Restated Credit Documents on or as soon
as practicable after the Effective Date were made or duly provided
for.
3. ADOPTION OF FRESH START ACCOUNTING
As discussed in Note 2, the Company emerged from bankruptcy on October 15,
2002. Pursuant to the provisions of SOP 90-7, the Company adopted the provisions
of fresh start accounting on October 31, 2002 to coincide with its normal
monthly financial closing cycle. Under fresh start accounting, the net
reorganization value of the Company is allocated among the Company's individual
assets and liabilities based upon their relative fair values, which were
primarily based upon independent appraisals. The Company engaged financial
advisors to assist in the determination of the reorganization value, which was
determined to be approximately $1.3 billion. The reorganization value was
allocated to the Company's net assets in relation to their fair values similar
to the procedures specified in SFAS 141, "Business Combinations." The Company
recorded $2.2 billion in reorganization items to record its net assets to fair
value primarily consisting of the following:
- an adjustment to property, plant and equipment of approximately $2.4
billion to reflect fair value as determined by an independent
appraiser; the appraiser also determined the allocation of the fair
value to the Company's various asset classes;
- an adjustment to deferred revenue of approximately $210 million to
reflect the estimated value of such contracts as if they were
entered into on the Effective Date;
- a liability for long-term commitments not representative of current
market conditions of approximately $84 million for commitments that
were either above current market rates or for capacity not required
based on the Company's business plans primarily related to real
estate leases and domestic and international capacity contracts; and
- an adjustment in the benefit obligation of approximately $40 million
to record unrecognized prior service costs and actuarial gains
(losses) through October 31, 2002.
The net reorganization value and the related allocation to the estimated
fair value of the net assets of WilTel are based upon a variety of estimates and
assumptions about future circumstances and events. Such estimates and
assumptions are inherently subject to significant uncertainties.
F-43
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The impact of the Plan and fresh start accounting on the Predecessor's
consolidated balance sheet as of October 31, 2002 is as follows:
SUCCESSOR
COMPANY
(a) (b) FRESH START (e) AFTER
PREDECESSOR NEW DEBT ACCOUNTING ESCROW ESCROW
COMPANY INVESTMENT RESTRUCTURING ADJUSTMENTS RELEASE RELEASE
----------- ---------- ------------- ----------- ---------- ----------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents $ 517.6 $ -- $ (350.0) $ -- $ 150.0 $ 317.6
Receivables 171.8 -- (1.8) 11.1(c) -- 181.1
Notes receivable 55.0 -- -- -- -- 55.0
Other 69.0 -- (0.9) (13.8)(c) -- 54.3
---------- ---------- ---------- ---------- ---------- ----------
Total current assets 813.4 -- (352.7) (2.7) 150.0 608.0
Property, plant and equipment, net 3,910.1 -- -- (2,408.0)(c) -- 1,502.1
Other assets and deferred charges, net 73.6 -- (3.3) (20.3)(c) -- 50.0
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 4,797.1 $ -- $ (356.0) $ (2,431.0) $ 150.0 $ 2,160.1
========== ========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current liabilities not subject to
compromise:
Accounts payable $ 168.2 $ -- $ (0.5) $ (0.1)(c) -- $ 167.6
Deferred income 100.6 -- -- (25.4)(c) -- 75.2
Accrued liabilities 228.8 -- (0.2) 43.2(c) -- 271.8
Long-term debt due within one year 380.1 -- (373.1) -- -- 7.0
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities not subject to
compromise 877.7 -- (373.8) 17.7 -- 521.6
Current liabilities subject to
compromise 243.0 -- (243.0) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 1,120.7 -- (616.8) 17.7 -- 521.6
Long-term debt 640.8 -- (74.6) -- -- 566.2
Long-term deferred income 362.1 -- -- (184.4)(c) -- 177.7
Other liabilities 51.9 -- -- 87.7(c) -- 139.6
Long-term liabilities subject to
compromise 4,603.9 -- (4,603.9) -- -- --
Minority interest in consolidated
Subsidiary 36.5 -- -- (31.5)(c) -- 5.0
6.75% redeemable cumulative convertible
preferred stock 166.1 -- -- (166.1)(d) -- --
Stockholders' equity (deficit):
Common stock 5.0 0.1 0.4 (5.0)(d) -- 0.5
Capital in excess of par value 3,993.9 149.9 599.6 (3,993.9)(d) -- 749.5
Subscriptions receivable -- (150.0) -- -- 150.0 --
Accumulated deficit (6,167.3) -- 4,339.3 1,828.0(d) -- --
Other comprehensive loss (16.5) -- -- 16.5(d) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total stockholders' equity (deficit) (2,184.9) -- 4,939.3 (2,154.4) 150.0 750.0
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity
(deficit) $ 4,797.1 $ -- $ (356.0) $ (2,431.0) $ 150.0 $ 2,160.1
========== ========== ========== ========== ========== ==========
Explanations of the adjustment columns in the consolidated balance sheet are as
follows:
(a) To record the $150 million investment by Leucadia as a subscription
receivable until the proceeds placed in escrow were released.
(b) To reflect the $350 million prepayment on the credit facility, the
discharge of liabilities subject to compromise, the replacement of the
sale and subsequent leaseback debt with the OTC Notes and issuance of
WilTel common stock upon consummation of the Plan resulting in a gain on
the reorganization of $4.3 billion.
F-44
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(c) To reflect the fair value of net assets as of October 31, 2002.
(d) To reflect the cancellation of WCG's Class A common stock and the 6.75%
redeemable cumulative convertible preferred stock and the elimination of
accumulated deficit and other comprehensive loss.
(e) To reflect the release of the $150 million Leucadia investment from escrow
in December 2002.
4. REORGANIZATION ITEMS, NET
Reorganization items, which consist of items incurred by WCG as a result
of reorganization under the Bankruptcy Code, are as follows for the ten months
ended October 31, 2002:
PREDECESSOR
(IN THOUSANDS)
--------------
Reorganization items, net:
Gain on the discharge of liabilities (a) $4,339,342
Fresh start adjustments to fair value (b) (2,154,464)
Gain on forgiveness of interest (c) 73,898
Write-off of deferred financing costs (d) (92,391)
Write-off of debt discounts (d) (10,055)
Retention bonus agreements with former officers (e) (12,926)
Retention incentive expense (e) (12,108)
Professional fees and other (f) (68,109)
Interest income (g) 2,845
----------
$2,066,032
==========
Explanations of the reorganization items in the table above are as follows:
(a) The gain on the discharge of liabilities subject to compromise primarily
included the Senior Redeemable Notes of approximately $2.4 billion, the
Trust Notes of $1.4 billion, the ADP Claims of approximately $754 million,
the Pre-Spin Services Claims of $100 million, the replacement of the sale
and subsequent leaseback debt with the OTC Notes of approximately $97
million and accrued interest of approximately $137 million, partially
offset by the issuance of $600 million of WilTel common stock.
(b) See Note 3 for a discussion of the adjustments to record net assets to
fair value in fresh start accounting.
(c) As discussed in Note 2, in March 2002, certain provisions of the indenture
related to the Trust Notes were amended. The amendment, among other
things, provided that TWC would make the required March and September 2002
interest payments on behalf of WCG to WCG Note Trust, and WCG would not be
required to reimburse TWC for these interest payments. Since the interest
accrued on these notes through March 2002 was not a claim in the chapter
11 proceedings, WCG recognized a gain of $73.9 million ($0.15 per share)
for the ten months ended October 31, 2002 in accordance with SOP 90-7.
(d) For the ten months ended October 31, 2002, the Company wrote off deferred
financing costs and debt discounts associated with liabilities subject to
compromise and a portion of the deferred financing costs associated with
the Company's credit facility to reorganization items in accordance with
SOP 90-7 since the deferred financing costs and debt discounts do not have
a remaining useful life as a result of the chapter 11 proceedings.
(e) As discussed in Note 20, the Company has recorded $12.9 million in
reorganization expense for the ten months ended October 31, 2002 primarily
related to taxes on the retention bonus agreements with former
F-45
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
officers in place, inasmuch as the Company committed to pay pursuant to
those agreements an aggregate of up to $20 million for taxes incurred by
the beneficiaries of those agreements. In addition, the Company recorded
$12.1 million for the ten months ended October 31, 2002 pursuant to an
employee incentive program that was adopted to retain employees during the
Company's restructuring process.
(f) Professional fees and other primarily consists of professional fees for
legal and financial advisory services in connection with the
reorganization.
(g) The Company recognized interest income of $2.8 million for the ten months
ended October 31, 2002 on accumulated cash that the Company did not
disburse as a result of the chapter 11 proceedings.
5. DISCONTINUED OPERATIONS
On January 25, 2001, WCG's Board of Directors authorized a plan for its
management to divest the Solutions segment. Accordingly, the financial
statements for 2000 reflect the Solutions segment as discontinued operations. On
January 29, 2001, WCG signed an agreement to sell the domestic, Mexican and
Canadian professional services operations of the Solutions segment to Platinum
Equity LLC ("Platinum Equity"). This sale closed on March 31, 2001 for
approximately $100 million in cash and an interest-bearing $75 million
promissory note receivable. In April 2002, Platinum Equity paid $30 million ($21
million in principal and $9 million in interest) on its $75 million promissory
note. Platinum Equity has not paid the remaining $54 million in principal plus
$3 million of accrued interest, which was due in September 2002. See Note 21 for
further discussion of the Platinum Equity dispute.
On March 27, 2001, WCG signed an agreement to sell its remaining Canadian
operations of the Solutions segment to Telus Corporation. The sale closed in
second quarter 2001 for approximately $38 million in cash.
6. SEGMENT DISCLOSURES
The Company's reportable segments are Network and Vyvx, previously called
Emerging Markets. Network primarily includes the nationwide inter-city
fiber-optic network, extended locally and globally. Network provides Internet,
data, voice and video services to companies that use high capacity
communications as an integral part of their service offerings. Network also
offers rights of use in dark fiber, which is fiber that it installs but for
which it does not provide communications transmission services. Network has
built networks and entered into strategic relationships to provide services in
the United States and connectivity to Asia, Australia, New Zealand, Canada,
Mexico and Europe. Vyvx provides network-based solutions for aggregating,
managing and distributing mission-critical content for content owners and rights
holders. In addition, Vyvx also offers a fully integrated hybrid
satellite/terrestrial service to support dedicated and occasional requirements
for the distribution of live content. Other includes certain corporate assets
not attributable to a specific segment such as cash and cash equivalents and
various equity and/or cost-based investments.
The Company evaluates performance based upon segment profit (loss) from
operations, which represents earnings before interest, income taxes,
depreciation and amortization and other unusual, non-recurring or non-cash
items, such as asset impairments and restructuring charges, equity earnings or
losses and minority interest. Segment loss from operations for 2001 and 2000
also excludes lease costs attributable to WCG's ADP lease covering a portion of
the Company's fiber-optic network ("operating lease costs"). A reconciliation of
segment loss from operations to loss from operations is provided below.
Intercompany sales are generally accounted for as if the sales were to
unaffiliated third parties. The following tables present certain financial
information concerning the Company's reportable segments.
F-46
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUCCESSOR COMPANY:
NETWORK VYVX OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
TWO MONTHS ENDED DECEMBER 31, 2002
Revenues:
Capacity and other ............... $ 168,615 $ 23,041 $ -- $ -- $ 191,656
Intercompany ..................... 5,052 20 -- (5,072) --
----------- ----------- ----------- ----------- -----------
Total segment revenues ............. $ 173,667 $ 23,061 $ -- $ (5,072) $ 191,656
=========== =========== =========== =========== ===========
Costs of sales:
Capacity and other ............... $ 159,705 $ 11,900 $ -- $ -- $ 171,605
Intercompany ..................... 20 5,052 -- (5,072) --
----------- ----------- ----------- ----------- -----------
Total cost of sales ................ $ 159,725 $ 16,952 $ -- $ (5,072) $ 171,605
=========== =========== =========== =========== ===========
Segment profit (loss):
Loss from operations ............. $ (50,718) $ (4,354) $ -- $ -- $ (55,072)
Adjustments to reconcile loss
from operations to segment
profit (loss):
Depreciation and amortization . 41,589 2,705 -- -- 44,294
Other:
Asset impairments and
restructuring charges ..... 6,423 2,149 -- -- 8,572
----------- ----------- ----------- ----------- -----------
Segment profit (loss) .............. $ (2,706) $ 500 $ -- $ -- $ (2,206)
=========== =========== =========== =========== ===========
Additions to long-lived assets ..... $ 6,256 $ 178 $ -- $ -- $ 6,434
=========== =========== =========== =========== ===========
PREDECESSOR COMPANY:
NETWORK VYVX OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ------------ -----------
(IN THOUSANDS)
TEN MONTHS ENDED OCTOBER 31, 2002
Revenues:
Capacity and other ....................... $ 879,011 $ 120,996 $ -- $ -- $ 1,000,007
Intercompany ............................. 32,588 149 -- (32,737) --
----------- ----------- ----------- ----------- -----------
Total segment revenues ..................... $ 911,599 $ 121,145 $ -- $ (32,737) $ 1,000,007
=========== =========== =========== =========== ===========
Costs of sales:
Capacity and other ....................... $ 783,418 $ 78,987 $ -- $ -- $ 862,405
Intercompany ............................. 149 32,588 -- (32,737) --
----------- ----------- ----------- ----------- -----------
Total cost of sales ........................ $ 783,567 $ 111,575 $ -- $ (32,737) $ 862,405
=========== =========== =========== =========== ===========
Segment loss:
Loss from operations ..................... $ (477,190) $ (82,892) $ (10,409) $ -- $ (570,491)
Adjustments to reconcile loss from
operations to segment loss:
Depreciation and amortization ......... 415,422 45,567 -- -- 460,989
Other:
Asset impairments and
restructuring charges ............. 19,689 8,363 431 -- 28,483
Contingent liabilities .............. 40,800 -- 13,500 -- 54,300
Settlement gains .................... (11,202) -- -- -- (11,202)
Exit cost reserves no longer required -- -- (3,573) -- (3,573)
Other ............................... (1,532) -- -- -- (1,532)
----------- ----------- ----------- ----------- -----------
Segment loss ............................... $ (14,013) $ (28,962) $ (51) $ -- $ (43,026)
=========== =========== =========== =========== ===========
Additions to long-lived assets ............. $ 73,743 $ 3,160 $ -- $ -- $ 76,903
F-47
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NETWORK VYVX OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ------------ -----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Revenues:
External customers:
Dark fiber .......................... $ 9,101 $ -- $ -- $ -- $ 9,101
Capacity and other .................. 1,012,098 164,322 -- -- 1,176,420
----------- ----------- ----------- ----------- -----------
Total external customers .............. 1,021,199 164,322 -- -- 1,185,521
Intercompany ........................ 56,641 380 -- (57,021) --
----------- ----------- ----------- ----------- -----------
Total segment revenues .................. $ 1,077,840 $ 164,702 $ -- $ (57,021) $ 1,185,521
=========== =========== =========== =========== ===========
Costs of sales:
Dark fiber ............................ $ 3,177 $ -- $ -- $ -- $ 3,177
Capacity and other .................... 929,157 97,121 -- -- 1,026,278
Intercompany .......................... 380 56,641 -- (57,021) --
----------- ----------- ----------- ----------- -----------
Total cost of sales ..................... $ 932,714 $ 153,762 $ -- $ (57,021) $ 1,029,455
=========== =========== =========== =========== ===========
Segment loss:
Loss from operations .................. $(3,425,095) $ (116,931) $ (2,340) $ -- $(3,544,366)
Adjustments to reconcile loss from
operations to segment loss:
Depreciation and amortization ....... 433,032 33,607 479 -- 467,118
Operating lease costs ............... 35,214 -- -- -- 35,214
Other:
Asset impairments and restructuring
charges ......................... 2,928,648 51,277 -- -- 2,979,925
Gain on sale of assets ............ (46,079) -- -- -- (46,079)
Other ............................. -- -- (1,500) -- (1,500)
----------- ----------- ----------- ----------- -----------
Segment loss ............................ $ (74,280) $ (32,047) $ (3,361) $ -- $ (109,688)
=========== =========== =========== =========== ===========
Equity method investments ............... $ 4,843 $ -- $ 3,587 $ -- $ 8,430
Additions to long-lived assets .......... $ 1,318,990 $ 68,678 $ 1,626 $ -- $ 1,389,294
NETWORK VYVX OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ------------ -----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000
Revenues:
External customers:
Dark fiber .......................... $ 62,397 $ -- $ -- $ -- $ 62,397
Capacity and other .................. 608,348 168,332 -- -- 776,680
----------- ----------- ----------- ----------- -----------
Total external customers .............. 670,745 168,332 -- -- 839,077
Intercompany .......................... 34,275 429 -- (34,704) --
----------- ----------- ----------- ----------- -----------
Total segment revenues .................. $ 705,020 $ 168,761 $ -- $ (34,704) $ 839,077
=========== =========== =========== =========== ===========
Costs of sales:
Dark fiber ............................ $ 42,207 $ -- $ -- $ -- $ 42,207
Capacity and other .................... 683,489 97,576 -- -- 781,065
Intercompany .......................... 429 34,275 -- (34,704) --
----------- ----------- ----------- ----------- -----------
Total cost of sales ..................... $ 726,125 $ 131,851 $ -- $ (34,704) $ 823,272
=========== =========== =========== =========== ===========
Segment loss:
Loss from operations .................. $ (404,900) $ (36,551) $ (7,220) $ -- $ (448,671)
Adjustments to reconcile loss from
operations to segment loss:
Depreciation and amortization ....... 154,288 30,269 467 -- 185,024
Operating lease costs ............... 52,035 -- -- -- 52,035
Other ............................... (686) -- -- -- (686)
----------- ----------- ----------- ----------- -----------
Segment loss ............................ $ (199,263) $ (6,282) $ (6,753) $ -- $ (212,298)
=========== =========== =========== =========== ===========
Equity method investments ............... $ 15,335 $ -- $ 77,454 $ -- $ 92,789
Additions to long-lived assets .......... $ 3,444,286 $ 37,113 $ 2,506 $ -- $ 3,483,905
F-48
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
TOTAL ASSETS
-------------------------------
SUCCESSOR PREDECESSOR
COMPANY COMPANY
---------- ----------
AS OF DECEMBER 31,
2002 2001
---------- ----------
(IN THOUSANDS)
Network .............................. $1,577,372 $4,446,479
Vyvx ................................. 82,819 230,155
Other ................................ 402,082 1,315,392
---------- ----------
Total assets ....................... $2,062,273 $5,992,026
========== ==========
The following geographic area data includes revenues from external
customers based on origin of services rendered and long-lived assets based upon
physical location for the following periods.
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ---------------------------------------------
FOR THE TWO FOR THE TEN
MONTHS ENDED MONTHS ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, OCTOBER 31, -----------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
(IN THOUSANDS)
Revenues from external customers:
United States ................. $ 179,328 $ 943,451 $1,125,319 $ 815,122
Other ......................... 12,328 56,556 60,202 23,955
---------- ---------- ---------- ----------
Total ........................... $ 191,656 $1,000,007 $1,185,521 $ 839,077
========== ========== ========== ==========
SUCCESSOR PREDECESSOR
COMPANY COMPANY
---------- ----------
AS OF DECEMBER 31,
2002 2001
---------- ----------
(IN THOUSANDS)
Long-lived assets:
United States ...................... $1,403,541 $4,215,867
Other .............................. 56,469 137,346
---------- ----------
Total ................................ $1,460,010 $4,353,213
========== ==========
Long-lived assets are comprised of property, plant and equipment assets.
In 2002, one of Network's customers exceeded 10% of the Company's revenues
with sales of approximately $73 million and $442 million for the two months
ended December 31, 2002 and for the ten months ended October 31, 2002,
respectively. In 2001, two of Network's customers exceeded 10% of the Company's
revenues with sales from each customer of approximately $402 million and $122
million, respectively. In 2000, three of Network's customers exceeded 10% of the
Company's revenues with sales from each customer of approximately $169 million,
$133 million and $101 million, respectively.
F-49
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES
2002
Asset impairments and restructuring charges of $8.6 million for the two
months ended December 31, 2002 included $8.4 million for severance related
expenses. Asset impairments and restructuring charges of $28.5 million for the
ten months ended October 31, 2002 included $21.6 million for severance related
expenses and $4.0 million related to the early termination or settlement of
lease agreements. The Company had workforce reductions of approximately 1,400
employees in 2002 and paid out approximately $26 million relating to severance
in 2002.
During the first three quarters of 2002, the Company compared estimated
future net cash flows associated with its long-lived assets with the remaining
basis of such long-lived assets on a going concern basis, and determined its
remaining basis in its long-lived assets was recoverable through future cash
flows. Estimates of future net cash flows used for potential impairment analysis
were consistent with estimates used by the Company's financial advisors to
arrive at the Company's reorganization value and included assumptions regarding
decreased prices for the Company's products and services, significant increases
in sales quantities in periods beyond 2002 and that the Company would continue
to have adequate liquidity. It was determined that no impairment was necessary
for the ten months ended October 31, 2002. The adoption of fresh start
accounting resulted in a reduction in the Company's carrying value of long-lived
assets by approximately $2.4 billion and is reported as a reorganization item.
The reorganization value was based on a discounted cash flow methodology, as
required, whereas the impairment tests utilized undiscounted cash flows, as
required. This is the primary reason no impairment was necessary during the
first three quarters of 2002, and a reduction in the carrying value of
long-lived assets was necessary at the adoption of fresh start accounting.
2001
During and subsequent to fourth quarter 2001, several industry events
occurred, including high profile bankruptcies of companies such as Global
Crossing Ltd. and Enron Corp. and other actions by WCG's peer group, along with
a continuing downward spiral of valuations associated with telecom companies. As
a result of the combination of industry events, conditions specific to WCG and
as part of its preparation of a comprehensive plan to restructure and
de-leverage its balance sheet, management revised its plans and intentions with
regard to the use of certain long-lived assets, and accordingly, revised its
estimates of future cash flows associated with these long-lived assets. Certain
assets were considered excess, and WCG measured future cash flows based on
disposition. These assets were impaired as described below using the present
value of future cash flows for fair value. Other long-lived assets were
currently in use or projected to be in use and these assets were not impaired
under SFAS 121 based on management's latest estimates of future cash flows.
These estimates included assumptions regarding decreased prices for WCG's
products and services, significant increases in sales quantities in periods
beyond 2002 and that WCG had adequate liquidity.
These events also resulted in abandoning or suspending projects because of
a reduced workforce or uncertainties related to the availability of funding to
complete the projects and limited growth profiles because of uncertainties that
were inherent in WCG's business. This analysis resulted in impairments for the
year ended December 31, 2001 as follows:
(In millions)
Dark fiber and conduit (a)................... $ 1,876
Optronics equipment (b)...................... 336
International assets and undersea cable (c).. 256
Wireless capacity, net (d)................... 215
Abandoned projects and other (e)............. 211
Goodwill and other intangible assets (f)..... 86
---------
Total impairment of long-lived assets..... $ 2,980
=========
F-50
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Explanations of the items in the table above are as follows:
(a) WCG assumed that on various routes it would keep 8 to 24 fibers for its
internal use. Previous assumptions were that WCG would keep an average of
24 fibers for its own use. WCG's fourth quarter 2001 impairment charge of
approximately $1.9 billion considered this change and revised estimates of
future cash flows for all excess fiber and conduit.
(b) Because of increasingly lower prices for excess optronics, WCG recorded a
fourth quarter 2001 impairment charge of approximately $186 million. WCG
had previously recorded a third quarter 2001 impairment charge of
approximately $150 million related to excess optronics.
(c) As of December 31, 2001, WCG had ownership interests in a number of
international routes in process of completion for which the funding of
that completion was in doubt. In addition, the completion or expected
completion of several undersea cable systems had negatively impacted
prices. Because of these conditions, WCG did not believe it would recover
its investment in these international assets. As such, WCG recorded a
fourth quarter 2001 impairment charge of approximately $256 million on
international routes.
(d) WCG had previously entered into a strategic relationship with Winstar
Communications, Inc. ("Winstar"). WCG planned to use wireless technology
to provide high capacity local exchange and internet access services to
companies located in buildings not served by fiber optic cable. However,
in 2001 Winstar filed for bankruptcy protection and the assets were
subsequently purchased by another company. Accordingly, WCG fully impaired
its basis in the Winstar capacity that it had previously purchased by
recording a net fourth quarter 2001 impairment charge of approximately
$215 million.
(e) WCG recorded a fourth quarter 2001 impairment charge of approximately $181
million primarily representing the write-off of project costs that would
not be completed because of funding constraints and/or personnel
reductions. WCG had previously recorded a third quarter 2001 charge of
approximately $30 million for similar items.
(f) WCG recorded a fourth quarter 2001 impairment charge of approximately $75
million representing the remaining balances of its goodwill and other
intangibles. WCG had previously recorded a third quarter 2001 impairment
charge of approximately $11 million related to goodwill associated with
its satellite operations.
The impairments discussed above related to the Network segment with the
exception of goodwill and other intangibles of which $51.3 million related to
the Vyvx segment.
8. OTHER OPERATING EXPENSE (INCOME), NET
Transactions included in segment profit (loss)
Other operating income of $6.2 million and $18.8 million for the two
months ended December 31, 2002 and the ten months ended October 31, 2002,
respectively, consisted primarily of cash settlement gains related to the
termination of various agreements.
In 2001, other operating income of $10.8 million primarily included cash
settlement gains of $28.7 million related to the termination of various
agreements, partially offset by expenses related to a loss provision on notes
receivable of $12.0 million and severance charges of $4.7 million.
F-51
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Transactions excluded from segment profit (loss)
Other operating expense of $38.0 million for the ten months ended October
31, 2002 primarily included a $54.3 million accrual for contingent liabilities
partially offset by non-cash settlement gains related to the termination of
various agreements of $8.3 million, a $3.6 million credit from the determination
that remaining liabilities accrued for exit costs established in previous years
related to various business sales and abandonments were no longer required, and
income of $2.9 million related to revisions of estimated costs associated with
the sale of the single strand of lit fiber in fourth quarter 2001.
