PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements
presented below are derived from the historical consolidated financial
statements of Qwest Communications International Inc. ("Qwest"), SuperNet, Inc.
("SuperNet"), Phoenix Network, Inc. ("Phoenix"), LCI International, Inc. ("LCI")
and Icon CMT Corp. ("Icon"). The unaudited pro forma condensed combined balance
sheet as of September 30, 1998 gives pro forma effect to the acquisition by
Qwest of all the issued and outstanding shares of capital stock of Icon as if
the acquisition had occurred on September 30, 1998. The unaudited pro forma
condensed combined statements of operations for the nine months ended September
30, 1998 and for the year ended December 31, 1997 give pro forma effect to the
acquisitions of SuperNet, Phoenix, LCI and Icon as if such acquisitions had
occurred on January 1, 1997. The unaudited pro forma condensed combined
financial statements do not give effect to Qwest's acquisition of EUnet
International Limited or the proposed joint venture with KPN Telecom B.V.
because such disclosure is not required under Rule 3-05 of the Securities and
Exchange Commission Regulation S-X.
LCI's two credit facilities (the "LCI Credit Facilities") expired on
December 31, 1998. LCI's discretionary lines of credit may be discontinued at
any time at the sole discretion of the providing banks. Certain of LCI's debt
securities permit mergers and consolidations, subject to compliance with certain
terms of the governing indenture. In November 1998, Qwest paid down the
outstanding balances under the LCI Credit Facilities and LCI's lines of credit.
The LCI Credit Facilities and LCI's lines of credit have been classified as
current in the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements give
effect to the acquisitions described above under the purchase method of
accounting and are based on the assumptions and adjustments described in the
accompanying notes to the unaudited pro forma condensed combined financial
statements presented on the following pages. The fair value of the consideration
has been allocated to the assets and liabilities acquired based upon the fair
values of such assets and liabilities at the date of each respective acquisition
and may be revised for a period of up to one year from the date of each
respective acquisition. The preliminary estimates and assumptions as to the
value of the assets and liabilities of LCI and Icon to the combined company is
based upon information available at the date of preparation of these unaudited
pro forma condensed combined financial statements, and will be adjusted upon the
final determination of such fair values. Qwest will complete final allocation of
purchase price within one year from the acquisition date. The items awaiting
final allocation include LCI network asset valuation and final determination of
the costs to sell these assets. It is anticipated that final allocation of the
LCI purchase price will not differ materially from the preliminary allocation.
Qwest has undertaken a study to determine the allocation of the Icon
purchase price to the various assets acquired, including in-process research and
development projects, and the liabilities assumed. Based upon Qwest's
consideration of the study's preliminary findings as of this date, Qwest has
allocated a portion of purchase price to certain intangible assets, including
in-process R&D. See the footnotes to the pro forma condensed combined financial
statements for further information on the preliminary
allocation of purchase price. Qwest will complete final allocation of purchase
price within one year from the acquisition date.
The unaudited pro forma condensed combined financial statements do not
purport to represent what Qwest's results of operations or financial condition
would have actually been or what operations would be if the transactions that
give rise to the pro forma adjustments had occurred on the dates assumed and are
not indicative of future results. The unaudited pro forma condensed combined
financial statements below should be read in conjunction with the historical
consolidated financial statements and related notes thereto of Qwest, Phoenix,
LCI, SuperNet and Icon.
