<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1998
REGISTRATION NO. 333-65095
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
QWEST COMMUNICATIONS INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 84-1339282
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
(303) 992-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT S. WOODRUFF
EXECUTIVE VICE PRESIDENT--FINANCE
QWEST COMMUNICATIONS INTERNATIONAL INC.
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
(303) 992-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL WEINSIER, ESQ.
JILL M. IRVIN, ESQ.
O'MELVENY & MYERS LLP PARKER CHAPIN FLATTAU & KLIMPL, LLP
153 EAST 53RD STREET, 54TH FLOOR 1211 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10022-4611 NEW YORK, NEW YORK 10036
(212) 326-2000 (212) 704-6000
(212) 326-2061 (FAX) (212) 704-6288 (FAX)
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective
and all other conditions to the merger contemplated by the Agreement and Plan
of Merger dated as of September 13, 1998, described in the enclosed Proxy
Statement/Prospectus have been satisfied or waived.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A) MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ICON CMT CORP.
1200 HARBOR BOULEVARD
WEEHAWKEN, NEW JERSEY 07087
ICON CMT CORP
DECEMBER 10, 1998
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
To the Stockholders of Icon CMT Corp.:
Icon CMT Corp. ("Icon") entered into a merger agreement with Qwest
Communications International Inc. ("Qwest") on September 13, 1998. The Icon
board of directors is seeking your vote for approval of this important
transaction.
Upon completion of the merger, Icon will become a subsidiary of Qwest, and
Icon stockholders will become stockholders of Qwest. In the merger, each share
of Icon common stock will be converted into the right to receive the fraction
of one share of Qwest common stock that results from dividing $12.00 by the
average of the daily volume weighted averages of the trading prices for Qwest
common stock for the 15 consecutive trading day period ending on the trading
day that is three business days before the actual date of the special meeting
of Icon stockholders. However, a share of Icon common stock will not be
converted into the right to receive less than 0.3200 shares of Qwest common
stock even if the average trading price exceeds $37.50 or more than 0.4444
shares of Qwest common stock even if the average trading price is less than
$27.00. The fraction of one share of Qwest common stock that will be issued
for each share of Icon common stock in the merger is referred to as the Qwest
exchange ratio.
We are asking you to approve the merger and to adopt the merger agreement.
THE ICON BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT AND THE MERGER ARE IN YOUR BEST INTERESTS AND THE BEST INTERESTS OF
ICON, HAS APPROVED THE MERGER AND THE MERGER AGREEMENT AND HAS DETERMINED THAT
THE MERGER AND THE MERGER AGREEMENT ARE ADVISABLE. THE ICON BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE MERGER AND THE
ADOPTION OF THE MERGER AGREEMENT. You can find the full text of the merger
agreement at the back of this document as Annex A.
The fraction of one share of Qwest common stock that will be issued for each
share of your Icon common stock in the merger will not be determined until
shortly before the actual date of the special meeting of Icon stockholders.
You may call 888-339-9805 anytime after Thursday, December 17, 1998 until the
merger closes to hear a tape recorded message stating what the average trading
price of Qwest common stock and the Qwest exchange ratio would be if they were
determined on the date of your call.
Whether or not you plan to attend the special meeting, please take the time
to vote on the merger proposal submitted to Icon's stockholders by completing
and mailing the enclosed proxy card. If you sign, date and mail your proxy
card without indicating how you wish to vote, your proxy will be counted as a
vote in favor of the merger. If you fail to return a properly executed proxy
card it will have the same effect as a vote AGAINST the merger. YOUR VOTE IS
VERY IMPORTANT.
Scott A. Baxter, Chairman of the Board of Directors, President and Chief
Executive Officer of Icon, Richard M. Brown, Vice President--Information
Technologies of Icon, and Scott Harmolin, Senior Vice President--Chief
Technology Officer of Icon, who are also directors of Icon, have agreed to
vote all of their shares of Icon common stock to approve the merger agreement
and the merger and against any other business combination transaction. On the
record date used to determine who is entitled to vote on the merger proposal,
Messrs. Baxter, Brown and Harmolin owned 6,550,354 shares of Icon common stock
in the aggregate, or approximately 41.2% of the shares then outstanding. In
addition, Icon officers and directors and other Icon stockholders who in the
aggregate owned 1,665,421 shares of Icon common stock, or approximately 10.5%
of the shares then outstanding, have indicated that they will vote their
shares in favor of the merger and the adoption of the merger
<PAGE>
agreement. Because the affirmative vote of all such shares (which collectively
constitute approximately 51.7% of the outstanding shares of Icon common stock
entitled to vote at the Icon special meeting) is sufficient to approve the
merger and adopt the merger agreement, it is expected that the merger will be
approved and the merger agreement adopted at the Icon special meeting, even if
no other Icon stockholder votes to approve the merger and adopt the merger
agreement.
Approval of the merger and adoption of the merger agreement requires the
affirmative vote of a majority of the outstanding shares of Icon common stock
entitled to vote at the special meeting. The Icon board of directors
unanimously recommends that you vote to authorize Icon to adjourn the Icon
special meeting to solicit additional proxies if the number of proxies
sufficient to approve the merger and adopt the merger agreement has not been
received by the scheduled date of the special meeting.
The date, time and place of the special meeting is:
December 31, 1998
8:00 a.m., local
time
Icon CMT Corp.