WCG had other operating income of $47.6 million in 2001. In October 2001,
WCG and WorldCom, Inc. ("WorldCom") reached an agreement in which WCG sold to
WorldCom the single strand of lit fiber that WCG had retained when it sold the
majority of its predecessor network to WorldCom in 1995. In exchange for
granting title of the fiber to WorldCom, WCG received cash of $143.6 million
from WorldCom resulting in a gain to WCG in fourth quarter 2001 of $46.1
million. WCG did not record any revenue from this sale. WCG purchased from
WorldCom a 20-year IRU of capacity on WorldCom's network for $100 million. The
agreement for the sale of the single strand of lit fiber and the purchase of the
IRU settled ongoing disputes of operational matters dating back to 1995.
9. BENEFIT (PROVISION) FROM INCOME TAXES
The benefit (provision) from income taxes includes:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ----------------------------------------------
FOR THE TWO FOR THE TEN
MONTHS MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------ ------------ -----------------------------
2002 2002 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
Current:
Federal ................................. $ -- $ -- $ -- $ (1,849)
State ................................... (3) (25) (64) (178)
Foreign ................................. -- -- -- --
------------ ------------ ------------ ------------
(3) (25) (64) (2,027)
Deferred:
Federal ................................. -- (850) (41,916) 37,323
State ................................... -- (155) (8,145) 10,909
Foreign ................................. -- -- 4 (12,098)
------------ ------------ ------------ ------------
-- (1,005) (50,057) 36,134
------------ ------------ ------------ ------------
Total benefit (provision) for income taxes $ (3) $ (1,030) $ (50,121) $ 34,107
============ ============ ============ ============
The U.S. and foreign components of income (loss) before income taxes are
as follows:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ----------------------------------------------
FOR THE TWO FOR THE TEN
MONTHS MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
------------ ------------ -----------------------------
2002 2002 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
United States ......................... $ (60,625) $ 1,146,955 $ (3,618,728) $ (294,381)
Foreign ............................... (421) 185,270 (141,508) (17,414)
------------ ------------ ------------ ------------
Total income (loss) before income taxes $ (61,046) $ 1,332,225 $ (3,760,236) $ (311,795)
============ ============ ============ ============
F-52
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's undistributed earnings from non U.S. subsidiaries in 2002,
2001 and 2000 have been accounted for as if fully repatriated.
Reconciliations from the benefit (provision) from income taxes at the
federal statutory rate to the benefit (provision) from income taxes are as
follows:
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ----------------------------------------------
FOR THE TWO FOR THE TEN
MONTHS MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
------------ ------------ -----------------------------
2002 2002 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
Benefit (provision) at statutory rate ...... $ 21,366 $ (466,279) $ 1,316,083 $ 109,128
Increases (reductions) resulting from:
State income taxes ........................ -- (119) (5,335) 6,191
Foreign operations ........................ (147) 64,845 (46,547) 1,080
Goodwill amortization ..................... -- -- (866) (986)
Non-deductible costs related to asset sales -- -- (5,426) --
Non-deductible reorganization expenses .... (566) (11,736) -- --
Valuation allowance adjustments ........... (19,920) (964,313) (1,108,965) (100,249)
Tax benefits (provisions) allocated from
TWC .................................... -- -- (200,718) 27,158
Non-taxable gain on debt discharge, net ... -- 1,377,623 -- --
Other--net ................................ (736) (1,051) 1,653 (8,215)
------------ ------------ ------------ ------------
Benefit (provision) from income taxes ...... $ (3) $ (1,030) $ (50,121) $ 34,107
============ ============ ============ ============
Significant components of deferred tax assets and liabilities as of
December 31 are as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ ------------
2002 2001
------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Deferred revenues .................................. $ 64,661 $ 194,925
Property, plant and equipment, including impairments 832,691 403,705
Investments, including impairments ................. 105,260 76,955
Other asset impairments ............................ 172,948 191,224
Reserves ........................................... 73,576 63,335
Net operating loss carryforward .................... 1,039,321 382,644
Other .............................................. 13,738 17,243
------------ ------------
2,302,195 1,330,031
Valuation allowance ................................. (2,250,621) (1,286,308)
------------ ------------
Total deferred tax assets ........................... 51,574 43,723
Deferred tax liabilities:
Property, plant and equipment ...................... -- --
Investments ........................................ -- --
Other .............................................. 51,574 43,723
------------ ------------
Total deferred tax liabilities ...................... 51,574 43,723
------------ ------------
Net deferred tax liability .......................... $ -- $ --
============ ============
As of December 31, 2002, the Company had $2.4 billion of federal net
operating losses, of which $859.9 million, $1.4 billion and $126.2 million will
expire in 2020, 2021 and 2022, respectively, $297.7 million of estimated capital
loss carryforwards, which will expire in 2005 and $71.2 million of foreign net
operating losses, as well as various state net operating losses, that expire at
various dates. Valuation allowances have been established that fully reserve the
net deferred tax assets. Uncertainties that may affect the utilization of the
loss
F-53
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
carryforwards include future operating results, tax law changes, rulings by
taxing authorities regarding whether certain transactions are taxable or
deductible and expiration of carryforward periods. The valuation allowance
increased in 2002 primarily to eliminate the deferred tax asset created by the
tax reversal of fresh start accounting adjustments.
If the Company had filed a separate federal income tax return for periods
presented prior to the spin-off of WCG from TWC, the 2000 tax benefit of $34.1
million would have changed to a $50.0 million tax provision to eliminate the net
deferred tax asset created in 2000 by the additional 1999 net operating loss
carryforward.
There were no cash refunds for income taxes in 2002 and 2001 and $0.5
million in 2000.
10. EMPLOYEE BENEFIT PLANS
After the sale of Solutions to Platinum Equity in March 2001, WCG retained
the salaried employees' noncontributory defined benefit pension plans. However,
no future service benefits will be accrued in these plans as the participants
are no longer employed by WCG. Effective January 1, 2001, separate
noncontributory defined benefit pension plans were established for WCG employees
that had previously been covered under TWC's plans. Subsequent to the tax-free
spin-off from TWC (see Note 16), these plans, as well as other postretirement
medical benefit obligations, were transferred from TWC to WCG for active
employees at that date. Effective May 31, 2001, WCG merged these transferred
noncontributory defined benefit pension plans and other postretirement medical
benefit obligations with the salaried employees' plans retained by WCG after the
sale of Solutions. These plans were transferred to WCL in April 2002 ("WilTel
Plans"). The Company does not provide a pension plan for employees hired
subsequent to the spin-off from TWC. Other postretirement medical benefits are
not provided for employees hired subsequent to January 1, 1992. As part of WCG's
bankruptcy proceedings, a $1 million obligation for the non-qualified pension
plan benefits for employees previously employed by Solutions was discharged.
The following table presents the changes in benefit obligations and plan
assets for pension benefits and other postretirement benefits for the WilTel
Plans for the periods indicated. It also presents a reconciliation of the funded
status of these benefits to the amount recognized in the accompanying
consolidated balance sheet.
F-54
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PENSION BENEFITS
----------------------------------------------
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------
FOR THE TWO FOR THE TEN
MONTHS ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
2002 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of period .......... $ 110,373 $ 89,063 $ 55,531
Benefit obligation transferred from TWC ............ -- -- 33,243
Service cost ....................................... 897 4,535 4,921
Interest cost ...................................... 1,229 5,754 5,365
Actuarial (gain) loss .............................. (11,652) 22,120 2,969
Benefits paid ...................................... (308) (6,433) (3,639)
Plan curtailment ................................... (2,727) (3,629) (9,327)
Discharge of Solutions non-qualified plan obligation -- (1,037) --
------------ ------------ ------------
Benefit obligation at end of period ................. 97,812 110,373 89,063
------------ ------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of period ... 57,912 75,832 45,039
Assets transferred from TWC ........................ -- -- 36,387
Actual return on plan assets ....................... (244) (12,140) (3,546)
Employer contribution .............................. -- 652 1,591
Benefits paid ...................................... (308) (6,433) (3,639)
------------ ------------ ------------
Fair value of plan assets at end of period .......... 57,360 57,911 75,832
------------ ------------ ------------
Funded status ....................................... (40,452) (52,462) (13,231)
Unrecognized net actuarial (gain) loss .............. (10,678) -- 1,917
Unrecognized prior service cost ..................... -- -- 702
------------ ------------ ------------
Net accrued benefit cost ............................ $ (51,130) $ (52,462) $ (10,612)
============ ============ ============
F-55
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER POSTRETIREMENT BENEFITS
----------------------------------------------
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------
FOR THE TWO FOR THE TEN
MONTHS ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
2002 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of period . $ 2,550 $ 4,081 $ --
Benefit obligation transferred from TWC ... -- -- 3,443
Service cost .............................. 18 112 156
Interest cost ............................. 28 144 171
Plan participants' contributions .......... 1 3 --
Actuarial (gain) loss ..................... -- (1,485) 311
Benefits paid ............................. (10) (24) --
Plan curtailment .......................... (554) (281) --
------------ ------------ ------------
Benefit obligation at end of period ........ 2,033 2,550 4,081
------------ ------------ ------------
Change in plan assets:
Fair value of plan assets at beginning
of period ................................. -- -- --
Assets transferred from TWC ............... -- -- --
Actual return on plan assets .............. -- -- --
Employer contribution ..................... 9 22 --
Plan participants' contributions .......... 1 3 --
Benefits paid ............................. (10) (25) --
------------ ------------ ------------
Fair value of plan assets at end of period . -- -- --
------------ ------------ ------------
Funded status .............................. (2,033) (2,550) (4,081)
Unrecognized net actuarial loss ............ -- -- 2,029
Unrecognized prior service cost ............ -- -- 73
------------ ------------ ------------
Net accrued benefit cost ................... $ (2,033) $ (2,550) $ (1,979)
============ ============ ============
The net accrued benefit cost for both pension benefits and other
postretirement benefits is included in the accompanying balance sheet as accrued
benefit cost within accrued liabilities.
The following tables present net pension expense and other postretirement
benefit expense for the WilTel Plans. The amounts reported for 2001 include
total year activity for retained Solutions salaried employees as well as
activity for WCG active employees subsequent to the spin-off from TWC. The
amounts reported in 2000 include activity only for retained Solutions salaried
employees, as WCG employees were included in the TWC plans for this period. The
fresh start adjustments fully recognize the unfunded benefit obligation in
accrued benefit costs and set the unrecognized prior service cost and
unrecognized net loss to zero.
F-56
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ----------------------------------------------
FOR THE TWO FOR THE TEN
MONTHS MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
------------ ------------ -----------------------------
2002 2002 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
Components of net periodic pension expense:
Service cost ...................................... $ 897 $ 4,535 $ 4,921 $ 3,877
Interest cost ..................................... 1,229 5,754 5,365 3,526
Expected return on plan assets .................... (731) (6,404) (6,991) (4,531)
Amortization of prior service credit .............. -- 72 9 (280)
Recognized net actuarial gain ..................... -- 129 (489) (186)
Curtailment gain .................................. (2,727) 246 (1,374) --
------------ ------------ ------------ ------------
Net periodic pension expense (income) ......... (1,332) 4,332 1,441 2,406
Fresh start valuation adjustment ................... -- 39,207 -- --
Discharge of Solutions non-qualified plan obligation -- (1,037) -- --
------------ ------------ ------------ ------------
Total pension cost (income) ................... $ (1,332) $ 42,502 $ 1,441 $ 2,406
============ ============ ============ ============
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ----------------------------------------------
FOR THE TWO FOR THE TEN
MONTHS MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
------------ ------------ -----------------------------
2002 2002 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS)
Components of net periodic postretirement benefit
expense:
Service cost ...................................... $ 18 $ 112 $ 156 $ --
Interest cost ..................................... 28 144 171 --
Amortization of prior service credit .............. -- 52 43 --
Recognized net actuarial (gain) loss .............. -- 3 (16) --
Curtailment charge (credit) ........................ (554) 8 -- --
------------ ------------ ------------ ------------
Net periodic pension expense .................... (508) 319 354 --
Fresh start valuation adjustment ................... -- 274 -- --
------------ ------------ ------------ ------------
Total postretirement cost ...................... $ (508) $ 593 $ 354 --
============ ============ ============ ============
Net pension expense related to WCG's participation in TWC's plans was $1.1
million and $2.7 million for 2001 and 2000, respectively. Other postretirement
benefit expense related to WCG's participation in TWC's plans was $0.2 million
and $0.4 million for 2001 and 2000, respectively.
The following are the weighted-average assumptions utilized as of December
31 of the year indicated:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------------- --------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
--------- ----------- --------- -----------
2002 2001 2002 2001
--------- ----------- --------- -----------
Discount rate ................ 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 7.00% 10.00% N/A N/A
Rate of compensation increase 3.50% 5.00% N/A N/A
The weighted-average expected long-term rate of return on plan assets
determined as of the beginning of 2002 was 9.5%. This rate was used until the
subsequent interim measurement of assets and obligations as of October
F-57
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
31, 2002. At that time, the expected long-term rate of return on plan assets was
reduced to 7.0%. The annual assumed rate of increase in the health care cost
trend rate for 2003 is 12% which systematically decreases to 5% by 2012.
The various nonpension postretirement benefit plans which WCG sponsors
provide for retiree contributions and contain other cost-sharing features such
as deductibles and coinsurance. The accounting for these plans anticipates
future cost-sharing changes to the written plans that are consistent with WCG's
expressed intent to increase the retiree contribution rate generally in line
with health care cost increases.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1-PERCENTAGE-POINT
--------------------
INCREASE DECREASE
-------- --------
(IN THOUSANDS)
Effect on total of service and interest cost components........... $ 5 $ (4)
Effect on postretirement benefit obligation....................... $ 295 $ (237)
Beginning January 1, 2001, the Company established and continues to
maintain a defined contribution plan for its employees. Prior to January 1,
2001, the Company's employees were included in various defined contribution
plans maintained by TWC. The Company's costs related to these plans were $10.6
million, $12.1 million and $8.1 million in 2002, 2001 and 2000, respectively.
These costs fluctuate as a result of changes in the eligible employee base.
11. INVESTMENTS
SUCCESSOR COMPANY
The Company has no short-term or long-term investments as of December 31,
2002 as all investments were either monetized, revalued to zero in conjunction
with fresh start accounting or qualify as cash equivalents.
Certain marketable equity securities were sold for proceeds of $2.0
million for the two months ended December 31, 2002. The Company recognized no
gross realized gains or losses as the fair value was set to equal the sales
price in conjunction with fresh start accounting.
PREDECESSOR COMPANY
Short-term investments
Short-term investments as of December 31, 2001 consisted of the following
(in thousands):
PREDECESSOR
COMPANY
-----------
Debt securities:
Debt securities mutual funds.................. $ 303,340
Corporate debt securities..................... 256,762
Government debt securities.................... 214,106
Other debt securities and time deposits....... 85,980
---------
Total debt securities....................... 860,188
Preferred stocks................................ 33,705
Marketable equity securities.................... 10,920
---------
Short-term investments...................... $ 904,813
=========
F-58
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Debt securities
The carrying amount of these investments was fair value, which
approximated cost. These investments were considered short-term based on
management's intent and ability to liquidate the investments within one year.
Interest and other investing income consisted primarily of interest income
related to the debt securities.
Preferred stock
The carrying amount of the preferred stock investments was fair value,
which approximated cost.
Marketable equity securities
As of December 31, 2001, the carrying amount of the marketable equity
securities was fair value with the aggregate cost of these investments, net of
write-downs, of $1.1 million and gross unrealized gains of $9.8 million after
taking into effect the write-downs discussed below.
A loss of $89.8 million and $1.7 million was recognized in 2001 and 2000,
respectively, related to write-downs of certain marketable equity security
investments resulting from management's determination that the decline in the
value of these investments was other than temporary.
Certain marketable equity securities were sold for proceeds of $7.0
million, $104.5 million and $254.4 million for the ten months ended October 31,
2002 and for the years ended December 31, 2001 and 2000, respectively. Gross
realized gains of $0.7 million, $63.7 million and $108.3 million were recognized
for the ten months ended October 31, 2002 and for the years ended December 31,
2001 and 2000, respectively, and gross realized losses of $40.5 million and
$14.6 million were recognized in 2001 and 2000, respectively. A gain of $214.7
million was also recognized in 2000 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.
Income of $40.9 million was recorded in 2001 from the change in market
value of cashless collars on certain marketable equity securities in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended since the cashless collars did not qualify as a hedge.
All of the cashless collars were terminated in 2001 yielding proceeds of $40.9
million.
Long-term investments
Long-term investments as of December 31, 2001 consisted of the following
(in thousands):
PREDECESSOR
COMPANY
-----------
Equity method..................................... $ 8,430
Cost method....................................... 3,125
----------
Long-term investments......................... $ 11,555
==========
Equity and cost method investments and advances to investees
The Company's equity losses were $2.7 million, $35.5 million and $20.3
million for the ten months ended October 31, 2002 and for the years ended
December 31, 2001 and 2000, respectively. Equity losses in 2001 included $20.0
million of equity losses related to WCG's equity investment in iBEAM in third
quarter 2001. WCG purchased the assets of iBEAM out of bankruptcy in December
2001. In addition, equity losses related to WCG's investment in Algar Telecom
Leste, S. A. ("ATL") were $10.4 million and $12.8 million in 2001 and 2000,
respectively. WCG sold its investment in ATL in two separate transactions in
2001 and 2000 as discussed
F-59
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
below.
Cash dividends of $4.5 million were received from an investment in a
company carried on the equity basis in 2001. Property distributions of $8.5
million were also received from an equity method investment in 2001. These
dividends and distributions were recorded as a return of investment and,
therefore, had no income statement impact.
A loss of $117.8 million and $32.8 million was recognized in 2001 and
2000, respectively, related to write-downs of certain cost-based and
equity-method investments resulting from management's estimate that the decline
in the value of these investments was other than temporary.
Other cost investments in the table above consisted primarily of common
stock investments in various privately-held companies in the telecommunications
industry.
In a series of transactions in first quarter 2000, WCG sold to an entity
jointly owned by SBC and Telefonos de Mexico S.A. de C.V., 7% and 30% of ATL's
total preferred shares and common stock, respectively. The partial sale of WCG's
investment in ATL, which had a carrying value of $30 million, yielded proceeds
of approximately $168 million. 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. As of December
31, 2000, WCG owned 66% of the preferred shares and 19% of the common stock of
ATL.
WCG entered into an agreement with America Movil, S.A. de C.V. in second
quarter 2001 to sell its remaining economic interest in ATL. The transaction
closed in third quarter 2001 and WCG received $309.6 million in cash with an
additional $90.0 million due from America Movil, S.A. de C.V. on May 15, 2002. A
gain of $45.1 million was recognized from the sale. In February 2002, America
Movil, S.A. de C.V. prepaid its note from the sale of ATL by paying a discounted
amount of $88.8 million.
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 was summarized as follows:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------- ------------
DEPRECIABLE
LIVES* 2002 2001
----------- --------- ------------
(IN YEARS) (IN THOUSANDS)
Network equipment (including fiber, optronics and
capacity IRUs)....................................... 3 - 20 $ 951,744 $ 3,253,651
Right-of-way........................................... 20 127,508 139,029
Buildings and leasehold improvements................... 10 - 30 140,960 595,083
Computer equipment and software........................ 2 - 3 124,330 397,491
General office furniture and fixtures.................. 5 - 8 61,947 70,086
Construction in progress............................... Not
applicable 35,455 346,385
Other.................................................. Various 61,850 152,307
--------- -----------
1,503,794 4,954,032
Less accumulated depreciation and amortization....... (43,784) (600,819)
---------- -----------
$1,460,010 $ 4,353,213
========== ===========
* As of December 31, 2002
Depreciation expense of $44.3 million, $461.0 million, $459.4 million and
$176.1 million was recorded for the two months ended December 31, 2002, for the
ten months ended October 31, 2002 and for the years ended December 31, 2001 and
2000, respectively.
In conjunction with fresh start accounting, the Company reassessed and
changed its useful lives for its property, plant and equipment from a weighted
average life of 21 years to 15 years. The impact of this change on
F-60
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Company's depreciation and amortization expense for the two months ended
December 31, 2002 was approximately $14 million.
13. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER NONCURRENT LIABILITIES
The Company's cash accounts reflect credit balances to the extent checks
written have not been presented for payment. The amounts of these credit
balances included in accounts payable were $21.9 million and $66.3 million as of
December 31, 2002 and 2001, respectively.
Accrued liabilities as of December 31 consisted of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
2002 2001
----------- -----------
(IN THOUSANDS)
Litigation................................................. $ 93,109 $ 20,500
Employee costs............................................. 35,446 62,646
Taxes, other than income taxes............................. 32,074 58,056
Unfavorable contractual commitments........................ 33,977 --
Interest................................................... 1,573 132,696
Other...................................................... 39,603 99,221
----------- ----------
$ 235,782 $ 373,119
=========== ==========
Other noncurrent liabilities as of December 31 consisted of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
2002 2001
----------- -----------
(IN THOUSANDS)
Employee costs............................................ $. 60,882 $ 16,059
Unfavorable contractual commitments....................... 44,976 --
Other..................................................... 31,074 12,876
----------- ----------
$ 136,932 $ 28,935
=========== ==========
14. ASSET RETIREMENT OBLIGATIONS
As discussed in the Recent Accounting Standards in Note 1, the Company
implemented SFAS No. 143 relating to asset retirement obligations as part of
implementing fresh start accounting as required by SOP 90-7 and recorded a
cumulative effect of change in accounting principle of $8.7 million in 2002 (net
of a zero tax provision). The cumulative effect of change in accounting
principle represents accretion and depreciation expense the Company would have
recorded had the provisions of SFAS No. 143 been in effect on the dates the
obligations were incurred. The Company's asset retirement obligations relate
primarily to two categories of assets:
FIBER AND CONDUIT - The Company has right-of-way agreements which
generally require the removal of fiber and conduit upon the termination of
those agreements.
TECHNICAL SITES - The Company leases land for technical sites and
leases space at technical sites along its network. Termination of these
lease agreements normally requires removal of equipment and other assets,
and restoration of the lease property to its original condition.
The estimation of the fair value of asset retirement obligations requires
the significant use of estimates regarding the amounts and timing of expected
cash flows. The fair value of the asset retirement obligations was
F-61
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
calculated using credit-adjusted risk-free rates ranging from 8% to 14%, which
were assigned based upon the expected timing of cash flows for each respective
obligation.
Upon adoption of SFAS No. 143 as of October 31, 2002, the Company recorded
an asset retirement obligation of $25.7 million. For the two months ended
December 31, 2002, the Company recognized $0.5 million of expense in
depreciation and amortization expense to accrete the liability to $26.2 million
as of December 31, 2002.
If the Company had adopted SFAS No. 143 on January 1, 2001, it would have
recorded a liability of $20.6 million. Accretion expense for the year ended
December 31, 2001 and for the ten months ended October 31, 2002 would have been
$2.6 million and $2.5 million, respectively. The liability as of December 31,
2001 would have been $23.2 million.
15. DEBT
Long-term debt as of December 31 consisted of the following:
WEIGHTED-
AVERAGE SUCCESSOR PREDECESSOR
INTEREST COMPANY COMPANY
RATE* 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Exit Credit Agreement ......................................... 6.3% $ 375,000 $ 975,000
OTC Notes ..................................................... 7.9% 141,663 --
PowerTel ...................................................... 8.4% 44,353 36,317
Senior Redeemable Notes, 10.70% - 11.875%, due 2007 - 2010 .... -- -- 2,438,692
Trust Notes due 2004 .......................................... -- -- 1,400,000
ADP Claims .................................................... -- -- 750,000
Sale and subsequent leaseback to TWC .......................... -- -- 269,194
Other, primarily capital leases ............................... 8.6% 8,473 42,064
------------ ------------
569,489 5,911,267
Less current maturities ....................................... (51,503) (72,488)
------------ ------------
Long-term debt ................................................ $ 517,986 $ 5,838,779
============ ============
- -----------
* As of December 31, 2002
A description of the Company's debt obligations listed in the table above
is as follows:
Exit Credit Agreement
As of December 31, 2001, WCL's credit facility consisted of amortizing
term loans totaling $975 million, which WCL had fully utilized, and a revolving
credit facility of $525 million, which WCL had not utilized. In connection with
the commencement of the chapter 11 proceedings, WCL and the credit facility
lenders entered into an amendment of the credit facility (the "Interim
Amendment"), which was effective until the Plan was consummated. The Interim
Amendment granted a waiver of all defaults and events of default occurring prior
to April 22, 2002, so long as there was no occurrence of a subsequent default,
as well as the amendment of certain other provisions of the credit facility to
avoid the occurrence of events of default as a result of the commencement of the
chapter 11 proceedings. In accordance with the Interim Amendment, WCL prepaid
$250 million ($200 million in April 2002 and $50 million in July 2002) leaving a
balance of $725 million prior to WCG's emergence from the chapter 11
proceedings.
On October 15, 2002, WCL and the credit facility lenders entered into the
Exit Credit Agreement and paid the lenders $350 million upon the effectiveness
of the Exit Credit Agreement leaving a balance under the Exit Credit
F-62
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Agreement of $375 million. The Exit Credit Agreement combined the term
loans under the previous credit facility into one loan repayable in installments
of principal beginning in June 2005 through September 2006 and currently bears
interest at either the Prime rate plus a margin of 3.50% or LIBOR plus a margin
of 4.50%, at the Company's option. In July 2004, the margin, in each case, will
increase 1%. In October 2002, WCL locked in a rate of 6.34% for three months
based on LIBOR. The Exit Credit Agreement does not provide for revolving loans
for WCL. Among other things, the Exit Credit Agreement provides for:
- a security interest in all of the domestic assets of the Company,
except for those assets secured under the OTC Notes in which the
lenders have a second priority mortgage lien on the assets secured
by the OTC Notes;
- prepayment of the term loans from cash proceeds received from
refinancing all or a portion of the Exit Credit Agreement, a sale
leaseback transaction (not otherwise permitted), issuance of debt
(not otherwise permitted), or asset sales (not otherwise permitted);
- prepayment of the term loans equal to 100% of excess cash flows and
50% of cash proceeds received from the sale of equity formation of a
joint venture or any other similar transaction;
- the Company meeting certain financial targets, as defined;
- aggregate dollar limitations on certain activities such as
indebtedness, investments and capital expenditures;
- the Company making certain representations and warranties, including
the existence of no material adverse effect, as defined;
- restrictions on the ability of WCL to transfer funds to WilTel,
except for certain payments as outlined in the Exit Credit
Agreement; and
- the ability for WCL to request up to $45 million in
cash-collateralized letters of credit, less the amount of cash
deposits and pledges made to third parties in an amount not to
exceed $30 million. The total of cash collateralized letters of
credit, plus cash deposits and pledges made to third parties,
outstanding as of December 31, 2002 was $39.9 million. Amounts held
as collateral for outstanding letters of credit are reflected
primarily in other noncurrent assets. In February 2003, the credit
facility lenders consented to WCL posting cash collateral to secure
an appeal bond in the Thoroughbred Technology and
Telecommunications, Inc. litigation, as discussed in Note
21, and provided that, to the extent that such collateral did not
exceed $50 million, it would not count against the $45 million cash
deposits and pledges limitation. The appeal bond was put in place in
March 2003 at a cost less than the allowed $50 million.