QWEST COMMUNICATIONS INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Nine Months Ended Sept. 30, 1998
(Unaudited)
(Amounts in Millions, Except Per Share Information)
Pro Forma Pro Forma
Historical Pro Forma Combined, Historical Pro Forma Including
Qwest LCI Phoenix Adjustments Excluding Icon Icon Adjustments Icon
------- ---------- ------- ----------- -------------- ---------- ----------- ---------
Revenue:
Communications services $ 884 $ 745 $ 17 $ -- $ 1,646 $ 59 $ -- $ 1,705
Construction services 494 -- -- -- 494 -- -- 494
------- ----- ---- ------ ------- ------ -------- --------
1,378 745 17 -- 2,140 59 -- 2,199
------- ----- ---- ------ ------- ------ -------- --------
Operating expenses:
Access and network operations 556 445 13 -- 1,014 46 -- 1,060
Construction services 334 -- -- -- 334 -- -- 334
Selling, general and administrative 341 163 7 -- 511 29 -- 540
Depreciation and amortization 120 45 1 32 (7) 215 1 9 (5) 231
16 (8) 6 (6)
1 (9)
Merger costs 63 -- -- (63)(10) -- 2 (2)(10) --
Provision for In-process R&D 750 -- -- (750)(10) -- -- 10 (4) --
(10)(10)
------- ----- ---- ------ ------- ------ -------- --------
2,164 653 21 (764) 2,074 78 13 2,165
------- ----- ---- ------ ------- ------ -------- --------
Income (loss) from operations (786) 92 (4) 764 66 (19) (13) 34
Other expense (income):
Interest expense, net 51 14 -- -- 65 (1) -- 64
------- ----- ---- ------ ------- ------ -------- --------
Income (loss) before income taxes (837) 78 (4) 764 1 (18) (13) (30)
Income tax expense (benefit) (14) 30 -- 20 (15) 36 -- (1)(15) 35
------- ----- ---- ------ ------- ------ -------- --------
Net income (loss) $ (823) $ 48 $ (4) $ 744 $ (35) $ (18) $ (12) $ (65)
======= ===== ==== ====== ======= ====== ======== ========
Loss per share - basic and diluted $ (3.17) $ (0.20)
======= ========
Weighted average shares used for
calculating loss per share -
basic and diluted 260 329
======= ========
See accompanying notes to unaudited pro forma condensed combined financial statements.
QWEST COMMUNICATIONS INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, 1997
(Unaudited)
(Amounts in Millions, Except Per Share Information)
Pro Forma Pro Forma
Historical Pro Forma Combined, Historical Pro Forma Including
Qwest LCI Phoenix Adjustments Excluding Icon Icon Adjustments Icon
------ ---------- ------- ----------- -------------- ---------- ----------- --------
Revenue:
Communications services $ 115 $ 1,642 $ 77 $ 6 (11) $ 1,840 $ 52 $ -- $ 1,892
Construction services 581 -- -- -- 581 -- -- 581
------ ------- ----- ----- -------- ----- ------- --------
696 1,642 77 6 2,421 52 -- 2,473
------ ------- ----- ----- -------- ----- ------- --------
Operating expenses:
Access and network operations 91 986 57 3 (11) 1,137 39 -- 1,176
Construction services 397 -- -- -- 397 -- -- 397
Selling, general and
administrative 164 417 30 3 (11) 614 24 -- 638
Depreciation and amortization 20 96 4 2 (9) 240 1 12 (5) 261
1 (11) 8 (6)
3 (12)
76 (7)
38 (8)
Merger costs -- 45 -- (45) (13) -- -- -- --
------ ------- ----- ----- -------- ----- ------- --------
672 1,544 91 81 2,388 64 20 2,472
------ ------- ----- ----- -------- ----- ------- --------
Income (loss) from operations 24 98 (14) (75) 33 (12) (20) 1
Other expense (income):
Interest expense, net 7 36 1 1 (14) 45 1 -- 46
Other (7) -- -- -- (7) -- -- (7)
------ ------- ----- ----- -------- ----- ------- --------
Income (loss) before income taxes 24 62 (15) (76) (5) (13) (20) (38)
Income tax expense (benefit) 9 31 -- 2 (15) 42 -- (3)(15) 39
------ ------- ----- ----- -------- ----- ------- --------
Net income (loss) $ 15 $ 31 $ (15) $ (78) $ (47) $ (13) $ (17) $ (77)
====== ======= ===== ===== ======== ===== ======= ========
Earnings (loss) per share - basic $ 0.08 $ (0.24)
====== ========
Earnings (loss) per share - diluted $ 0.07 $ (0.24)
====== ========
Weighted average shares used for
calculating earnings (loss) per
share - basic 191 326
====== ========
Weighted average shares used for
calculating earnings (loss) per
share - diluted 194 326
====== ========
See accompanying notes to unaudited pro forma condensed combined financial statements.
