Exhibit 99.1
[LOGO]
Level 3 Communications, Inc.
1025 Eldorado Boulevard
Broomfield, CO 80021
www.Level3.com
NEWS RELEASE
FOR IMMEDIATE RELEASE
Level 3 Contacts:
Media: Josh Howell Investors: Robin Grey
720/888-2517 720/888-2518
Level 3 Reports Third Quarter Results
Level 3 Reports Consolidated Revenue of $1.067 Billion
Full Year 2002 Projection of $421 Million of Consolidated Adjusted EBITDA
BROOMFIELD, Colo., October 30, 2002 - Level 3 Communications, Inc. (Nasdaq:LVLT)
today announced its third quarter 2002 results. Consolidated revenue increased
to $1.067 billion from $750 million in the second quarter 2002, primarily due to
growth in information services revenue. Consolidated EBITDA, excluding
stock-based compensation expense, increased to positive $109 million from
positive $76 million for the previous quarter and negative $10 million for the
same period last year. Consolidated Adjusted EBITDA was $110 million for the
third quarter, an increase from $102 million in the second quarter 2002.
The net loss for the quarter was $0.73 per share, or $299 million, including a
$5 million extraordinary gain from debt repurchases. Excluding the gain from
debt repurchases, the net loss was $304 million, or $0.74 per share versus
previously announced projections of a net loss per share of $0.85.
Overview
The company's core business consists of communications and information services.
The company's non-core businesses include coal mining and toll road operations.
The company reports separately the financial results of the communications
business, information services business and other businesses.
Communications Business Segment
Third Quarter Communications Business Financial Highlights
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Metric
($ in millions) Third Quarter Actuals Third Quarter
Projections(1)
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Communications GAAP Revenue $274 $255
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Communications Cash Revenue $275 $250
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Communications Services Revenue $246 $225
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Reciprocal Compensation Revenue $28 $30
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Communications Cost of Revenue $42 NA
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Communications SG&A (2) $150 NA
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Communications EBITDA (3) $84 $40
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(1) Projections issued July 18, 2002.
(2) Excludes $2 million reversal of a previous restructuring accrual.
(3) Includes $2 million reversal of a previous restructuring accrual.
Communications GAAP Revenue and Communications Cash Revenue
Communications GAAP revenue for the third quarter was $274 million, versus $276
million for the previous quarter. Included in total communications GAAP revenue
was $246 million of communication services revenue and $28 million attributable
to reciprocal compensation revenue.
Communications cash revenue for the third quarter was $275 million.
Communications cash revenue is defined as communications GAAP revenue plus
changes in cash deferred revenue. Communications cash revenue includes upfront
cash received for dark fiber and other IRU sales that are recognized as GAAP
revenue over the life of the contract, generally ranging from 5 to 20 years.
Communications GAAP revenue and Communications cash revenue were greater than
expected primarily as a result of $16 million in one-time termination revenue
and $10 million in one-time revenue related to a settlement with XO
Communications. Termination revenue is recognized when deferred revenue is
accelerated as a result of customers disconnecting services or when customers
make termination penalty payments to Level 3 to settle contractually committed
purchase amounts that they no longer expect to meet.
"During the third quarter, we continued to see strength in our IP and Softswitch
services, which was generally offset by continued weakness in the transport and
colocation business," said Kevin O'Hara, president and COO of Level 3.
The company had approximately 1,600 customers at the end of the quarter,
consistent with the end of the second quarter. Approximately 65 percent of the
customer base currently purchases more than one Level 3 service.
The company recently announced customer agreements with Cox Communications,
EarthLink, Microsoft, and REACH.
Cost of Revenue
Communications cost of revenue for the third quarter 2002 was $42 million,
resulting in an 85 percent gross margin, versus 77 percent in the second quarter
2002 and 65 percent in the same period last year.
Excluding one-time revenue items which have no corresponding cost of revenue and
the favorable settlement of a vendor dispute which resulted in a reversal of a
previous network expense accrual, communications gross margin for the third
quarter was 81 percent.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $150 million for third quarter 2002, versus
$160 million for the second quarter 2002, and versus $221 million for the same
period last year. SG&A expenses decreased quarter over quarter as a result of
ongoing cost containment programs. The total number of employees in the
communications business was approximately 2,765 at the end of the third quarter.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA, excluding stock-based compensation expense, from the communications
business was positive $84 million for the third quarter including a $2 million
reversal of a previous restructuring accrual, versus positive $51 million for
the previous quarter including a $3 million cash charge associated with
restructuring and impairment costs, and negative $16 million for the same period
last year.