1200 Harbor
Boulevard
8th Floor
Weehawken, New Jersey
07087.
This document provides you with detailed information about Icon, Qwest and
the proposed merger. I encourage you to read this entire document carefully.
Should you have any questions about Qwest, Icon or the merger, please contact
Qwest's Investor Relations Department at 800-567-7296 or Andrea Kaimowitz of
Morgan Walke Associates, Icon's investors relations representative, at 212-850-
5600.
Sincerely,
/s/ Scott A. Baxter
Scott A. Baxter
President and Chief Executive Officer
2
<PAGE>
ICON CMT CORP.
1200 HARBOR BOULEVARD
WEEHAWKEN, NEW JERSEY 07087
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
----------------
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of Icon CMT Corp. ("Icon") will be held at 8:00 a.m., local time, on
Thursday, December 31, 1998 at Icon's headquarters, 1200 Harbor Boulevard, 8th
Floor, Weehawken, New Jersey 07087. The Special Meeting is being called for
the following purposes:
1. To consider and vote upon a proposal to approve the merger of Icon
with a wholly owned subsidiary of Qwest Communications International Inc.
("Qwest"), and to adopt the Agreement and Plan of Merger dated as of
September 13, 1998 (as amended, the "Merger Agreement") relating to the
merger;
2. To authorize Icon to adjourn the Special Meeting to solicit additional
proxies in the event that the number of proxies sufficient to approve any
of the proposals has not been received by the date of the Special Meeting;
and
3. To transact such other business as may be properly brought before the
Special Meeting and any adjournments thereof.
A copy of the Merger Agreement is set forth as Annex A to the Proxy
Statement/Prospectus that accompanies this notice.
The Merger Agreement provides for Qwest 1998-I Acquisition Corp., a wholly
owned subsidiary of Qwest, to merge with and into Icon. As a result of the
Merger, Icon will become a wholly owned subsidiary of Qwest and each share of
common stock of Icon ("Icon Common Stock") will be converted into the right to
receive the fraction of one share of Qwest common stock (the "Qwest Common
Stock") that is equal to the "Exchange Ratio." The Exchange Ratio will equal
$12.00 divided by the average of the daily volume weighted averages of the
trading prices for Qwest Common Stock for the 15 consecutive trading day
period ending on the trading day that is three business days before the actual
date of the Special Meeting (the "Average Market Price"), but will not be less
than 0.3200 (if the Average Market Price exceeds $37.50) or more than 0.4444
(if the Average Market Price is less than $27.00).
Only holders of Icon Common Stock of record at the close of business on
November 6, 1998 are entitled to notice of and to vote at the Special Meeting
or any adjournment or postponement thereof.
The accompanying Proxy Statement/Prospectus sets forth information relating
to Icon and Qwest, including financial information, and describes the terms
and conditions of the Merger and the Merger Agreement. Other important
information about these matters is incorporated by reference to other
documents. Please review all these materials carefully before completing the
enclosed proxy card.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD. PLEASE RETURN THE PROXY CARD IN THE
RETURN POSTAGE-PAID ENVELOPE SO THAT WE RECEIVE IT BEFORE DECEMBER 21, 1998.
BY RETURNING THE PROXY CARD PROMPTLY, YOU WILL SAVE ICON ANY ADDITIONAL
EXPENSE OF SOLICITING YOUR PROXY.
By Order of the Board of Directors
/s/ Richard M. Brown
Richard M. Brown
Secretary
Weehawken, New Jersey
December 10, 1998
<PAGE>
ICON CMT CORP.
PROXY STATEMENT
FOR
ICON CMT CORP. SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 31, 1998
---------------
QWEST COMMUNICATIONS INTERNATIONAL INC.
PROSPECTUS
Icon CMT Corp. and Qwest Communications International Inc. are furnishing
this Proxy Statement/Prospectus to holders of shares of Icon common stock, in
connection with the solicitation of proxies by the Icon board of directors for
use at a special meeting of Icon stockholders that has been called to consider
and vote on a proposal to approve the merger of Icon with a wholly owned
subsidiary of Qwest and to adopt the related merger agreement. A copy of the
merger agreement is attached to this Proxy Statement/Prospectus as Annex A and
is a part of this document.
Upon completion of the merger, Icon will become a subsidiary of Qwest, and
Icon stockholders will become stockholders of Qwest. In the merger, each share
of Icon's common stock will be converted into the right to receive the
fraction of one share of Qwest common stock that results from dividing $12.00
by the average of the daily volume weighted averages of the trading prices for
Qwest common stock for the 15 consecutive trading day period ending on the
trading day that is three business days before the actual date of the Icon
special meeting. However, a share of Icon common stock will not be converted
into the right to receive less than 0.3200 shares of Qwest common stock even
if the average trading price exceeds $37.50 or more than 0.4444 shares of
Qwest common stock even if the average trading price is less than $27.00. The
fraction of one share of Qwest common stock that will be issued for each share
of Icon common stock in the merger is referred to as the Qwest exchange ratio.
The Icon special meeting will held on Thursday, December 31, 1998 at 8:00
a.m., local time, at Icon's headquarters, 1200 Harbor Boulevard, 8th Floor,
Weehawken, New Jersey 07087, and at any adjournment or postponement thereof.