WCL is the obligor under the Exit Credit Agreement and has pledged
substantially all of its assets to secure its obligations under that agreement.
In addition, WCL's obligations are guaranteed by WilTel and secured by
substantially all of the assets of the Company. The Exit Credit Agreement ranks
senior to the Company's other debt.
Sale and subsequent leaseback to TWC and the OTC Notes
In September 2001, the Company sold its headquarters building and other
ancillary assets to TWC for approximately $276 million in cash. Concurrent with
the sale, the Company leased its headquarters building for a period of ten years
and other ancillary assets for a period of three to ten years with varying
payment terms. On April 25, 2002, TWC notified the Company that the commencement
of the chapter 11 proceedings was an event of default under certain agreements
with TWC including the sale and subsequent leaseback agreements.
As discussed in Note 2, the sale and subsequent leaseback agreement was
terminated and replaced with the OTC Notes of approximately $145 million in
accordance with the Settlement Agreement, which also resolved WCG's defaults
under the sale and subsequent leaseback agreement. The OTC Notes consists of:
(1) a $100 million note at a fixed annual interest rate of 7.0%, with equal
monthly payments for the first 90 months (based on a 360 month amortization
schedule) and with the entire remaining unpaid principal balance due and payable
on April 1, 2010 and (2) a $44.8 million note with accrued interest paid in kind
("PIK Interest") and capitalized once
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WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
annually, with the original principal balance, all capitalized PIK Interest, and
all accrued PIK Interest (totaling $74.4 million at maturity) due and payable on
December 29, 2006. The second note carries a fixed interest rate of 10.0%
through 2003, and each year thereafter the interest rate increases 2.0%
resulting in an interest rate of 16% in the final year of 2006. The $100 million
note was reduced by payments made of $3.1 million during the period from October
15, 2002 to the close of the escrow in December 2002. The OTC Notes are secured
by the OTC Mortgage, under which TWC was granted a first priority mortgage lien
and security interest in the headquarters building and other ancillary assets.
In addition, the OTC Notes are secured by a second lien and security interest in
66% of the beneficial interest of WilTel Communications Pty Limited, which owns
certain interests in PowerTel.
PowerTel
In first quarter 2001, PowerTel entered into a 150 million Australian
dollar bank facility agreement due March 2006 with a variable interest rate as
defined in the agreement. As of December 31, 2001, PowerTel had drawn 71 million
Australian dollars (or $36.3 million) under the bank facility agreement.
In February 2002, the Company advanced PowerTel 16 million Australian
dollars (or $8.3 million) in the form of a subordinated loan in order to satisfy
certain conditions of the restructuring plan with PowerTel's bank group due to
PowerTel's violation of two covenant requirements for the three months ending
December 31, 2001. In March 2002, as part of an approved restructuring plan with
its bank group, PowerTel received waivers from its bank group related to the
covenant violations. In addition, the bank facility was reduced by 50 million
Australian dollars to 100 million Australian dollars. Under the approved
restructuring plan, beginning September 1, 2002, subject to meeting certain
covenants with its lenders, PowerTel had access to its remaining bank facility.
In September 2002, PowerTel met its covenant requirements and borrowed an
additional 7.5 million Australian dollars bringing the total outstanding balance
under the bank facility to 78.5 million Australian dollars (or $44.4 million) as
of December 31, 2002.
Subsequent to December 31, 2002, PowerTel informed its bank group that it
was in violation of its financial covenants. WilTel has entered into discussions
with a third party, pursuant to which the third party would purchase WilTel's
ownership in PowerTel and provide additional funding to PowerTel. In addition,
PowerTel is in discussion with its bank group to modify its covenant
requirements prospectively. PowerTel's bank group is not pursuing any remedies
for failing to comply with the covenant violations and has waived the covenant
breaches. However, since there is no assurance that this possible sale will be
consummated or that PowerTel will be able to renegotiate its bank facility on
satisfactory terms or secure additional funding, WilTel has classified the
PowerTel bank facility as short-term as of December 31, 2002. Even though WilTel
consolidates PowerTel, it is not legally obligated to provide additional funding
to PowerTel and has no current intention to do so. As of December 31, 2002, the
Company's investment in PowerTel was fully impaired.
Senior Redeemable Notes
In the second half of 2001, a wholly-owned subsidiary of WCG purchased
$551.0 million of the Senior Redeemable Notes in the open market at an average
price of 43% of face value. The purchase resulted in a gain of $296.9 million,
including the recognition of deferred costs and debt discounts related to the
purchased Senior Redeemable Notes.
The Senior Redeemable Notes were unsecured obligations of WCG. On April 1,
2002, WCG did not make interest payments totaling approximately $91 million due
under the terms of one of the Senior Redeemable Notes indentures. The failure to
make that payment resulted in a default under that indenture. In addition, the
commencement of chapter 11 proceedings resulted in a default under each of the
indentures governing the Senior Redeemable Notes. The Senior Redeemable Notes
were discharged in the chapter 11 proceedings, and the noteholders received
WilTel common stock in accordance with the Plan as discussed in Note 2.
F-64
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Trust Note
This note was included in the Settlement Agreement between TWC, the
Committee and Leucadia (see Note 2).
ADP Claims
This note was included in the Settlement Agreement between TWC, the
Committee and Leucadia (see Note 2).
Scheduled Debt Maturities
Scheduled maturities of debt as of December 31, 2002 are as follows (in
thousands):
2003.......................................... $ 7,150
2004.......................................... 3,673
2005.......................................... 157,114
2006.......................................... 265,712
2007.......................................... 1,551
Thereafter.................................... 89,936
----------
$ 525,136
==========
The scheduled maturities table above excludes the payment of the PIK
interest of $29.6 million in 2006 from the OTC Notes and the PowerTel bank
facility due to the discussions above.
The Company's ability to classify the non-current portion of its debt
obligations as long-term is dependent on its ability to meet the covenant
requirements listed in its debt agreements or obtain waivers or amendments in
the event the Company cannot comply with its covenants or cure any instances of
noncompliance. As of December 31, 2002, with the exception of the PowerTel bank
facility discussed above, the Company was and expects to remain in compliance
with its covenants.
Cash payments for interest, net of amounts capitalized, were $5.2 million,
$115.7 million, $381.7 million and $152.1 million for the two months ended
December 31, 2002, for the ten months ended October 31, 2002 and for the years
ended December 31, 2001 and 2000, respectively. These payments include
commitment fees relating to the Company's credit facility of $0.1 million, $6.2
million, $7.5 million and $9.0 million for the two months ended December 31,
2002, for the ten months ended October 31, 2002 and for the years ended December
31, 2001 and 2000, respectively.
16. STOCKHOLDERS' EQUITY
In 2001, TWC's Board of Directors approved a tax-free spin-off of WCG to
TWC's shareholders. TWC owned 24,265,892 shares of WCG Class A common stock
outstanding and 395,434,965 shares of Class B common stock outstanding which it
converted to Class A shares prior to the spin-off. After the close of the market
on April 23, 2001, TWC distributed 398,500,000 shares, or approximately 95%, of
the WCG common stock it owned, to holders of TWC common shares on a pro rata
basis by distributing approximately 0.822399 of a share of WCG Class A common
stock as a dividend on each share of TWC common stock outstanding on the record
date.
Prior to the spin-off, TWC and WCG entered into an agreement that, among
other things, resulted in the transfer of ownership of a building under
construction and other assets from TWC to WCG, a commitment to fund the
completion of the building, the conversion of the TWC note into paid in capital
and the issuance of 24.3 million shares of WCG Class A common stock. WCG's total
equity increased by $42.9 million and $1.2 billion in 2002 and 2001,
respectively, as a result of this transaction.
As discussed in Note 2, pursuant to the terms of the Plan, all of WCG's
Class A common stock was cancelled and 50 million shares of WilTel common stock
was issued upon emergence from the chapter 11 proceedings. In addition, certain
transfer restrictions apply to transactions in WilTel common stock as discussed
in Note 2.
F-65
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below presents changes in the components of accumulated other
comprehensive income (loss).
UNREALIZED FOREIGN
APPRECIATION CURRENCY
(DEPRECIATION) TRANSLATION
OF SECURITIES ADJUSTMENTS TOTAL
-------------- -------------- --------------
(IN THOUSANDS)
PREDECESSOR COMPANY:
Balance as of December 31, 1999 ................................ $ 140,827 $ (15,929) $ 124,898
Current period change:
Pre-income tax amount ........................................ 222,140 (29,240) 192,900
Reclassification adjustment for net gains realized in net loss (308,419) -- (308,419)
Income tax benefit ........................................... 34,670 -- 34,670
-------------- -------------- --------------
(51,609) (29,240) (80,849)
-------------- -------------- --------------
Balance as of December 31, 2000 ................................ 89,218 (45,169) 44,049
Current period change:
Pre-income tax amount ........................................ (202,698) (42,794) (245,492)
Reclassification adjustment for net losses realized in net
loss ........................................................ 66,648 70,246 136,894
Income tax benefit ........................................... 53,038 -- 53,038
-------------- -------------- --------------
(83,012) 27,452 (55,560)
-------------- -------------- --------------
Balance as of December 31, 2001 ................................ 6,206 (17,717) (11,511)
Change for the ten months ended October 31, 2002:
Pre-income tax amount ........................................ (7,743) 2,440 (5,303)
Reclassification adjustment for net gains realized in net
loss ........................................................ (663) -- (663)
Income tax benefit ........................................... 1,005 -- 1,005
-------------- -------------- --------------
(7,401) 2,440 (4,961)
Reorganization adjustments ..................................... 1,195 15,277 16,472
-------------- -------------- --------------
Balance as of October 31, 2002 ................................. -- -- --
SUCCESSOR COMPANY:
Change for the two months ended December 31, 2002 .............. -- 780 780
-------------- -------------- --------------
Balance as of December 31, 2002 ................................ $ -- $ 780 $ 780
============== ============== ==============
In 2001, WCG realized a foreign currency loss of $70.2 million, of which
$66.4 million related to the sale of ATL (see Note 11).
18. STOCK-BASED COMPENSATION
Prior to WCG's emergence from the chapter 11 proceedings, the Company had
various plans providing for WCG to grant common stock-based awards to its
employees and employees of its subsidiaries. These plans permitted the granting
of various types of awards including, but not limited to, stock options,
stock-appreciation rights, restricted stock and deferred stock. As a result of
the chapter 11 proceedings, these plans were terminated and all outstanding
common stock awards were cancelled pursuant to the Plan. See Note 2.
As of December 31, 2002, the Company has not adopted a new long-term
incentive plan which provides for the granting of common stock-based awards of
WilTel common stock. Accordingly, no stock awards have been granted as of
December 31, 2002.
F-66
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. LEASES
Future minimum annual rentals under noncancellable operating leases and
service contracts for off-network capacity as of December 31, 2002 are payable
as follows:
OFF-NETWORK
PROPERTY CAPACITY AND
RENTAL EQUIPMENT OTHER TOTAL
------------- ------------- ------------- -------------
(IN THOUSANDS)
2003 ....................... $ 31,807 $ 13,075 $ 14,335 $ 59,217
2004 ....................... 29,459 7,444 14,076 50,979
2005 ....................... 29,461 6,131 13,702 49,294
2006 ....................... 27,007 -- 13,362 40,369
2007 ....................... 24,738 -- 13,316 38,054
Thereafter ................. 110,225 -- 142,839 253,064
------------- ------------- ------------- -------------
Total minimum annual rentals $ 252,697 $ 26,650 $ 211,630 $ 490,977
============= ============= ============= =============
Total capacity expense incurred from leasing from a third party's network
(off-network capacity expense) was $11.9 million, $92.1 million, $208.2 million
and $332.3 million for the two months ended December 31, 2002, the ten months
ended October 31, 2002 and for the years ended December 31, 2001 and 2000,
respectively. All other rent expense was $6.4 million, $42.2 million, $51.4
million and $49.5 million for the two months ended December 31, 2002, the ten
months ended October 31, 2002 and for the years ended December 31, 2001 and
2000, respectively.
20. RELATED PARTY TRANSACTIONS
Transactions with Former Executive Officers
As part of the spin-off from TWC, WCG inherited a long-established loan
program from TWC under which TWC extended loans to its executives to purchase
TWC stock (the "Executive Loans"). At the time of the spin-off, six WCG
executives had outstanding loans with TWC, and as part of the spin-off, the
Executive Loans were transferred to WCG. As of December 31, 2001, the
outstanding balance of these loans were $19.9 million, all which were considered
long-term receivables.
Effective December 31, 2001, the Compensation Committee of the Board of
Directors of WCG established a program to award annual retention bonuses over a
period of five years in the aggregate amount of $13 million to certain
executives to be applied, after deduction of applicable withholding taxes,
solely against their respective outstanding principal loan balances. The
agreements executed under this program were subsequently amended in conjunction
with the Plan.
Under the amended retention bonus agreements, the Company reimbursed
interest payments owed by the WCG executives as of January 1, 2002. In addition,
the Company became responsible for paying all taxes, limited to an aggregate
total of $20 million, associated with interest and principal payments under the
retention bonus agreements, as well as any taxes incurred as a result of the
payment of taxes by the Company. Under a separate amendment, all retention bonus
payments vested upon consummation of the transactions included in the Plan, but
still are to be paid out over the first through fourth anniversaries of the
Effective Date, unless accelerated as a result of death or disability of the
payee. Any officers who were parties to retention bonus agreements were not
eligible to participate in the Company's otherwise applicable change in control
severance plan. The Company recorded an expense of $23.3 million for the ten
months ended October 31, 2002 related to the retention bonus agreements, $10.4
million of this expense was recorded to selling, general and administrative
expense for costs prior to WCG commencing chapter 11 proceedings and the
remaining $12.9 million was recorded to
F-67
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
reorganization expense for costs after WCG commenced chapter 11 proceedings. As
of December 31, 2002, the Company has accrued liabilities of $2.3 million and
other long-term liabilities of $5.9 million representing taxes to be paid by the
Company related to the retention bonus agreements.
On October 10, 2002, the Bankruptcy Court approved a settlement agreement
between WCG and John C. Bumgarner, a former officer of WCG who participated in
the TWC loan program. The agreement provided that WCG would settle a $6.9
million employee loan plus accrued interest in return for the loan's collateral
of 238,083 shares of TWC common stock and 195,798 shares of WCG common stock and
approximately $7 million of face value of WCG's Senior Redeemable Notes. As a
result of the surrender of the Senior Redeemable Notes by Mr. Bumgarner, no
shares of WilTel common stock were distributed under the Plan to Mr. Bumgarner.
In addition, Mr. Bumgarner will provide consulting services at no cost to the
Company for a period of three years from the date of his retirement. The Company
recorded a loss of approximately $7 million to provision for doubtful accounts
for the ten months ended October 31, 2002 related to the agreement.
The Company also recorded $12.1 million to reorganization expense for the
ten months ended October 31, 2002 related to an employee incentive program that
was adopted to retain employees during the Company's restructuring process, of
which $3.9 million and $0.7 million related to former officers of the Company
and current officers of the Company, respectively. As of December 31, 2002, the
Company had accrued liabilities related to the employee incentive program of
$2.8 million and $0.6 million for former officers and current officers of the
Company, respectively.
Leucadia
On November 27, 2002, WilTel entered into a one-year Restructuring
Services Agreement with Leucadia effective as of October 16, 2002. Under the
terms of this agreement, Leucadia provides restructuring advice to WilTel with
respect to management, operations, future business opportunities, and other
matters to be mutually determined between Leucadia and WilTel. Leucadia does not
receive any compensation for its services rendered under this agreement, but is
reimbursed for all expenses incurred in connection with its performance under
the agreement.
21. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has historically entered into various telecommunications
equipment agreements in connection with its fiber-optic network construction. As
of December 31, 2002, the Company has either satisfied these agreements or
negotiated the termination of the agreements such that any remaining obligations
are not significant.
LITIGATION
The Company is subject to various types of litigation in connection with
its business and operations.
Right of Way Class Action Litigation
A number of suits attempting to achieve class action status seek damages
and other relief from the Company based on allegations that the Company
installed portions of its fiber-optic cable without all necessary landowner
consents. These allegations relate to the use of rights of way licensed by
railroads, state departments of transportation and others controlling
pre-existing right-of-way corridors. The putative members of the class in each
suit are those owning the land underlying or adjoining the right-of-way
corridors. Similar actions have been filed against all major carriers with
fiber-optic networks. It is likely that additional actions will be filed. The
F-68
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company believes it obtained sufficient rights to install its cable. It also
believes that the class action suits are subject to challenge on procedural
grounds.
The Company and other major carriers are seeking to settle the class
action claims referenced above relating to the railroad rights of way through an
agreed class action. These companies initially sought approval of a settlement
in a case titled Zografos et al. vs. Qwest Communications Corp., et al., filed
in the U.S. District Court for the District of Oregon on January 31, 2002. On
July 12, 2002, the Oregon Court dismissed the action. Thereafter, on September
4, 2002, an existing case titled Smith, et al., vs. Sprint, et al., pending in
the U.S. District Court for the Northern District of Illinois, was amended to
join the Company and two other telecommunications companies as defendants. On
that same day, the plaintiffs and defendants jointly asked the Court to
preliminarily approve a nationwide class action settlement agreement. The Court
has entered a scheduling order and a hearing on the motion for preliminary
approval has been scheduled for April 7, 2003. If approved, the settlement would
settle the majority of the putative nationwide and statewide class actions
referenced above.
Platinum Equity Dispute
In March 2001, the Company sold its Solutions segment to Platinum Equity LLC for
a sales price that was subject to adjustment based upon a computation of the net
working capital of the business as of March 31, 2001. On August 28, 2001,
Platinum Equity sent formal notice that it believes the Company owes it
approximately $47 million arising from a recalculation of the net working
capital of the domestic, Mexican, and Canadian professional services operations
of the Solutions segment. Pursuant to the provisions of the sale agreement, the
parties submitted the dispute to binding arbitration before an independent
public accounting firm. Both parties have completed submission of information to
the arbitrator and are awaiting the arbitrator's decision. The amount currently
in dispute is approximately $55 million. The Company does not believe that a
material adjustment to the net working capital calculation is required. A final
decision is expected by mid-2003.
In September 2002, Platinum Equity filed suit in the District Court of
Oklahoma County, State of Oklahoma, against the Company alleging various
breaches of representations and warranties related to the sale of the Solutions
segment and requesting declaratory action with respect to its right to set-off
its damages for such breaches against the approximate sum of $57 million that it
owes the Company under the terms of a promissory note issued by Platinum Equity
when it purchased the Solutions business. Platinum Equity failed to make the
payment that was due September 30, 2002, and, in October 2002, the Company
notified Platinum Equity that it was in default for its non-payment to the
Company. The Company has filed a counterclaim in the lawsuit alleging breach of
contract, breach of guaranty and conversion. Although the court dismissed the
Company's claim for conversion, the court allowed the Company to plead a claim
for tortious breach of contract. Discovery in this suit is ongoing.
Thoroughbred Technology and Telecommunications, Inc. vs. WCL
Thoroughbred Technology and Telecommunications, Inc. ("TTTI") filed suit
on July 24, 2001, against WCL in a case titled Thoroughbred Technology and
Telecommunications, Inc. vs. Williams Communications, LLC f/k/a Williams
Communications, Inc., Civil Action No. 1:01-CV-1949-RLV, pending in the U.S.
District Court for the Northern District of Georgia, Atlanta Division. TTTI
alleged claims that included breach of contract with respect to a fiber-optic
installation project that TTTI was constructing for itself and other parties,
including WCL, with respect to certain conduit segments including a
three-conduit segment between Cleveland, Ohio and Boyce, Virginia. TTTI sought
specific performance to require that WCL take title to the Cleveland-Boyce
segment and pay TTTI in excess of $36 million plus pre-judgment interest for
such purchase. WCL alleged various defenses, including significant warranty and
breach of contract claims against TTTI.
On May 9, 2002, the trial court determined that WCL did not have the right
to terminate the contract with respect to the Cleveland-Boyce segment, but
deferred ruling on TTTI's remedy until a later time. In a series of
F-69
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
rulings on January 27, 2003, the court ordered, among other things, (1) that
WCL's claims against TTTI for breach of contract and construction deficiencies
for certain of the telecommunications routes constructed by TTTI be heard by an
arbitration panel; and (2) that WCL close the purchase of the Cleveland-Boyce
segment and pay TTTI the sum of $36,264,750 plus pre-judgment interest for such
purchase. The court denied WCL's motion for a stay of the proceedings while the
construction claims against TTTI were adjudicated through arbitration and
further denied the Company's request to stay closing on the Cleveland-Boyce
segment pending an appeal of the trial court's decision. WCL sought and obtained
a stay of the trial court's order compelling a closing of the Cleveland-Boyce
segment from the United States Court of Appeals for the 11th Circuit thereby
staying WCL's obligation to close the transaction until the appeal is decided
and further conditioned on the posting of an appropriate supersedeas bond by the
Company. Subsequently, the trial court approved the requested bond in the
approximate amount of $44.1 million. The Company has posted the bond, which was
docketed by the trial court on March 13, 2003. WCL will proceed with its appeal
of the trial court's decision while pursuing its claims of construction defects
against TTTI through arbitration. WCL's arbitrable claims against TTTI aggregate
approximately $70 million although the timetable for arbitration of the claims
remains uncertain. The Company remains confident in its position with regard to
the litigation, the appeal and the arbitration, and intends to pursue its claims
vigorously; however, the ultimate outcome of this matter cannot be predicted
with certainty.
StarGuide
On October 12, 2001, StarGuide Digital Networks ("StarGuide") sued WCG in
the United States District Court for Nevada for infringement of three patents
relating to streaming transmission of audio and video content. Subsequently,
StarGuide added WCL as a party to the action. StarGuide seeks compensation for
past infringement, an injunction against infringing use, and treble damages due
to willful infringement. On July 1, 2002, StarGuide initiated a second patent
suit against WCL with respect to a patent that is a continuation of the patents
at issue in the prior litigation. The two actions have been consolidated. The
Company believes that it has not infringed the patents at issue and intends to
defend its interest vigorously. The Company has also raised various defenses,
including patent invalidity. The parties were engaged in court-sponsored
mediation, but those negotiations failed to result in a settlement. The parties
are proceeding with discovery.
Summary
The Company is a party to various other claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
management, upon the advice of legal counsel, the ultimate resolution of all
claims, legal actions, and complaints, after consideration of amounts accrued,
insurance coverage, or other indemnification arrangements, is not expected to
have a materially adverse effect upon the Company's future financial position or
results of operations, although unfavorable outcomes in the items discussed
above could significantly impact the Company's liquidity.
OTHER
SBC
SBC, the Company's largest customer (comprising 47 percent and 37 percent
of Network's revenues for the year ended December 31, 2002 and 2001,
respectively), may terminate its provider agreements with the Company if any of
the following occurs:
- the Company begins to offer retail long distance voice transport or
local exchange services on its network, except in limited
circumstances;
- the Company materially breaches its agreements with SBC, causing a
material adverse effect on the commercial value of the relationship
to SBC; or
- the Company has a change of control without SBC's consent.
F-70
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On September 25, 2002, the Bankruptcy Court approved the Stipulation
Agreement between the Company and SBC conditioned upon the consummation of the
Plan. The Stipulation Agreement provided for the necessary SBC approval of the
Plan and resolved change-of-control issues that SBC had raised regarding WCG's
spin-off from TWC. At the same time, SBC and WCL executed amendments to their
provider agreements that more clearly specify the products and services for
which WilTel is the preferred provider, establish pricing methodologies, and
establish tracking mechanisms and criteria for ensuring performance of both
parties under the agreements. SBC notified the Company prior to the Effective
Date that it believed the conditions to the Stipulation Agreement may not have
been satisfied because, among other things, the terms of the Escrow Agreement
(described in Note 2) may have constituted a material modification of the Plan.
In December 2002, the terms of the Escrow Agreement were satisfied. Therefore,
the Company believes all conditions to effectiveness of the Stipulation
Agreement have been satisfied and that the Company and SBC will be able to
continue their business relationship as contemplated under the amendments to the
provider agreement.
The provider agreements state that upon SBC receiving authorization from
the FCC to provide long distance services in any state in its traditional
telephone exchange service region, SBC has the option to purchase from WilTel at
net book value all voice or data switching assets that are physically located in
that state and of which SBC has been the primary user. The option must be
exercised within one year of the receipt of authorization. WilTel then would
have one year after SBC's exercise of the option to migrate traffic to other
switching facilities, install replacement assets and complete other transition
activities. This purchase option would not permit SBC to acquire any rights of
way that WilTel uses for its network or other transport facilities it maintains.
This option has not been exercised and is no longer available for some states
where early authorization was received. Upon termination of the provider
agreements with SBC, SBC has the right in certain circumstances to purchase
voice or data switching assets, including transport facilities, of which SBC's
usage represents 75 percent or more of the total usage of these assets.
The Company may terminate the provider agreements if either of the
following occurs:
- SBC has a change of control; or
- there is a material breach by SBC of the agreements, causing a
material adverse effect on the commercial value of the relationship
to the Company.
Either party may terminate a particular provider agreement if the action
or failure to act of any regulatory authority materially frustrates or hinders
the purpose of that agreement. There is no monetary remedy for such a
termination. In the event of termination due to its actions, the Company could
be required to pay SBC's transition costs of up to $200 million. Similarly, in
the event of termination due to SBC's actions, SBC could be required to pay the
Company's transition costs of up to $200 million, even though the Company's
costs may be higher.
22. FINANCIAL INSTRUMENTS
FAIR VALUE METHODS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet approximate fair value due to the short-term maturity of
these instruments.