QWEST COMMUNICATIONS INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 1998
(Unaudited)
(Amounts in Millions)
Historical
---------------------------- Pro Forma Pro Forma
Qwest Icon Adjustments Combined
------------ ------------ ----------- -----------
ASSETS
Current assets:
Cash $ 225 $ 10 $ -- $ 235
Trade accounts receivable, net 294 12 -- 306
Deferred income tax asset 297 -- -- 297
Prepaid expenses and other 314 5 -- 319
------------ ------------ ---------- -----------
Total current assets 1,130 27 -- 1,157
Property and equipment, net 2,044 14 -- 2,058
Excess of cost over net assets acquired 3,204 -- 177 (4) 3,381
Other, net 456 -- 74 (4) 530
------------ ------------ ---------- -----------
TOTAL ASSETS $ 6,834 $ 41 $ 251 $ 7,126
============ ============ ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 1,180 $ 17 $ 4 (4) $ 1,201
Long-term debt and capital lease obligations 1,387 -- -- 1,387
Other long-term liabilities 515 -- 30 (4) 545
------------ ------------ ---------- -----------
Total liabilities 3,082 17 34 3,133
Commitments and contingencies
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 3 -- -- 3
Additional paid-in capital 4,603 63 251 (4) 4,854
(63)(4)
(Accumulated deficit) retained earnings (854) (39) 39 (4) (864)
(10)(4)
------------ ------------ ---------- -----------
Total stockholders' equity 3,752 24 217 3,993
------------ ------------ ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,834 $ 41 $ 251 $ 7,126
============ ============ ========== ===========
See accompanying notes to unaudited pro forma condensed combined financial statements.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) On June 5, 1998, Qwest acquired LCI, a communications service provider,
for approximately $3.9 billion in Qwest Common Stock. At the close of
the acquisition (the "LCI Merger"), Qwest issued approximately 129.9
million shares of Qwest common stock (including outstanding LCI stock
options assumed by Qwest) and incurred approximately $13.5 million in
direct acquisition costs. The LCI Merger was accounted for as a
purchase.
(2) Represents the purchase by Qwest of the outstanding shares of LCI
common stock, the assumption of certain liabilities, the incurrence of
related transaction costs, and the initial allocation of the pro forma
purchase price. (amounts in millions)
Aggregate value of stock consideration(a) .................. $ 3,657
Value of LCI outstanding stock options assumed by Qwest(b) . 260
Direct costs of the acquisition ............................ 14
-------
$ 3,931
=======
Allocation of purchase price:
Working capital, excluding deferred taxes .................. $ (352)
Deferred federal income taxes (c) .......................... 144
Property and equipment ..................................... 717
Goodwill ................................................... 3,026
Research and development (d) ............................... 682
Developed technology (d) ................................... 318
Other intangible assets .................................... 65
Long-term debt, excluding current portion .................. (462)
Other liabilities and assets, net .......................... (207)
-------
Total .................................. $ 3,931
=======
(a) Represents the value of Qwest Common Stock issued for the acquisition
of the approximately 98.3 million shares of LCI common stock
outstanding. Based on an average trading price of $31.92, for a
specified period prior to closing as required by the Qwest/LCI merger
agreement. Qwest issued approximately 114.6 million shares of Qwest
Common Stock to acquire all the outstanding shares of LCI common stock.
(b) Represents the assumption by Qwest of the approximately 13.1 million
stock options outstanding under LCI's stock option plans. Based upon an
exchange ratio of 1.1661, Qwest issued approximately 15.3 million Qwest
stock options to assume the outstanding LCI stock options.
(c) Represents the allocation of purchase price to deferred income taxes.
(d) In connection with the acquisition of LCI, Qwest allocated $682 million
of the purchase price to in-process research and development ("R&D")
projects. $318 million was allocated to developed technology and $65
million to other intangible assets, while $3,026.0 million was
allocated to goodwill. This allocation to the in-process R&D represents
the estimated fair value based on risk-adjusted cash flows related to
the incomplete projects. At the date of the merger, the development of
these projects had not yet reached technological feasibility and the
R&D in progress had no alternative future uses. Accordingly, these
costs were expensed as of the merger date.
Through the use of third party appraisal consultants, Qwest assessed
and allocated values to the in-process research and development. The
values assigned to these assets were determined by identifying
significant research projects for which technological feasibility had
not been established. These assets consisted of a significant number of
R&D projects grouped into three categories: (1) next-generation network
systems automation tools; (2) advanced data services, including Frame
Relay and IP technologies; and (3) new operational systems and tools.
Taken together, these projects, if successful, will enable Qwest to
provide advanced voice and data services as well as sophisticated
network management and administration functions. A brief description of
the three categories of in-process projects is presented below:
o R&D Related to Network Systems Automation. These R&D projects are
intended to create a new method of automating LCI's service
provisioning and network management systems, and were valued at
approximately $218 million. These proprietary projects include the
development of data warehousing and new interface technologies to
enable the interchange of data across disparate networks. As of the
transaction date, Qwest believes the overall project was 60%
complete. Development efforts through September 30, 1998 have
proceeded according to expectations. The expected costs to complete
the projects are approximately $4 million in 1998 and $10 million
in 1999. While material progress has been made with these projects,
significant risk still is associated with their completion. If
these projects are unsuccessful, their expected contribution to
revenues and profits will not materialize.