We expect that the merger will close on December 31, 1998 promptly following
the Icon special meeting. However, some of the other conditions to closing may
not be satisfied at that time. If those remaining conditions are satisfied
after the Icon special meeting, the Qwest exchange ratio will not be adjusted
to reflect any change that might result if the average trading price were
determined on the later date when the closing actually occurs. You may call
888-339-9805 anytime after Thursday, December 17, 1998 until the merger closes
to hear a tape recorded message stating what the Qwest average market price
and the exchange ratio would be if they were determined on the date of the
call.
THE ICON BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
THE MERGER AND THE ADOPTION OF THE MERGER AGREEMENT AT THE ICON SPECIAL
MEETING.
The merger will not close unless holders of a majority of the outstanding
shares of Icon common stock vote to approve the merger and adopt the merger
agreement. Icon's three founders, who are also directors and executive
officers of Icon, have agreed to vote all of their shares of Icon common stock
to approve the merger agreement and the merger and against any other business
combination transaction. On November 6, 1998, the record date used to
determine who is entitled to vote on the merger proposal, these stockholders
owned 6,550,354 shares of Icon common stock in the aggregate, or approximately
41.2% of the shares then outstanding. In addition, Icon officers and directors
and other Icon stockholders who in the aggregate owned 1,665,421 shares of
Icon common stock on the record date, or approximately 10.5% of the shares
then outstanding, have indicated that they will vote their shares in favor of
the merger and the adoption of the merger agreement. Because the affirmative
vote of all such shares (which collectively constitute approximately 51.7% of
the outstanding shares of Icon common stock entitled to vote at the Icon
special meeting) is sufficient to approve the merger and adopt the merger
agreement, it is expected that the merger will be approved and the merger
agreement adopted at the Icon special meeting, even if no other Icon
stockholder votes to approve the merger and adopt the merger agreement.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 24 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY ICON STOCKHOLDERS AND IN EVALUATING THE PROPOSALS
TO BE VOTED UPON AT THE ICON SPECIAL MEETING.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER
THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus and the accompanying forms of proxy are
first being mailed to Icon stockholders on or about December 10, 1998.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER 10, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
SUMMARY................................................................... 5
THE COMPANIES............................................................. 5
Icon CMT Corp........................................................... 5
Qwest Communications International Inc. ................................ 5
ICON SPECIAL MEETING...................................................... 6
Purpose of the Special Meeting.......................................... 6
Date, Time and Place.................................................... 6
Recommendation of the Icon Board........................................ 6
Opinion of Icon's Financial Advisor..................................... 6
Vote Required for Approval and Related Matters.......................... 7
RISK FACTORS.............................................................. 7
PLAN OF MERGER............................................................ 8
The Merger Agreement.................................................... 8
Option Agreements....................................................... 11
Voting Agreements....................................................... 12
Qwest Credit Facility................................................... 12
Warrants; Registration Rights Agreement................................. 13
Private Line Services Agreement......................................... 13
Interests of Certain Persons in the Merger.............................. 13
Accounting Treatment of the Merger...................................... 13
Certain Federal Income Tax Consequences................................. 13
No Appraisal Rights..................................................... 13
COMPARATIVE PER SHARE DATA................................................ 14
COMPARATIVE MARKET PRICE INFORMATION...................................... 15
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
DATA..................................................................... 16
ICON SPECIAL MEETING...................................................... 22
Date, Time, Place and Purpose........................................... 22
Record Date; Shares Entitled to Vote.................................... 22
Quorum; Vote Required................................................... 22
Proxies................................................................. 23
RISK FACTORS.............................................................. 24
Uncertainty of Value of Qwest Common Stock Received in the Merger....... 24
Tax Treatment........................................................... 24
Interests of Icon Officers and Directors in the Merger.................. 24
Completing the Qwest Network and Increasing Traffic Volume.............. 24
Operating Losses and Working Capital Deficits........................... 25
Icon's Limited Operating History; History of Negative Cash Flow and
Operating Losses....................................................... 25
Competition............................................................. 26
Dependence on Significant Customers..................................... 26
Managing Rapid Growth................................................... 27
Pricing Pressures and Industry Capacity................................. 27
Year 2000 Risks......................................................... 28
Rapid Technological Changes............................................. 28
Regulation Risks........................................................ 29
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reliance on Key Personnel............................................. 29
Concentration of Voting Power; Potential Conflicts of Interest........ 29
Anti-Takeover Provisions.............................................. 30
Dividend Policy; Restriction on Payment of Dividends.................. 30
Possible Volatility of Stock Price.................................... 30
Shares Eligible for Future Sale....................................... 30
PLAN OF MERGER.......................................................... 32
Background of the Merger.............................................. 32
Recommendation of the Icon Board; Icon's Reasons for the Merger....... 35
Opinion of Icon's Financial Advisor................................... 36
Terms of the Merger Agreement......................................... 40
Certain Federal Income Tax Consequences............................... 52
Accounting Treatment of the Merger.................................... 53
Regulatory Approvals.................................................. 53
No Appraisal Rights................................................... 53
Other Transaction Documents........................................... 53
Interests of Certain Persons in the Merger............................ 56
Federal Securities Law Consequences................................... 58
Litigation............................................................ 58
INDUSTRY OVERVIEW....................................................... 59
General............................................................... 59
Long Distance Network Services........................................ 59
