<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-22609
---------
QWEST COMMUNICATIONS INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
---------
DELAWARE 84-1339282
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1000 QWEST TOWER
555 17TH STREET
DENVER, COLORADO 80202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 291-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the Company outstanding) was 207,692,503 as of April
29, 1998.
1
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
1998 (Unaudited) and December 31, 1997.................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 (Unaudited).... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (Unaudited).... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three Months
Ended March 31, 1998 and 1997............................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 18
Item 2. Changes in Securities and Use of Proceeds................... 18
Item 6. Exhibits and Reports of Form 8-K............................ 18
Signature Page.............................................................. 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 573,161 $ 379,784
Accounts receivable, net....................................... 114,073 78,250
Costs and estimated earnings in excess of billings ........... 212,962 256,566
Other current assets ......................................... 12,128 9,342
----------- -----------
Total current assets ...................................... 912,324 723,942
Property and equipment, net .................................... 772,594 614,640
Deferred income tax asset ...................................... 6,143 17,988
Intangible and other long-term assets, net ..................... 88,507 41,535
Total assets .............................................. $ 1,779,568 $ 1,398,105
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........................ $ 308,843 $ 253,313
Billings in excess of costs and estimated earnings ........... 21,184 21,390
Deferred income tax liability ................................ 5,340 22,344
Current portion of long-term debt ............................ 1,109 12,011
Payable to Majority Shareholder .............................. 1,974 2,091
Deferred revenue ............................................. 5,021 4,273
----------- -----------
Total current liabilities ................................. 343,471 315,422
Long-term debt ................................................. 959,270 630,463
Other liabilities .............................................. 69,665 70,476
Total liabilities ......................................... 1,372,406 1,016,361
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; authorized 25.0 million
shares; no shares issued and outstanding .................... -- --
Common stock - $.01 par value; authorized 400.0 million
shares; 207.7 million shares and 206.6 million shares
issued and outstanding at March 31, 1998 and December 31,
1997, respectively .......................................... 2,077 2,066
Additional paid-in capital ................................... 443,661 411,605
Accumulated deficit .......................................... (38,576) (31,927)
----------- -----------
Total stockholders' equity ................................ 407,162 381,744
----------- -----------
Total liabilities and stockholders' equity ................ $ 1,779,568 $ 1,398,105
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
1998 1997
-------- --------
Revenue:
Carrier services .......................... $ 19,190 $ 11,199
Commercial services ....................... 23,394 9,411
-------- --------
42,584 20,610
Network construction services ............. 134,463 52,083
-------- --------
177,047 72,693
-------- --------
Operating expenses:
Telecommunications services ............... 32,695 18,063
Network construction services ............. 93,117 36,265
Selling, general and administrative ....... 44,428 13,947
Growth share plan ......................... 2,301 13,100
Depreciation and amortization ............. 8,031 3,962
-------- --------
180,572 85,337
Loss from operations ....................... (3,525) (12,644)
Other income (expense):
Interest expense, net .................... (14,376) (984)
Interest income .......................... 8,074 680
Other income, net ........................ -- 5,714
-------- --------
Loss before income taxes .............. (9,827) (7,234)
Income tax benefit ......................... (3,178) (2,458)
-------- --------
Net loss .............................. $ (6,649) $ (4,776)
======== ========
Net loss per share--basic .................. $ (0.03) $ (0.03)
======== ========
Net loss per share--diluted ................ $ (0.03) $ (0.03)
======== ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net cash provided by operating activities ........................................ $ 53,540 $ 33,359
---------- ----------
Cash flows from investing activities:
Proceeds from sale of contract rights .......................................... -- 7,000
Expenditures for property and equipment ........................................ (142,107) (63,922)
Cash acquired in acquisition ................................................... 463 --
---------- ----------
Net cash used in investing activities ........................................ (141,644) (56,922)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of employee stock options ............................... 1,811 --
Borrowings of long-term debt ................................................... 300,000 270,000
Repayments of long-term debt ................................................... (19,383) (93,277)
Debt issuance costs ............................................................ (830) (8,210)
Net (payments to) advances from Majority Shareholder ........................... (117) 8,814
---------- ----------
Net cash provided by financing activities .................................... 281,481 177,327
---------- ----------
Net increase in cash and cash equivalents .................................... 193,377 153,764
Cash and cash equivalents, beginning of period ................................... 379,784 6,905
---------- ----------
Cash and cash equivalents, end of period ......................................... $ 573,161 $ 160,669
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest, net ..................................................... $ 1,210 $ 3,056
========== ==========
Cash paid for taxes, other than to Majority Shareholder ......................... $ 37 $ 68
========== ==========
Supplemental disclosure of significant non-cash investing and financing
activities:
Accrued capital expenditures .................................................... $ 2,709 $ 15,000
========== ==========
Assets acquired, net of cash and liabilities assumed in acquisition............... $ 26,759 $ --
========== ==========
Capital expenditures financed with equipment credit facility .................... $ 14,888 $ --
========== ==========
Income tax benefit attributable to exercise of employee stock options ........... $ (1,924) $ --
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BACKGROUND
Qwest Communications International Inc. (the "Company") was wholly-owned by
Anschutz Company (the "Majority Shareholder") until June 27, 1997, when the
Company issued common stock in an initial public offering (the "IPO"). As of
March 31, 1998, the Majority Shareholder owned approximately 83.3% of the
outstanding common stock of the Company. The Company is the ultimate holding
company for the operations of Qwest Communications Corporation and subsidiaries
("Qwest").
The Company is a developer and operator of telecommunications networks and
facilities and operates in the telecommunications industry. It principally
provides the following services within that industry:
--Telecommunications Services--the Company provides dedicated line and
switched services to interexchange carriers and competitive access providers
("Carrier Services") and long distance voice, data and video services to
businesses and consumers ("Commercial Services").