Notes receivables less allowance: The carrying amounts reported in
the balance sheet approximate fair value due to the short-term maturity of
these instruments.
Long-term debt: The carrying amounts reported in the balance sheet
approximate fair value due to the long-term debt outstanding being
primarily variable-rate debt.
F-71
WILTEL COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's cash equivalents include high-quality securities
placed with various major financial institutions with high credit ratings.
The Company's investment policy limits its credit exposure to any one
issuer/obligor.
The Company's customers include numerous corporations. The Company
serves a wide range of customers, of which SBC comprises approximately 24%
of its net accounts receivable balance as of December 31, 2002. There are
no other customers which are individually significant to its business.
While sales to these various customers are generally unsecured, the
financial condition and creditworthiness of customers are routinely
evaluated.
F-72
WILTEL COMMUNICATIONS GROUP, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
As a consequence of consummating the Plan (as defined in Note 2) in
October 2002, the 2002 financial results have been separately presented
under the label "Predecessor Company" for periods prior to November 1,
2002 and "Successor Company" for the two-month period ended December 31,
2002 as required by SOP 90-7.
Summarized quarterly financial data are as follows (in thousands,
except per share amounts) and reflects the reclassification of the
extraordinary gain reported in 2001 to continuing operations due to the
early adoption of SFAS No. 145 as described in Note 1 to the consolidated
financial statements.
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
SUCCESSOR COMPANY:
TWO MONTHS ENDED DECEMBER 31, 2002
Revenues .............................................. $ 191,656
Cost of sales ......................................... 171,605
Loss from operations .................................. (55,072)
Net loss .............................................. (61,049)
Basic and diluted loss per common share:
Net loss ............................................ (1.22)
PREDECESSOR COMPANY:
TEN MONTHS ENDED OCTOBER 31, 2002
Revenues .............................................. $ 298,593 $ 293,111 $ 306,148 $ 102,155
Cost of sales ......................................... 259,401 258,220 268,287 76,497
Loss from operations .................................. (166,013) (200,892) (158,540) (45,046)
Income (loss) from continuing operations .............. (283,301) (293,080) (224,773) 2,132,349
Cumulative effect of change in accounting principle ... -- -- -- (8,667)
Net income (loss) ..................................... (283,301) (293,080) (224,773) 2,123,682
Basic and diluted earnings (loss) per common share:
Income (loss) from continuing operations
attributable to common stockholders ................. (.58) (.59) (.45) 4.26
Cumulative effect of change in accounting principle .. -- -- -- (.01)
Net income (loss) attributable to common stockholders (.58) (.59) (.45) 4.25
FIRST SECOND THIRD FOURTH
2001 QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Revenues ............................................. $ 276,064 $ 281,338 $ 297,776 $ 330,343
Cost of sales ........................................ 254,858 246,739 244,173 283,685
Loss from operations ................................. (141,631) (146,795) (368,372) (2,887,568)
Net loss ............................................. (302,174) (245,740) (268,331) (2,994,112)
Basic and diluted loss per common share:
Net loss attributable to common stockholders ....... (.65) (.51) (.55) (6.09)
The sum of losses per share for the four quarters may not equal the total
loss per share for the year due to changes in the average common shares
outstanding.
SUCCESSOR COMPANY:
Fourth quarter 2002 net loss includes asset impairments and restructuring
charges of $8.6 million primarily for severance related expenses (see Note 7).
F-73
WILTEL COMMUNICATIONS GROUP, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)
PREDECESSOR COMPANY:
First, second, third and fourth quarter 2002 income (loss) from continuing
operations includes asset impairments and restructuring charges of $11.2
million, $2.2 million, $1.8 million and $13.3 million, respectively, primarily
for severance related expenses (see Note 7). Income (loss) from continuing
operations also includes reorganization expenses, net of $7.3 million, $56.3
million and $52.3 million for first, second and third quarter 2002,
respectively, and reorganization income, net of $2.2 billion for fourth quarter
2002 as a result of WCG's reorganization under the Bankruptcy Code (see Note 4).
The cumulative effect of change in accounting principle in fourth quarter 2002
of $8.7 million (net of a zero tax provision) relates to the adoption of SFAS
No. 143 relating to asset retirement obligations as part of its fresh start
accounting (see Note 14).
First, second, third and fourth quarter 2001 net loss includes loss from
write-downs of certain investments of $59.2 million, $34.5 million, $42.0
million and $71.9 million, respectively (see Note 11). Third quarter 2001 net
loss also includes equity losses relating to iBEAM of $20.0 million. Third and
fourth quarter 2001 net loss includes asset impairments and restructuring
charges of $191.3 million and $2.8 billion, respectively (see Note 7). The third
quarter 2001 net loss includes a $45.1 million gain from the sale of ATL. Fourth
quarter 2001 net loss includes a gain on sale of assets of $46.1 million. A gain
of $223.7 million and $73.2 million was included in net loss for the third and
fourth quarters 2001, respectively, related to purchasing a portion of WCG's
senior redeemable notes in the open market at a favorable price (see Note 15).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
F-74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The term of each director expires at the Company's annual stockholders'
meeting in 2003. Unless otherwise indicated, all directors have held office
since October 15, 2002. The Stockholders Agreement between the Company and
Leucadia includes obligations between those parties that impact the nomination
and election of directors (see Item 1(d) "Other Information--Overview of the
Chapter 11 Case--Capitalization, Corporate Governance, and Leucadia
Agreements").
JEFF K. STOREY, AGE 42
Director since October 31, 2002. Mr. Storey has served as President and
CEO of the Company since October 31, 2002. He served as Vice President and
General Manager of Operations from May 2002 until October 2002 and Senior Vice
President of Operations from September 2000 until July 2002, during which time
he was responsible for all network operations of the Company. From January 2000
to September 2000 he served the Company as Vice President of Local Access,
responsible for developing and implementing the Company's access strategy. From
May 1999 until January 2000 he was Executive Director of the Company's voice
services. Before joining the Company in 1999, he was Vice President of
Commercial Services for Cox Communications from March 1998 until May 1999. From
1994 until 1998 he served as Vice President and General Manager for Cox
Fibernet.
JOHN PATRICK COLLINS, AGE 60
Mr. Collins is an attorney and private investor and, since 1995, has been
CEO and Managing Director of Collins & McIlhenny, Inc., an NASD member firm
formed to provide private capital placement and financial advisory services to
small and middle market oil and gas producers. Prior thereto (1982 - 1993), Mr.
Collins was Chairman of the Board and CEO of Plains Resources Inc., a publicly
traded oil & gas company. Mr. Collins is also a director of the Oklahoma
Independent Petroleum Association.
IAN M. CUMMING, AGE 62
Mr. Cumming is Chairman of the Board of the Company and from October 15,
2002, through October 30, 2002, served as interim President and CEO of the
Company. Mr. Cumming has served as Chairman of the Board of Leucadia since June
1978. Mr. Cumming is a director of Allcity Insurance Company, a property and
casualty insurer, and MK Gold Company, an international mining company, both
subsidiaries of Leucadia. Mr. Cumming is also Chairman of the Board of The
FINOVA Group Inc., a middle market lender in which Leucadia holds an indirect 25
percent equity interest and a director of Skywest, Inc., a Utah-based regional
air carrier. He is also a director of HomeFed Corporation, a publicly held real
estate development company, in which Leucadia has an approximate 30 percent
equity interest and Carmike Cinemas, Inc., a publicly held motion picture
exhibitor in the United States, in which Leucadia has an approximate 11 percent
equity interest.
WILLIAM H. CUNNINGHAM, AGE 59
Mr. Cunningham is a professor of marketing at The University of Texas at
Austin. From 1992 until June 2000 he served as Chancellor (CEO) of The
University of Texas System. Mr. Cunningham serves as a director for the
following companies: Jefferson-Pilot Corporation; Southwest Airlines; Introgen
Therapeutics; and LIN Television. Mr. Cunningham served as President and CEO
from December 2000 until September 2001 of IBT Technologies, a privately held
e-learning start-up company that filed a Chapter 7 petition for bankruptcy on
III-1
December 17, 2001, and is currently being liquidated. He also served that
company as chairman of the board from January 2000 until December 17, 2001.
MICHAEL DIAMENT, AGE 34
Mr. Diament is a portfolio manager and director of bankruptcies and
restructurings for Renegade Swish, LLC, an investment management firm and
affiliate of Acme Widget, LP, at which Mr. Diament held a similar position from
January 2001 through December 2002. From February 2000 until January 2001 he was
a senior research analyst for Sandell Asset Management, an investment management
firm. Mr. Diament served as Vice President of Havens Advisors, an investment
management firm, from July 1998 until January 2000.
ALAN J. HIRSCHFIELD, AGE 67
Mr. Hirschfield is a private investor. From 1992 until 2000, he served as
Co-CEO of Data Broadcasting Corporation, now Interactive Data Corporation, a
global provider of financial and business information to institutional and
retail investors, following a merger completed in February 2000. Mr. Hirschfield
is a director of Interactive Data Corporation (formerly Data Broadcasting
Corporation), Cantel Medical Corporation, J Net Enterprises Inc., and Carmike
Cinemas, Inc.
JEFFREY C. KEIL, AGE 59
Mr. Keil has served as President and CEO of Ellesse, LLC, an advisory
company, since July 2001. From January 1998 through June 2001 he served as
chairman of the executive committee of International Real Returns, LLC, an
advisory company. From 1996 until January 1998 Mr. Keil was a general partner
with Keil Investment Partners, a private fund that invested in the financial
sector in Israel. He is a director of Anthracite Capital, Inc., a real estate
investment trust.
MICHAEL P. RESSNER, AGE 54
Mr. Ressner served as a senior finance executive for Nortel Networks,
Inc., a global Internet and communications company, from 1981 to 2002, including
Vice President and General Manager from 2000 to 2001; Vice President of Finance
from 1999 to 2000; and Vice President of Finance and CFO of two business units
from 1994 until 1998. He is also a director for Entrust, Inc., a global provider
of Internet security services.
JOSEPH S. STEINBERG, AGE 59
Mr. Steinberg has served as a director of Leucadia since December 1978 and
as President of Leucadia since January 1979. Mr. Steinberg is President and
director of The FINOVA Group Inc. He is also a director of White Mountains
Insurance Group, Ltd, a publicly traded insurance holding company in which
Leucadia has less than a 5 percent equity interest. He is a director of MK Gold
Company and Jordan Industries, Inc., a public company that owns and manages
manufacturing companies, in which Leucadia has an approximate 10 percent equity
interest. Mr. Steinberg is chairman of HomeFed Corporation and a director of
Allcity Insurance Company.
CANDICE L. CHEESEMAN, AGE 47
Ms. Cheeseman is General Counsel and Secretary and has served in that
capacity since December 10, 2002. From January 1999 until December 2002, Ms.
Cheeseman held various positions within the Company's legal department,
including senior counsel for Williams Communications Solutions. Prior to joining
the Company in 1999, she was senior attorney for Marriott International.
III-2
MARDI FORD DE VERGES, AGE 49
Ms. de Verges is Vice President and Treasurer and has served in that
capacity since December 10, 2002. She has held various finance and management
positions since joining the Company in June 2000. From 1989 until June 2000 she
held various management and finance positions with CITGO Petroleum Corporation.
KEN KINNEAR, AGE 41
Mr. Kinnear, a certified public accountant, is Vice President and
Controller of WilTel and has served in that capacity since December 10, 2002.
Mr. Kinnear has responsibility as the Company's Principal Financial Officer and
Chief Accounting Officer. From May 18, 2000, until December 2002, he served as
Vice President, Controller, and Chief Accounting Officer of WCG, and served as
Director of Accounting and Reporting from 1998 to May 2000.
H. E. SCRUGGS, AGE 45
Mr. Scruggs is Senior Vice President--Corporate of WilTel, and has held
that position since October 15, 2002. Mr. Scruggs is a Vice President of
Leucadia and has served in that capacity since August 2002, as well as from
March 2000 until January 2002. Mr. Scruggs has also served as an officer of
various subsidiaries of Leucadia since 1995.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who beneficially own more
than 10 percent of the Company's stock to file certain reports with the SEC
concerning their beneficial ownership of the Company's equity securities. The
SEC regulations also require that a copy of all such Section 16(a) forms filed
be furnished to the Company by the executive officers, directors, and greater
than 10 percent stockholders. Based solely upon on a review of the copies of the
forms furnished to us and written representations from our executive officers,
directors and greater than 10 percent stockholders, we believe that during the
year ended December 31, 2002, all persons subject to the reporting requirements
of Section 16(a) filed the required reports on a timely basis, except as
follows: H. Brian Thompson, director of WCG until October 15, 2002, filed an
amended Form 5 for 2001 on May 21, 2002, to report the purchase of 50,000 shares
of the Class A Common Stock of WCG on October 1, 1999. This transaction should
have been reported on an October 1999 Form 4. Additionally, Mr. Thompson's
amended Form 5 for 2001 reported the November 10, 2001, purchase of 2,000 shares
of the Class A Common Stock of WCG held indirectly in trust for his
granddaughter, for which he disclaimed beneficial ownership. This transaction
should have been reported on a November 2001 Form 4. On February 10, 2003,
former WCG director and CEO Howard E. Janzen filed a Form 5 for 2002 to report
holdings of 4,871 shares of WilTel's common stock that should have been reported
on a Form 3 within ten days of October 15, 2002, the Effective Date of the Plan.
Mr. Janzen's resignation as director of WilTel was effective as of October 16,
2002, thus he was subject to Section 16 on October 15, 2002. As of October 16,
2002, Mr. Janzen was no longer subject to Section 16.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation of WilTel's current and former Chief Executive Officers, the former
Chief Executive Officer of WCG, and each of the five other most highly
compensated executive officers of WilTel or WCG for the three fiscal years ended
December 31, 2002.
III-3
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- ---------------------------
RESTRICTED STOCK
STOCK OPTION
BONUS (YR. AWARDS (YR. SHARES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY EARNED) (1) EARNED) (2) WCG (3) COMPENSATION
- --------------------------- ---- ------ ----------- ----------- ------- ------------
CURRENT OFFICERS:
JEFF K. STOREY 2002 $ 270,288 $ 1,000 $ 0 0 $ 520,690 (4)
WilTel President and
Chief Executive Officer
(since October 31, 2002)
KEN KINNEAR 2002 $ 160,961 $ 1,000 $ 0 0 $ 90,860 (4)
Vice President and Controller
(since December 10, 2002)
MARDI FORD DE VERGES 2002 $ 150,350 $ 1,000 $ 0 0 $ 84,695 (4)
Vice President and Treasurer
(since December 10, 2002)
CANDICE L. CHEESEMAN 2002 $ 123,784 $ 1,000 $ 0 0 $ 66,425 (4)
General Counsel and Secretary
(since December 10, 2002)
FORMER OFFICERS:
IAN M CUMMING (5) 2002 $ 0 $ 0 $ 0 0 $ 0
Interim President and Chief
Executive Officer
(from October 16, 2002 -
October 31, 2002)
HOWARD E. JANZEN 2002 $ 416,000 $ 1,000 $ 0 0 $12,924,098 (6)
Chairman of the Board, President 2001 $ 520,000 $ 0 $ 269,200 868,095 $ 10,200 (7)
and Chief Executive Officer 2000 $ 500,000 $ 446,393 $ 0 100,000 $ 11,466 (7)
(until October 16, 2002)
SCOTT E. SCHUBERT 2002 $ 320,000 $ 1,000 $ 0 0 $ 8,352,569 (6)
Chief Financial and Corporate 2001 $ 320,000 $ 53,198 $ 53,198 196,513 $ 10,200 (7)
Services Officer 2000 $ 272,961 $ 107,727 $ 385,000 81,800 $ 11,466 (7)
(until December 10, 2002)
FRANK M. SEMPLE 2002 $ 322,320 $ 1,000 $ 0 0 $ 4,447,571 (6)
Chief Operating Officer 2001 $ 322,320 $ 56,574 $ 216,306 1,331,130 $ 10,200 (7)
(until November 1, 2002) 2000 $ 300,000 $ 169,963 $ 985,017 125,000 $ 11,466 (7)
(1) Each named executive officer was awarded $1,000 in 2002 as part of the All
Employee Bonus Plan. 2001 amounts exclude that portion of the 2001
executive incentive compensation program award that was paid in deferred
share awards. Half of the 2001 award was paid in cash and the other half
was paid in deferred share awards of WCG stock. Deferred share awards are
reported in the Restricted Stock Awards column. Pursuant to the
Confirmation Order (see Item 1(d) "Other Information--Overview of the
Chapter 11 Proceedings", above) all equity interests in WCG, including WCG
Common Stock, were cancelled as of the Effective Date (October 15, 2002)
and thus have no monetary value as of that date.
III-4
(2) Amounts reported in this column consist of (a) the dollar value as of the
date of grant of WCG's deferred share awards under the terms of WCG's 1999
Stock Plan (a WCG incentive compensation plan that permitted the grant of,
among other things, stock options and deferred stock; this plan is no
longer in effect pursuant to the cancellation of all equity interests in
WCG as of the Effective Date) and (b) the value of awards granted pursuant
to a then existing executive incentive compensation program at the time of
grant. Half of the awards under the executive incentive compensation
program were converted to WCG stock using the closing price of WCG stock
on the date of grant for awards made in 2001 as follows: Mr. Janzen -
213,651 shares valued at $1.26 per share; Mr. Schubert - 42,221 shares
valued at $1.26 per share; Mr. Semple - 44,901 shares valued at $1.26 per
share. For Mr. Semple, amount in 2001 also consists of the dollar value of
deferred share awards of WCG stock under an executive incentive
compensation program for prior years (1994, 1996, 1997, and 1998
respectively) which were converted from TWC stock to WCG stock on April
23, 2001, in each case, based on the price of TWC stock on the date of
grant: 2,350 TWC shares converted to 23,556 shares of WCG stock which
vested on December 2, 1997, valued at $0.9238 per share; 2,120 TWC shares
converted to 21,250 shares of WCG stock which vested on December 31, 1999,
valued at $2.0015 per share; 4,163 TWC shares converted to 41,729 shares
of WCG stock which vested on January 22, 1998 valued at $2.2871 per share;
and 1,283 TWC shares converted to 12,861 shares of WCG stock which vested
on December 31, 2001, valued at $3.0453 per share. For fiscal year 2000,
amounts consist of a deferred share award of 20,000 shares of WCG stock
awarded for retention purposes on September 22, 2000, under WCG's 1999
Stock Plan to each of Messrs. Schubert and Semple, valued at $385,000,
based on the closing price of WCG stock on the date of grant. For Mr.
Semple, the 2000 amount also reflects a deferred share award of 17,329
shares of WCG stock on January 24, 2000 granted under the terms of WCG's
1999 Stock Plan with performance based vesting, valued at $34.625 per
share (the closing price of WCG stock on the date of grant) (aggregate of
$600,017). Pursuant to the Confirmation Order (see Item 1(d) "Other
Information--Overview of the Chapter 11 Proceedings", above) all equity
interests in WCG, including WCG Common Stock, were cancelled as of the
Effective Date (October 15, 2002) and thus have no monetary value as of
that date. No restricted stock awards for WilTel common stock were granted
in 2002.
(3) No WilTel or WCG stock options were awarded in 2002. Mr. Janzen's options
to purchase shares reflect 601,428 WCG options converted from options of
TWC in the spin-off of WCG from TWC on April 23, 2001; 200,000 options
awarded on April 24, 2001; and 66,667 options awarded on November 31,
2001. Mr. Schubert's options to purchase shares reflect 75,179 WCG options
converted from TWC options at the spin-off of WCG from TWC on April 23,
2001; 88,000 options awarded on April 24, 2001, and 33,334 options awarded
on November 30, 2001. Mr. Semple's options to purchase shares reflect
1,177,797 WCG options converted from TWC options at the spin-off of WCG
from TWC on April 23, 2001; 120,000 options awarded on April 24, 2001, and
33,333 options awarded on November 30, 2001. As of October 15, 2002, all
equity interests in WCG were cancelled and thus have no monetary value as
of that date.
(4) Each named executive officer received a restructuring incentive award,
each of which provided that 25 percent of the award be paid in 2002 and 75
percent of the award be paid in April 2003. The total restructuring
incentive awards are as follows: Mr. Storey - $510,000; Mr. Kinnear -
$80,000; Ms. de Verges - $75,000; Ms. Cheeseman - $58,452. Additional
amounts represent contributions made by the Company to a defined
contribution plan.
(5) Mr. Cumming served as Interim President and Chief Executive Officer and
received no compensation from WilTel for such services. Mr. Cumming
currently serves as Chairman of the Board.
(6) For Mr. Janzen, this amount consists of $11,012,323 pursuant to a
retention bonus agreement including $4,875,486 as a tax gross-up, $780,000
restructuring incentive award, $1,041,775 severance payment, $78,000 for
unused paid-time-off and $12,000 in contributions made by the Company to a
defined contribution plan. For Mr. Schubert, this amount consists of
$7,860,569 pursuant to a retention bonus agreement including $3,480,110 as
a tax gross-up, $480,000 restructuring incentive award, and $12,000 in
contributions made by the Company to a defined contribution plan. For Mr.
Semple, this amount consists of $3,952,091 pursuant to a retention bonus
agreement including $1,749,709 as a tax gross-up, $483,480 restructuring
incentive award, and $12,000 in contributions made by the Company to a
defined contribution plan. Under the amended retention bonus agreements,
any outstanding bonus amounts that remained at the time of the effective
date of the Plan (October 15, 2002) will be paid out in four equal
payments on each of the first through fourth anniversaries of the
effective date. The restructuring incentive award was awarded to each
executive officer listed above with the terms of such award providing that
25 percent of the award be paid in 2002 and 75 percent of the award be
paid in April 2003. See "Employment Agreements and Change in Control
Severance Plan," below for more information concerning agreements with
each of Messrs. Janzen, Schubert, and Semple.
(7) Represents contributions made by the Company to a defined contribution
plan.
III-5
STOCK OPTION GRANTS IN LAST FISCAL YEAR
No WilTel or WCG stock options were granted during fiscal year 2002.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Pursuant to the Plan, all equity interests in WCG, including all stock
options that were outstanding, were cancelled as of the Effective Date (October
15, 2002). Thus, WCG options are not exercisable and have no monetary value.
RETIREMENT PLAN
Prior to January 1, 2001, eligible employees participated in the TWC
Pension Plan. Effective January 1, 2001, eligible employees participate in the
Williams Communications Pension Plan (the "Pension Plan"). The Pension Plan is a
noncontributory, tax-qualified defined benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended. The Pension Plan generally
includes salaried employees who were employed before April 24, 2001, and who
have completed one year of service. Executive officers participate in the
Pension Plan on the same terms as other full-time employees.
The Pension Plan is a cash balance pension plan. Account balances are
credited with an annual employer contribution and quarterly interest
allocations. Each year an employer contribution equal to a percentage of
eligible compensation is allocated to an employee's pension account. Such
percentage is based upon the employee's age according to the following table:
PERCENTAGE OF ELIGIBLE PAY
PERCENTAGE OF GREATER THAN THE
AGE ALL ELIGIBLE PAY SOCIAL SECURITY WAGE BASE
--- ---------------- -------------------------
30 or younger........................... 4.5% +1%
30-39................................... 6.0% +2%
40-49................................... 8.0% +3%
50+..................................... 10.0% +5%
For employees, including the executive officers named in the Summary
Compensation Table, who were active employees and plan participants in the TWC
Pension Plan on March 31, 1998, and April 1, 1998, and are now participants in
the Pension Plan, the percentage of all eligible pay is increased by an amount
equal to the sum of 0.3 percent multiplied by the participant's total years of
service prior to March 31, 1998. Interest is credited to account balances
quarterly at a rate determined annually in accordance with the terms of the
plan. The normal retirement benefit is a monthly annuity based on an
individual's account balance as of benefit commencement. The plan defines
eligible compensation to include salary and bonuses. Normal retirement age is
65. Early retirement may begin as early as age 55. At retirement, employees are
entitled to receive a single-life annuity or one of several optional forms of
payment having an equivalent actuarial value to the single-life annuity.
The Internal Revenue Code of 1986, as amended, currently limits the
pension benefits that can be paid from a tax-qualified defined benefit plan,
such as the pension plan, to highly compensated individuals. These limits
prevent such individuals from receiving the full pension benefit based on the
same formula as is applicable to other employees. As a result, the Company has
adopted an unfunded supplemental retirement plan to provide a supplemental
retirement benefit equal to the amount of such reduction to every employee,
including the executive officers named in the Summary Compensation Table, whose
benefit payable under the Pension Plan is reduced by Internal Revenue Code
limitations.
III-6
Total estimated annual benefits payable at normal retirement age (assuming
continued service through normal retirement age for current officers and no
future service for former officers) under the cash balance formula from both the
tax qualified and the supplemental retirement plans are as follows:
Jeff K. Storey ........ $ 362,025
Ken Kinnear ........... $ 171,120
Mardi Ford de Verges .. $ 77,746
Candice L. Cheeseman .. $ 75,694
Howard E. Janzen ...... $ 185,841
Scott E. Schubert ..... $ 23,978
Frank M. Semple ....... $ 111,201
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional
compensation for service on the Board of Directors or Committees of the Board.
Non-employee directors receive an annual retainer of $32,500 paid in quarterly
installments in advance. The Chairman of the Audit Committee is paid an
additional annual retainer of $5,000 payable quarterly at the same time as the
Director annual retainer. Non-employee directors also receive $1,000 for each
Board or committee meeting attended in person and $500 for each Board or
committee meeting attended by teleconference. Each director is entitled to
reimbursement for out-of-pocket expenses incurred for each meeting.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL SEVERANCE PLAN
A consultation agreement between WilTel and Mr. Howard E. Janzen effective
October 15, 2002, provides that, following Mr. Janzen's resignation as an
officer, employee, and director of WilTel effective October 16, 2002, he will
provide consultation services for Company matters that require his direct and
immediate input. In exchange Mr. Janzen will receive $400,000 over the next four
years to be paid in annual installments of $100,000 beginning October 2002 and
ending October 2005. The agreement also provides for Mr. Janzen to retain all
benefits and rights to which he was vested and entitled on the Effective Date of
the Plan.
An employment agreement between Williams Communications, LLC and Scott E.