Telecommunications Technology......................................... 60
Telecommunications Markets............................................ 60
BUSINESS OF ICON........................................................ 62
General............................................................... 62
Market and Industry Overview.......................................... 62
Strategy.............................................................. 63
Joint Venture......................................................... 64
Communications Infrastructure......................................... 65
Services and Products................................................. 66
Communications Services............................................... 66
Sales and Marketing................................................... 68
Competition........................................................... 69
Proprietary Rights.................................................... 71
Government Regulation................................................. 71
Legal Proceedings..................................................... 73
Employees............................................................. 73
Properties............................................................ 74
SELECTED HISTORICAL FINANCIAL DATA OF ICON.............................. 75
ICON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. 76
Overview.............................................................. 76
Results of Operations................................................. 79
Quarterly Results of Operations....................................... 83
Liquidity and Capital Resources....................................... 84
Recently Issued Accounting Standards.................................. 85
Year 2000............................................................. 85
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT OF ICON....................................................... 86
Directors, Executive Officers and Key Employees........................ 86
Committees of the Board of Directors................................... 88
Compensation of Directors.............................................. 88
COMPENSATION OF ICON'S EXECUTIVE OFFICERS................................ 89
Option Grants in Last Fiscal Year...................................... 89
Fiscal Year-End Value of Unexercised Options........................... 89
Employment Agreements.................................................. 90
Compensation Committee Interlocks and Insider Participation............ 90
1995 Option Plan....................................................... 90
Agreements With Employees.............................................. 91
401(k) Plan............................................................ 91
Profit Sharing Plan.................................................... 92
CERTAIN TRANSACTIONS..................................................... 92
SECURITY OWNERSHIP OF ICON MANAGEMENT AND OTHERS......................... 93
BUSINESS OF QWEST........................................................ 95
Recent Developments.................................................... 95
DESCRIPTION OF QWEST CAPITAL STOCK....................................... 98
Authorized and Outstanding Capital Stock............................... 98
Common Stock........................................................... 98
Authorized Qwest Preferred Stock....................................... 98
Certain Charter and Statutory Provisions............................... 99
COMPARATIVE MARKET PRICE INFORMATION..................................... 100
COMPARATIVE RIGHTS OF QWEST STOCKHOLDERS AND ICON STOCKHOLDERS........... 101
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS........................ 104
QWEST COMMUNICATIONS INTERNATIONAL INC. PRO FORMA CONDENSED COMBINED BAL-
ANCE SHEET.............................................................. 107
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 108
LEGAL OPINION............................................................ 112
TAX OPINION.............................................................. 112
EXPERTS.................................................................. 112
AVAILABLE INFORMATION.................................................... 113
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS......................... 114
ANNEXED DOCUMENTS........................................................ 114
GLOSSARY................................................................. 115
INDEX TO THE FINANCIAL STATEMENTS........................................ F-1
ANNEX A--MERGER AGREEMENT................................................ A-1
ANNEX B--OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION.. B-1
ANNEX C--QUARTERLY REPORT ON FORM 10-Q OF QWEST.......................... C-1
ANNEX D--QWEST AND ITS SUBSIDIARIES...................................... D-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS THE MERGER A GOOD IDEA?
A: First, the merger will increase your stockholder value. The $12.00 merger
price was 65.5% above the $7.25 closing price per share of Icon common stock on
September 11, 1998, the last trading day before the signing of the merger
agreement. The merger will generally be tax-free, meaning that you will not
have to pay taxes on the shares of Qwest common stock you receive until you
sell those shares. You will have to pay taxes only on the cash that you will
receive instead of a fractional share of Qwest common stock.
Second, the merger is a good strategic combination of two companies that have
different, but related, businesses. Qwest is a facilities-based provider of
multimedia communications services to businesses, consumers and communications
entities. In addition, Qwest is constructing and installing fiber optic
communications systems for interexchange carriers and other communications
entities, as well as for its own use. Icon is an Internet solutions provider
that offers a comprehensive range of services and products that enable
corporate customers to implement their Internet, intranet and extranet
strategies.
We believe that Icon's established base of customers, particularly in the
financial services, telecommunications, pharmaceutical and media industries,
and experienced sales and engineering staff, complement Qwest's strategy to
expand its multimedia service offerings for its customers on a global basis.
The merger will join these customers to Qwest's fiber-optic network, extensive
distribution channels and state-of-the-art back office systems. The merger will
also help Qwest enter the Web hosting and Web enabling market for its large
business customers.
For a more detailed discussion of the reasons for the merger, see "PLAN OF
MERGER--Recommendation of the Icon Board; Icon's Reasons for the Merger."
Achieving the anticipated benefits of the Merger is subject to certain risks,
as discussed under "RISK FACTORS" and "INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS."
Q: WHAT WILL HAPPEN TO MY ICON COMMON STOCK IN THE MERGER?
A: In the merger, you will receive a fraction of one share of Qwest common
stock in exchange for each share of your Icon common stock. The size of the
fraction depends on the average trading price of Qwest common stock on the
Nasdaq National Market during a specified period before the special meeting of
Icon stockholders that has been called to vote on the merger agreement and the
merger. This fraction is referred to as the Qwest exchange ratio. If the number
of shares of Icon common stock that you own would entitle you to receive a
whole number of shares of Qwest common stock as well as a fractional share of
Qwest common stock, then you will receive that whole number of the shares of
Qwest common stock and you also will receive cash instead of that fractional
share of Qwest common stock.
Q: HOW IS THE QWEST EXCHANGE RATIO DETERMINED?
