-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TmgdMJ/3jbZxxLSHnJoNceS26e5IlQC0Zdo8JtyG3zBRDJBhydtXUu5YsZcBOYIj H9mVuoxLoqYvSBCfPGhm/w== 0001019056-99-000037.txt : 19990115 0001019056-99-000037.hdr.sgml : 19990115 ACCESSION NUMBER: 0001019056-99-000037 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QWEST COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0001037949 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841339282 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-22609 FILM NUMBER: 99506382 BUSINESS ADDRESS: STREET 1: 700 QWEST TOWER STREET 2: 555 SEVENTEENTH STREET CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3039921400 MAIL ADDRESS: STREET 1: 700 QWEST TOWER STREET 2: 555 SEVENTEENTH STREET CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: QUEST COMMUNICATIONS INTERNATIONAL INC DATE OF NAME CHANGE: 19970416 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): December 31, 1998 QWEST COMMUNICATIONS INTERNATIONAL INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE ----------------- (State or other jurisdiction of incorporation) 000-22609 84-1339282 - -------------------------------------------------------------------------------- (Commission File Number) (IRS Employer Identification No.) 700 QWEST TOWER, 555 SEVENTEENTH STREET DENVER, COLORADO 80202 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 303-992-1400 ------------ NOT APPLICABLE ----------------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On January 4, 1999, the Registrant announced the consummation of the merger pursuant to the Agreement and Plan of Merger dated as of September 13, 1998 (the "Merger Agreement"), among Icon CMT Corp. ("Icon"), the Registrant and a wholly-owned subsidiary of the Registrant, providing for the merger of such subsidiary with and into Icon. As of December 31, 1998, the effective date of the merger, each outstanding share of common stock of Icon ("Icon Common Stock") was converted into the right to receive 0.3200 shares of the Registrant's common stock and cash in lieu of fractional shares, in accordance with the terms of the Merger Agreement. The press release dated January 4, 1999 of the Registrant and Icon announcing the consummation of the merger is filed with the Securities and Exchange Commission as Exhibit 99.1 to this Current Report on Form 8-K. The press release contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that include, among others (1) statements by the Registrant concerning the benefits expected to result from certain business activities and transactions and the Merger, including, without limitation, synergies in the form of increased revenues, decreased expenses and avoided expenses and expenditures that are expected to be realized by the Registrant after the closing of the Merger, (2) the Registrant's plans to complete the Qwest Network, an approximately 18,450 route-mile, coast-to-coast, technologically advanced fiber optic communications network, and (3) other statements by the Registrant of expectation, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. The management of the Registrant cautions the reader that these forward-looking statements are subject to risks and uncertainties, including financial, regulatory environment, and trend projections, that could cause actual events or results to differ materially from those expressed or implied by the statements. Such risks and uncertainties include those risks, uncertainties and risk factors identified, among other places, under "RISK FACTORS" and RESULTS OF OPERATIONS" in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, as amended. The most important factors that could prevent the Registrant from achieving its stated goals include, but are not limited to, (a) failure by the Registrant to construct the Qwest Network on schedule and on budget, (b) operating and financial risks related to managing rapid growth, integrating acquired businesses and sustaining operating cash flow to meet its debt service requirements, make capital expenditures and fund operations, (c) intense competition in the Registrant's communications services market, (d) the Registrant's ability to achieve Year 2000 compliance, (e) rapid and significant changes in technology and markets, and (f) adverse changes in the regulatory or legislative environment affecting the Registrant. These cautionary statements should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by the Registrant or persons acting on its behalf. The Registrant undertakes no obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 2 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) The audited financial statements of Icon for the years ended December 31, 1995, 1996 and 1997 and the unaudited financial statements of Icon for the nine months ended September 30, 1997 and 1998 are incorporated by reference from Amendment No. 1 to the Registration Statement on Form S-4 (File No. 333-65095) filed by the Registrant on December 10, 1998. (b) The pro forma financial statements of the Registrant giving effect to the acquisition of Icon are filed with the Securities and Exchange Commission as Exhibit 99.2 to this Current Report on Form 8-K. (c) Exhibits 23.1 Consent of PricewaterhouseCoopers LLP. 99.1 Press release of the Registrant and Icon CMT Corp. dated January 4, 1999. 99.2 Pro Forma Financial Statements. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ----------------- QWEST COMMUNICATIONS INTERNATIONAL INC. DATE: January 13, 1999 By: /s/ Robert S. Woodruff ------------------------------------ Robert S. Woodruff Executive Vice President and Chief Financial Officer 4 EXHIBIT INDEX Exhibit 23.1 Consent of PricewaterhouseCoopers LLP. Exhibit 99.1 Press release of the Registrant and Icon CMT Corp. dated January 4, 1999. Exhibit 99.2 Pro Forma Financial Statements. 