Communications EBITDA margin increased to approximately 31 percent this quarter
from 18 percent for the previous quarter, primarily as a result of higher
one-time revenue and the company's continued focus on cost containment.
Capital Expenditures
Consolidated gross capital expenditures for property, plant and equipment were
$31 million for the quarter, declining from $81 million during the second
quarter. However, reported or "net" capital expenditures were negative $19
million, primarily as a result of the final payments made with respect to
several large construction contracts at costs that were below previously
estimated and accrued amounts. During the quarter, the company closed out
contracts that resulted in net reversals of previously reported capital
expenditures of $50 million. Capital expenditures for the third quarter include
approximately $5 million for the information services and other businesses.
Network Highlights
At the end of the second quarter, Level 3 offered services in 73 markets, 57
North American markets and 16 European markets. The company has local fiber
networks in 36 markets and has constructed approximately 946,000 local fiber
miles to date.
During the third quarter, the company began offering services in four additional
European expansion markets: Geneva, Milan, Stockholm and Zurich.
Information Services Business Segment
Results for the information services business include the company's (i)Structure
and Software Spectrum subsidiaries. As of the third quarter, the results of
Corporate Software are consolidated with Software Spectrum.
Revenue
Information services revenue was $764 million for the third quarter 2002,
representing a 71 percent increase over the previous quarter. This increase is a
result of inclusion of a full quarter of Software Spectrum results in the third
quarter as well as better than expected performance at Software Spectrum.
Software Spectrum's strong performance during the third quarter was primarily
due to higher than expected sales during the third quarter as a result of
certain promotions offered to customers by Microsoft, which represents Software
Spectrum's largest vendor.
The total number of employees in the information services business was
approximately 3,350 at the end of the third quarter.
EBITDA
EBITDA, excluding stock-based compensation expense, from the information
services business was positive $14 million for the third quarter including $5
million in severance and employee related costs associated with the integration
of Corporate Software and Software Spectrum, compared to positive $18 million
for the previous quarter and positive $4 million for the same period last year.
EBITDA for the third quarter was higher than expected as a result of higher
revenue.
"We are now one of the world's largest resellers of business software," said
Howard Diamond, Chairman of Level 3 Information Services. "The combined
companies have a global reach and a customer base that includes the majority of
the Fortune 500 companies."
Other Businesses
Revenue
Revenue from the company's coal mining business and its interest in California
Private Transportation Company (CPTC) was $29 million for the third quarter
2002, versus $27 million for the second quarter 2002 and $26 million for the
same period last year.
EBITDA
EBITDA from the company's coal mining business and its interest in CPTC was $11
million for the third quarter compared to $7 million last quarter and $2 million
for the same period last year.
Consolidated Expenses
Stock-Based Compensation Expense
The company recognized $37 million in non-cash expense for stock-based
compensation during the quarter. The OSO Program represents the principal
component of the company's stock-based compensation. This expense is accounted
for in accordance with SFAS No. 123, "Accounting For Stock-Based Compensation."
Level 3 expenses the value of OSOs and its other stock-based compensation over
the respective vesting period.
Under Level 3's plan, OSOs are issued quarterly to employees, with the value of
the options indexed to the performance of the company's common stock relative to
the performance of the Standard & Poor's 500 (S&P 500) Index.
Depreciation and Amortization
Depreciation and amortization expenses for the quarter were $201 million, a 6
percent increase over the previous quarter.
Working Capital and Operating Cash Flow
During the third quarter, the company had consolidated working capital
requirements of approximately $111 million. Of this amount, approximately $37
million was from the communications business and $74 million was from
information services and other businesses. The information services business had
higher than expected working capital requirements during the quarter as a result
of higher than expected revenue and the associated normal working capital
required to support that revenue, as well as slower than expected collections on
accounts receivable.
"We believe the shortfall in collections during the third quarter was a result
of lack of focus in this area during the integration of Software Spectrum and
Corporate Software, as opposed to any issue related to the customer credit
quality," said Sureel Choksi, CFO of Level 3. "We have since taken steps to
ensure that we are focused on collections efforts, and as a result expect
improvements in information services working capital going forward."
Operating Cash Flow, defined as Consolidated Adjusted EBITDA minus capital
expenditures and working capital requirements, was negative $32 million for the
quarter compared to negative $36 million last quarter. Cash Consumption from
Continuing Operations, defined as Operating Cash Flow minus net cash interest
expense, was $152 million during the quarter compared to $108 million last
quarter.