o R&D Related to Frame Relay and IP Services. These projects involve
R&D related to the deployment of frame relay and IP technologies
within the LCI network, and were valued at approximately $155
million. With the completion of this next-generation network, LCI
will be able to address emerging new demand trends for data
services. Management considers this a complex project due to the
customized work required. As of the transaction date, Qwest
believes the overall project was 60% to 70% complete. Development
efforts through September 30, 1998 have proceeded according to
expectations. The expected costs to complete the projects are
approximately $53 million in 1998 and $7 million in 1999. While
material progress has been made with these projects, significant
risk still is associated with their completion. If these projects
are unsuccessful, their expected contribution to revenues and
profits will not materialize.
o R&D Related to Operational Systems and Tools. These projects
involve R&D related to the development of new service and network
management tools and engineering functions, and
were valued at approximately $309 million. These proprietary
projects are closely associated with LCI's deployment of advanced
data services. Applications enabled by these new technologies
include the ability to offer new products and service packages. As
of the transaction date, Qwest believes the projects were 60% to
70% complete. Development efforts through September 30, 1998 have
proceeded according to expectations. The expected costs to complete
the projects are approximately $10 million in 1998 and $24 million
in 1999. While material progress has been made with the R&D
projects, these are unique technologies and significant risk is
associated with their completion. If these projects are
unsuccessful, their expected contribution to revenues and profits
will not materialize.
Remaining R&D efforts for these projects include various phases of technology
design, development and testing. Anticipated completion dates for the projects
in progress will occur in phases over the next two years, at which point Qwest
expects to begin generating the economic benefits from the technologies.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology to developing
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows from
the expected product sales of such products to their present value using a
risk-adjusted discount rate.
Qwest estimates total revenues from the specific acquired in-process technology
to peak in 2003 and steadily decline from 2004 through 2009 as other new product
and service technologies are expected to be introduced by Qwest. These
projections are based on management's estimates of market size and growth,
expected trends in technology, and the expected timing of new product
introductions.
Discounting the net cash flows back to their present values is based on the
weighted average cost of capital ("WACC"). The business enterprise is comprised
of various types of assets, each possessing different degrees of investment risk
contributing to LCI's overall weighted average cost of capital. Intangible
assets are assessed higher risk factors due to their lack of liquidity and poor
versatility for redeployment elsewhere in the business. Reasonable returns on
monetary and fixed assets were estimated based on prevailing interest rates. The
process for quantifying intangible asset investment risk involved consideration
of the uncertainty associated with realizing discernible cash flows over the
life of the asset. A discount rate of 19% was used for valuing the in-process
research and development. This discount rate is higher than the implied WACC due
to the inherent uncertainties surrounding the successful development of the
purchased in-process technology, the useful life of such technology, the
profitability levels of such technology, and the uncertainty of technological
advances that are unknown at this time. As is standard in the appraisal of high
growth markets, projected revenues, expenses and discount rates reflect the
probability of technical and marketing successes.
The value of the in-process projects was adjusted to reflect value and
contribution of the acquired research and development. In doing so,
consideration was given to the R&D's stage of completion, the complexity of the
work completed to date, the difficulty of completing the
remaining development, costs already incurred, and the projected cost to
complete projects.
Qwest believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the merger. Qwest cannot assure, however, that the
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, actual results may vary from the
projected results.
Qwest expects to continue its support of these efforts and believes Qwest has a
reasonable chance of successfully completing the R&D programs. However, risk is
associated with the completion of the projects and Qwest cannot assure that the
projects will meet with either technological or commercial success.
If none of these projects is successfully developed, the sales and profitability
of Qwest may be adversely affected in future periods. The failure of any
particular individual project in-process would not materially impact Qwest's
financial condition, results of operations or the attractiveness of the overall
LCI investment. Operating results are subject to uncertain market events and
risks, which are beyond Qwest's control, such as trends in technology,
government regulations, market size and growth, and product introduction or
other actions by competitors.
The developed technology, other intangibles and goodwill will be amortized on a
straight-line basis over 10 years, 10 years and 40 years, respectively.
(3) On March 30, 1998, Qwest acquired Phoenix pursuant to a transaction
whereby each outstanding share of Phoenix common stock was exchanged
for shares of Qwest Common Stock having an aggregate market value equal
to approximately $27.2 million, and future payments of up to $4.0
million.