5 EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the report on Form 8-K of Qwest Communications International Inc. ("Qwest") dated January 13, 1999 of our report dated March 6, 1998, except as to the acquisition and restatement described in Note 2, which is as of September 30, 1998, relating to the consolidated financial statements of Icon CMT Corp. as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which is included in Qwest's Registration Statement on Form S-4 (No. 333-65095) dated December 10, 1998 (the "Form S-4"). We also consent to the application of such report to the Financial Statement Schedule of Icon CMT Corp. for the three years ended December 31, 1997 listed under Item 21(b) of the Form S-4 when such Financial Statement Schedule is read in conjunction with the consolidated financial statements of Icon CMT Corp. referred to in our report. The audits referred to in such report also included this Financial Statement Schedule. We also consent to the reference to us under the heading "Experts" in the Form S-4. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------ PricewaterhouseCoopers LLP Stamford, Connecticut January 13, 1999 EX-99.1 3 EXHIBIT 99.1 January 4, 1999 QWEST COMPLETES ACQUISITION OF ICON CMT CORP.; MERGER WILL BOOST RELATIONSHIP WITH MICROSOFT DENVER - JAN. 4, 1999--Qwest Communications International Inc. announced today the completion of its acquisition of Icon CMT Corp., a leading Internet solutions provider. The merger boosts Qwest's relationship with Microsoft Corp., and marks a strategic milestone for Qwest's leadership developing broadband multimedia services. Last month Qwest and Microsoft said that, beginning in the second quarter of 1999, they would deliver next-generation Internet-based broadband services to businesses to help maximize network resources, reduce costs, generate new sources of revenue and optimize the management of computing operations. The addition of Icon's sales channels, data centers and more than 400 IT professional staff will provide the additional resources necessary to support the development, integration and maintenance of advanced hosting services - --including dedicated electronic commerce, Web application hosting, streaming media, managed software services and virtual private networking. "Icon's solid reputation of helping businesses deploy Web-based applications compliments our efforts to drive the development of broadband applications and accelerate growth in the adoption of end-to-end Internet-based solutions," said Joseph P. Nacchio, president and CEO of Qwest. Each outstanding share of Icon common stock will be exchanged for .3200 shares of Qwest common stock and cash in lieu of fractional shares. The exchange rate for each Icon share was determined by dividing $12 by $43.9693 -- the average of the daily volume weighted average of trading prices for Qwest common stock for the 15 consecutive trading day period ending on December 28, 1998. Scott Baxter, Icon's CEO, will join Qwest and serve as president of Qwest Internet Solutions, a business unit, reporting to Lewis O. Wilks, president of Qwest's Internet and Multimedia Markets. # # # Qwest Communications International Inc. (NASDAQ: QWST) is a leader in reliable and secure broadband Internet-based data, voice and image communications for businesses and consumers. Headquartered in Denver, Qwest has more than 8,000 employees and 80 sales offices in North America, Europe and Mexico. The Qwest Macro Capacity (SM) Fiber Network, designed with the newest optical networking, will span more than 18,500 route miles in the United States when it is completed in mid-1999. In addition, Qwest and KPN, the Dutch telecommunications company, have a venture to build and operate a high-capacity European fiber optic, Internet Protocol-based network in Europe that has 2,100 miles today and will span 9,100 miles when it is completed in 2002. Qwest also has completed a 1,500-mile network in Mexico. # # # THIS RELEASE MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS MAY DIFFER MATERIALLY FROM ACTUAL FUTURE EVENTS OR RESULTS. READERS ARE REFERRED TO THE DOCUMENTS FILED BY QWEST WITH THE SEC, SPECIFICALLY THE MOST RECENT REPORTS WHICH IDENTIFY IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS, DEPENDENCE ON NEW PRODUCT DEVELOPMENT, RAPID TECHNOLOGICAL AND MARKET CHANGE, FINANCIAL RISK MANAGEMENT AND FUTURE GROWTH SUBJECT TO RISKS. OTHER RISK FACTORS INCLUDE (A) OPERATING AND FINANCIAL RISKS RELATED TO MANAGING RAPID GROWTH, INTEGRATING ACQUIRED BUSINESSES AND SUSTAINING OPERATING CASH FLOW TO MEET ITS DEBT SERVICE REQUIREMENTS, MAKE CAPITAL EXPENDITURES AND FUND OPERATIONS, (B) QWEST'S ABILITY TO ACHIEVE YEAR 2000 COMPLIANCE AND (C) THE EXECUTION OF DEFINITIVE DOCUMENTATION. THESE CAUTIONARY STATEMENTS SHOULD BE CONSIDERED IN CONNECTION WITH ANY SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ISSUED BY QWEST OR PERSONS ACTING ON ITS BEHALF. QWEST UNDERTAKES NO OBLIGATION TO REVIEW OR CONFIRM ANALYSTS' EXPECTATIONS OR ESTIMATES OR TO RELEASE PUBLICLY ANY REVISIONS TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. THE QWEST LOGO IS A REGISTERED TRADEMARK OF QWEST COMMUNICATIONS INTERNATIONAL INC. IN THE U.S. AND CERTAIN OTHER COUNTRIES. Contact Information: Media Contact: Investor Relation Contact: Qwest Communications Qwest Communications Mike Tarpey Lee Wolfe (303) 992-2277 (800) 567-7296 michael.tarpey@qwest.net IR@qwest.net EX-99.2 4 EXHIBIT 99.2 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. -----END PRIVACY-ENHANCED MESSAGE-----