Corporate Transactions and Business Outlook
Issuance of 9% Junior Convertible Subordinated Notes
During the third quarter, the company completed the issuance of $500 million
aggregate principal amount of its 9% Junior Convertible Subordinated Notes due
2012. The purchasers were Longleaf Partners Funds, Berkshire Hathaway Inc., and
Legg Mason Inc. The company plans to use the net proceeds for general corporate
purposes, including potential acquisitions relating to industry consolidation
opportunities, capital expenditures, and working capital.
Capital Structure
During the third quarter, Level 3 completed an amendment of its Senior Secured
Credit Facility. Modifications to the credit facility include:
o Increased flexibility for the company to pursue acquisitions for cash
consideration;
o Removal of the two revenue-based financial covenants;
o Modification of an Adjusted EBITDA-based covenant in accordance with
the company's business plan;
o Reduction of the $650 million, undrawn revolving credit facility by
$500 million to $150 million, with restrictions on availability;
o Maintenance of a minimum cash balance, generally equal to $525
million, of which $400 million is pledged to the banks; and
o Increase of 0.5% per year to the cost of borrowing.
During the third quarter, the company retired approximately $75 million face
amount of debt through cashless debt for equity exchanges. The company will
continue to evaluate debt reduction opportunities.
Asset Sale
As previously announced, the company has reached a non-binding letter of intent
to sell its 65 percent interest in CPTC. The sale is subject to execution of
definitive documentation. There can be no assurance that the company will
complete the sale of its interest in CPTC.
Vice Chairman R. Douglas Bradbury To Retire at the End of 2002
The company also announced today that Vice Chairman and Executive Vice President
R. Douglas Bradbury plans to retire at the end of the year, but is expected to
continue as an active member of the Board of Directors and will work with the
company on certain projects.
"I'm particularly pleased that we will continue to benefit from Doug's breadth
of experience and, in particular, his invaluable judgment and wisdom," said Jim
Crowe, CEO of Level 3. "Doug is committed to his ongoing leadership role on the
Board and with our senior management team. He will continue to make an important
contribution and we look forward to continuing to work together."
Business Outlook
"We continue to see mixed signals in terms of leading indicators for the
communications business," said Crowe. "On the positive side, we are experiencing
lower disconnects than during the first half of the year as the credit quality
of our customer base strengthens, and are pleased with the progress we are
making on cost containment efforts. We are also continuing to see significant
sales proposal activity. However, actual sales of recurring services during the
third quarter were generally consistent with weak second quarter levels. In
addition, we continue to experience protracted sales cycles and significant
weakness in IRU sales. As a result of these factors, our ability to project
longer term results continues to be subject to increased uncertainty."
"For the information services business, we see strong EBITDA growth and we are
focused on managing associated cash flows."
Fourth Quarter and Full Year 2002 Projections
Level 3 expects consolidated revenue to be approximately $1.03 billion during
the fourth quarter, including $250 million from the communications business,
$750 million from information services and $30 million of other revenue.
Approximately $223 million of the communications GAAP revenue is expected to
come from services revenue and the balance from reciprocal compensation. No
one-time communications services revenue is projected for the fourth quarter.
Excluding one-time revenue recognized during the third quarter, communications
services revenue is expected to increase slightly to $223 million during the
fourth quarter from $220 million during the third quarter. Communications cash
revenue for the fourth quarter is expected to be $250 million.
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Metric Fourth Quarter Full Year 2002
($ in millions except Net Loss per Share) Projections Projections (1)(2)
- ----------------------------------------- --------------- ------------------
Communications GAAP Revenue $250 $1,078
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Communications Cash Revenue $250 $1,175
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Information Services Revenue $750 $2,041
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Revenue from Other Businesses $30 $114
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Consolidated GAAP Revenue $1,030 $3,233
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Consolidated EBITDA $85 $321
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Consolidated Adjusted EBITDA $85 $421
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Gross Capital Expenditures $45 $218
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Net Loss per Share $0.70 $2.07
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(1) Full Year 2002 Projections are the sum of actual results through
September 30, 2002 plus the Fourth Quarter Projections.
(2) Full Year 2002 Consolidated EBITDA and Consolidated Adjusted EBITDA
include $6 million of cash restructuring charges. $44 million of
non-cash asset impairment charges during the year are excluded from
Consolidated EBITDA and Consolidated Adjusted EBITDA.