Schubert effective December 10, 2002, provides that Mr. Schubert will serve as a
senior executive of WilTel (but not an executive officer) with no change to the
compensation and benefits to which he is entitled, and that he will no longer
serve as Chief Financial and Corporate Services Officer of WilTel. On or after
June 27, 2003, Mr. Schubert's employment may be terminated immediately upon
notice either by him or WilTel. In the event of such termination he will receive
severance benefits equal to those that he would have been entitled to receive as
Chief Financial and Corporate Services Officer under the Williams Communications
Group, Inc. Severance Protection Plan, as if his employment had involuntarily
terminated due to Severance, as that term is defined in the plan. WilTel
reserves the right to terminate Mr. Schubert's employment before June 27, 2003.
In that event, he will receive the total compensation, benefits and severance he
is entitled to under the Williams Communications Group, Inc. Severance
Protection Plan totaling $637,909.74 in severance and other benefit costs,
unless terminated for Cause, as defined in such plan. Mr. Schubert has tendered
his resignation to be effective on April 1, 2003.
An employment agreement between Williams Communications, LLC and Frank M.
Semple effective November 1, 2002, provides that Mr. Semple will serve as a
senior executive of WilTel (but not an executive officer) with no change to the
compensation and benefits to which he is entitled, and that he will no longer
serve as Chief Operating Officer of WilTel. On May 1, 2003, his employment may
be terminated either by himself or by WilTel. In the event of such termination,
he will receive severance benefits equal to those that he would have been
entitled to receive as Chief Operating Officer under the Williams Communications
Group, Inc. Severance
III-7
Protection Plan, as if his employment had involuntarily terminated due to
Severance, as that term is defined in the plan. WilTel reserves the right to
terminate Mr. Semple's employment before May 1, 2003. In that event, he will
receive the total compensation, benefits and severance he is entitled to under
the Williams Communications Group, Inc. Severance Protection Plan totaling
$485,404.74 in severance and other benefit costs, unless terminated for Cause,
as defined in such plan.
The Williams Communications Group, Inc. Severance Protection Plan provides
severance benefits for employees who are terminated because of a reduction in
force or job elimination and who are not participants in the Williams
Communications Group, Inc. Change in Control Severance Protection Plan I or II.
The severance benefit for the Chief Executive Officer is a lump sum payment
equal to 200 percent of annual base salary. The severance benefit for the senior
vice president level is a lump sum payment equal to 150 percent of the annual
base salary, and for the vice president level a lump sum payment equal to 100
percent of the annual base salary. Pursuant to their agreements with WilTel
outlined above, Mr. Janzen received, and Messrs. Schubert and Semple may
receive, severance benefits under this plan.
The Williams Communications Group, Inc. Change in Control Severance
Protection Plan II provides severance benefits to eligible employees including
the current WilTel executive officers listed by title in the Summary
Compensation Table, except for the Chief Executive Officer, who is an eligible
employee of Change in Control Severance Protection Plan I, below. A participant
in Plan II is eligible for benefits in exchange for a release of claims against
the Company and certain other agreements if, within two years following a change
in control of WCG, his or her employment is terminated (i) involuntarily other
than for Cause, death, Disability, or the Sale of a Business, or (ii)
voluntarily for Good Reason, as each capitalized term is defined in this plan.
Eligible employees are full-time or part-time regular employees at the time a
"Change in Control" occurs, as that term is defined in this plan. For the
limited purpose of participation in this plan, a Change in Control as defined in
the plan includes, among other things, an incidence of any person becoming the
owner of 25 percent or more of the voting securities of the Company, as Leucadia
did on October 15, 2002. The severance benefit provides a benefit that ranges
from two weeks to 24 months of base salary plus target incentive. It also
provides that the Company will pay an additional lump sum equivalent to a
participant's applicable COBRA premium for the period of time for which a
participant receives a severance benefit.
The Williams Communications Group, Inc. Change in Control Severance
Protection Plan I provides severance benefits to certain named employees
including the current Chief Executive Officer of WilTel. This Plan provides
severance benefits if, within two years following a Change in Control, as
defined in this plan, the participant's employment is terminated (i)
involuntarily other than for Cause, Disability, death, Retirement, or the Sale
of a Business, or (ii) voluntarily for Good Reason, as each capitalized term is
defined in this plan. For the limited purpose of participation in this plan, a
Change in Control as defined in the plan includes, among other things, an
incidence of any person becoming the owner of 25 percent or more of the voting
securities of the Company, as Leucadia did on October 15, 2002. Eligible
employees under this Plan are not eligible to participate in the Williams
Communications Group, Inc. Severance Protection Plan or Change in Control
Severance Plan II described above. Eligible employees under this Plan who have
waived their participation therein are eligible to participate in the Williams
Communications Group, Inc. Severance Protection Plan described above.
The Williams Communications, LLC Restructuring Incentive Plan (the
"Restructuring Incentive Plan") provided a retention incentive for designated
employees who were determined by the WCG Board of Directors to be necessary to
the success of the restructuring of the Company. Payments under the plan were
contingent upon participants' employment on the Effective Date of the Plan.
Participants in the Restructuring Incentive Plan entered into Restructuring
Incentive Agreements with Williams Communications, LLC. Under the agreements,
participants received 25 percent of the award following October 15, 2002, and
will receive the balance in April 2003. The Restructuring Incentive Plan will
automatically terminate when all payments have been made.
III-8
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Messrs. Collins, Diament,
Hirschfield, and Keil. No member of the Compensation Committee was an officer or
employee of the Company or any of its subsidiaries during 2002. No member of the
Compensation Committee is a former officer of the Company or any of its
subsidiaries. No member of the Compensation Committee has a direct or indirect
material interest in any transaction to which the Company or any of its
subsidiaries was or is to be a party in which the amount involved exceeds
$60,000. No member of the Compensation Committee is a director or executive
officer of any business or entity with a material business relationship with the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Company does not have any equity compensation plans.
The following table sets forth the number of shares of WilTel common stock
and the percentage represented by such number of each person who is known to the
Company to own beneficially 5 percent or more of the Company's common stock as
of February 28, 2003. Based upon a review of filings made with the SEC, the
Company believes that no other person beneficially owns 5 percent or more of the
Company's common stock.
NUMBER OF PERCENT
TITLE OF CLASS NAME AND ADDRESS SHARES OF CLASS
-------------- ----------------------------- ---------- --------
Common Stock Leucadia National Corporation 23,700,000 47.4%
315 Park Avenue South
New York, New York 10010
The following table sets forth, as of February 13, 2003, the amount of common
stock of the Company beneficially owned by each of the Company's directors, each
of its executive officers named in the Summary Compensation Table, and by all
directors and executive officers as a group. Unless otherwise indicated, each
beneficial owner has sole voting and sole investment power with respect to their
respective shares. In addition, unless otherwise indicated, the address of each
beneficial owner named below is c/o WilTel Communications Group, Inc, One
Technology Center, Tulsa, Oklahoma 74103.
SHARES OF
COMMON STOCK PERCENT
OWNED DIRECTLY OF
NAME OF INDIVIDUAL OR GROUP OR INDIRECTLY (1) CLASS
----------------------------------------- ----------------- -----
Candice L. Cheeseman................................ -- --
John Patrick Collins................................ 2,611 *
Ian M. Cumming (1).................................. -- --
William H. Cunningham............................... -- --
Mardi Ford de Verges................................ -- --
Michael Diament..................................... -- --
Alan J. Hirschfield................................. -- --
Howard E. Janzen (2)................................ 4,871 *
Jeffrey C. Keil..................................... -- --
Ken Kinnear ........................................ 104 *
Michael P. Ressner ................................. -- --
Scott E. Schubert (3)............................... 14,425 *
H. E. Scruggs -- --
Frank M. Semple (4)................................. -- --
Joseph S. Steinberg (1)............................. -- --
Jeff K. Storey...................................... -- --
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP (16 PERSONS) .............................. 22,011 (1) *(1)
- ---------
* Less than 1 percent
III-9
(1) Although neither Mr. Cumming nor Mr. Steinberg directly owns any shares of
the Company's common stock, by virtue of their ownership of approximately
16.9 percent and 15.7 percent interests, respectively, in Leucadia (as of
January 14, 2003), each may be deemed to be the indirect beneficial owner
of shares of the Company's common stock beneficially owned by Leucadia.
Mr. Cumming and Mr. Steinberg have an oral agreement pursuant to which
they will consult with each other as to the election of a mutually
acceptable Board of Directors of Leucadia. The business address of each of
Mr. Cumming and Mr. Steinberg is c/o Leucadia National Corporation, 315
Park Avenue South, New York, NY 10010.
(2) Howard E. Janzen, former Chief Executive Officer, President, and Director
of WCG resigned as an officer, employee, and director of WilTel as of
October 16, 2002.
(3) As of December 10, 2002, Scott E. Schubert no longer held the office of
Chief Financial and Corporate Services Officer of the Company. Mr.
Schubert is currently a senior executive pursuant to an employment
agreement with the Company as described in Item 11, above. Mr. Schubert
has tendered his resignation as an employee to be effective April 1, 2003.
(4) As of November 1, 2002, Frank M. Semple no longer held the office of Chief
Operating Officer of the Company. Mr. Semple is currently a senior
executive pursuant to an employment agreement with the Company as
described in Item 11, above.
No director or officer beneficially owns any other equity securities of
the Company or any of its subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EXECUTIVE OFFICER LOANS
In prior years, TWC granted loans to employees, primarily executive
officers, including employees of WCG. In conjunction with the spin-off from TWC,
WCG acquired the loans of six WCG officers totaling $19.9 million. In June and
December 2001, all loans to each individual were combined, due dates were
extended, and interest rates were adjusted to the minimum allowable interest
rate under applicable federal income tax laws. In July 2002 the loans were
amended to set a minimum interest rate under applicable federal income tax laws
and to change the maturity dates to the later of the original maturity dates
(four years or less) or the fourth anniversary of the Effective Date.
TOTAL INTEREST LARGEST AMOUNT PRINCIPAL
INTEREST OVER TERM OUTSTANDING OUTSTANDING
NAME RATE OF LOAN DURING 2002 12/31/2002
---- ---- ------- ----------- ----------
John C. Bumgarner 5.02% $ 1,882,718.08 $ 7,178,119.68 $ 0.00
Gerald L. Carson 3.97% $ 341,297.88 $ 1,194,138.96 $ 743,573.83
Howard E. Janzen 3.97% $ 1,646,199.13 $ 5,779,369.38 $ 3,598,733.44
Frank M. Semple 3.97% $ 550,268.18 $ 2,074,094.22 $ 1,291,509.80
James W. Dutton 3.97% $ 47,725.17 $ 245,948.31 $ 153,148.61
Scott E. Schubert 3.97% $ 1,117,590.40 $ 4,125,299.73 $ 2,568,767.12
TOTALS $ 5,585,798.84 $20,596,970.28 $ 8,355,732.80
Effective December 31, 2001, the Compensation Committee of the board of
directors of WCG established a program to award annual retention bonuses over a
period of five years in the aggregate amount of approximately $14 million to
certain executives to be applied, after deduction of applicable withholding
taxes, solely against their respective outstanding principal loan balances. The
agreements executed under this program were subsequently amended in conjunction
with the Plan.
III-10
Under the amended retention bonus agreements, WilTel reimbursed interest
payments owed by executives as of January 1, 2002. In addition, WilTel became
responsible for paying all taxes associated with interest and principal payments
under the retention bonus agreements, as well as taxes incurred as a result of
the payment of taxes by WilTel. Under a separate amendment, all retention bonus
payments vested upon consummation of the transaction in the Plan but will still
be paid out over the first through fourth anniversaries of the Effective Date.
Payment will only accelerate upon death or disability. The payment of associated
taxes is limited to an aggregate total of $20 million for all participants.
Under the Leucadia agreement, any officers who were parties to retention bonus
agreements were not eligible to participate in WilTel's otherwise applicable
change in control severance plan. The Company recorded expense of $23.3 million
for the ten months ended October 31, 2002 related to the retention bonus
agreements.
Total retention bonus amounts and payment schedule are as follows (in
thousands):
TOTAL
RETENTION TOTAL AMOUNTS AMOUNTS AMOUNTS AMOUNTS
BONUS BEFORE TOTAL TAX RETENTION PAID IN TO BE PAID TO BE PAID TO BE PAID TO BE PAID
NAME TAX GROSSUP GROSSUP BONUS 2002 IN 2003 IN 2004 IN 2005 IN 2006
- ---- ----------- ------- ----- ---- ------- ------- ------- -------
Gerald L. Carson $ 1,268 $ 1,063 $ 2,331 $ 834 $ 391 $ 382 $ 369 $ 355
Howard E. Janzen $ 6,137 $ 5,082 $ 11,219 $ 4,036 $ 1,890 $ 1,830 $ 1,764 $ 1,699
Frank M. Semple $ 2,202 $ 1,834 $ 4,036 $ 1,448 $ 678 $ 660 $ 637 $ 613
James W. Dutton $ 261 $ 229 $ 490 $ 172 $ 81 $ 82 $ 79 $ 76
Scott E. Schubert $ 4,381 $ 3,412 $ 7,793 $ 2,881 $ 1,291 $ 1,252 $ 1,207 $ 1,162
TOTALS $ 14,249 $ 11,620 $ 25,869 $ 9,371 $ 4,331 $ 4,206 $ 4,056 $ 3,905
On October 10, 2002, the Bankruptcy Court approved a settlement agreement
between WCG and John C. Bumgarner, a former officer of WCG who participated in
the TWC loan program. The Agreement provided that WCG would settle a $6.9
million employee loan plus accrued interest in return for the loan's collateral
of 238,083 shares of TWC common stock and 195,798 shares of WCG common stock and
approximately $7 million face value of WCG's Senior Redeemable Notes. The
surrender of the Senior Redeemable Notes prevented any WilTel stock distribution
under the Plan to Mr. Bumgarner. In addition, Mr. Bumgarner will provide
consulting services, if required or requested by the Company, at no cost to the
Company for a period of three years from the date of his retirement. The Company
recorded a loss of approximately $7 million for the ten months ended October 31,
2002, related to this agreement.
OTHER RELATED PARTY TRANSACTIONS
Ian M. Cumming and Joseph S. Steinberg, two directors of the Company, are
the Chairman and President, respectively, and significant shareholders of
Leucadia, which, as of October 28, 2002, beneficially owns 47.4 percent of the
Company's outstanding common stock. H. E. Scruggs, Senior Vice
President--Corporate of the Company, is an employee of Leucadia and does not
receive compensation from the Company. Pursuant to the Plan, Leucadia purchased
an aggregate of 44 percent of the Company's common stock by investing $150
million in the Company and purchasing the claims of TWC for $180 million (see
Item 1(d) "Other Information--Overview of the Chapter 11 Proceedings," above).
Although the Plan, including the distribution of Company common stock to
Leucadia, was consummated on October 15, 2002, under temporary authority from
the FCC, the $330 million purchase price paid by Leucadia was placed in escrow
in the form of irrevocable letters of credit pending final FCC approval. On
December 2, 2002, upon the satisfaction of conditions of the escrow agreement
when the Company received final FCC approval, the Company received the $150
million Leucadia investment.
III-11
On November 27, 2002, WilTel and Leucadia entered into a one-year
Restructuring Services Agreement (the "Restructuring Services Agreement")
effective as of October 16, 2002. Under the terms of the Restructuring Services
Agreement, Leucadia provides advice to WilTel with respect to management,
operations, future business opportunities, and other matters to be mutually
determined between WilTel and Leucadia. Leucadia does not receive any
compensation for services rendered under the Restructuring Services Agreement,
but is reimbursed for all expenses incurred in connection with its performance
under the Agreement.
Ross K. Ireland was a director of WCG from January 25, 2001, until his
resignation on February 5, 2002. At the time of his resignation as a WCG
director, Mr. Ireland was Senior Executive Vice President for SBC. An SBC
subsidiary purchases wholesale long distance service from the Company. Revenues
from SBC totaling $514.9 million for the year ended December 31, 2002,
represented approximately 47 percent of the Company's total revenues.
III-12
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) Based on their evaluation as of a date within 90 days of the filing date
of this Annual Report on Form 10-K, the Company's Chief Executive Officer
and Principal Financial Officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in reports that it files or
submits under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange
Commission rules and forms.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (a)(2). The financial statements and financial statement
schedules listed in the Index to the Consolidated Financial Statements below are
filed as part of this report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Covered by report of independent auditors:
Report of Ernst & Young LLP, Independent Auditors..................................................................... F-24
Consolidated Balance Sheets as of December 31, 2002 (Successor Company) and 2001 (Predecessor Company)............... F-25
Consolidated Statements of Operations for the two months ended December 31, 2002 (Successor Company), the ten
months ended October 31, 2002 (Predecessor Company) and the years ended December 31, 2001 and 2000 (Predecessor
Company)........................................................................................................... F-26
Consolidated Statements of Stockholders' Equity (Deficit) for the two months ended December 31, 2002 (Successor
Company), the ten months ended October 31, 2002 (Predecessor Company) and the years ended December 31, 2001 and
2000 (Predecessor Company)......................................................................................... F-27
Consolidated Statements of Cash Flows for the two months ended December 31, 2002 (Successor Company), the ten
months ended October 31, 2002 (Predecessor Company) and the years ended December 31, 2001 and 2000 (Predecessor
Company)........................................................................................................... F-29
Notes to Consolidated Financial Statements............................................................................ F-31
Schedules for the two months ended December 31, 2002 (Successor Company), the ten months ended October 31, 2002
(Predecessor Company) and the years ended December 31, 2001 and 2000 (Predecessor Company):
I - Condensed financial information of Registrant.................................................................. V-1
II - Valuation and qualifying accounts............................................................................. V-15
Not covered by report of independent auditors:
Quarterly Financial Data (Unaudited).................................................................................. F-73
All other schedules have been omitted since the required information is
not present or is not present in an amount sufficient to require submission of
the schedules, or because the information required is included in the financial
statements and notes thereto.
(a)(3) and (c). The documents in the Exhibit List below are filed as part of
this annual report.
IV-1
EXHIBIT LIST
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1* Copy of the Order Confirming Second Amended Joint Plan of
Reorganization of Williams Communications Group, Inc. and
CG Austria, Inc. (filed as Exhibit 99.1 to the Williams
Communications Group, Inc. Current Report on Form 8-K dated
October 11, 2002 (the "October 11, 2002, 8-K"))
2.2* Second Amended Joint Plan of Reorganization of Williams
Communications Group, Inc. and CG Austria, Inc. (filed as
Exhibit A to Exhibit 99.2 to the Williams Communications
Group, Inc. Current Report on Form 8-K dated August 23,
2002)
2.3* Modifications to Second Amended Joint Chapter 11 Plan of
Reorganization of Williams Communications Group, Inc. and
CG Austria, Inc. (Attachment I to Order Confirming Second
Amended Joint Plan of Reorganization of Williams
Communications Group, Inc. and CG Austria, Inc.) (filed as
Exhibit 99.3 to the Williams Communications Group, Inc.
October 11, 2002, 8-K)
2.4* Consent Order in Aid of Consummation of Debtors' Second
Amended Joint Chapter 11 Plan of Reorganization (filed as
Exhibit 99.4 to the Williams Communications Group, Inc.
October 11, 2002, 8-K)
3.1* Charter of the Company, filed with the Secretary of State
of the State of Nevada on October 14, 2002 (filed as
Exhibit 99.7 to the Company's Current Report on Form 8-K
dated October 24, 2002 (the "October 24, 2002, 8-K"))
3.2* By-Laws of the Company, as amended, dated as of October 15,
2002 (filed as Exhibit 99.9 to the Company's October 24,
2002, 8-K)
4.1* Stockholders Agreement, dated as of October 15, 2002,
between Leucadia National Corporation and the Company
(filed as Exhibit 99.6 to the Company's October 24, 2002,
8-K)
4.2* Registration Rights Agreement, dated as of October 15,
2002, between Leucadia National Corporation and the Company
(filed as Exhibit 99.10 to the Company's October 24, 2002,
8-K)
4.3* Co-Sale Agreement, dated as of October 15, 2002, between
Leucadia National Corporation and the Company (filed as
Exhibit 99.11 to the Company's October 24, 2002, 8-K)
10.1* Amended and Restated Alliance Agreement between Telefonos
de Mexico, S.A. de C.V. and Williams Communications, Inc.,
dated May 25, 1999 (filed as Exhibit 10.2 to the Williams
Communications Group, Inc. Equity Registration Statement,
Amendment No. 8, dated September 29, 1999)
10.2* Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8, 1999
(filed as Exhibit 10.10 the Williams Communications Group,
Inc. Equity Registration Statement, Amendment No. 1, dated
May 27, 1999)
IV-2
10.3* Transport Services Agreement dated February 8, 1999, among
Southwestern Bell Communication Services, Inc., SBC
Operations, Inc. and Williams Communications, Inc. (filed
as Exhibit 10.11 to the Williams Communications Group,
Inc. Equity Registration Statement, Amendment No. 1, dated
May 27, 1999)
10.4* Umbrella Agreement by and between DownTown Utilities Pty
Limited, WilTel Communications Pty Limited, Spectrum
Network Systems Limited, CitiPower Pty, Energy Australia,
South East Queensland Electricity Corporation Limited,
Williams Holdings of Delaware Inc. and Williams
International Services Company, dated June 19, 1998 (filed
as Exhibit 10.27 to the Williams Communications Group, Inc.
Equity Registration Statement, Amendment No. 1, dated May
27, 1999)
10.5* Sale and Purchase Agreement by and among Williams
Communications, LLC, Williams Learning Network, Inc.,
Williams Communications Solutions, LLC, Platinum Equity,
LLC, WCS Acquisition Corporation, and WCS Acquisition LLC,
dated as of January 29, 2001 (filed as Exhibit 10.64 to the
Williams Communications Group, Inc. Annual Report on Form
10-K for the year ended December 31, 2000, as filed on
March 12, 2001)
10.6* Amended and Restated Separation Agreement dated April 23,
2001, by and between The Williams Companies, Inc. and the
Company (filed as Exhibit 99.1 to the Williams
Communications Group, Inc. Current Report on Form 8-K dated
May 3, 2001, (the "May 3, 2001, 8-K"))
10.7* Amended and Restated Administrative Services Agreement
dated April 23, 2001, between The Williams Companies, Inc.,
and those certain subsidiaries of Williams collectively as
the "Williams Subsidiaries" and the Company and those
certain subsidiaries of the Company listed collectively as
the "Communications Subsidiaries" (filed as Exhibit 99.2 to
the Williams Communications Group, Inc. May 3, 2001, 8-K)
10.8* Sale and Purchase Agreement dated as of March 26, 2001, by
and among WCS, Inc., Williams Communications, LLC, and
TELUS Communications Inc. (filed as Exhibit 10.78 to the
Williams Communications Group, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, as filed on
August 10, 2001)
10.9* Stock Purchase Agreement dated as of June 24, 2001, by and
among iBEAM Broadcasting Corporation, Williams
Communications, LLC, Allen & Company Incorporated, and Lunn
iBEAM, LLC (filed as Exhibit 10.81 to the Williams
Communications Group, Inc. Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, as filed on August 10,
2001)
10.10* Stockholders Agreement dated as of July 10, 2001, by and
among Williams Communications, LLC, iBEAM Broadcasting
Corporation, the other stockholders iBEAM Broadcasting
Corporation and certain other parties (filed as Exhibit
10.82 to the Williams Communications Group, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, as
filed on August 10, 2001)
10.11* Asset Sale Agreement dated as of October 11, 2001, by and
between iBeam Broadcasting Corporation and Williams
Communications, LLC (filed as Exhibit 10.91 to the Williams
Communications Group, Inc. Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, as filed on April
1, 2002)
10.12* Debtor-in-Possession Credit and Security Agreement dated as
of October 11, 2001, by and between iBeam Broadcasting
Corporation and Williams Communications, LLC (filed as
Exhibit
IV-3
10.92 to the Williams Communications Group, Inc. Annual
Report on Form 10-K for the fiscal year ended December 31,
2001, as filed on April 1, 2002)
10.13* Fee Letter dated October 11, 2001, from Williams
Communications, LLC to iBeam Broadcasting Corporation
(filed as Exhibit 10.93 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.14* Asset Purchase Agreement by and between CoreExpress, Inc.
and Williams Communications, LLC dated as of October 31,
2001 (filed as Exhibit 10.96 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.15* Amendment dated December 3, 2001, to Asset Purchase
Agreement by and between CoreExpress, Inc. and Williams
Communications, LLC dated as of October 31, 2001 (filed as
Exhibit 10.97 to the Williams Communications Group, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, as filed on April 1, 2002)
10.16* First Amendment dated as of December 7, 2001, to the Asset
Sale Agreement dated as of October 11, 2001, by and between
iBeam Broadcasting Corporation and Williams Communications,
LLC (filed as Exhibit 10.98 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.17* Amendment No. 1 dated December 7, 2001, to
Debtor-in-Possession Term Credit and Security Agreement
dated as of October 11, 2001, by and between iBeam
Broadcasting Corporation and Williams Communications, LLC
(filed as Exhibit 10.99 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.18* Private Foreclosure Sale Agreement dated as of December 20,
2001, among Williams Communications, LLC, (Purchaser);
CoreExpress, Inc. (Debtor); Cisco Systems Capital
Corporation, Cisco Systems, Inc., Nortel Networks, Inc.,
UMB Bank & Trust, N.A., and Morgan Stanley & Co. (Senior
Secured Parties); Juniper Networks Credit Corporation,
Commercial and Municipal Financial Corporation, Sumner
Group, Inc., CIT Technologies Corporation d/b/a Technology
Rentals and Services, Inc., Sunrise Leasing Corporation
d/b/a Cisco Systems Capital Corporation, and
Hewlett-Packard Co. (Purchase Money Lenders) (filed as
Exhibit 10.100 to the Williams Communications Group, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, as filed on April 1, 2002)
10.19* Copy of the Williams Communications Group, Inc. April 22,
2002, agreement with principal creditor group (filed as
Exhibit 10.1 to the Williams Communications Group, Inc.
Current Report on Form 8-K dated April 22, 2002 (the "April
22, 2002, 8-K"))
10.20* Copy of the Williams Communications Group, Inc. agreement
with The Williams Companies, Inc. (filed as Exhibit 10.2 to
the Williams Communications Group, Inc. April 22, 2002,
8-K")
10.21* Settlement Agreement among Williams Communications Group,
Inc., CG Austria, Inc., the Official Committee of Unsecured
Creditors, The Williams Companies, Inc., and Leucadia
National Corporation dated July 26, 2002, filed with the
Bankruptcy Court as Exhibit A to the Joint Motion (filed as
Exhibit 99.2 to the Williams Communications Group, Inc.