--Network Construction Services--the Company installs fiber optic
communications systems for interexchange carriers, local telephone
companies, cable television companies, competitive access providers and
other communications entities, as well as for its own use.
(2) BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
as of March 31, 1998 and for the three months ended March 31, 1998 and 1997
include the accounts of the Company and all majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
The unaudited interim condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring items, which are, in the opinion of
management, necessary to present a fair statement of the results of the interim
periods presented. The results of operations for any interim period are not
necessarily indicative of results for the full year. Such financial statements
should be read in conjunction with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The Company has no elements of comprehensive income other than net income.
(3) ACQUISITIONS AND OTHER TRANSACTION
On March 8, 1998, the Company signed a definitive merger agreement with LCI
International, Inc. ("LCI"), a communications services provider. The boards of
directors of each company have approved the merger. The terms of the merger
agreement call for the acquisition of all of LCI's outstanding common shares and
the assumption of all of LCI's stock options by the Company. The purchase price
of the all-stock transaction is anticipated to be approximately $4.4 billion.
The merger is intended to qualify as a tax-free reorganization and will be
accounted for as a purchase.
If the LCI merger is consummated, the Company will no longer be included in
the consolidated federal income tax return of its Majority Shareholder. As a
result, the net operating losses for income tax purposes of the Company,
included in the consolidated federal income tax returns of its Majority
Shareholder from January 1, 1997 through the consummation date of the LCI
merger, will not be available for use by the Company in its separate tax returns
after the LCI merger. The Company recognized a deferred tax asset because it
believed that the tax benefits attributable to its net income tax operating loss
carryforwards would be realized by the recognition of future taxable amounts
under the terms of its tax sharing agreement with its Majority Shareholder.
Based on an analysis of the tax attributes of the Company and its Majority
Shareholder, the Majority Shareholder will not be able to realize the benefit of
the Company's net operating losses. Accordingly, the deferred tax assets
attributable to the Company's net operating loss carryforwards, calculated on a
separate return basis, will be reported on the consummation date of the LCI
merger as an adjustment to the Company's capital in the form of an in-substance
dividend.
6
<PAGE>
The aggregate purchase price was allocated as follows (in thousands):
Working capital.............................. $(8,891)
Property and equipment....................... 2,912
Goodwill..................................... 46,229
Litigation liability......................... (4,000)
Other........................................ (9,028)
-------
$27,222
=======
The results of operations of Phoenix were included in the accompanying
condensed consolidated statements of operations of the Company from the date of
acquisition. The following pro forma operating results of the Company and
Phoenix for the three months ended March 31, 1998 and 1997 have been prepared
assuming the acquisition had been consummated on January 1, 1997 (in thousands,
except per share amounts):
1998 1997
-------- -------
Revenue...................................... $193,854 $94,051
Net loss..................................... (10,558) (7,093)
Loss per share basic......................... $ (0.05) $ (0.04)
Loss per share diluted....................... $ (0.05) $ (0.04)
On April 14, 1998, the Company acquired EUnet International Limited ("EUnet"),
a European internet service provider with business units operating in 13
European countries for approximately $154.4 million in cash and Company common
stock. Within three weeks of the closing of the acquisition, certain EUnet
stockholders and optionholders will receive approximately 3.6 million newly
issued shares of Company common stock, having a value of approximately $135.3
million (based upon a deemed value of approximately $37.42 per share), and
approximately $4.7 million in cash. In addition, in connection with the
registration of the resale of the shares of Company common stock issued in the
transaction under the Securities Act of 1933 (the "Act"), EUnet stockholders
will receive at the Company's option, either (i) approximately $14.4 million in
cash (plus interest to the date of payment) or (ii) additional newly issued
shares of Company common stock having the value of such cash payment, based upon
an average of the Company common stock closing prices for 15 consecutive trading
days commencing 20 trading days before the effective date of registration. Of
the number of shares of Company common stock to be issued in the transaction, .6
million shares will be placed in escrow for two years, and may be recovered by
the Company, to satisfy any indemnification claims. The EUnet acquisition will
be accounted for as a purchase. The shares of Company common stock will be
issued to EUnet stockholders and optionholders in a private placement exempt
from registration under the Act. The Company has agreed to undertake the
registration of the resale of the shares of Company common stock under the Act
not later than the earlier of (i) three weeks after the closing of the
previously announced LCI merger or (ii) September 30, 1998 (or, under certain
circumstances, a later date, but no later than October 31, 1998).
7
<PAGE>
In January 1998, the Company signed a long-term contract to provide Apex
Global Internet Services, Inc. ("AGIS"), an internet service provider,
telecommunications capacity along approximately 10,000 route miles of the Qwest
Network. The Company received, on a contingent basis, 19.99% of AGIS's common
stock and will receive up to $310.0 million in cash over an extended payment
term. There are restrictions on the sale by the Company of AGIS's common stock,
and AGIS has the right to repurchase the common stock until the contract's
second anniversary. The Company will also receive monthly operations and
maintenance fees totaling approximately $251.0 million over the term of the
multi-year contract. Prior to delivery of the telecommunications capacity and
acceptance by AGIS, AGIS has the right to purchase interim capacity from the
Company. The total cash consideration under the contract will be reduced by 60%
of the sums paid by AGIS for purchases of interim capacity. Pursuant to the
terms of the contract, AGIS may require the Company to purchase an additional
$10.0 million of its common stock. If the Company fails to complete at least
75% of AGIS's network by the contract's third anniversary, AGIS may, at its
option, either accept the completed portion and pay for it on a pro rata basis
or terminate the contract and require the Company to return the consideration
received.