A: The Qwest exchange ratio will give you a fractional share of Qwest common
stock having an exchange value of $12.00 for each share of your Icon common
stock, subject to certain limitations explained below. The exchange ratio is
calculated by dividing $12.00 by the average of the daily volume weighted
averages of the trading prices of Qwest common stock on the Nasdaq National
Market over the 15 consecutive trading days ending on the trading day that is
three business days before the actual date of the Icon special meeting. This
average is referred to as the Qwest average market price.
If the Qwest average market price is between $27.00 and $37.50, the Qwest
exchange ratio will be set between 0.4444 and 0.3200, so that Icon stockholders
will receive shares of Qwest common stock having an exchange value of $12.00
for each share of Icon common stock.
If the Qwest average market price is greater than $37.50, the Qwest exchange
ratio will be set at 0.3200, so that the exchange value you will receive for
each share of Icon common stock will be greater than $12.00 as the Qwest
average market price increases above $37.50 per share.
1
<PAGE>
If the Qwest average market price is less than $27.00, the Qwest exchange
ratio will be set at 0.4444 so that the exchange value you will receive for
each share of Icon common stock will be less than $12.00 as the Qwest average
market price decreases below $27.00 per share.
The Qwest average market price would have been $41.9229 if the Icon special
meeting had been held on Wednesday, December 9, 1998. Accordingly, if this
Qwest average market price were actually used in calculating the Qwest
exchange ratio, then the Qwest exchange ratio would be 0.3200 and the Qwest
exchange value for each share of your Icon common stock would be $13.4153.
This is only an example. You should not expect the actual Qwest average market
price to be $41.9229. The actual Qwest average market price will be determined
three business days before the actual date of the Icon special meeting.
Although the Qwest average market price may be $41.9229 as of that date, it is
more likely to be greater or less than $41.9229, and the difference may be
significant. The Qwest exchange ratio and the Qwest exchange value would then
increase or decrease accordingly, subject to the limitations explained above.
Q: HOW WILL I KNOW WHAT THE ACTUAL QWEST EXCHANGE RATIO IS?
A: You can call Qwest toll free 888-339-9805 anytime after Thursday, December
17, 1998 to hear a tape recorded message stating what the Qwest average market
price and the Qwest exchange ratio would be on the date of the call, as if
that date was the date to be used for determining the Qwest average market
price. The actual determination date will be three business days before the
actual date of the Icon special meeting.
Q: WHAT IS THE VALUE OF THE QWEST COMMON STOCK THAT I WILL RECEIVE IN THE
MERGER?
A: The cash value of the shares of Qwest common stock that you will receive in
the merger depends mainly on the number of shares that you receive and the
trading price for Qwest common stock when you sell the shares. You should
consider the following:
. The number of shares of Qwest common stock that you will receive in the
merger is determined by the Qwest average market price rather than the
actual trading price of Qwest common stock on any specific date, including
the merger closing date. As explained above, the Qwest average market price
depends on the trading prices of Qwest common stock over a 15-day period
that ends three days before the actual date of the Icon special meeting. For
example, if the Icon special meeting had taken place on Wednesday, December
9, 1998, then the Qwest average market price would have been $41.9229. By
contrast, the closing price per share of Qwest common stock was $44.6250 on
that day. Note that the Qwest average market price will be fixed three
business days before the actual date of the Icon special meeting even if the
merger does not close on that date, but instead closes sometime later. The
Qwest average market price will not be recalculated after the actual meeting
date.
. The exchange value of the Qwest common stock that you will receive in the
merger is calculated by multiplying the Qwest average market price by the
Qwest exchange ratio. That amount is referred to as the Qwest exchange
value. As indicated above, the Qwest exchange value will be $12.00 for each
share of your Icon common stock if the Qwest average market price is between
$27.00 and $37.50. The Qwest exchange value will exceed $12.00 if the Qwest
average market price is greater than $37.50, and the Qwest exchange value
will be less than $12.00 if the Qwest average market price is less than
$27.00. The table on page 9 of the attached Proxy Statement/Prospectus sets
forth the range of Qwest exchange values that relate to a sample range of
Qwest average market prices. The Qwest exchange value of the fractional
share of Qwest common stock that you will receive in the merger for each
share of your Icon common stock is not necessarily the market value of that
fractional share, as noted below.
. The cash value that you would receive from selling the Qwest common stock
that you receive in the merger will mainly depend upon the Qwest trading
price per share when you sell those shares. This cash value is NOT the same
as the Qwest exchange value of the Qwest common stock that you will receive
in the merger. The cash value may be greater than the Qwest exchange value
or less than the Qwest exchange value, and the cash value will in any case
change over time. The cash value of your Qwest shares will depend upon the
factors that generally influence the trading prices of securities.
2
<PAGE>
Q: WHEN WILL THE MERGER CLOSE?
A: We expect that the merger will close promptly after the Icon stockholders
approve the merger and adopt the merger agreement at the Icon special meeting.
The Icon special meeting is scheduled for Thursday, December 31, 1998. However,
the closing may be delayed if other closing conditions have not been then
satisfied.
Q: WHAT ARE MY FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: Your receipt of shares of Qwest common stock in the merger generally will be
tax free. However, you may have to pay taxes on cash received instead of a
fractional share of Qwest common stock. For a detailed discussion of the tax
consequences of the merger, see "RISK FACTORS--Tax Treatment" and "PLAN OF
MERGER--Certain Federal Income Tax Consequences."