Current Report on Form 8-K dated July 31, 2002, (the "July
31, 2002, 8-K"))
IV-4
10.22* First Amended Joint Chapter 11 Plan of Reorganization of
Williams Communications Group, Inc. and CG Austria,
filed with the Bankruptcy Court as Exhibit 1 to the
Settlement Agreement (filed as Exhibit 99.3 to the Williams
Communications Group, Inc. July 31, 2002, 8- K)
10.23* Investment Agreement between Williams Communications Group,
Inc. and Leucadia National Corporation dated July 26, 2002,
filed with the Bankruptcy Court as Exhibit 2 to the
Settlement Agreement (filed as Exhibit 99.4 to the Williams
Communications Group, Inc. July 31, 2002, 8-K)
10.24* Purchase and Sale Agreement between Leucadia National
Corporation and The Williams Companies, Inc., dated July
26, 2002, filed with the Bankruptcy Court as Exhibit 3 to
the Settlement Agreement (filed as Exhibit 99.5 to the
Williams Communications Group, Inc. July 31, 2002 8-K)
10.25* Real Property Purchase and Sale Agreement among Williams
Communications Group, Inc., Williams Headquarters Building
Company, Williams Technology Center, LLC, Williams
Communications, LLC, and Williams Aircraft Leasing, LLC,
dated July 26, 2002, filed with the Bankruptcy Court as
Exhibit 4 to the Settlement Agreement (filed as Exhibit
99.6 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.26* List of TWC Continuing Contracts, filed with the Bankruptcy
Court as Exhibit 5 to the Settlement Agreement (filed as
Exhibit 99.7 to the Williams Communications Group, Inc.
July 31, 2002 8-K)
10.27* Agreement for the Resolution of Continuing Contract
Disputes among Williams Communications Group, Inc.,
Williams Communications, LLC, and The Williams Companies,
Inc., dated July 26, 2002, filed with the Bankruptcy Court
as Exhibit 6 to the Settlement Agreement (filed as Exhibit
99.8 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.28* Tax Cooperation Agreement between Williams Communications
Group, Inc. and The Williams Companies, Inc., dated July
26, 2002, filed with the Bankruptcy Court as Exhibit 7 to
the Settlement Agreement (filed as Exhibit 99.9 to the
Williams Communications Group, Inc. July 31, 2002 8-K)
10.29* Amendment to Trademark License Agreement between Williams
Communications Group, Inc. and The Williams Companies,
Inc., dated July 26, 2002, filed with the Bankruptcy Court
as Exhibit to the Settlement Agreement (filed as Exhibit
99.10 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.30* Assignment of Rights between Williams Information Services
Corporation and Williams Communications, LLC, dated July
26, 2002, filed with the Bankruptcy Court as Exhibit 9 to
the Settlement Agreement (filed as Exhibit 99.11 to the
Williams Communications Group, Inc. July 31, 2002 8-K)
10.31* Guaranty Indemnification Agreement between Williams
Communications Group, Inc. and The Williams Companies,
Inc., dated July 26, 2002, filed with the Bankruptcy Court
as Exhibit 10 to the Settlement Agreement (filed as Exhibit
99.12 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.32* Declaration of Trust, dated as of October 15, 2002, by and
among Williams Communications Group, Inc., the Company
and the Residual Trustee (filed as Exhibit 99.1 to the
Company's October 24, 2002, 8-K)
IV-5
10.33* Amendment No. 1, dated as of October 15, 2002, to the
Purchase Agreement, dated as of July 26, 2002, between TWC
and Leucadia (filed as Exhibit 99.2 to the Company's
October 24, 2002, 8-K)
10.34* Escrow Agreement, dated as of October 15, 2002, by and
among the Company, TWC, Leucadia and The Bank of New York,
as Escrow Agent (filed as Exhibit 99.3 to the Company's
October 24, 2002, 8-K)
10.35* First Amendment, dated as of September 30, 2002, to the
Investment Agreement, dated as of July 26, 2002, by and
among the Company, Leucadia and WCL (filed as Exhibit 99.4
to the Company's October 24, 2002, 8-K)
10.36* Amendment No. 2, dated as of October 15, 2002, to the
Investment Agreement, dated as of July 26, 2002 and amended
as of September 30, 2002, by and among the Company,
Leucadia and WCL (filed as Exhibit 99.5 to the Company's
October 24, 2002, 8-K)
10.37* Second Amended and Restated Credit and Guaranty Agreement
dated as of September 8, 1999, as amended and restated as
of April 25, 2001 and as further amended and restated as of
October 15, 2002 (filed as Exhibit 99.12 to the Company's
October 24, 2002, 8-K)
10.38* Amendment No. 9, dated as of October 15, 2002, to Amended
and Restated Credit Agreement, dated as of September 8,
1999, and Amendment No. 1, dated as of October 15, 2002, to
the Subsidiary Guarantee, dated as of September 8, 1999
(filed as Exhibit 99.13 to the Company's October 24, 2002,
8-K)
10.39* Amended and Restated Security Agreement, dated as of April
23, 2001, as amended and restated as of October 15, 2002
(filed as Exhibit 99.14 to the Company's October 24, 2002,
8-K)
10.40* Amendment No. 1, dated as of October 15, 2002, to the Real
Property Purchase and Sale Agreement, dated as of July 26,
2002, among Williams Headquarters Building Company, WTC,
WCL, WCG and Williams Communications Aircraft, LLC (filed
as Exhibit 99.15 to the Company's October 24, 2002, 8-K)
10.41* Restructuring Services Agreement, effective as of October
16, 2002, between the Company and Leucadia (filed as
Exhibit 10.1 to the Company's December 5, 2002, 8-K)
10.42 Pledge Agreement dated as of October 15, 2002, by CG
Austria, Inc., as pledgor, to Williams Headquarters
Building Company, as pledgee
10.43 + First Amendment to Master Alliance Agreement between SBC
Communications Inc. and Williams Communications, Inc, by
and between SBC Communications Inc. and Williams
Communications, LLC, dated September 25, 2002
10.44 + First Amendment to Transport Services Agreement among
Southwestern Bell Communications Services Inc., SBC
Operations, Inc. and Williams Communications, Inc., by and
among Southwestern Bell Communications Services Inc., SBC
Operations, Inc. and Williams Communications, Inc., dated
September 29, 2000
10.45 Second Amendment to Transport Services Agreement, as
amended by Amendment No. 1 dated September 29, 2000, by and
among Southwestern Bell Communications Services Inc., SBC
Operations and Williams Communications, LLC,
effective as of June 25, 2001
IV-6
10.46 + Third Amendment to Transport Services Agreement, as
amended by Amendment No. 1 dated September 20, 2000, and
Amendment No. 2 dated June 25, 2001, by and among
Southwestern Bell Communications Services Inc., SBC
Operations, Inc. and Williams Communications, LLC, dated
September 25, 2002
10.47 + Fiber Lease Agreement, together with Colocation and
Maintenance Agreement and Lease Agreement #2, each dated
April 26, 2002, and each amended October 10, 2002,
between Metromedia Fiber Network Services, Inc. and
Williams Communications, LLC. Such agreements, as
amended, supercede that certain Fiber Lease Agreement
between Metromedia Fiber Network Services, Inc. and
Williams Communications, Inc., dated September 16, 1999
(filed as Exhibit 10.5 to the Williams Communications
Group, Inc. Equity Registration Statement, Amendment No.
8, dated September 29, 1999)
10.48 + Fiber Lease Agreement together with Colocation and
Maintenance Agreement, each dated April 26, 2002,and each
amended October 10, 2002, and February 14, 2003, between
Williams Communications, LLC and Metromedia Fiber Network
Services, Inc. Such agreements, as amended, supercede that
certain Fiber Lease Agreement between Williams
Communications, Inc. and Metromedia Fiber National Network
Services, Inc., dated September 16, 1999 (filed as Exhibit
10.6 to the Williams Communications Group, Inc. Equity
Registration Statement, Amendment No. 8, dated September 29,
1999)
10.49 Williams Communications Group, Inc. Change in Control
Severance Protection Plan I, effective as of April 18, 2002
10.50 Williams Communications Group, Inc. Change in Control
Severance Protection Plan II, amended and restated as of
April 18, 2002 (supercedes the Williams Communications
Change in Control Severance Protection Plan filed as Exhibit
10.55 to the Williams Communications Group, Inc. Equity
Registration Statement, Amendment No. 3, dated July 12,
1999)
10.51 Williams Communications Group, Inc. Severance Protection
Plan, amended and restated as of April 18, 2002
10.52 Consultation Agreement effective October 15, 2002, between
WilTel and Howard E. Janzen
10.53 Employment Agreement dated December 9, 2002, between
Williams Communications, LLC and Scott E. Schubert
10.54 Employment Agreement dated November 15, 2002, between
Williams Communications, LLC and Frank M. Semple
10.55 Retention Incentive Agreement effective November 13, 2002,
between Williams Communications, LLC and Jeff K. Storey
10.56 Retention Bonus Agreement as amended, dated July 19, 2002,
among Williams Communications Group, Inc., Williams
Communications, LLC, and Howard E. Janzen, effective as of
July 14, 2002
10.57 Retention Bonus Agreement as amended, dated July 19, 2002,
among Williams Communications Group, Inc., Williams
Communications, LLC, and Scott E. Schubert, effective as of
July 14, 2002
IV-7
10.58 Retention Bonus Agreement as amended, dated July 19, 2002,
among Williams Communications Group, Inc., Williams
Communications, LLC, and Frank M. Semple, effective as of
July 14, 2002
10.59 Restructuring Incentive Plan of Williams Communications, LLC
as amended and restated as of July 26, 2002
21 Subsidiaries of the Registrant
99.1* Order Pursuant to Section 1125 of the Bankruptcy Code and
Bankruptcy Rules 3017 and 2002 (A) Approving Proposed Second
Amended Disclosure Statement and Certain Related Relief, (B)
Approving Procedures for Solicitation and Tabulation of
Votes to Accept or Reject Proposed Second Amended Joint Plan
of Reorganization, and (C) Scheduling a Hearing on
Confirmation of Such Plan, dated August 13, 2002 (filed as
Exhibit 99.1 to the Williams Communications Group, Inc.
Current Report on Form 8-K dated August 23, 2002 (the
"August 23, 2002, 8-K"))
99.2* Second Amended Disclosure Statement With Respect to Second
Amended Joint Chapter 11 Plan of Reorganization of Williams
Communications Group, Inc., and CG Austria, Inc., dated
August 12, 2002 (filed as Exhibit 99.2 to the Williams
Communications Group, Inc. August 23, 2002, 8-K)
99.3* Monthly operating statement of WCG for the month ended
August 31, 2002 (filed as Exhibit 99.5 to the Williams
Communications Group, Inc. October 11, 2002, 8-K)
99.4* Monthly operating statement of WCG for the period after
April 22, 2002 (date of filing) through May 31, 2002 (filed
as Exhibit 99.18 to the Company's October 24, 2002, 8-K)
99.5* Monthly operating statement of WCG for the month ending June
30, 2002 (filed as Exhibit 99.19 to the Company's October
24, 2002, 8-K)
99.6* Monthly operating statement of WCG for the month ending July
31, 2002 (filed as Exhibit 99.20 to the Company's October
24, 2002, 8-K)
99.7* Monthly operating statement of WCG for the month ending
August 31, 2002 (filed as Exhibit 99.21 to the Company's
October 24, 2002, 8-K)
99.8* Monthly operating statement of WCG for the month ending
September 30, 2002 (filed as Exhibit 99.22 to the Company's
October 24, 2002, 8-K)
99.9 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
* Previously filed with the Securities and Exchange Commission as part
of the filing indicated, and incorporated herein by reference.
+ Portions of exhibit have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2.
(b) During the fourth quarter 2002, WilTel filed Current Reports on Form
8-K on October 16, October 24, November 4, and December 6, 2002, respectively
that reported significant events under Item 5 of the Form. The October 24 Form
8-K also included a statement under Item 1 that, while WilTel made no
representation in that
IV-8
regard about the event reported under Item 5, that the transactions described in
Item 5 may be deemed to be a change in control. WilTel filed a Form 8-K on
November 15, 2002, that reported under Item 9 of the Form certifications by the
chief executive officer and chief financial officer of the Company delivered
pursuant to 18 U.S.C. Section 1350.
IV-9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WILTEL COMMUNICATIONS GROUP, INC.
(Registrant)
By: /s/ Jeff K. Storey
-------------------------------
Jeff K. Storey
President and Chief Executive
Officer
Dated: March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
/s/ Ian M. Cumming Chairman of the Board
- ---------------------------
Ian M. Cumming
/s/ Jeff K. Storey Director; President and Chief Executive Officer
- --------------------------- (principal executive officer)
Jeff K. Storey
/s/ Ken Kinnear Vice President and Controller
- --------------------------- (principal financial officer)
Ken Kinnear
/s/ John Patrick Collins Director
- ---------------------------
John Patrick Collins
/s/ William H. Cunningham Director
- ---------------------------
William H. Cunningham
/s/ Michael Diament Director
- ---------------------------
Michael Diament
/s/ Alan J. Hirschfield Director
- ---------------------------
Alan J. Hirschfield
/s/ Jeffrey C. Keil Director
- ---------------------------
Jeffrey C. Keil
/s/ Michael P. Ressner Director
- ---------------------------
Michael P. Ressner
/s/ Joseph S. Steinberg Director
- ---------------------------
Joseph S. Steinberg
Dated: March 27, 2003
CERTIFICATION
I, Jeff K. Storey, certify that:
1. I have reviewed this annual report on Form 10-K of WilTel
Communications Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Jeff K. Storey
- ---------------------------------
Jeff K. Storey
Principal Executive Officer
CERTIFICATION
I, Ken Kinnear, certify that:
1. I have reviewed this annual report on Form 10-K of WilTel
Communications Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Ken Kinnear
- --------------------------
Ken Kinnear
Principal Financial Officer
WILTEL COMMUNICATIONS GROUP, INC. -- (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(DOLLARS IN THOUSANDS)
BALANCE SHEETS
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------ ------------
AS OF DECEMBER 31,
------------ ------------
ASSETS 2002 2001
------------ ------------
Cash ...................................................... $ 11,618 $ --
Other current assets ...................................... 70 761
------------ ------------
Total current assets ...................................... 11,688 761
Investments:
Equity in wholly-owned subsidiary ....................... 684,684 (5,613,313)
Receivable from wholly-owned subsidiary ................. -- 8,519,891
Property, plant and equipment, net ........................ 667 --
Unamortized debt issuance costs ........................... -- 52,735
Security deposits ......................................... 3,550 --
------------ ------------
Total assets .............................................. $ 700,589 $ 2,960,074
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................ $ 100 $ 100,000
Due to wholly-owned subsidiary .......................... -- 36,437
Interest accrued ........................................ -- 88,133
Preferred stock dividends accrued ....................... -- 3,516
Accrued liabilities:
Retention accruals .................................... 2,286 --
Other ................................................. 2,223 --
------------ ------------
Total current liabilities ................................. 4,609 228,086
Long-term debt:
Senior redeemable notes ................................. -- 2,438,692
Wholly-owned subsidiary ................................. -- 1,500,000
Long-term retention accruals .............................. 5,949 --
Other ..................................................... 300 --
WCG 6.75% redeemable cumulative convertible preferred stock -- 242,338
Stockholders' equity (deficit):
WCG Class A common stock ................................. -- 4,910
WilTel common stock ...................................... 500 --
Capital in excess of par value ........................... 749,500 3,862,465
Accumulated deficit ...................................... (61,049) (5,304,906)
Accumulated other comprehensive income (loss) ............ 780 (11,511)
------------ ------------
Total stockholders' equity (deficit) ...................... 689,731 (1,449,042)
------------ ------------
Total liabilities and stockholders' equity (deficit) ...... $ 700,589 $ 2,960,074
============ ============
V-1
WILTEL COMMUNICATIONS GROUP, INC. -- (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ ------------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------ ----------- -----------------------------
2002 2002 2001 2000
------------ ----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses ..... $ (138) $ (3,004) $ -- $ --
Provision for employee note receivable ........... -- (6,807) -- --
Restructuring charges ............................ -- (220) -- --
----------- ----------- ----------- -----------
Total operating expenses ....................... (138) (10,031) -- --
Interest accrued .................................... -- (114,669) (331,529) (271,532)
Intercompany interest income ........................ -- 114,669 331,529 271,532
Investing income .................................... 78 637 -- --
Gain on purchase of long-term debt .................. -- -- 296,896 --
Reorganization items, net ........................... -- 2,165,300 -- --
----------- ----------- ----------- -----------
Income (loss) before equity in income (loss) of
continuing operations of wholly-owned subsidiary . (60) 2,155,906 296,896 --
Equity in net loss of continuing operations of
wholly-owned subsidiary .......................... (60,989) (824,711) (4,107,253) (277,688)
----------- ----------- ----------- -----------
Income (loss) from continuing operations ............ (61,049) 1,331,195 (3,810,357) (277,688)
Loss from discontinued operations ................... -- -- -- (540,000)
Cumulative effect of change in accounting principle . -- (8,667) -- --
----------- ----------- ----------- -----------
Net income (loss) ................................... (61,049) 1,322,528 (3,810,357) (817,688)
Preferred stock dividends and amortization of
preferred stock issuance costs ................... -- (5,473) (17,568) (4,956)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (61,049) $ 1,317,055 $(3,827,925) $ (822,644)
=========== =========== =========== ===========
V-2
WILTEL COMMUNICATIONS GROUP, INC. -- (PARENT)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
(DOLLARS IN THOUSANDS)
STATEMENTS OF CASH FLOWS
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ --------------------------------------------------
TWO MONTHS TEN MONTHS
ENDED ENDED YEAR ENDED
..................................................... DECEMBER 31, OCTOBER 31, DECEMBER 31,
------------ ------------ -------------------------------
..................................................... 2002 2002 2001 2000
------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations ....... $ (61,049) $ 1,331,195 $ (3,810,357) $ (277,688)
Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by (used
in) operating activities:
Non-cash reorganization items:
Gain on discharge of liabilities ................ -- (4,346,274) -- --
Fresh start valuation of assets and liabilities . -- 2,161,397 -- --
Write-off of deferred financing costs and debt
discounts ....................................... -- 68,503 -- --
Gain on forgiveness of interest ................. -- (73,898) -- --
Provision for employee note-receivable ............ -- 6,807 -- --
Equity in net loss from continuing operations of
wholly-owned subsidiary ......................... 60,989 824,711 4,107,253 277,688
Gain on purchase of long-term debt ................ -- -- (296,896) --
Cash provided by (used in) changes in:
Receivables ..................................... (53) (426) -- --
Other current assets ............................ 113 339 -- --
Accounts payable ................................ (2,599) 2,592 -- --
Accrued liabilities ............................. (2,130) 3,334 -- --
Current and non-current retention accruals ...... -- 12,926 -- --
Other ........................................... -- 141 -- --
------------ ------------ ------------ ------------
Net cash used in operating activities .............. (4,729) (8,653) -- --
FINANCING ACTIVITIES:
Change in receivable from wholly-owned subsidiary .. -- 19,709 (1,261,289) (1,214,869)
Proceeds from long-term debt ....................... -- -- 1,500,000 996,982
Purchase of long-term debt ......................... -- -- (239,539) --
Investment by Leucadia National Corporation ........ 150,000 -- -- --
Proceeds from issuance of common stock, net of
expenses .......................................... -- 9,452 18,904 4,166
Proceeds from issuance of preferred stock, net of
expenses .......................................... -- -- -- 240,500
Debt issuance costs ................................ -- -- -- (26,779)
Preferred stock dividends paid ..................... -- (4,161) (18,076) --
------------ ------------ ------------ ------------
Net cash provided by financing activities........... 150,000 25,000 -- --
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Capital Contribution to wholly-owned
subsidiary ....................................... (150,000) -- -- --
Purchase of short-term investments ................. -- (24,947) -- --
Proceeds from sales of investments ................. -- 24,947 -- --
------------ ------------ ------------ ------------
Net cash (used in) financing activities ............ (150,000) -- -- --
Increase (decrease) in cash and cash equivalents ... (4,729) 16,347 -- --
Cash and cash equivalents at beginning of period ... 16,347 -- -- --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ......... $ 11,618 $ 16,347 $ -- $ --
============ ============ ============ ============
V-3
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Condensed financial information of the registrant, WilTel Communications
Group, Inc. ("WilTel" and, together with its direct and indirect subsidiaries,
the "Company"), is required to be presented when restricted net assets of its
consolidated subsidiaries exceed 25 percent of the consolidated net assets as of
the end of the year. As discussed in Note 7, because Williams Communications,
LLC's ("WCL") Exit Credit Agreement restricts WCL's ability to transfer funds
and pay dividends to WilTel, substantially all of the net assets of WilTel's
consolidated subsidiaries are restricted.
On April 22, 2002, Williams Communications Group, Inc. ("WCG") and CG
Austria, Inc. (collectively, the "Debtors") commenced proceedings under chapter
11 of title 11 of the United States Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). As discussed in Note 2, pursuant to the terms of a plan of
reorganization, WilTel emerged on October 15, 2002 as the successor to WCG.
WCG was a non-operating holding company whose principal asset was 100% of
the membership interest in WCL, which changed its name to WilTel Communications,
LLC in January 2003. In connection with the consummation of the Plan (as defined
in Note 2), WCG transferred substantially all of its assets to WilTel on October
15, 2002. WCL is an operating company, which owns or leases and operates a
nationwide inter-city fiber-optic network, extended locally and globally, to
provide Internet, data, voice and video services. In addition, WCL is the direct
or indirect parent of all the remaining subsidiaries of the Company, including
CG Austria, Inc., a non-operating holding company with direct and indirect
interest in certain foreign subsidiaries of the Company. WCL was not included in
the chapter 11 proceedings.
The Company became subject to the provisions of Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code," upon commencement of the chapter 11 proceedings. SOP 90-7
requires, among other things, that pre-petition liabilities that are subject to
compromise be segregated in the consolidated balance sheet. In addition,
revenues, expenses, realized gains and losses and provisions for losses
resulting from the reorganization and restructuring of the Company are reported
separately as reorganization items in the consolidated statement of operations.
Interest expense on liabilities subject to compromise and preferred stock
dividends ceased to accrue upon commencement of the chapter 11 proceedings.
In conjunction with formulating the Plan (as defined in Note 2), the
Company was required to estimate its post-confirmation reorganization value. The
Company's financial advisors assisted in the valuation utilizing methodologies
that were based upon the cash flow projections and business plan as contemplated
by the Predecessor Company. These methodologies incorporated discounted cash
flow techniques, a comparison of the Company and its projected performance to
market values of comparable companies and a comparison of the Company and its
projected performance to values of past transactions involving comparable
entities. The cash flow valuations utilized five-year projections discounted at
a weighted average cost of capital of approximately 27.5%, including a terminal
value equal to a multiple of projected fifth year operating results, together
with the net present value of the five-year projected cash flows. Based upon
these analyses, upon emergence from the chapter 11 proceedings, the
reorganization value for the Company was estimated to be approximately $1.3
billion. This reorganization value was reflected in the Company's consolidated
balance sheet upon emergence from the chapter 11 proceedings as post-emergence
debt of approximately $573 million and an equity value of $750 million.
The Company emerged from the chapter 11 proceedings in October 2002 and
implemented fresh start accounting under the provisions of SOP 90-7 effective
October 31, 2002 to coincide with its normal monthly financial closing cycle.
Under SOP 90-7, the net reorganization value of the Company was allocated to its
assets and liabilities, its accumulated deficit was eliminated and new equity
was issued according to the Plan (as defined in Note 2). The Company recorded a
$2.2 billion reorganization charge to adjust the historical carrying value of
V-4
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
its assets and liabilities to fair value reflecting the allocation of the
Company's reorganization value of approximately $1.3 billion. The Company also
recorded a $4.3 billion gain on the discharge of debt pursuant to the Plan (as
defined in Note 2). In addition, changes in accounting principles that would be
required in the financial statements within twelve months following emergence
from the chapter 11 proceedings were adopted in the Company's fresh start
financial statements. See Note 3 in the consolidated financial statements for a
presentation of the impact of implementing fresh start accounting on WCG's
consolidated balance sheet as of October 31, 2002.
The Company's current focus is to retain its existing business by
providing a high quality of service, to obtain new business if it can be done on
a profitable basis, to reduce its operating expenses to the greatest extent
possible, and to conserve liquidity. As of December 31, 2002, the Company had
$291.3 million of cash and cash equivalents to meet its cash requirements and
believes that it has sufficient liquidity to meet its needs through 2004. The
Company has $375 million of debt under its Exit Credit Agreement and
approximately $142 million of debt under the OTC Notes (see Note 15 to the
consolidated financial statements). Approximately $157 million of this debt
matures during 2005. Unless the Company is able to generate significant cash
flows from operations through revenue growth, expense reductions or some
combination of both, it is likely that new capital will have to be raised to
meet its maturing debt obligations in 2005.
The Company's emergence from the chapter 11 proceedings resulted in a new
reporting entity with no retained earnings or accumulated deficit as of October
31, 2002. Accordingly, the Company's consolidated financial statements for
periods prior to October 31, 2002 are not comparable to consolidated financial
statements presented on or subsequent to October 31, 2002. The 2002 financial
results have been separately presented under the label "Predecessor Company" for
periods prior to November 1, 2002 and "Successor Company" for the two-month
period ended December 31, 2002 as required by SOP 90-7. The Predecessor Company
is also referred to as "WCG" and the Successor Company is also referred to as
"WilTel".
Prior to April 2001, The Williams Companies, Inc. ("TWC") owned 100% of
WCG's outstanding Class B common stock which gave TWC approximately 98% of the
voting power of WCG. In March 2001, TWC's Board of Directors approved a tax-free
spin-off of WCG to TWC's shareholders. On April 23, 2001, TWC distributed
approximately 95% of the WCG common stock it owned to holders of TWC common
shares on a pro rata basis.