(4) NETWORK CONSTRUCTION SERVICES
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements were as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Costs incurred on uncompleted contracts............................. $ 566,618 $ 473,760
Estimated earnings.................................................. 279,251 238,191
--------- ---------
845,869 711,951
Less: billings to date.............................................. 654,091 476,775
--------- ---------
$ 191,778 $ 235,176
========= =========
Costs and estimated earnings in excess of billings.................. $ 212,962 $ 256,566
Billings in excess of costs and estimated earnings.................. (21,184) (21,390)
--------- ---------
$ 191,778 $ 235,176
========= =========
Revenue the Company expects to realize for work to be
performed on the above uncompleted contracts...................... $ 393,371 $ 506,791
========= =========
</TABLE>
The Company has entered into various agreements to provide indefeasible rights
of use of multiple fibers along the Qwest Network, an approximately 16,250
route-mile, coast-to-coast, technologically advanced fiber optic
telecommunications network. Such agreements include contracts with three major
customers for an aggregate purchase price of approximately $1.0 billion. The
Company obtained construction performance bonds totaling $175.0 million.
Network Construction Services revenue relating to the contracts with these major
customers was approximately $106.5 million and $49.0 million for the three
months ended March 31, 1998 and 1997, respectively. Progress billings are made
upon customers' acceptance of performance milestones.
Although these construction agreements provide for certain penalties if the
Company does not complete construction within the time frames specified within
the agreements, management does not anticipate that the Company will incur any
substantial penalties under these provisions.
8
<PAGE>
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, DECEMBER 31,
1998 1997
--------- -----------
<S> <C> <C>
Accounts payable ............................. $ 100,231 $ 80,862
Construction accrual ......................... 94,366 75,543
Property, sales and other taxes .............. 42,218 33,926
Accrued interest ............................. 14,075 7,704
Right-of-way obligations ..................... 35,222 34,006
Other ........................................ 22,731 21,272
--------- -----------
Accounts payable and accrued expenses ........ $ 308,843 $ 253,313
========= ===========
</TABLE>
(6) Long-Term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, DECEMBER 31,
1998 1997
--------- -----------
<S> <C> <C>
8.29% Notes.................................... $ 304,353 $ --
9.47% Notes .................................. 365,194 356,908
10 7/8% Notes ................................ 250,000 250,000
Equipment credit facility .................... 37,492 22,604
Capital lease and other obligations .......... 3,340 12,962
--------- -----------
Total debt ................................... 960,379 642,474
Less current portion ...................... (1,109) (12,011)
--------- -----------
Long-term debt ............................... $ 959,270 $ 630,463
========= ===========
</TABLE>
In January 1998, the Company issued and sold $450.5 million in principal
amount at maturity of 8.29% Senior Discount Notes, due 2008 (the "8.29%
Notes"), generating net proceeds of approximately $299.2 million, after
deducting offering costs. The 8.29% Notes will accrete at a rate of 8.29% per
annum, compounded semiannually. The principal amount of the 8.29% Notes is due
and payable in full on February 1, 2008. The 8.29% Notes are redeemable at the
Company's option, in whole or in part, at any time on or after February 1, 2003
at specified redemption prices. In addition, prior to February 1, 2001, the
Company may use the net cash proceeds from certain equity transactions to redeem
up to 35% of the 8.29% Notes at specified redemption prices. Cash interest on
the 8.29% Notes will not accrue until February 1, 2003, and thereafter will
accrue at a rate of 8.29% per annum, and will be payable semiannually in arrears
commencing on August 1, 2003, and thereafter on February 1 and August 1 of each
year. The Company has the option of commencing cash interest on an interest
payment date on or after February 1, 2001, in which case the outstanding
principal amount at maturity of the 8.29% Notes will, on such interest payment
date, be reduced to the then accreted value, and cash interest will be payable
on each interest payment date thereafter.
In connection with the sale of the 8.29% Notes, the Company agreed to make an
offer to exchange new notes (the "Exchange Offer"), registered under the Act
and with terms identical in all material respects to the 8.29% Notes, for the
8.29% Notes or, alternatively, to file a shelf registration statement under the
Act with respect to the 8.29% Notes. In April 1998, the Company filed a
registration statement with respect to the Exchange Offer. If the Exchange Offer
registration statement is not declared effective within specified time periods
or, after being declared effective, ceases to be effective during specified time
periods (a "Registration Default"), additional cash interest will accrue at a
rate per annum equal to 0.50% of the principal amount at maturity of the 8.29%
Notes during the 90-day period immediately following the occurrence of a
Registration Default and increasing in increments of 0.25% per
9
<PAGE>
annum of the principal amount at maturity of the 8.29% Notes up to a maximum of
2.0% per annum, at the end of each subsequent 90-day period until the
Registration Default is cured.
The indentures for the 8.29% Notes contain certain covenants that, among
other things, limit the ability of the Company and certain of its subsidiaries
(the "Restricted Subsidiaries") to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase capital
stock or subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Restricted
Subsidiaries, issue or sell capital stock of the Company's Restricted
Subsidiaries or enter into certain mergers and consolidations.
In February 1998, the Company completed an exchange of the 9.47% Series B
Senior Discount Notes (the "9.47% Exchange Notes"), registered under the Act,
for all of the $555.9 million in principal amount at maturity of 9.47% Senior
Discount Notes, due 2007 (the "9.47% Notes.") The 9.47% Exchange Notes are
identical in all material respects to the originally issued 9.47% Notes.
(7) COMMITMENTS AND CONTINGENCIES
(a) Network Construction Project
In 1996, the Company commenced construction of the Qwest Network. The Company
estimates the total cost to construct and activate the Qwest Network and
complete construction of the dark fiber sold to Frontier, WorldCom and GTE will
be approximately $2.0 billion . The Company projects its total remaining cost
at March 31, 1998 for completing the construction of the Qwest Network will be
approximately $1.0 billion. This amount includes the Company's remaining
commitment through December 31, 1998 to purchase a minimum quantity of materials
for approximately $112.0 million as of March 31, 1998, subject to quality and
performance expectations, and contracts for the construction of conduit systems
aggregating approximately $50.2 million.