(4) On December 31, 1998, Icon shareholders ratified, by a vote of the
shareholders of record, a definitive merger agreement with Qwest (the
"Icon Merger Agreement"). The Icon Merger Agreement provides for the
acquisition of Icon in a stock-for-stock merger, which will be
accounted for as a purchase. The actual number of shares of Qwest
Common Stock to be exchanged for each Icon share was determined by
dividing $12 by a 15-day volume weighted average of trading prices for
Qwest Common Stock prior to the Icon shareholders meeting. The exchange
ratio was fixed at .3200, as the Qwest average stock price of $43.9693
exceeded the $37.50 ceiling for determining the exchange ratio. As of
December 31, 1998, approximately 15.9 million shares of Icon Common
Stock were outstanding. Therefore, approximately 5.1 million shares of
Qwest Common Stock were issued to the Icon shareholders (excluding 0.8
million shares to be issued upon the exercise of outstanding Icon stock
options and warrants assumed by Qwest).
The total cost of the Icon acquisition is approximately $254.1 million,
including $3.5 million of direct costs of the acquisition. Based on a
preliminary valuation analysis, Qwest allocated $10.0 million to
in-process research and development ("R&D") projects, $74.1 million to
other intangible assets, and $177.0 million to goodwill. At the date of
the merger, the R&D projects had not reached technological feasibility,
and these projects do not have alternative future uses. Accordingly,
these costs were expensed as of the merger date. The other intangibles
will be amortized on a straight-line basis over their respective useful
lives of 4 to 10 years. Goodwill will be amortized on a straight-line
basis of 15 years.
(5) Represents the amortization of goodwill from the preliminary Icon
purchase price allocation. The amortization is calculated using an
estimated useful life of 15 years. See note 4.
(6) Represents the amortization of other intangible assets on straight-line
basis that result from the preliminary Icon purchase price allocation
using estimated useful lives of 4 to 10 years. See note 4.
(7) Represents the amortization of goodwill that resulted from the
preliminary LCI purchase price allocation. Goodwill amortization is
calculated using an estimated useful life of 40 years. See note 2.
(8) Represents the amortization of developed technology and other
intangible assets that results from the preliminary LCI purchase price
allocation. Developed technology and other intangible assets
amortization is calculated using an estimated useful life of 10 years.
See note 2.
(9) Represents the amortization of goodwill that resulted from the Phoenix
purchase price allocation. Goodwill amortization is calculated using an
estimated useful life of 15 years.
(10) Merger costs and the provision for in-process R&D are eliminated
because they are non-recurring in nature. Merger costs and the
provision for in-process R&D for Qwest are directly attributable to the
LCI Merger and Icon Merger, as applicable. These charges are
non-deductible for federal tax purposes.
(11) On October 22, 1997, Qwest acquired from an unrelated third party all
the outstanding shares of common stock, and common stock issued at the
closing of the acquisition of SuperNet for $20.0 million in cash. The
acquisition was accounted for using the purchase method of accounting,
and the purchase price was allocated on that basis to the net assets
acquired. The historical statement of operations of Qwest includes the
operating results of SuperNet beginning October 22, 1997. This pro
forma adjustment represents SuperNet's unaudited results of operations
for the period January 1, 1997 to October 21, 1997.
(12) Represents amortization for the period January 1, 1997 to October 21,
1997 of goodwill that resulted from the SuperNet purchase price
allocation.
(13) Represents the reversal of merger costs recognized by LCI in the
acquisition of USLD Communications Corp., which had been accounted for
under the pooling-of-interests method.
(14) Represents the amortization of LCI debt premium over the 10- year life
of the underlying debt.
(15) Represents the assumed income tax effect of the pro forma adjustment
relating to the amortization of developed technology, other intangible
assets, the reversal of historical merger costs and the amortization of
LCI's debt premium.
(16) Effective with the LCI merger, Qwest is no longer included in the
consolidated federal income tax return of Anschutz Company, Qwest's
majority shareholder. As a result, the tax sharing agreement with
Anschutz Company is no longer effective. Qwest previously recognized a
deferred tax asset attributable to its net operating loss carryforwards
under the tax sharing agreement.
Qwest currently believes the tax benefits previously recognized under
the tax sharing agreement may be realized through tax planning
strategies. Accordingly, any in-substance dividend
resulting from the deconsolidation from Anschutz Company is not
expected to be material to the consolidated balance sheet of Qwest.
(17) Transactions among Qwest, SuperNet, Phoenix, LCI and Icon are not
significant.