2. BANKRUPTCY PROCEEDINGS
OVERVIEW OF THE CHAPTER 11 PROCEEDINGS
On April 22, 2002, the Debtors filed petitions for relief under the
Bankruptcy Code in the Bankruptcy Court. On September 30, 2002, the Bankruptcy
Court entered an order confirming the Second Amended Joint Chapter 11 Plan of
Reorganization of the Debtors (the "Plan"), effective on October 15, 2002 (the
"Effective Date"). The confirmation order was subject to certain conditions
including gaining necessary FCC regulatory approvals to transfer control of
licenses from WCG to the Company. Prior to the Effective Date, WCG, WCL, and the
Company applied to and received from the FCC special temporary authority to
transfer control of all licenses to the Company. The granting of the special
temporary authority from the FCC allowed the Company to emerge from the chapter
11 proceedings on the Effective Date subject to an escrow agreement discussed
below.
A copy of the Plan was filed as Exhibit A to Exhibit 99.2 to WCG's Current
Report on Form 8-K, dated August 13, 2002. Modifications to the Plan were filed
as Exhibit 99.3 to WCG's Current Report on Form 8-K, dated September 30, 2002
(the "Confirmation Date 8-K"). A copy of the Confirmation Order was filed as
Exhibit 99.1 to the Confirmation Date 8-K.
V-5
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Described below is a summary of certain significant agreements and
important events that have occurred in and following the bankruptcy
reorganization. The summary should be read in conjunction with and is qualified
in its entirety by reference to the Plan and the material transaction documents
discussed herein and made available as exhibits to WCG's and WilTel's public
filings, including those filed with the SEC.
Plan of Reorganization
On September 30, 2002, the Bankruptcy Court approved and entered an order
confirming the Plan, which had been proposed by the Debtors, the official
committee of unsecured creditors (the "Committee") and Leucadia National
Corporation ("Leucadia"). The Plan was designed to meet the requirements of the
Settlement Agreement (described in greater detail below) and the pre-petition
Restructuring Agreement. By implementing both the Settlement Agreement and the
Restructuring Agreement, the Plan allowed WCG to raise the $150 million new
investment from Leucadia. That additional investment allowed WCG to further
reduce its secured debt without sacrificing working capital (see below for a
discussion of the Escrow Agreement and the ultimate release from escrow of the
$150 million investment).
Settlement Agreement
On July 26, 2002, TWC, the Committee, and Leucadia entered into a
settlement agreement (the "Settlement Agreement") that provided for, among other
things, (a) the mutual release of each of the parties, (b) the purchase by
Leucadia of TWC's unsecured claims against WCG (approximately $2.35 billion face
amount) for $180 million, (c) the satisfaction of such TWC claims and a $150
million investment in the Company by Leucadia in exchange for 44% of the
outstanding WilTel common stock, and (d) modification of WCG's sale and
subsequent leaseback transaction covering the WCG headquarters building and
modification of the TWC Continuing Contracts (as defined in the Settlement
Agreement). An order approving the Settlement Agreement was issued on August 23,
2002.
TWC's unsecured claims of $2.35 billion related to arrangements between
WCG and TWC and primarily consisted of the following:
Senior Reset Note Claim: Approximately $1.4 billion of those claims
related to the Trust Notes, which were senior secured notes issued by a WCG
subsidiary in March 2001. The proceeds from the sale of the Trust Notes were (i)
transferred to WCG in exchange for WCG's $1.5 billion 8.25% senior reset note
due 2008 (the "Senior Reset Note") and (ii) contributed by WCG as capital to WCL
to provide liquidity following the tax-free spin-off from TWC. Obligations of
WCG and its affiliates under the Trust Notes were secured by the Senior Reset
Note and were effectively guaranteed by TWC. In July 2002, TWC exchanged $1.4
billion of new senior unsecured notes of TWC (the "New TWC Notes") for all of
the outstanding Trust Notes. TWC, as agent under the Trust Notes indenture, had
the right to sell the Senior Reset Note to achieve the highest reasonably
available market price and the Bankruptcy Court found that the TWC sale of the
TWC Assigned Claims to Leucadia met this requirement.
ADP Claims: In 1998, WCG entered into an operating lease agreement
covering a portion of its fiber-optic network referred to as an asset defeasance
program ("ADP"). The total cost of the network assets covered by the lease
agreement was $750 million. Pursuant to the ADP, WCG had the option to purchase
title to those network assets at any time for an amount roughly equal to the
original purchase price, and TWC was expressly obligated to pay the purchase
price under an intercreditor agreement entered into by TWC in connection with
the then-existing WCL credit facility. In March 2002, WCG exercised its purchase
option, and TWC funded the purchase price of approximately $754 million. In
exchange for this payment from TWC, the intercreditor agreement provided that
TWC was entitled to either the issuance of WCG equity or WCG unsecured
subordinated debt (meaning debt that was subordinate in priority to WCL's
pre-petition credit facility), each on terms reasonably acceptable to the
lenders under WCL's pre-petition credit facility. On March 29, 2002, WCG
tendered an
V-6
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
unsecured note to TWC for approximately $754 million that was not accepted by
TWC. Any and all causes of action of TWC or any of its direct or indirect
subsidiaries against a Debtor relating to the ADP were resolved pursuant to the
terms of the Settlement Agreement.
Pre-Spin Services Claims: The terms of the Settlement Agreement also
resolved "Pre-Spin Services Claims" of TWC arising from a Services Agreement
entered into between WCG and TWC when WCG was a wholly-owned subsidiary of TWC.
Pursuant to this agreement, TWC and certain of its affiliates performed payroll,
administrative, and related services for WCG and its affiliates. Pre-Spin
Services Claims were also resolved pursuant to the Settlement Agreement.
The Settlement Agreement also resolved WCG's defaults under the sale and
subsequent leaseback transaction (discussed below) as a result of WCG's
bankruptcy filing, thus negating any threat or risk that the Company would be
evicted or otherwise lose possession of its headquarters due to the bankruptcy.
SBC Stipulation
On September 25, 2002, the Bankruptcy Court approved a stipulation
agreement (the "Stipulation Agreement") between the Company and SBC conditioned
upon the consummation of the Plan. The Stipulation Agreement provided for the
necessary SBC approval of the Plan and resolved change-of-control issues that
SBC had raised regarding WCG's spin-off from TWC. At the same time, SBC and WCL
executed amendments to their alliance agreements.
Purchase of Headquarters Building
In connection with the spin-off of WCG by TWC in 2001, TWC and WCG entered
into a sale and leaseback transaction for WCG's headquarters building and
certain real and personal property, including two corporate aircraft (the
"Building Purchase Assets"), as a result of which TWC purchased the Building
Purchase Assets and leased them back to WCG. Pursuant to an agreement between
WCG and TWC, among others, dated July 26, 2002, (as amended, the "Real Property
Purchase and Sale Agreement"), WCG repurchased the Building Purchase Assets from
TWC for an aggregate purchase price of approximately $145 million (the "Purchase
Price").
The Purchase Price consisted of promissory notes issued by Williams
Technology Center, LLC ("WTC"), the Company, and WCL to TWC (the "OTC Notes").
One note for $100 million is due April 1, 2010; the other note for $44.8 million
is due December 29, 2006. The obligations of WTC, WilTel, and WCL under the OTC
Notes may be subject to reduction, depending on the disposition of certain
aircraft leases described in greater detail in the Real Property Purchase and
Sale Agreement. Obligations of WTC, WilTel, and WCL under the OTC Notes were
secured by, and made pursuant to, a mortgage agreement (the "OTC Mortgage"),
under which WTC granted a first priority mortgage lien and security interest to
TWC in all of its right, title and interest in, to and under the headquarters
building and related real and personal property.
The Settlement Agreement also contemplated that the Lenders would receive
a second priority mortgage lien and security interest in those same assets. The
Real Property Purchase and Sale Agreement also provided that the OTC Notes are
secured in part by a second lien and security interest in the Company's
interests in PowerTel. See Note 15 to the consolidated financial statements for
a further discussion of the terms of the OTC Notes.
The Real Property Purchase and Sale Agreement further provides that if,
within one year after the date of the Settlement Agreement, WTC exchanges or
disposes of or enters into an agreement to exchange or dispose of any or all of
the headquarters building or the related real or personal property for an
aggregate sales price in an amount greater than $150 million, WTC shall be
required to prepay the OTC Notes in full and pay to TWC an amount equal to the
product of (i) 50% multiplied by (ii) the excess of the aggregate sales price
over (A) $150 million less (B) the amount equal to (x) the aggregate
consideration received by TWC in connection with the
V-7
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
disposition of certain aircraft dry leases referred to in the Real Property
Purchase and Sale Agreement or (y) the amount of proceeds received by WCG in
connection with the refinancing of the aircraft currently subject to such
aircraft dry leases.
As described below, consummation of the transactions contemplated by the
Real Property Purchase and Sale Agreement were conditioned upon satisfaction of
the terms of the Escrow Agreement (as defined below).
Transactions on the Effective Date
On the Effective Date, pursuant to the Plan and the confirmation order,
WilTel emerged as the successor to WCG and issued an aggregate of 22,000,000
shares of WilTel common stock to Leucadia and an aggregate of 27,000,000 shares
of WilTel common stock to a grantor trust (the "Residual Trust") among WCG,
WilTel, and Wilmington Trust Corporation, as trustee (the "Residual Trustee") on
behalf of certain creditors of WCG. An additional 1,000,000 shares of WilTel
common stock were issued to WCG in connection with a "channeling injunction"
that could potentially benefit securities holders involved in a class action
proceeding against WCG.
WilTel issued shares of its common stock to Leucadia under the Plan in two
distributions. First, pursuant to a Purchase and Sale Agreement, dated as of
July 26, 2002, between Leucadia and TWC (amended on October 15, 2002), Leucadia
acquired from TWC certain claims that TWC had against WCG (the "TWC Assigned
Claims") for a purchase price of $180 million paid in the form of a letter of
credit issued by Fleet Bank (the "TWC Letter of Credit") and WilTel issued
11,775,000 shares of its common stock to Leucadia in satisfaction of such claims
in accordance with the Plan.
Second, pursuant to an Investment Agreement by and among Leucadia, WCG,
and WCL, dated as of July 26, 2002 (amended on October 15, 2002), on the
Effective Date Leucadia invested $150 million in the Company in exchange for
10,225,000 shares of WilTel common stock (the "New Investment"). Leucadia paid
$1,000 of the purchase price in cash to WilTel and delivered the remainder, in
the form of a letter of credit issued by JP Morgan Chase Bank (the "Company
Letter of Credit").
Leucadia delivered the TWC Letter of Credit and the Company Letter of
Credit into an escrow account established pursuant to an Escrow Agreement (the
"Escrow Agreement") dated as of October 15, 2002, among the Company, Leucadia,
TWC, and The Bank of New York as Escrow Agent. The Escrow Agreement provided for
the release of the Letters of Credit (and documents related to the Real Property
Purchase and Sale Agreement) upon receipt, prior to February 28, 2003, of
approval from the FCC for the transfer of control to the Company of the licenses
that had been temporarily issued to WCL prior to the Effective Date. Failure to
obtain FCC approval by February 28, 2003, in accordance with the terms of the
Escrow Agreement would have resulted in an "unwind" of the New Investment and
the purchase of the TWC Assigned Claims. However, following receipt of the FCC
approval on November 25, 2002, the proceeds of the Company Letter of Credit were
paid to the Escrow Agent for disbursement to the Company in accordance with the
terms of the Escrow Agreement, and the proceeds of the TWC Letter of Credit were
paid to the Escrow Agent for disbursement to TWC.
WCG continues to exist as a separate corporate entity, formed in the State
of Delaware, in order to liquidate any residual assets and wind up its affairs.
On the Effective Date, WCG transferred substantially all of its assets to
WilTel. The other Debtor, CG Austria, continues to exist as a separate corporate
entity, incorporated in the State of Delaware, and owned solely by WCL.
The Exit Credit Agreement
On the Effective Date, WCL and the lenders under its credit facility (the
"Lenders") entered into a credit agreement (the "Exit Credit Agreement") that
combined the term loans under the previous credit facility into one loan for
$375 million (paid down throughout the bankruptcy from a pre-petition balance of
$975 million). See
V-8
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Note 15 to the consolidated financial statements for a further discussion of the
terms of the Exit Credit Agreement.
Capitalization, Corporate Governance, and Leucadia Agreements
Pursuant to the Plan and a Stockholders Agreement, dated October 15, 2002,
between Leucadia and the Company (the "Stockholders Agreement"), the Company's
Board of Directors is comprised of four members designated by Leucadia, four
members designated by the Official Committee of Unsecured Creditors of WCG, and
the Chief Executive Officer of the Company, Jeff K. Storey, who was elected as
Chief Executive Officer of the Company and became a member of the Board of
Directors on October 31, 2002. Pursuant to the Stockholders Agreement, so long
as Leucadia beneficially owns at least 20% of the outstanding common stock of
WilTel, it will be entitled to nominate four members of the Board of Directors.
If Leucadia beneficially owns less than 20% but more than 10% of the outstanding
common stock of WilTel, it will be entitled to nominate one member to the Board
of Directors. In addition, the Stockholders Agreement provides that, until
October 15, 2004, Leucadia will vote all of its shares of WilTel common stock in
favor of Committee designees to the Board. Until October 15, 2004, any
replacement of a Committee designee will occur through a nominating process
detailed at Section 3.4 of the Stockholders Agreement.
Pursuant to the Stockholders Agreement, for a period of five years from
the Effective Date of the Plan, Leucadia may not acquire or agree to acquire any
of the Company's securities except (a) with prior approval by a majority of the
members of the Board of Directors that are independent or by holders of a
majority of the Company voting securities that are not owned by Leucadia voting
together as a single class, (b) in connection with certain other acquisitions,
so long as Leucadia would not hold in excess of 49% of the Company's voting
securities following such acquisition or (c) a Permitted Investor Tender Offer
(as defined in the Stockholders Agreement).
The WilTel articles of incorporation (the "Charter") provide that 200
million shares of common stock are authorized for issuance (of which 50 million
shares were issued under the Plan and are outstanding), and 100 million shares
of preferred stock are authorized for issuance (of which no shares are issued
and outstanding).
Leucadia has entered into a Registration Rights Agreement with the Company
by which the Company has granted Leucadia certain rights to obligate the Company
to register for sale under the Securities Act of 1933, the shares owned by
Leucadia or its affiliates, including the shares issued pursuant to the Plan.
Leucadia and the Company have entered into a Stockholder Rights and
Co-Sale Agreement (the "Co-Sale Agreement") by which, among other things,
certain WilTel holders (any of the approximately 2,500 holders who submitted an
affidavit within 90 days after the Effective Date, or their Permitted Transferee
under the Co-Sale Agreement, who maintain beneficial ownership of at least 100
shares of common stock received pursuant to the Plan) will be eligible to
participate in (i) issuances of Securities (as defined in the Co-Sale Agreement)
to Leucadia until the fifth anniversary of the Effective Date and (ii) any
transfer (other than transfers to affiliates of Leucadia and Exempt Transactions
(as defined in the Co-Sale Agreement)) by Leucadia of shares of WilTel common
stock representing 33% or more of the WilTel common stock outstanding. In
addition, two such holders each paid $25,000 to the Company (with the submission
of the affidavit referred to above) to be eligible to participate in proposed
issuances or actual issuances of Other Securities (as defined in the Co-Sale
Agreement) to Leucadia until the fifth anniversary of the Effective Date.
On October 28, 2002, Leucadia purchased in a private transaction 1.7
million shares of WilTel's common stock as reported on Schedule 13-D filed on
October 30, 2002, which brings Leucadia's ownership interest in WilTel to 47.4%.
V-9
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The "Five-Percent Limitation" on Stock Ownership
As required by the Plan, the Charter imposes certain restrictions on the
transfer of "Corporation Securities" (as defined in the Charter, including
common stock, preferred stock, and certain other interests) with respect to
persons who are, or become, five-percent shareholders of the Company, as
determined in accordance with applicable tax laws and regulations (the
"Five-percent Ownership Limitation"). The Five-percent Ownership Limitation
provides that any transfer of, or agreement to transfer, Corporation Securities
prior to the end of the effectiveness of the restriction (as described below)
shall be prohibited if either (y) the transferor holds five percent or more of
the total fair market value of the Corporation Securities (a "Five-percent
Shareholder") or (z) to the extent that, as a result of such transfer (or any
series of transfers of which such transfer is a part), either (1) any person or
group of persons shall become a Five-percent Shareholder, or (2) the holdings of
any Five-percent Shareholder shall be increased, excluding issuances of WilTel
common stock under the Plan and certain other enumerated exceptions. Each
certificate representing shares of WilTel common stock bears a legend that
re-states the applicable provisions of the Charter.
The Five-percent Ownership Limitation will not apply to: (i) certain
transactions approved by the WilTel Board, (ii) an acquisition by Leucadia of
shares of the Corporation Securities that, as a percentage of the total shares
outstanding, is not greater than the difference between 49% and the percentage
of the total shares outstanding acquired by Leucadia or any of its subsidiaries
in the Plan, plus any additional Corporation Securities acquired by Leucadia and
its subsidiaries, and (iii) certain other transactions specified in the Charter
if, prior to the transaction, the WilTel Board or a duly authorized committee
thereof determines in good faith upon request of the transferor or transferee
that the transaction meets certain specified criteria.
The Charter also prohibits the issuance of non-voting equity securities.
Additional Effective Date Transactions
In addition, the following transactions, among others, occurred on the
Effective Date pursuant to the Plan (capitalized terms used but not defined
herein have the meaning ascribed to them in the Plan):
- - All of the Restated Credit Documents were executed and delivered and
became effective, and $350 million was paid to the Lenders thereunder.
- - Each of the transactions that comprise the TWC Settlement occurred or were
implemented and became binding and effective in all respects (subject to
the Escrow Agreement), including:
- documents to effect the sale by Williams Headquarters Building
Company of the Building Purchase Assets to WTC pursuant to the Real
Property Purchase and Sale Agreement were deposited into escrow with
The Bank of New York, as Escrow Agent, and subsequently delivered
when the $330 million proceeds of the Leucadia New Investment and
purchase of TWC Assigned Claims were released to the Company and
TWC, respectively, pursuant to the terms of the Escrow Agreement;
- all of the releases contemplated by the TWC Settlement became
binding and effective, including releases whereby WCG, WCG's current
and former directors and officers, and the Committee released TWC
and its current and former directors, officers, and agents; in
addition, TWC released WCG and WCG's current and former directors
and officers, including the claims that TWC alleged it had against
WCG's non-debtor subsidiaries; and
- all other transactions contemplated under the TWC Settlement were
consummated.
V-10
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
- - As contemplated by the Settlement Agreement, the confirmation order
provided an injunction with respect to (a) channeling all personal claims
of WCG's unsecured creditors against TWC and deeming them satisfied from
the consideration provided by TWC under the Settlement Agreement; and (b)
channeling all remaining securities actions against WCG's officers and
directors to a "fund" consisting of up to 2% of WilTel's common stock and
the right to collect under WCG's director and officer liability insurance
policies.
- - Pursuant to the Settlement Agreement, TWC transferred to WCG all of its
rights in the "WilTel" and "WilTel Turns Up Worldwide" marks, and in
exchange WCG agreed to amend the term of the Trademark License Agreement,
dated April 23, 2001, between TWC and WCG, to two years following the
Effective Date, at which time the Company would no longer have the right
to use the "Williams" mark, the "Williams Communications" mark, and
certain other "Williams" related marks. The transfer of these rights was
effectuated through an Assignment of Rights Agreement between Williams
Information Services Corporation ("WISC") and WCL pursuant to which WISC
agreed to grant, sell, and convey to WCL all of its right, title, and
interest in the United States and Canada to the trademarks "WilTel" and
"WilTel Turns Up Worldwide."
- - WCG has various administrative service and support contracts with TWC. The
Settlement Agreement provides for the continuation of only those contracts
between WCG and the TWC entities that WCG views as favorable (the "TWC
Continuing Contracts"), as well as modification to certain of those TWC
Continuing Contracts to waive any rights to an unfavorable alteration of
contract terms due to the New Investment or the transactions contemplated
by the Plan.
- - All other payments, deliveries and other distributions to be made pursuant
to the Plan or the Restated Credit Documents on or as soon as practicable
after the Effective Date were made or duly provided for.
3. REORGANIZATION ITEMS, NET
Reorganization items, which consist of items incurred by WCG as a result
of reorganization under the Bankruptcy Code, are as follows for the ten months
ended October 31, 2002:
PREDECESSOR
-----------
(IN THOUSANDS)
Reorganization items, net:
Gain on the discharge of liabilities (a) $4,346,274
Fresh start adjustments to fair value (b) (2,161,397)
Gain on forgiveness of interest (c) 73,898
Write-off of deferred financing costs (d) (58,448)
Write-off of debt discounts (d) (10,055)
Retention bonus agreements with former officers (e) (12,926)
Professional fees and other (f) (12,046)
----------
$ 2,165,300
===========
Explanations of the reorganization items in the table above are as follows:
(a) The gain on the discharge of liabilities subject to compromise
primarily included the Senior Redeemable Notes of approximately $2.4
billion, the Senior Reset Note of $1.5 billion, the ADP Claims of
approximately $754 million, the Pre-Spin Services Claims of $100
million and accrued interest of approximately $137 million,
partially offset by the issuance of $600 million of WilTel common
stock.
V-11
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(b) Under fresh start accounting, the net reorganization value is
allocated among the individual assets and liabilities based upon
their relative fair values. The Company's fresh start adjustments to
record its net assets to fair value of $2.2 billion primarily
related to adjusting its investment in WCL to its fair value and the
cancellation of WCG's redeemable cumulative convertible preferred
stock. For a complete discussion of the Company's fresh start
accounting adjustments, see Note 3 to the consolidated financial
statements.
(c) As discussed in Note 2, in March 2002, certain provisions of the
indenture related to the Senior Reset Note were amended. The
amendment, among other things, provided that TWC would make the
required March and September 2002 interest payments on behalf of WCG
to WCG Note Trust, and WCG would not be required to reimburse TWC
for these interest payments. Since the interest accrued on these
notes through March 2002 was not a claim in the chapter 11
proceedings, WCG recognized a gain of $73.9 million ($0.15 per
share) for the ten months ended October 31, 2002 in accordance with
SOP 90-7.
(d) For the ten months ended October 31, 2002, the Company wrote off
deferred financing costs and debt discounts associated with
liabilities subject to compromise to reorganization items in
accordance with SOP 90-7 since the deferred financing costs and debt
discounts do not have a remaining useful life as a result of the
chapter 11 proceedings.
(e) As discussed in Note 20 to the consolidated financial statements,
the Company has recorded $12.9 million in reorganization expense for
the ten months ended October 31, 2002 primarily related to taxes on
the retention bonus agreements with former officers in place,
inasmuch as the Company committed to pay pursuant to those
agreements an aggregate of up to $20 million for taxes incurred by
the beneficiaries of those agreements.
(f) Professional fees and other primarily consists of professional fees
for legal and financial advisory services in connection with the
reorganization.
4. RECEIVABLE FROM WHOLLY-OWNED SUBSIDIARY
As of December 31, 2001, WCG's receivable from WCL consisted of an
eight-year promissory note entered into on November 1, 1999. The note consisted
of $2.7 billion of interest-bearing advances to WCL at an interest rate equal to
WCG's Senior Redeemable Notes described below, $1.5 billion of interest-bearing
advances to WCL at an interest rate equal to the Senior Reset Note described
below, $100.0 million of interest-bearing advances to WCL at an interest rate
equal to the other financing arrangements with TWC described below and $4.2
billion of non-interest bearing advances to WCL. On April 22, 2002, WCG
contributed $9.6 billion of this promissory note to member's equity of WCL
leaving a balance of $75.0 million. In addition, on April 22, 2002, WCL paid to
WCG $25 million, leaving a non-interest bearing balance of $50.0 million, in
order to fund the expenses of the chapter 11 proceedings. Upon emergence from
the chapter 11 proceedings, the remaining balance of the promissory note was
contributed to member's equity of WCL.
5. PROPERTY, PLANT AND EQUIPMENT
In December 2002, WCL transferred certain real property assets located in
Nevada to WilTel pursuant to the Plan. Depreciation is computed on a
straight-line method over estimated useful lives.
V-12
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
6. LONG-TERM DEBT
Long-term debt as of December 31 consisted of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
2002 2001
---------- ----------
(IN THOUSANDS)
Senior Redeemable Notes, 10.70% - 11.875%, due 2007 - 2010 ..... $ -- $2,438,692
Senior Reset Note due 2008 ...................................... -- 1,500,000
Senior Redeemable Notes
In the second half of 2001, a wholly-owned subsidiary of WCG purchased
$551.0 million of the Senior Redeemable Notes in the open market at an average
price of 43% of face value. The purchase resulted in a gain of $296.9 million,
including the recognition of deferred costs and debt discounts related to the
purchased Senior Redeemable Notes.
The Senior Redeemable Notes were unsecured obligations of WCG. On April 1,
2002, WCG did not make interest payments totaling approximately $91 million due
under the terms of one of the Senior Redeemable Notes indentures. The failure to
make that payment resulted in a default under that indenture. In addition, the
commencement of chapter 11 proceedings resulted in a default under each of the
indentures governing the Senior Redeemable Notes. The Senior Redeemable Notes
were discharged in the chapter 11 proceedings, and the noteholders received
WilTel common stock in accordance with the Plan as discussed in Note 2.
Senior Reset Note
This note was included in the Settlement Agreement between TWC, the
Committee and Leucadia (see Note 2).
7. GUARANTEE
As of December 31, 2001, WCL had a $1.5 billion credit facility. In
connection with the commencement of the chapter 11 proceedings, WCL and the
credit facility lenders entered into an amendment of the credit facility (the
"Interim Amendment"), which was effective until the Plan was consummated. The
Interim Amendment granted a waiver of all defaults and events of default
occurring prior to April 22, 2002, so long as there was no occurrence of a
subsequent default, as well as the amendment of certain other provisions of the
credit facility to avoid the occurrence of events of default as a result of the
commencement of the chapter 11 proceedings. In accordance with the Interim
Amendment, WCL prepaid $250 million ($200 million in April 2002 and $50 million
in July 2002) leaving a balance of $725 million prior to WCG's emergence from
the chapter 11 proceedings. On October 15, 2002, WCL and the credit facility
lenders entered into the Exit Credit Agreement and paid the lenders $350 million
upon the effectiveness of the Exit Credit Agreement leaving a balance under the
Exit Credit Agreement of $375 million. WCG (Parent) was a guarantor under the
original credit facility and the Interim Amendment. WilTel is a guarantor under
the Exit Credit Agreement. The Exit Credit Agreement restricts WCL's ability to
transfer funds and pay dividends to WilTel. However, these restrictions allow
WCL to transfer funds to for certain other payments as outlined Exit Credit
Agreement. The Exit Credit Agreement expires in September 2006.