(b) Network and Telecommunications Capacity Exchanges
In January 1998, the Company entered into an agreement to acquire long-term
telecommunications capacity rights from an unrelated third party in exchange for
long-term telecommunications capacity rights along segments of the Qwest Network
under construction. The exchange agreement provides for the payment of cash by
either of the parties for any period during the contract term in which a party
provides less than the contracted telecommunications capacity. Pursuant to the
agreement, the Company may be required to make cash payments for a portion of
the telecommunications capacity it receives until it completes construction of
the Qwest Network. The exchange agreement provides for liquidating damages to be
levied against the Company in the event the Company fails to deliver the
telecommunications capacity, in accordance with the agreed-upon timetable.
(c) Legal Matters
As of the filing of this Form 10-Q, the Company is aware of two lawsuits that
have been filed in the Court of Chancery of the State of Delaware relating to
the LCI merger. The first suit, Miri Shapiro v. William F. [Mc]Connell, et al.,
was filed on March 9, 1998 and names LCI, certain of its directors and the
Company as defendants. The second suit, Alfred Rehm v. H. Brian Thompson, et
al., was filed on March 12, 1998 and names LCI, certain of its directors and the
Company as defendants. Each suit was brought by a purported stockholder of LCI,
individually and allegedly as a class action on behalf of all stockholders of
LCI. Generally these suits allege breach of fiduciary duty by the Board of
Directors of LCI in connection with the Qwest merger agreement. They seek
preliminary and permanent injunctive relief prohibiting the consummation of the
merger, unspecified damages and other relief.
10
<PAGE>
On May 5, 1998, the Company and LCI entered into proposed settlement with the
plaintiffs in the Shapiro and Rehm actions. Pursuant to the Memorandum of
Understanding entered into by counsel for the Company, LCI and the plaintiffs,
the Company and LCI agreed to (i) include financial information with respect to
the quarter ended March 31, 1998 in a joint proxy statement/prospectus filed as
part of the Registration Statement on Form S-4 to be filed pursuant to the Act
in connection with the issuance of shares to consummate the merger, (ii) request
LCI's financial advisor to issue an opinion with respect to the fairness of the
merger consideration dated as of the date of the joint proxy
statement/prospectus, (iii) reduce the termination fee associated with the
proposed merger from $133.0 million to $125.0 million, (iv) include in the joint
proxy statement/prospectus additional disclosure regarding actions by LCI and
its representatives regarding alternative business combination transactions and
(v) not oppose a proposal for legal fees and expenses by the plaintiff's
attorneys in the amount of not more than approximately $.4 million. Pursuant to
the proposed settlement, the actions will be dismissed with prejudice and the
defendants will be released from all claims that were or could have been
asserted in the actions. Because the Shapiro and Rehm actions are class actions,
the proposed settlement is subject to reasonable confirmatory discovery,
certification of the plaintiff class, notice to the class and Court approval.
(8) LOSS PER SHARE
The weighted average number of shares used for computing basic and diluted
loss per share was 206.7 million and 173.0 million for the three months ended
March 31, 1998 and 1997, respectively. The weighted average number of options
to purchase common stock that was excluded from the computation of diluted
earnings per share because the exercise price of the option was greater than the
average market price of the common stock was 2.3 million for the three months
ended March 31, 1998.
11
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of federal securities laws, including statements about the Company's
plans to complete its approximately 16,250 route mile, coast-to-coast,
technologically advanced, fiber optic telecommunications network (the "Qwest
Network"), expectations as to funding its capital requirements, anticipated
expansion of carrier and commercial services, regulatory and pricing trend
projections, and other statements of expectations, beliefs, future plans and
strategies, anticipated developments, and other matters that are not historical
facts. Management cautions the reader that these forward-looking statements are
subject to risks and uncertainties that could cause actual events or results to
differ materially from those expressed or implied by the statements. Important
factors that could prevent the Company from achieving its stated goals include,
but are not limited to: (i) failure by the Company and LCI International, Inc.
("LCI") to consummate their merger on a timely basis or at all; (ii) failure of
the Company to manage effectively, cost efficiently and on a timely basis the
construction of the Qwest Network; (iii) failure to enter into additional
customer contracts to sell dark fiber or provide high-volume capacity and
otherwise expand its telecommunications customer base; (iv) failure to obtain
and maintain all necessary rights-of-way; (v) intense competition in the
Company's and LCI's carrier and commercial services markets; (vi) the potential
for rapid and significant changes in technology and their effect on the
Company's and/or LCI's operations; (vii) operating and financial risks related
to managing rapid growth and integrating acquired businesses; (viii) adverse
changes in the regulatory environment affecting the Company and/or LCI; and (ix)
risks of being highly leveraged and sustaining operating cash deficits. For
additional information, see "Risk Factors" included in the Company's
registration statement No. 333-49915 on Form S-4, and other Company filings with
the SEC.
Overview
The Company is a facilities-based provider of multimedia communications
services to interexchange carriers and other communications entities ("Carrier
Services") and to businesses and consumers ("Commercial Services"); and it
constructs and installs fiber optic communications systems for interexchange
carriers and other communications entities, as well as for its own use
("Network Construction Services").
The Company is expanding its existing voice and data network into the Qwest
Network. The domestic network is expected to be completed in 1999. In April
1998, the Company activated the entire transcontinental portion of the Qwest
Network from Los Angeles to San Francisco to New York, thus becoming the first
network service provider to complete a transcontinental native Internet Protocol
("IP") fiber network. The Company is also expanding its network to carry
international data and voice traffic into Mexico and Europe. Completion of the
Mexico network is scheduled for late 1998. The network extension into Europe
will be obtained through the exchange of telecommunications capacity with
Teleglobe Inc., including two 155-megabit circuits crossing the Atlantic Ocean
from New York City to London, and with Global Crossing Ltd. ("Global"),
including four STM1s (the European equivalent of OC3 SONET circuits) on Global's
subsea fiber optic cable system connecting U. S. cities with Europe. The
transatlantic telecommunications capacity supports the Company's growth into the
European market.