Q: WILL I HAVE APPRAISAL RIGHTS?
A: No. You will not have any appraisal rights as a result of the merger.
Q: WHY SHOULD I VOTE?
A: You should vote to express your approval or disapproval of the merger and
the merger agreement. Not voting the shares has the same effect as voting
against the merger and the merger agreement.
THE ICON BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE
MERGER AND THE ADOPTION OF THE MERGER AGREEMENT.
Scott A. Baxter, Chairman of the Board of Directors, President and Chief
Executive Officer of Icon, Richard M. Brown, Vice President--Information
Technologies of Icon, and Scott Harmolin, Senior Vice President--Chief
Technology Officer of Icon, who are also directors of Icon, have agreed to vote
all of their shares of Icon common stock to approve the merger agreement and
the merger and against any other business combination transaction. Messrs.
Baxter, Brown and Harmolin beneficially owned 6,550,354 shares of Icon common
stock in the aggregate on the record date used to determine who is entitled to
vote on the merger proposal, or approximately 41.2% of the shares then
outstanding. In addition, Icon officers and directors, SCP Private Equity
Partners, L.P., one of Icon's largest stockholders, and other Icon stockholders
who in the aggregate owned 1,665,421 shares of Icon common stock, or
approximately 10.5% of the shares then outstanding, have indicated that they
will vote their shares in favor of the merger and the adoption of the merger
agreement. Because the affirmative vote of all such shares (which collectively
constitute approximately 51.7% of the outstanding shares of Icon common stock
entitled to vote at the Icon special meeting) is sufficient to approve the
merger and adopt the merger agreement, it is expected that the merger will be
approved and the merger agreement adopted at the Icon special meeting, even if
no other Icon stockholder votes to approve the merger and adopt the merger
agreement.
The merger will not close unless holders of a majority of the outstanding
shares of Icon common stock vote to approve the merger and adopt the merger
agreement. The Icon board of directors unanimously recommends that you vote to
authorize Icon to adjourn the Icon special meeting to solicit additional
proxies if the number of proxies sufficient to approve the merger and adopt the
merger agreement has not been received by the scheduled date of the Icon
special meeting.
Q: WHAT SHOULD I DO NOW?
A: PLEASE VOTE. You should mail your signed and dated proxy card in the
enclosed envelope as soon as possible, so that your shares will be represented
at the Icon special meeting. After the merger is completed, we will send you
written instructions that will tell you how to exchange your share
certificates. PLEASE DO NOT SEND IN YOUR ICON STOCK CERTIFICATES NOW OR WITH
YOUR PROXIES. Hold your Icon stock certificates until you receive our
instructions.
Q: CAN I CHANGE MY VOTE AFTER YOU MAIL IN A SIGNED PROXY CARD?
A: Yes. You can change your vote in one of three ways at any time before your
proxies are used. First, you can revoke your proxies by written notice. Second,
you can complete a new, later-dated proxy card. Third, you can attend the Icon
special meeting and vote in person.
Q: HOW DO I VOTE SHARES HELD IN MY BROKER'S NAME?
A: If your broker holds your shares of Icon common stock in his name (or in
what is commonly
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called "street name"), then you should give your broker written instructions on
how to vote. The shares will not be voted if you do not give these
instructions. Please instruct your broker in writing to vote shares held in
street name to approve of the merger and to adopt the merger agreement.
Q: WHO CAN ANSWER MY QUESTIONS?
A: Please call Qwest's Investor Relations Department at 800-567-7296 or Andrea
Kaimowitz of Morgan Walke Associates, Icon's investor relations representative,
at 212-850-5600 if you have questions about Qwest, Icon or the merger.
4
<PAGE>
SUMMARY
This section summarizes selected information from this Proxy
Statement/Prospectus, the merger agreement and other documents. It may not
contain all the information that is important to you. To understand the merger
more fully, and for a more complete description of Icon and Qwest, please read
carefully the Proxy Statement/Prospectus, the merger agreement and the other
documents to which we refer you.
References to "Qwest" mean Qwest Communications International Inc. and its
predecessors, together with Qwest's subsidiaries, including LCI International,
Inc. ("LCI") and Qwest Communications Corporation ("QCC"). A glossary of other
terms used in this Proxy Statement/Prospectus begins on page 115 of this Proxy
Statement/Prospectus.
THE COMPANIES
ICON CMT CORP.
1200 HARBOR BLVD.
WEEHAWKEN, NEW JERSEY 07087
(201) 601-2000
INTERNET: WWW.ICON.COM
(See page 62)
Icon is an Internet solutions provider that offers a comprehensive range of
services and products that enable corporate customers to implement their
Internet, intranet and extranet strategies.
Icon's mission is to provide end-to-end solutions to its customers by
facilitating the distribution of the customers' information and applications
over Icon's communications infrastructure as well as access to such information
and applications. In order to provide end-to-end solutions, Icon integrates
services and products in three key areas: (1) communications services,
including high quality Internet access and web/server hosting and management;
(2) a range of professional services, including custom application and website
development and design, systems integration and maintenance and support
services; and (3) product resales, including hardware and software, which are
an integral component of systems design and integration and serve as a means of
establishing customer relationships. Icon differentiates itself by integrating
its services and products to provide customized turnkey solutions for the needs
of corporate customers.