The company expects Consolidated Adjusted EBITDA of $85 million for the fourth
quarter and $421 million for the full year 2002, versus the previous projection
of $400 million. The projected decline in Consolidated Adjusted EBITDA quarter
over quarter is the result of an expected decline in one-time communications
revenue during the fourth quarter. Consolidated EBITDA, excluding stock-based
compensation expense, is expected to be positive $85 million for the fourth
quarter, of which approximately $55 million is anticipated to be generated by
the communications business, $22 million by the information services business
and the balance by other businesses.
Consolidated gross capital expenditures for the fourth quarter are expected to
be approximately $45 million and $218 million for the full year 2002, versus the
previous projection of $275 million. The company expects the net loss for the
fourth quarter to be $0.70 per share.
Consolidated working capital requirements are expected to be approximately $35
million for the fourth quarter and $339 million for the full year 2002, versus
the previous projection of $225 million. The company expects to generate
positive Operating Cash Flow during the fourth quarter 2002. For the full year
2002, Operating Cash Flow is expected to be negative $136 million.
"We believe that turning Operating Cash Flow positive is a significant milestone
towards our objective of achieving positive free cash flow," said Choksi.
The company continues to expect total cash and marketable securities on hand
plus restricted cash of $400 million pledged to the banks as part of the recent
amendment to the Senior Secured Credit Facility (but excluding all other
restricted cash), to be approximately $1.3 billion at the end of 2002.
Summary
"While the environment remains challenging, over the past quarter, Level 3 has
enhanced its ability to take advantage of opportunities that exist in the
telecommunications industry," said Crowe. "Our liquidity position, ongoing cost
management effort and expectation that we will turn Operating Cash Flow positive
during the fourth quarter 2002, give us confidence in the strength of our
financial position. As a result of the combination of our financial stability,
our industry-leading provisioning times and quality of service, we remain well
positioned with our target customer base and believe we will continue to
increase our market share of their transport, IP, colocation and dial-up access
business needs."
Level 3 will hold its third quarter earnings conference call today at 11 a.m.
eastern time. Investors and analysts who want to join the call can dial
612-332-0226, 612-332-0107 or 612-288-0318. A live broadcast of the call can
also be heard on Level 3's web site at www.level3.com and an audio replay will
be available through November 1 by dialing 320-365-3844, access code 648427. For
additional information please call 720-888-2502.
About Level 3 Communications
Level 3 (Nasdaq:LVLT) is an international communications and information
services company. The company offers a wide range of communications services
over its 20,000 mile broadband fiber optic network including Internet Protocol
(IP) services, broadband transport, colocation services, and patented
Softswitch-based managed modem and voice services. Its Web address is
www.Level3.com .
The company offers information services through its wholly-owned subsidiaries,
(i)Structure, and Software Spectrum. (i)Structure is an Application
Infrastructure Provider that provides managed IT infrastructure services and
enables businesses to outsource IT operations. Its Web address is
www.i-structure.com. Software Spectrum is a global business-to-business software
services provider specializing in enterprise software management, licensing and
support. Its web address is www.softwarespectrum.com.
Forward Looking Statement
Some of the statements made by Level 3 in this press release are forward-looking
in nature. Actual results may differ materially from those projected in
forward-looking statements. Level 3 believes that its primary risk factors
include, but are not limited to: changes in the overall economy relating to,
among other things, the September 11 attacks and subsequent events, substantial
capital requirements; development of effective internal processes and systems;
the ability to attract and retain high quality employees; technology; the number
and size of competitors in its markets; law and regulatory policy; and the mix
of products and services offered in the company's target markets. Additional
information concerning these and other important factors can be found within
Level 3's filings with the Securities and Exchange Commission. Statements in
this release should be evaluated in light of these important factors.