On March 8, 1998, the Company signed a definitive merger agreement with LCI, a
communications services provider. The boards of directors of each company have
approved the merger. The terms of the merger agreement call for the acquisition
of all of LCI's outstanding common shares and the assumption of all of LCI's
stock options by the Company. The purchase price of the all-stock transaction is
anticipated to be approximately $4.4 billion. The merger is intended to qualify
as a tax-free reorganization and will be accounted for as a purchase.
On March 30, 1998, the Company consummated its acquisition of Phoenix Network,
Inc. ("Phoenix") for $27.2 million in Company common stock. Phoenix, a non-
facilities-based reseller of long distance services, has
12
<PAGE>
approximately 40,000 business customers. Additional cash consideration of up to
$4.0 million is being withheld pending the outcome of litigation to which the
Company may have certain potential liability, and as to which final and
nonappealable resolution has not been attained. The transaction was accounted
for as a purchase.
On April 14, 1998, the Company acquired EUnet International Limited ("EUnet"),
a European internet service provider with business units operating in 13
European countries for approximately $154.4 million in Company common stock and
cash. EUnet has approximately 60,000, primarily business, customers throughout
Europe. The merger will be accounted for as a purchase.
Carrier Services. Carrier Services provides high-volume and conventional
dedicated line services over the Company's owned capacity and switched services
over owned and leased capacity to interexchange carriers and other
telecommunications providers. The Company is expanding Carrier Services to
increase its revenue stream and reduce per unit costs, targeting capacity sales
on a segment-by-segment basis as the Qwest Network is deployed and activated,
and is increasingly seeking longer-term, high-volume capacity agreements from
major carriers. In addition to traditional telecommunications carriers, the
Company is marketing to ISPs, electric utility companies and other data service
companies.
Commercial Services. Commercial Services provides voice, data and video
services to businesses and consumers. The Company builds direct, end-user
relationships by developing strong distribution channels, providing competitive
pricing and superior network quality and offering enhanced, market-driven
services to businesses and consumers.
Revenue from Commercial Services is recognized primarily on a minutes-of-use
basis. Commercial Services has generated revenue using four primary sales
channels: direct sales, direct mail, agent and telemarketing. In September 1997,
the Company entered into an arrangement with a third party under which they will
jointly define and test new broadband business multimedia services.
In April 1998, the Company began expanding its high-speed data networking
service offerings. Through agreements with various technology partners, the
Company will offer Remote Access VPN on native IP and advanced Frame Relay/ATM
services along with Qwest Network.
Network Construction Services. Network Construction Services constructs and
installs fiber optic communication systems for interexchange carriers and other
telecommunications providers, as well as for the Company's own use. The Company
began operations in 1988 constructing fiber optic conduit systems primarily for
major long distance carriers in exchange for cash and capacity rights. In 1996,
the Company entered into major construction contracts for the sale of dark fiber
to Frontier and WorldCom whereby the Company has agreed to install and provide
dark fiber to each along portions of the Qwest Network. The Company also entered
into two substantial construction contracts with GTE in 1997 for the sale of
dark fiber along portions of the route of the Qwest Network. After completion of
the Qwest Network, the Company expects that revenue from Network Construction
Services will be less significant to the Company's operations.
Revenue from Network Construction Services generally is recognized under the
percentage of completion method as performance milestones relating to the
contract are satisfactorily completed. Losses, if any, on uncompleted contracts
are expensed in the period in which they are identified and any revisions to
estimated profits on a contract are recognized in the period in which they
become known.
13
<PAGE>
Results of Operations
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
The Company reported a net loss of $6.6 million in the three months ended
March 31, 1998, compared to a net loss of $4.8 million in the three months ended
March 31, 1997. The increase in net loss was primarily due to the factors
discussed below. Excluding the effect of the compensation expense relating to
the Growth Share Plan, net of income tax, the Company's reported net loss would
have been approximately $5.2 million for the three months ended March 31, 1998
compared to net income of $3.7 million for the three months ended March 31,
1997.
Revenues. Selected components of revenues for the three months ended March
31, 1998 and 1997, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31, March 31, $ %
1998 1997 Increase Increase
----------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Carrier services......................... $ 19,190 $11,199 $ 7,991 71%
Commercial services...................... 23,394 9,411 13,983 149%
Network construction services............ 134,463 52,083 82,380 158%
----------------- ------------------ --------------- ---------------
Total revenues....................... $177,047 $72,693 $104,354 144%
================= ================== =============== ===============
</TABLE>
Telecommunication services revenue increased due to increases in revenue from
carrier switched services and carrier dedicated line services provided on the
Qwest Network. Additonally, commerical services experienced growth in switched
services provided to businesses and consumers as a result of continued expansion
of the Company's direct sales, direct mail, agent and telemarketing sales
channels. Revenue from sales to consumers became more diversified, reflecting
the growth in branded dial-1 service, the expansion of agent channels that
focused on affinity-based marketing efforts and the growth in voice over IP
service (Q.talkSM), which was launched in the first quarter 1998. Direct mail
marketing efforts continued to be successful. Network construction services
revenue increased primarily due to revenue from dark fiber sales to GTE and
other carriers under contracts entered into subsequent to the first quarter
1997.