V-13
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
8. RELATED PARTY TRANSACTIONS
Transactions with Former Executive Officers
As part of the spin-off from TWC, WCG inherited a long-established loan
program from TWC under which TWC extended loans to its executives to purchase
TWC stock (the "Executive Loans"). At the time of the spin-off, six WCG
executives had outstanding loans with TWC, and as part of the spin-off, the
Executive Loans were transferred to WCG. As of December 31, 2001, the
outstanding balance of these loans were $19.9 million, all which were considered
long-term receivables.
Effective December 31, 2001, the Compensation Committee of the board of
directors of WCG established a program to award annual retention bonuses over a
period of five years in the aggregate amount of $13 million to certain
executives to be applied, after deduction of applicable withholding taxes,
solely against their respective outstanding principal loan balances. The
agreements executed under this program were subsequently amended in conjunction
with the Plan.
Under the amended retention bonus agreements, the Company reimbursed
interest payments owed by the WCG executives as of January 1, 2002. In addition,
the Company became responsible for paying all taxes limited to an aggregate
total of $20 million associated with interest and principal payments under the
retention bonus agreements, as well as any taxes incurred as a result of the
payment of taxes by the Company. Under a separate amendment, all retention bonus
payments vested upon consummation of the transactions included in the Plan, but
still are to be paid out over the first through fourth anniversaries of the
Effective Date, unless accelerated as a result of death or disability of the
payee. Any officers who were parties to retention bonus agreements were not
eligible to participate in the Company's otherwise applicable change in control
severance plan. WCG recorded an expense of $23.3 million for the ten months
ended October 31, 2002 related to the retention bonus agreements, $10.4 million
of this expense was recorded to selling, general and administrative expense for
costs prior to WCG commencing chapter 11 proceedings and the remaining $12.9
million was recorded to reorganization expense for costs after WCG commenced
chapter 11 proceedings. As of December 31, 2002, WilTel has accrued liabilities
of $2.3 million and other long-term liabilities of $5.9 million representing
taxes to be paid by WilTel related to the retention bonus agreement.
On October 10, 2002, the Bankruptcy Court approved a settlement agreement
between WCG and John C. Bumgarner, a former officer of WCG who participated in
the TWC loan program. The agreement provided that WCG would settle a $6.9
million employee loan plus accrued interest in return for the loan's collateral
of 238,083 shares of TWC common stock and 195,798 shares of WCG common stock and
approximately $7 million of face value of WCG's Senior Redeemable Notes. As a
result of the surrender of the Senior Redeemable Notes by Mr. Bumgarner, no
shares of WilTel common stock were distributed under the Plan to Mr. Bumgarner.
In addition, Mr. Bumgarner will provide consulting services at no cost to the
Company for a period of three years from the date of his retirement. WCG
recorded a loss of approximately $7 million to provision for doubtful accounts
for the ten months ended October 31, 2002 related to the agreement.
Leucadia
On November 27, 2002, WilTel entered into a one-year Restructuring
Services Agreement with Leucadia effective as of October 16, 2002. Under the
terms of this agreement, Leucadia provides restructuring advice to WilTel with
respect to management, operations, future business opportunities, and other
matters to be mutually determined between Leucadia and WilTel. Leucadia does
not receive any compensation for its services rendered under this agreement,
but is reimbursed for all expenses incurred in connection with its performance
under the agreement.
9. DIVIDENDS FROM SUBSIDIARY
WilTel did not receive any cash dividends for the two months ended
December 31, 2002 from its subsidiary, WCL. WCG did not receive any cash
dividends for the ten months ended October 31, 2002 and for the years ended
December 31, 2001 and 2000 from its subsidiary, WCL.
V-14
WILTEL COMMUNICATIONS GROUP, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS(a)
(IN THOUSANDS)
ADDITIONS
---------
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSES OTHER(c) DEDUCTIONS(b) BALANCE
------------ ------------ ------------ ------------ ------------
Allowance for doubtful accounts:
SUCCESSOR COMPANY:
Two months ended December 31, 2002 $ 48,769 $ 787 $ 95 $ 272 $ 49,379
PREDECESSOR COMPANY:
Ten months ended October 31, 2002 $ 41,362 $ 8,922 $ 1,392 $ 2,907 $ 48,769
2001 ............................. 21,501 26,020 8,551 14,710 41,362
2000 ............................. 8,843 9,959 6,650 3,951 21,501
Notes receivable allowance:
SUCCESSOR COMPANY:
Two months ended December 31, 2002 $ 2,424 $ -- $ -- $ -- $ 2,424
PREDECESSOR COMPANY:
Ten months ended October 31, 2002 $ 12,000 $ 11,196 $ 732 $ 21,504 $ 2,424
2001 ............................. -- 12,000 -- -- 12,000
2000 ............................. -- -- -- -- --
- -------
(a) Deducted from related assets.
(b) Represents balances written off, net of recoveries and reclassifications.
(c) Primarily relates to acquisitions of businesses and billing adjustments.
V-15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1* Copy of the Order Confirming Second Amended Joint Plan of
Reorganization of Williams Communications Group, Inc. and
CG Austria, Inc. (filed as Exhibit 99.1 to the Williams
Communications Group, Inc. Current Report on Form 8-K dated
October 11, 2002 (the "October 11, 2002, 8-K"))
2.2* Second Amended Joint Plan of Reorganization of Williams
Communications Group, Inc. and CG Austria, Inc. (filed as
Exhibit A to Exhibit 99.2 to the Williams Communications
Group, Inc. Current Report on Form 8-K dated August 23,
2002)
2.3* Modifications to Second Amended Joint Chapter 11 Plan of
Reorganization of Williams Communications Group, Inc. and
CG Austria, Inc. (Attachment I to Order Confirming Second
Amended Joint Plan of Reorganization of Williams
Communications Group, Inc. and CG Austria, Inc.) (filed as
Exhibit 99.3 to the Williams Communications Group, Inc.
October 11, 2002, 8-K)
2.4* Consent Order in Aid of Consummation of Debtors' Second
Amended Joint Chapter 11 Plan of Reorganization (filed as
Exhibit 99.4 to the Williams Communications Group, Inc.
October 11, 2002, 8-K)
3.1* Charter of the Company, filed with the Secretary of State
of the State of Nevada on October 14, 2002 (filed as
Exhibit 99.7 to the Company's Current Report on Form 8-K
dated October 24, 2002 (the "October 24, 2002, 8-K"))
3.2* By-Laws of the Company, as amended, dated as of October 15,
2002 (filed as Exhibit 99.9 to the Company's October 24,
2002, 8-K)
4.1* Stockholders Agreement, dated as of October 15, 2002,
between Leucadia National Corporation and the Company
(filed as Exhibit 99.6 to the Company's October 24, 2002,
8-K)
4.2* Registration Rights Agreement, dated as of October 15,
2002, between Leucadia National Corporation and the Company
(filed as Exhibit 99.10 to the Company's October 24, 2002,
8-K)
4.3* Co-Sale Agreement, dated as of October 15, 2002, between
Leucadia National Corporation and the Company (filed as
Exhibit 99.11 to the Company's October 24, 2002, 8-K)
10.1* Amended and Restated Alliance Agreement between Telefonos
de Mexico, S.A. de C.V. and Williams Communications, Inc.,
dated May 25, 1999 (filed as Exhibit 10.2 to the Williams
Communications Group, Inc. Equity Registration Statement,
Amendment No. 8, dated September 29, 1999)
10.2* Master Alliance Agreement between SBC Communications Inc.
and Williams Communications, Inc. dated February 8, 1999
(filed as Exhibit 10.10 the Williams Communications Group,
Inc. Equity Registration Statement, Amendment No. 1, dated
May 27, 1999)
10.3* Transport Services Agreement dated February 8, 1999, among
Southwestern Bell Communication Services, Inc., SBC
Operations, Inc. and Williams Communications, Inc. (filed
as Exhibit 10.11 to the Williams Communications Group, Inc.
Equity Registration Statement, Amendment No. 1, dated May
27, 1999)
10.4* Umbrella Agreement by and between DownTown Utilities Pty
Limited, WilTel Communications Pty Limited, Spectrum
Network Systems Limited, CitiPower Pty, Energy Australia,
South East Queensland Electricity Corporation Limited,
Williams Holdings of Delaware Inc. and Williams
International Services Company, dated June 19, 1998 (filed
as Exhibit 10.27 to the Williams Communications Group, Inc.
Equity Registration Statement, Amendment No. 1, dated May
27, 1999)
10.5* Sale and Purchase Agreement by and among Williams
Communications, LLC, Williams Learning Network, Inc.,
Williams Communications Solutions, LLC, Platinum Equity,
LLC, WCS Acquisition Corporation, and WCS Acquisition LLC,
dated as of January 29, 2001 (filed as Exhibit 10.64 to the
Williams Communications Group, Inc. Annual Report on Form
10-K for the year ended December 31, 2000, as filed on
March 12, 2001)
10.6* Amended and Restated Separation Agreement dated April 23,
2001, by and between The Williams Companies, Inc. and the
Company (filed as Exhibit 99.1 to the Williams
Communications Group, Inc. Current Report on Form 8-K dated
May 3, 2001, (the "May 3, 2001, 8-K"))
10.7* Amended and Restated Administrative Services Agreement
dated April 23, 2001, between The Williams Companies, Inc.,
and those certain subsidiaries of Williams collectively as
the "Williams Subsidiaries" and the Company and those
certain subsidiaries of the Company listed collectively as
the "Communications Subsidiaries" (filed as Exhibit 99.2 to
the Williams Communications Group, Inc. May 3, 2001, 8-K)
10.8* Sale and Purchase Agreement dated as of March 26, 2001, by
and among WCS, Inc., Williams Communications, LLC, and
TELUS Communications Inc. (filed as Exhibit 10.78 to the
Williams Communications Group, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001, as filed on
August 10, 2001)
10.9* Stock Purchase Agreement dated as of June 24, 2001, by and
among iBEAM Broadcasting Corporation, Williams
Communications, LLC, Allen & Company Incorporated, and Lunn
iBEAM, LLC (filed as Exhibit 10.81 to the Williams
Communications Group, Inc. Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, as filed on August 10,
2001)
10.10* Stockholders Agreement dated as of July 10, 2001, by and
among Williams Communications, LLC, iBEAM Broadcasting
Corporation, the other stockholders iBEAM Broadcasting
Corporation and certain other parties (filed as Exhibit
10.82 to the Williams Communications Group, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, as
filed on August 10, 2001)
10.11* Asset Sale Agreement dated as of October 11, 2001, by and
between iBeam Broadcasting Corporation and Williams
Communications, LLC (filed as Exhibit 10.91 to the Williams
Communications Group, Inc. Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, as filed on April
1, 2002)
10.12* Debtor-in-Possession Credit and Security Agreement dated as
of October 11, 2001, by and between iBeam Broadcasting
Corporation and Williams Communications, LLC (filed as
Exhibit
10.92 to the Williams Communications Group, Inc. Annual
Report on Form 10-K for the fiscal year ended December 31,
2001, as filed on April 1, 2002)
10.13* Fee Letter dated October 11, 2001, from Williams
Communications, LLC to iBeam Broadcasting Corporation
(filed as Exhibit 10.93 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.14* Asset Purchase Agreement by and between CoreExpress, Inc.
and Williams Communications, LLC dated as of October 31,
2001 (filed as Exhibit 10.96 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.15* Amendment dated December 3, 2001, to Asset Purchase
Agreement by and between CoreExpress, Inc. and Williams
Communications, LLC dated as of October 31, 2001 (filed as
Exhibit 10.97 to the Williams Communications Group, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, as filed on April 1, 2002)
10.16* First Amendment dated as of December 7, 2001, to the Asset
Sale Agreement dated as of October 11, 2001, by and between
iBeam Broadcasting Corporation and Williams Communications,
LLC (filed as Exhibit 10.98 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.17* Amendment No. 1 dated December 7, 2001, to
Debtor-in-Possession Term Credit and Security Agreement
dated as of October 11, 2001, by and between iBeam
Broadcasting Corporation and Williams Communications, LLC
(filed as Exhibit 10.99 to the Williams Communications
Group, Inc. Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed on April 1, 2002)
10.18* Private Foreclosure Sale Agreement dated as of December 20,
2001, among Williams Communications, LLC, (Purchaser);
CoreExpress, Inc. (Debtor); Cisco Systems Capital
Corporation, Cisco Systems, Inc., Nortel Networks, Inc.,
UMB Bank & Trust, N.A., and Morgan Stanley & Co. (Senior
Secured Parties); Juniper Networks Credit Corporation,
Commercial and Municipal Financial Corporation, Sumner
Group, Inc., CIT Technologies Corporation d/b/a Technology
Rentals and Services, Inc., Sunrise Leasing Corporation
d/b/a Cisco Systems Capital Corporation, and
Hewlett-Packard Co. (Purchase Money Lenders) (filed as
Exhibit 10.100 to the Williams Communications Group, Inc.
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, as filed on April 1, 2002)
10.19* Copy of the Williams Communications Group, Inc. April 22,
2002, agreement with principal creditor group (filed as
Exhibit 10.1 to the Williams Communications Group, Inc.
Current Report on Form 8-K dated April 22, 2002 (the "April
22, 2002, 8-K"))
10.20* Copy of the Williams Communications Group, Inc. agreement
with The Williams Companies, Inc. (filed as Exhibit 10.2 to
the Williams Communications Group, Inc. April 22, 2002,
8-K")
10.21* Settlement Agreement among Williams Communications Group,
Inc., CG Austria, Inc., the Official Committee of Unsecured
Creditors, The Williams Companies, Inc., and Leucadia
National Corporation dated July 26, 2002, filed with the
Bankruptcy Court as Exhibit A to the Joint Motion (filed as
Exhibit 99.2 to the Williams Communications Group, Inc.
Current Report on Form 8-K dated July 31, 2002, (the "July
31, 2002, 8-K"))
10.22* First Amended Joint Chapter 11 Plan of Reorganization of
Williams Communications Group, Inc. and CG Austria, filed
with the Bankruptcy Court as Exhibit 1 to the Settlement
Agreement (filed as Exhibit 99.3 to the Williams
Communications Group, Inc. July 31, 2002, 8- K)
10.23* Investment Agreement between Williams Communications Group,
Inc. and Leucadia National Corporation dated July 26, 2002,
filed with the Bankruptcy Court as Exhibit 2 to the
Settlement Agreement (filed as Exhibit 99.4 to the Williams
Communications Group, Inc. July 31, 2002, 8-K)
10.24* Purchase and Sale Agreement between Leucadia National
Corporation and The Williams Companies, Inc., dated July
26, 2002, filed with the Bankruptcy Court as Exhibit 3 to
the Settlement Agreement (filed as Exhibit 99.5 to the
Williams Communications Group, Inc. July 31, 2002 8-K)
10.25* Real Property Purchase and Sale Agreement among Williams
Communications Group, Inc., Williams Headquarters Building
Company, Williams Technology Center, LLC, Williams
Communications, LLC, and Williams Aircraft Leasing, LLC,
dated July 26, 2002, filed with the Bankruptcy Court as
Exhibit 4 to the Settlement Agreement (filed as Exhibit
99.6 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.26* List of TWC Continuing Contracts, filed with the Bankruptcy
Court as Exhibit 5 to the Settlement Agreement (filed as
Exhibit 99.7 to the Williams Communications Group, Inc.
July 31, 2002 8-K)
10.27* Agreement for the Resolution of Continuing Contract
Disputes among Williams Communications Group, Inc.,
Williams Communications, LLC, and The Williams Companies,
Inc., dated July 26, 2002, filed with the Bankruptcy Court
as Exhibit 6 to the Settlement Agreement (filed as Exhibit
99.8 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.28* Tax Cooperation Agreement between Williams Communications
Group, Inc. and The Williams Companies, Inc., dated July
26, 2002, filed with the Bankruptcy Court as Exhibit 7 to
the Settlement Agreement (filed as Exhibit 99.9 to the
Williams Communications Group, Inc. July 31, 2002 8-K)
10.29* Amendment to Trademark License Agreement between Williams
Communications Group, Inc. and The Williams Companies,
Inc., dated July 26, 2002, filed with the Bankruptcy Court
as Exhibit to the Settlement Agreement (filed as Exhibit
99.10 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.30* Assignment of Rights between Williams Information Services
Corporation and Williams Communications, LLC, dated July
26, 2002, filed with the Bankruptcy Court as Exhibit 9 to
the Settlement Agreement (filed as Exhibit 99.11 to the
Williams Communications Group, Inc. July 31, 2002 8-K)
10.31* Guaranty Indemnification Agreement between Williams
Communications Group, Inc. and The Williams Companies,
Inc., dated July 26, 2002, filed with the Bankruptcy Court
as Exhibit 10 to the Settlement Agreement (filed as Exhibit
99.12 to the Williams Communications Group, Inc. July 31,
2002 8-K)
10.32* Declaration of Trust, dated as of October 15, 2002, by and
among Williams Communications Group, Inc., the Company and
the Residual Trustee (filed as Exhibit 99.1 to the
Company's October 24, 2002, 8-K)
10.33* Amendment No. 1, dated as of October 15, 2002, to the
Purchase Agreement, dated as of July 26, 2002, between TWC
and Leucadia (filed as Exhibit 99.2 to the Company's
October 24, 2002, 8-K)
10.34* Escrow Agreement, dated as of October 15, 2002, by and
among the Company, TWC, Leucadia and The Bank of New York,
as Escrow Agent (filed as Exhibit 99.3 to the Company's
October 24, 2002, 8-K)
10.35* First Amendment, dated as of September 30, 2002, to the
Investment Agreement, dated as of July 26, 2002, by and
among the Company, Leucadia and WCL (filed as Exhibit 99.4
to the Company's October 24, 2002, 8-K)
10.36* Amendment No. 2, dated as of October 15, 2002, to the
Investment Agreement, dated as of July 26, 2002 and amended
as of September 30, 2002, by and among the Company,
Leucadia and WCL (filed as Exhibit 99.5 to the Company's
October 24, 2002, 8-K)
10.37* Second Amended and Restated Credit and Guaranty Agreement
dated as of September 8, 1999, as amended and restated as
of April 25, 2001 and as further amended and restated as of
October 15, 2002 (filed as Exhibit 99.12 to the Company's
October 24, 2002, 8-K)
10.38* Amendment No. 9, dated as of October 15, 2002, to Amended
and Restated Credit Agreement, dated as of September 8,
1999, and Amendment No. 1, dated as of October 15, 2002, to
the Subsidiary Guarantee, dated as of September 8, 1999
(filed as Exhibit 99.13 to the Company's October 24, 2002,
8-K)
10.39* Amended and Restated Security Agreement, dated as of April
23, 2001, as amended and restated as of October 15, 2002
(filed as Exhibit 99.14 to the Company's October 24, 2002,
8-K)
10.40* Amendment No. 1, dated as of October 15, 2002, to the Real
Property Purchase and Sale Agreement, dated as of July 26,
2002, among Williams Headquarters Building Company, WTC,
WCL, WCG and Williams Communications Aircraft, LLC (filed
as Exhibit 99.15 to the Company's October 24, 2002, 8-K)
10.41* Restructuring Services Agreement, effective as of October
16, 2002, between the Company and Leucadia (filed as
Exhibit 10.1 to the Company's December 5, 2002, 8-K)
10.42 Pledge Agreement dated as of October 15, 2002, by CG
Austria, Inc., as pledgor, to Williams Headquarters
Building Company, as pledgee
10.43 + First Amendment to Master Alliance Agreement between SBC
Communications Inc. and Williams Communications, Inc, by
and between SBC Communications Inc. and Williams
Communications, LLC, dated September 25, 2002
10.44 + First Amendment to Transport Services Agreement among
Southwestern Bell Communications Services Inc., SBC
Operations, Inc. and Williams Communications, Inc., by and
among Southwestern Bell Communications Services Inc., SBC
Operations, Inc. and Williams Communications, Inc., dated
September 29, 2000
10.45 Second Amendment to Transport Services Agreement, as
amended by Amendment No. 1 dated September 29, 2000, by and
among Southwestern Bell Communications Services Inc., SBC
Operations, and Williams Communications, LLC, effective as
of June 25, 2001
10.46 + Third Amendment to Transport Services Agreement, as
amended by Amendment No. 1 dated September 20, 2000, and
Amendment No. 2 dated June 25, 2001, by and among
Southwestern Bell Communications Services Inc., SBC
Operations, Inc. and Williams Communications, LLC, dated
September 25, 2002
10.47 + Fiber Lease Agreement, together with Colocation and
Maintenance Agreement and Lease Agreement #2, each dated
April 26, 2002, and each amended October 10, 2002,
between Metromedia Fiber Network Services, Inc. and
Williams Communications, LLC. Such agreements, as
amended, supercede that certain Fiber Lease Agreement
between Metromedia Fiber Network Services, Inc. and
Williams Communications, Inc., dated September 16, 1999
(filed as Exhibit 10.5 to the Williams Communications
Group, Inc. Equity Registration Statement, Amendment No.
8, dated September 29, 1999)
10.48 + Fiber Lease Agreement together with Colocation and
Maintenance Agreement, each dated April 26, 2002,and each
amended October 10, 2002, and February 14, 2003, between
Williams Communications, LLC and Metromedia Fiber Network
Services, Inc. Such agreements, as amended, supercede that
certain Fiber Lease Agreement between Williams
Communications, Inc. and Metromedia Fiber National Network
Services, Inc., dated September 16, 1999 (filed as Exhibit
10.6 to the Williams Communications Group, Inc. Equity
Registration Statement, Amendment No. 8, dated September 29,
1999)
10.49 Williams Communications Group, Inc. Change in Control
Severance Protection Plan I, effective as of April 18, 2002
10.50 Williams Communications Group, Inc. Change in Control
Severance Protection Plan II, amended and restated as of
April 18, 2002 (supercedes the Williams Communications
Change in Control Severance Protection Plan filed as Exhibit
10.55 to the Williams Communications Group, Inc. Equity
Registration Statement, Amendment No. 3, dated July 12,
1999)
10.51 Williams Communications Group, Inc. Severance Protection
Plan, amended and restated as of April 18, 2002
10.52 Consultation Agreement effective October 15, 2002, between
WilTel and Howard E. Janzen
10.53 Employment Agreement dated December 9, 2002, between
Williams Communications, LLC and Scott E. Schubert
10.54 Employment Agreement dated November 15, 2002, between
Williams Communications, LLC and Frank M. Semple
10.55 Retention Incentive Agreement effective November 13, 2002,
among Williams Communications, LLC and Jeff K. Storey
10.56 Retention Bonus Agreement as amended, dated July 19, 2002,
among Williams Communications Group, Inc., Williams
Communications, LLC, and Howard E. Janzen, effective as of
July 14, 2002
10.57 Retention Bonus Agreement as amended, dated July 19, 2002,
between Williams Communications Group, Inc., Williams
Communications, LLC, and Scott E. Schubert, effective as of
July 14, 2002
10.58 Retention Bonus Agreement as amended, dated July 19, 2002,
among Williams Communications Group, Inc., Williams
Communications, LLC, and Frank M. Semple, effective as of
July 14, 2002
10.59 Restructuring Incentive Plan of Williams Communications, LLC
as amended and restated as of July 26, 2002
21 Subsidiaries of the Registrant
99.1* Order Pursuant to Section 1125 of the Bankruptcy Code and
Bankruptcy Rules 3017 and 2002 (A) Approving Proposed Second
Amended Disclosure Statement and Certain Related Relief, (B)
Approving Procedures for Solicitation and Tabulation of
Votes to Accept or Reject Proposed Second Amended Joint Plan
of Reorganization, and (C) Scheduling a Hearing on
Confirmation of Such Plan, dated August 13, 2002 (filed as
Exhibit 99.1 to the Williams Communications Group, Inc.
Current Report on Form 8-K dated August 23, 2002 (the
"August 23, 2002, 8-K"))
99.2* Second Amended Disclosure Statement With Respect to Second
Amended Joint Chapter 11 Plan of Reorganization of Williams
Communications Group, Inc., and CG Austria, Inc., dated
August 12, 2002 (filed as Exhibit 99.2 to the Williams
Communications Group, Inc. August 23, 2002, 8-K)
99.3* Monthly operating statement of WCG for the month ended
August 31, 2002 (filed as Exhibit 99.5 to the Williams
Communications Group, Inc. October 11, 2002, 8-K)
99.4* Monthly operating statement of WCG for the period after
April 22, 2002 (date of filing) through May 31, 2002 (filed
as Exhibit 99.18 to the Company's October 24, 2002, 8-K)
99.5* Monthly operating statement of WCG for the month ending June
30, 2002 (filed as Exhibit 99.19 to the Company's October
24, 2002, 8-K)
99.6* Monthly operating statement of WCG for the month ending July
31, 2002 (filed as Exhibit 99.20 to the Company's October
24, 2002, 8-K)
99.7* Monthly operating statement of WCG for the month ending
August 31, 2002 (filed as Exhibit 99.21 to the Company's
October 24, 2002, 8-K)
99.8* Monthly operating statement of WCG for the month ending
September 30, 2002 (filed as Exhibit 99.22 to the Company's
October 24, 2002, 8-K)
99.9 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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* Previously filed with the Securities and Exchange Commission as part
of the filing indicated, and incorporated herein by reference.
+ Portions of exhibit have been omitted pursuant to a request for
confidential treatment pursuant to Rule 24b-2.
(b) During the fourth quarter 2002, WilTel filed Current Reports on Form
8-K on October 16, October 24, November 4, and December 6, 2002, respectively
that reported significant events under Item 5 of the Form. The October 24 Form
8-K also included a statement under Item 1 that, while WilTel made no
representation in that regard about the event reported under Item 5, that the
transactions described in Item 5 may be deemed to be a change in control. WilTel
filed a Form 8-K on November 15, 2002, that reported under Item 9 of the Form
certifications by the chief executive officer and chief financial officer of the
Company delivered pursuant to 18 U.S.C. Section 1350.