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LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2002 2001 2002 2001
Revenue:
Communications $ 274 $ 316 $ 828 $1,029
Information Services 764 30 1,291 94
Other 29 26 84 84
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Total Revenue 1,067 372 2,203 1,207
Costs and Expenses:
Cost of Revenue 759 146 1,389 620
Depreciation and Amortization 201 306 601 864
Selling, General and Administrative 196 236 572 754
Stock-Based Compensation 37 80 154 239
Restructuring & Impairment Charges 3 - 50 111
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Total Costs and Expenses 1,196 768 2,766 2,588
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Loss from Operations (129) (396) (563) (1,381)
Other Loss, net (175) (111) (312) (350)
------ ------ ------ ------
Loss from Continuing Operations
before Income Taxes (304) (507) (875) (1,731)
Income Tax Benefit - - 119 -
------ ------ ------ ------
Net Loss from Continuing Operations (304) (507) (756) (1,731)
Loss from Discontinued Operations, net - (24) - (66)
Extraordinary Gain on Debt Extinguishment, net 5 94 211 94
------ ------ ------ ------
Net Loss $ (299) $ (437) $ (545) $(1,703)
======== ======= ======= =======
Loss per Share:
Basic and Diluted
Net Loss from Continuing Operations $ (0.74) $ (1.35) $ (1.89) $ (4.67)
Discontinued Operations, net - (0.07) - (0.18)
Extraordinary Gain on Debt Extinguishment, net 0.01 0.25 0.53 0.25
------ ------ ------ ------
Net Loss $ (0.73) $ (1.17) $ (1.36) $ (4.60)
======== ======= ======= =======
Weighted Average Shares Outstanding
(in thousands):
Basic and Diluted 410,898 375,638 400,371 370,582
======== ======== ======== ========
LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(unaudited)
September 30, June 30,
(dollars in millions) 2002 2002
- --------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 963 $ 1,051
Restricted securities 541 146
Accounts receivable, less allowances of $37 and $45, respectively 443 696
Other 121 195
---- ----
Total Current Assets 2,068 2,088
Property, Plant and Equipment, net 6,360 6,592
Intangibles and Goodwill 375 377
Other Assets, net 291 287
---- ----
$ 9,094 $ 9,344
======= =======
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable $ 560 $ 944
Current portion of long-term debt 12 10
Accrued payroll and employee benefits 173 184
Accrued interest 74 83
Deferred revenue 158 240
Other 234 230
---- ----
Total Current Liabilities 1,211 1,691
Long-Term Debt, less current portion 6,385 5,939
Deferred Revenue 1,291 1,349
Accrued Reclamation Costs 92 91
Other Liabilities 369 352
Stockholders' Deficit (254) (78)
---- ----
$ 9,094 $ 9,344
======= =======
Executive Officer Intended Transfers of Company Securities
The company has a policy that generally requires the members of its board of
directors and members of senior management that are "executive officers" for
purposes of the SEC's Section 16 rules to pre-announce their intention to make
transfers of the company's securities in the permitted period following each
earnings release, which policy the company reviews at least annually. In
addition, this policy applies only to an intent to transfer shares not
previously announced, and does not apply to certain transfers for estate
planning purposes.
The following schedule shows the individuals that have expressed a current
intent to transfer, during the period, the maximum number of shares they propose
to transfer and the percentage of their holdings that the intended transfer
amount represents.
None of the individuals are required to dispose of shares and the listed
individuals may choose to sell fewer, or none, of the shares described, but will
not, when combined with shares previously preannounced but not yet transferred,
sell more during the period. An individual's ultimate decision to transfer
shares of common stock will be made in compliance with applicable federal
securities laws.
Name and Title No. of Shares Percentage(1)
R. Douglas Bradbury 100,000 2%
Vice Chairman
Kevin J. O'Hara
President, Chief Operating 600,000(2) 18%
Officer and Director
Thomas C. Stortz
Group Vice President, General 100,000 9%
Counsel and Secretary
John F. Waters, Jr.
Group Vice President, Chief
Technology Officer 100,000 10%
(1) The number of shares indicated represents the percentage of the
individual's: (a) total shares of the Company's common stock held plus
(b) all other shares of common stock that may be acquired in the
future through the exercise of vested or unvested options, including
outperform stock options. For purposes of this calculation, each
option, vested or unvested, was considered to be a single share of
common stock.
(2) Mr. O'Hara currently intends to use the net proceeds of his sale of
shares of common stock to repay the outstanding principal amount and
accrued interest on his previously disclosed personal loan from the
Company.
The Sarbanes-Oxley Act of 2002 and the related changes to Securities and
Exchange Commission's rules now require insiders to report most transactions in
the issuer's securities on Form 4 within 2 business days of the transaction. In
light of the requirement for accelerated reporting of insider transactions
contained in Sarbanes-Oxley and the Securities and Exchange Commission's revised
rules, at its November 2002 regularly scheduled meeting, the Board of
Directors of the Company will consider a proposal to conform the Company's
securities sale announcement policy to the requirement for accelerated
reporting.
If the Board approves this proposal, the Company will no longer report
"Executive Officer's Intended Transfer of Company Securities" as part of its
quarterly or annual earnings releases, and the officers will disclose reportable
transactions in the Company's securities in a manner that is consistent with
then current reporting requirements. The Company will disclose any action taken
by the Board at its November 2002 meeting on a Current Report on Form 8-K, which
will be filed with the Securities and Exchange Commission.