Operating Expenses. Selected components of operating expenses for the three
months ended March 31, 1998 and 1997, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
$ %
March 31, March 31, Increase/ Increase/
1998 1997 (Decrease) (Decrease)
----------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Telecommunication services............... $ 32,695 $18,063 $ 14,632 81%
Network construction services............ 93,117 36,265 56,852 157%
Selling, general and administrative...... 44,428 13,947 30,481 219%
Growth share plan........................ 2,301 13,100 (10,799) (82%)
Depreciation and amortization............ 8,031 3,962 4,069 103%
----------------- ------------------ --------------- ---------------
Total operating expenses............. $180,572 $85,337 $ 95,235 112%
================= ================== =============== ===============
</TABLE>
Expenses for telecommunications services primarily consist of the cost of
leased capacity, Local Exchange Carrier ("LEC") access charges, engineering
and other operating costs. The growth in telecommunications services expenses
was primarily attributable to the continued growth in switched services and
network engineering and operations, partially offset by an increase in on-net
traffic over the Qwest Network. As the Qwest Network is completed and activated,
the Company is able to serve more customer needs over its own capacity.
Expenses for network construction services consist primarily of costs to
construct the Qwest Network, including conduit, fiber cable, construction crews
and rights of way. Costs attributable to the construction of the Qwest Network
for the Company's own use are capitalized. Expenses for network construction
services increased due to costs of construction contracts relating to increased
dark fiber sales revenue.
14
<PAGE>
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. The increase was due
primarily to increases in expenses related to the Company's direct mail sales
program, the marketing of the Company's new brand identity and new service
offerings, administrative and information services support of the Company's
growth, the recruiting and hiring of additional personnel and increased property
taxes and maintenance costs related to the increase in fixed assets along the
Qwest Network. SG&A is expected to increase as the Company opens commercial
sales offices in selected major geographic markets to implement the Company's
strategy, as segments of the Qwest Network become operational. In addition, SG&A
expenses will increase as the Company continues to expand its Carrier and
Commercial Services and recruit experienced telecommunications industry
personnel to implement the Company's strategy.
The Company has a Growth Share Plan for certain of its employees and
directors, which was the Company's management incentive plan prior to the
initial public offering. Growth Share Plan expense reflects the Company's
estimate of compensation expense with respect to the Growth Shares issued to
participants. A "Growth Share" is a unit of value based on the increase in
value of the Company over a specified measuring period. The Company anticipates
total additional expense of up to approximately $21.1 million through the year
2002 in connection with this plan. The Company does not anticipate any future
grants under the Growth Share Plan.
The Company's depreciation and amortization expense increased primarily due to
activating segments of the Qwest Network during the three months ended March 31,
1998, purchases of additional equipment used in constructing the Qwest Network,
purchases of other fixed assets to accommodate the Company's growth and
amortization of goodwill related to the SuperNet acquisition. The Company
expects that depreciation and amortization expense will continue to increase in
subsequent periods as the Company continues to activate additional segments of
the Qwest Network and amortizes goodwill recorded from acquisitions.
Other Income (Expense). Selected components of other income (expense) for
the three months ended March 31, 1998 and 1997, were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
$ %
March 31, March 31, Increase/ Increase/
1998 1997 (Decrease) (Decrease)
----------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Interest expense, net of capitalized.... $(14,376) $ (984) $(13,392) (1,361%)
Interest income.......................... 8,074 680 7,394 1,087%
Other income (expense), net.............. -- 5,714 (5,714) (100%)
----------------- ------------------ --------------- ---------------
Total other income (expense)......... $ (6,302) $5,410 $(11,712) (216%)
================= ================== =============== ===============
</TABLE>
The increase in net interest expense resulted from an increase in interest on
long-term indebtedness, related primarily to the 10 7/8% Notes, the 9.47% Notes
and the 8.29% Notes (see "Liquidity and Capital Resources" below), partially
offset by increases in capitalized interest resulting from construction of the
Qwest Network. Interest income increased due primarily to increased cash
equivalent balances.
Pursuant to a capacity sale in 1993, the Company obtained certain rights of
first refusal to re-acquire network communications equipment and terminal
locations including leasehold improvements should the purchaser, under that
agreement, sell the network. In the three months ended March 31, 1997, the
Company sold certain of these rights to the purchaser in return for $9.0 million
in cash and the right to re-acquire certain terminal facilities, $7.0 million of
which the Company received in the three months ended March 31, 1997 and recorded
as gain on sale of contract rights.
The Company sold a portion of its dedicated line services on leased capacity
in July 1996. During the transition of the service agreements to the buyer, the
Company incurred certain facilities costs on behalf of the buyer, which were to
be reimbursed to the Company. A dispute arose with respect to the reimbursement
of such costs and, as a result, the Company made a provision of approximately
$2.0 million in the three months ended March 31, 1997. No such items of other
income or expense occurred in the three months ended March 31, 1998.
15
<PAGE>
Income Taxes. The Company is included in the consolidated federal income tax
return of Anschutz Company (the "Majority Shareholder"). A tax sharing
agreement provides for allocation of tax liabilities and benefits to the
Company, in general, as though it filed a separate tax return. The Company's
effective tax rate during the three months ended March 31, 1998 and 1997
approximated the statutory federal rate.
If the LCI merger is consummated, the Company will no longer be included in
the consolidated federal income tax return of its Majority Shareholder. As a
result, the net operating losses for income tax purposes of the Company,
included in the consolidated federal income tax returns of its Majority
Shareholder from January 1, 1997 through the consummation date of the LCI
merger, will not be available for use by the Company in its separate tax returns
after the LCI merger. The Company recognized a deferred tax asset because it
believed that the tax benefits attributable to its net income tax operating loss
carryforwards would be realized by the recognition of future taxable amounts
under the terms of its tax sharing agreement with its Majority Shareholder.
Based on an analysis of the tax attributes of the Company and its Majority
Shareholder, the Majority Shareholder will not be able to realize the benefit of
the Company's net operating losses. Accordingly, the deferred tax assets
attributable to the Company's net operating loss carryforwards, calculated on a
separate return basis, will be reported on the consummation date of the LCI
merger as an adjustment to the Company's capital in the form of an in-substance
dividend.