Icon's customers include major corporations in the financial services,
telecommunications, pharmaceutical and media industries, such as Alliance
Capital Management LP, Astra Pharmaceuticals, L.P. (formerly Astra Merck,
Inc.), Bear, Stearns & Co. Inc., Bell Atlantic Internet Solutions, Inc., CBS,
Inc., ING U.S. Financial Services Corporation, C/net: The Computer Network,
Merrill Lynch & Co., Inc., Proctor & Gamble Co. and Fleet Securities, Inc.
QWEST COMMUNICATIONS INTERNATIONAL INC.
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
(307) 992-1400
INTERNET: WWW.QWEST.NET
(See page 95)
Qwest is a facilities-based provider of a full range of multimedia
communications services to businesses, consumers and communications entities.
In addition, Qwest is constructing and installing fiber optic communications
systems for interexchange carriers and other communications entities, as well
as for its own use. Qwest is expanding its existing long distance network into
an approximately 18,450 route-mile, coast-to-
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<PAGE>
coast, technologically advanced, fiber optic telecommunications network. Qwest
will employ, throughout substantially all of the network, a self-healing SONET
ring architecture equipped with the most advanced commercially available fiber
and transmission electronics manufactured by Lucent Technologies and Northern
Telecom Inc., respectively. The network's advanced fiber and transmission
electronics are expected to provide Qwest with lower installation, operating
and maintenance costs than older fiber systems generally in commercial use
today. In addition, Qwest has entered into contracts for the sale of dark fiber
along the route of the network, which will reduce Qwest's net cost per fiber
mile with respect to the fiber it retains for its own use. As a result of these
cost advantages, Qwest believes it will be well-positioned to capture market
share and take advantage of the rapidly growing demand for long haul voice and
data transmission capacity and services.
Under Qwest's current plan, its network will extend approximately 18,450 route
miles coast-to-coast and connect approximately 130 metropolitan areas that
represent approximately 80% of the originating and terminating long distance
traffic in the United States. Presently, Qwest provides services to its
customers through owned and leased digital fiber optic facilities and more than
15 switches strategically located throughout the United States, connecting
Qwest to metropolitan areas that account for more than 95% of U.S. call volume.
Construction of the network is scheduled to be completed in 1999. Through a
combination of its network and leased facilities, Qwest will continue to offer
interstate services in all 48 contiguous states. In April 1998, Qwest activated
the entire transcontinental portion of the network from Los Angeles to San
Francisco to New York, thus becoming the first network service provider to
complete a transcontinental native Internet Protocol fiber network. Qwest is
also expanding its network to carry international data and voice traffic into
Mexico and Europe. Completion of the Mexico network is scheduled for early
1999. The network expansion into Europe includes capacity on three submarine
systems. The transatlantic capacity includes eight STM-1s (the European
equivalent to SONET OC-3) from New York City to London and other European
destinations.
ICON SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING (See page 22)
The purpose of the Icon special meeting is to consider and vote upon a proposal
to approve the merger and adopt the merger agreement.
DATE, TIME AND PLACE (See page 22)
The Icon special meeting will be held on Thursday, December 31, 1998, at 8:00
a.m., local time, at Icon's headquarters, 1200 Harbor Boulevard, 8th Floor,
Weehawken, New Jersey 07087.
RECOMMENDATION OF THE ICON BOARD (See page 35)
The Icon board of directors has unanimously determined that the merger
agreement and the merger are in your best interests and the best interests of
Icon, has approved the merger and the merger agreement and has determined that
the merger and the merger agreement are advisable. THE ICON BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE MERGER AND THE
ADOPTION OF THE MERGER AGREEMENT.
OPINION OF ICON'S FINANCIAL ADVISOR (See page 36)
Donaldson, Lufkin & Jenrette Securities Corporation, financial advisor to Icon
in connection with the merger, has delivered its opinion to the board of
directors of Icon, dated the date of this Proxy Statement/Prospectus, to the
effect that as of the date of the opinion and based upon and subject to the
assumptions, limitations and qualifications contained in the opinion, the
merger consideration to be received by the holders of Icon common
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<PAGE>
stock in the merger (other than holders of Icon common stock who are affiliates
of Icon) was fair, from a financial point of view, to such holders. The entire
opinion is attached as Annex B to this Proxy Statement/Prospectus. The opinion
is directed to the Icon board of directors and relates only to the fairness of
the merger consideration to the holders of Icon common stock (other than the
holders of Icon common stock who are affiliates of Icon) from a financial point
of view, does not address any other aspect of the merger or related
transactions and does not constitute a recommendation to any Icon stockholder
as to how such stockholder should vote at the Icon special meeting. Please read
the opinion carefully in its entirety in connection with this Proxy
Statement/Prospectus for the assumptions made and procedures followed by the
financial advisor, the matters considered by them and the limits of their
review.
VOTE REQUIRED FOR APPROVAL AND RELATED MATTERS (See page 22)
Record Date; Shares Entitled to Vote. You are entitled to receive notice of the
Icon special meeting and to vote at the special meeting only if you were a
stockholder of record of Icon common stock at the close of business on November
6, 1998. At the close of business on the record date, 15,899,470 shares of Icon
common stock were outstanding. Each share entitles its registered holder to one
vote.