LIQUIDITY AND CAPITAL RESOURCES
Prior to March 31, 1997, the Company funded capital expenditures, debt service
and cash used in operations through a combination of stockholder advances,
capital contributions and external borrowings supported by collateral owned by
the Majority Shareholder or affiliates, as well as external borrowings
collateralized by certain of the Company's assets. Since March 31, 1997, the
Company has funded capital expenditures and long-term debt repayments primarily
through net proceeds from the issuance of debt and equity securities aggregating
approximately $903.6 million. The Company also received net proceeds of $299.2
million from the issuance of the 8.29% Notes in January 1998. The Company
intends to finance its operations in the future through internally and
externally generated funds without relying on cash advances, contributions or
guarantees from the Majority Shareholder.
Total cash expended during the three months ended March 31, 1998 to fund
capital expenditures and repayments of long-term debt to third parties was
$142.1 million and $19.4 million, respectively. Total cash provided by
operations was $53.5 million during the same period. As of March 31, 1998, the
Company had working capital of $568.9 million resulting primarily from the
issuance of the 8.29% Notes in January 1998.
The Company estimates the total cost to construct and activate the Qwest
Network and complete construction of the dark fiber sold to Frontier, WorldCom
and GTE will be approximately $2.0 billion. Of this amount, the Company had
already expended approximately $1.0 billion as of March 31, 1998. The Company
anticipates remaining total cash outlays (including capital expenditures) for
these purposes of approximately $750 million in 1998 and $235 million in 1999.
Estimated total Qwest Network expenditures for 1998 include the Company's
commitment to purchase a minimum quantity of fiber for approximately $399.0
million (subject to quality and performance specifications), of which
approximately $287.0 million had been expended as of March 31, 1998. Estimated
total expenditures for 1998 and 1999 together also include approximately $92.0
million for the purchase of electronic equipment. In addition, the Company
anticipates approximately $557.0 million of capital expenditures in 1998 and
1999 to support growth in Carrier Services and Commercial Services.
As of March 31, 1998, the Company has obtained the following sources of funds
which are available to complete the build-out: (i) approximately $1.2 billion
under the Frontier, WorldCom and GTE contracts and additional smaller
construction contracts for sales of dark fiber, of which approximately $575.0
million had already been received and $625.0 million remained to be paid at
March 31, 1998; (ii) $90.0 million of vendor financing; (iii) $242.0 million in
net proceeds from the sale of the 10 7/8% Notes, of which approximately $124.4
million was used to pay down certain existing debt, (iv) $342.1 million in net
proceeds from the sale of the 9.47% Notes; (v)
16
<PAGE>
$299.2 million in net proceeds from the sale of the 8.29% Notes and (vi)
approximately $319.5 million in net proceeds from the IPO. The Company believes
that its available cash and cash equivalent balances at March 31, 1998, and cash
flow from operations will satisfy its currently anticipated cash requirements at
least through the end of 1998.
In January 1998, the Company issued its 8.29% Notes, generating net proceeds
of approximately $299.2 million, after deducting offering costs. The 8.29% Notes
will accrete at a rate of 8.29% per annum, compounded semiannually, to an
aggregate principal amount of $450.5 million by February 1, 2003. The 8.29%
Notes mature on February 1, 2008. The 8.29% Notes are redeemable at the
Company's option, in whole or in part, at any time on or after February 1, 2003,
at specified redemption prices. Cash interest on the 8.29% Notes will not accrue
until February 1, 2003, and thereafter will accrue at a rate of 8.29% per annum,
and will be payable semiannually in arrears commencing on August 1, 2003 and
thereafter on February 1 and August 1 of each year. The 8.29% Notes indenture
contains certain covenants that, among other things, limit the ability of the
Company and certain of its subsidiaries (the "Restricted Subsidiaries") to
incur additional indebtedness and issue preferred stock, pay dividends or make
other distributions, repurchase capital stock or subordinated indebtedness,
create certain liens, enter into certain transactions with affiliates, sell
assets of the Company or its Restricted Subsidiaries, issue or sell capital
stock of the Company's Restricted Subsidiaries or enter into certain mergers and
consolidations.
In connection with the sale of the 8.29% Notes, the Company agreed to make an
offer to exchange new notes (the "Exchange Offer"), registered under the Act
and with terms identical in all material respects to the 8.29% Notes, for the
8.29% Notes or, alternatively, to file a shelf registration statement under the
Act with respect to the 8.29% Notes. In April 1998, the Company filed a
registration statement with respect to the Exchange Offer. If the Exchange Offer
registration statement is not declared effective within specified time periods
or, after being declared effective, ceases to be effective during specified time
periods (a "Registration Default"), additional cash interest will accrue at a
rate per annum equal to 0.50% of the principal amount at maturity of the 8.29%
Notes during the 90-day period immediately following the occurrence of a
Registration Default and increasing in increments of 0.25% per annum of the
principal amount at maturity of the 8.29% Notes up to a maximum of 2.0% per
annum, at the end of each subsequent 90-day period until the Registration
Default is cured.
In October 1997, the Company issued and sold its 9.47% Notes, generating net
proceeds of approximately $342.1 million, after deducting offering costs. In
February 1998, the Company completed an exchange of identical notes, registered
under the Act, for all of the 9.47% Notes.
In April 1995, the Company entered into a secured construction loan facility
used to fund certain conduit installation projects. The outstanding balance of
$10.9 million at December 31, 1997 was repaid in February 1998.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the filing of this Form 10-Q, the Company is aware of two lawsuits that
have been filed in the Court of Chancery of the State of Delaware relating to
the LCI merger. The first suit, Miri Shapiro v. William F. [Mc]Connell, et al.,
was filed on March 9, 1998 and names LCI, certain of its directors and the
Company as defendants. The second suit, Alfred Rehm v. H. Brian Thompson, et
al., was filed on March 12, 1998 and names LCI, certain of its directors and the
Company as defendants. Each suit was brought by a purported stockholder of LCI,
individually and allegedly as a class action on behalf of all stockholders of
LCI. Generally these suits allege breach of fiduciary duty by the Board of
Directors of LCI in connection with the Qwest merger agreement. They seek
preliminary and permanent injunctive relief prohibiting the consummation of the
merger, unspecified damages and other relief.
On May 5, 1998, the Company and LCI entered into proposed settlement with the
plaintiffs in the Shapiro and Rehm actions. Pursuant to the Memorandum of
Understanding entered into by counsel for the Company, LCI and the plaintiffs,
the Company and LCI agreed to (i) include financial information with respect to
the quarter ended March 31, 1998 in a joint proxy statement/prospectus filed as
part of the Registration Statement on Form S-4 to be filed pursuant to the Act
in connection with the issuance of shares to consummate the merger, (ii) request
LCI's financial advisor to issue an opinion with respect to the fairness of the
merger consideration dated as of the date of the joint proxy
statement/prospectus, (iii) reduce the termination fee associated with the
proposed merger from $133.0 million to $125.0 million, (iv) include in the joint
proxy statement/prospectus additional disclosure regarding actions by LCI and
its representatives regarding alternative business combination transactions and
(v) not oppose a proposal for legal fees and expenses by the plaintiff's
attorneys in the amount of not more than approximately $.4 million. Pursuant to
the proposed settlement, the actions will be dismissed with prejudice and the
defendants will be released from all claims that were or could have been
asserted in the actions. Because the Shapiro and Rehm actions are class actions,
the proposed settlement is subject to reasonable confirmatory discovery,
certification of the plaintiff class, notice to the class and Court approval.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
The Company has used approximately $187.1 million of the $319.5 million
net proceeds from its initial public offering for construction of its
fiber optic telecommunications network with the remaining net proceeds
temporarily invested in certain short-term investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K:
During the quarter ended March 31, 1998, the Company filed the
following Current Reports on Form 8-K:
(i) On January 12, 1998, the Company filed a Current Report on Form 8-
K describing the definitive agreement and plan of merger among the
Company, a wholly-owned subsidiary of the Company and Phoenix
Network, Inc. ("Phoenix") in an all-stock transaction valued at
approximately $27.2 million that resulted in Phoenix becoming a
subsidiary of the Company.
18
<PAGE>
(ii) On January 29, 1998, the Company filed a Current Report on Form
8-K announcing the sale and issuance of $450.5 million in
aggregate principal amount at maturity of its 8.29% Senior
Discount Notes, due 2008 (the "8.29% Notes").
(iii) Also, on January 29, 1998, the Company filed a Current Report on
Form 8-K providing pro forma financial information as of and for
the nine months ended September 30, 1997 and for the year ended
December 31, 1996, giving pro forma effect to: (i) the
acquisition by the Company of all issued and outstanding shares
of capital stock, and capital stock issued at the closing of the
acquisition in October 1997, of SuperNet; (ii) the proposed
acquisition by the Company of all the issued and outstanding
shares of capital stock of Phoenix (collectively the
"Acquisitions"); and (iii) the issuance of $555.9 million in
aggregate principal amount at maturity of 9.47% Senior Discount
Notes (the "9.47% Notes") as if the Acquisitions and the issuance
of the 9.47% Notes had occurred on September 30, 1997, and as
adjusted to reflect the issuance of the 8.29% Notes as if the
issuance of the 8.29% Notes had occurred on September 30, 1997.
(iv) On March 9, 1998, the Company filed a Current Report on Form 8-K
describing the definitive agreement and plan of merger among the
Company, a wholly-owned subsidiary of the Company ("Merger Sub")
and LCI International, Inc. ("LCI") providing for the merger of
Merger Sub with and into LCI in an all-stock transaction valued
at approximately $4.4 billion that will result in LCI becoming a
wholly-owned subsidiary of the Company.
(v) On March 20, 1998, the Company filed a Current Report on Form 8-K
providing pro forma financial information as of and for year
ended December 31, 1997, giving pro forma effect to the
acquisition of SuperNet, Inc. and the proposed acquisitions of
Phoenix and LCI, as well as the issuance by Qwest in January 1998
of the 8.29% Notes.
(vi) On March 27, 1998, the Company filed a Current Report on Form 8-K
describing the definitive transaction agreement among the Company
and certain stockholders of EUnet International Limited ("EUnet")
to acquire EUnet for approximately $154.4 million in cash and
common stock of the Company.
19
<PAGE>
SIGNATURE
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.,
a Delaware corporation
By: /s/ Robert S. Woodruff
------------------------------------
ROBERT S. WOODRUFF
EXECUTIVE VICE PRESIDENT--FINANCE AND CHIEF FINANCIAL
OFFICER AND TREASURER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
May 5, 1998
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
INCLUDED IN THE COMPANY'S FORM 10-Q, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 573,161
<SECURITIES> 0
<RECEIVABLES> 121,056
<ALLOWANCES> 6,983
<INVENTORY> 0
<CURRENT-ASSETS> 912,324
<PP&E> 822,669
<DEPRECIATION> 50,075
<TOTAL-ASSETS> 1,779,568
<CURRENT-LIABILITIES> 343,471
<BONDS> 919,547
0
0
<COMMON> 2,077
<OTHER-SE> 443,661
<TOTAL-LIABILITY-AND-EQUITY> 1,779,568
<SALES> 177,047
<TOTAL-REVENUES> 177,047
<CGS> 0
<TOTAL-COSTS> 180,572
<OTHER-EXPENSES> (8,074)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,376
<INCOME-PRETAX> (9,827)
<INCOME-TAX> (3,178)
<INCOME-CONTINUING> (6,649)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,649)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