Quorum; Vote Required; Proxies. Holders of a majority of the outstanding shares
of Icon common stock entitled to vote must be present at the Icon special
Meeting in person or by proxy to constitute a quorum at the Icon special
meeting. As of the record date, Icon's directors and executive officers and
their affiliates beneficially owned approximately 51.7% of the outstanding
shares of Icon common stock.
Scott A. Baxter, Chairman of the Board of Directors, President and Chief
Executive Officer of Icon, Richard M. Brown, Vice President--Information
Technologies of Icon, and Scott Harmolin, Senior Vice President and Chief
Technology Officer of Icon, who are also directors of Icon, have agreed to vote
all their shares of Icon common stock to approve the merger agreement and the
merger and against any other business combination transaction. They have
granted to Qwest an irrevocable proxy in connection with this agreement. On the
record date, Messrs. Baxter, Brown and Harmolin owned 6,550,354 shares of Icon
common stock in the aggregate, or approximately 41.2% of the shares then
outstanding. In addition, Icon officers and directors, SCP Private Equity
Partners, L.P., one of the Icon's largest stockholders, and other Icon
stockholders who in the aggregate owned 1,665,421 shares of Icon common stock,
or approximately 10.5% of the shares then outstanding, have indicated that they
will vote their shares in favor of the merger and the adoption of the merger
agreement. Because the affirmative vote of all such shares (which collectively
constitute approximately 51.7% of the outstanding shares of Icon common stock
entitled to vote at the Icon special meeting) is sufficient to approve the
merger and adopt the merger agreement, it is expected that the merger will be
approved and the merger agreement adopted at the Icon special meeting, even if
no other Icon stockholder votes to approve the merger and adopt the merger
agreement.
Approval of the merger and adoption of the merger agreement requires the
affirmative vote of a majority of the outstanding shares of Icon common stock
entitled to vote at the Icon special meeting. The Icon board of directors
unanimously recommends that you vote to authorize Icon to adjourn the Icon
special meeting to solicit additional proxies if the number of proxies
sufficient to approve the merger and adopt the merger agreement has not been
received by the scheduled date of the Icon special meeting.
Icon common stock represented by properly executed proxies for which no
instruction is given will be voted "FOR" adoption of the merger agreement and
"FOR" the adjournment of the Icon special meeting to solicit additional
proxies, if necessary.
RISK FACTORS
In evaluating Icon, Qwest, the merger and the merger agreement, you should
carefully consider certain risk factors. See "RISK FACTORS" beginning on page
24.
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<PAGE>
PLAN OF MERGER
TERMS OF THE MERGER AGREEMENT (See page 40)
Merger Agreement. Icon and Qwest entered into the merger agreement on September
13, 1998. The merger agreement is attached as Annex A to this Proxy
Statement/Prospectus.
The Merger. Upon completion of the merger, Icon will become a subsidiary of
Qwest, and Icon stockholders will become stockholders of Qwest. In the merger,
each share of Icon's common stock will be converted into the right to receive a
fraction of one share of Qwest common stock that results from dividing $12.00
by the average of the daily volume weighted averages of the trading prices for
Qwest common stock for the 15 consecutive trading day period ending on the
trading day that is three business days before the actual date of the special
meeting of Icon stockholders. However, a share of Icon common stock will not be
converted into the right to receive less than 0.3200 shares of Qwest common
stock even if the average trading price exceeds $37.50 or more than 0.4444
shares of Qwest common stock even if the average trading price is less than
$27.00. Accordingly, the value you would receive for each share of Icon common
stock (based upon the Qwest average market price) will be greater than $12.00
as the Qwest average market price increases above $37.50 per share.
Correspondingly, the value you will receive for each share of Icon common stock
(based upon the Qwest average market price) will be less than $12.00 as the
Qwest average market price decreases below $27.00 per share. The fraction of
one share of Qwest common stock that will be issued for each share of Icon
common stock in the merger is referred to as the Qwest exchange ratio. The
exchange value described above that you will receive for each share of your
Icon common stock is not necessarily the cash value of the fractional share of
Qwest common stock that you will receive for each of your Icon shares as
explained below.
Table of Exchange Values of Qwest Common Stock to be Issued in the Merger. The
columns in the table below give you the following information:
(A) The first column shows a range of Qwest average market prices from $50.00
to $20.00. The Qwest average market price can be greater than $50.00 and less
than $20.00. Note that the number of shares of Qwest common stock that you
receive in the merger will be based upon an average market price over a 15-day
period that ends three business days before the actual date of the Icon special
meeting. That number will not be based on the closing price per share of the
Qwest common stock on the closing date. The Qwest average market price can, and
probably will, differ from the trading price of the Qwest common stock on the
closing date of the merger. For example, the Qwest average market price would
have been $41.9229 if the Icon special meeting had been held on Wednesday,
December 9, 1998. By contrast, the closing price per share of Qwest common
stock was $44.6250 on that date. Note that the Qwest average market price will
be fixed as of three business days before the actual date of the Icon special
meeting, even if the merger does not close on the meeting date, but instead
closes sometime later. The Qwest average market price will not be recalculated
at such later time.
(B) The second column shows the fractional share of Qwest common stock that
would be issued for each share of your Icon common stock at each of the Qwest
average market prices shown in the table. This fractional share is also known
as the Qwest exchange ratio. Note that the Qwest exchange ratio does not fall
below 0.3200 if the Qwest average market price exceeds $37.50, nor does the
Qwest exchange ratio rise above 0.4444 if the Qwest average market price is
less than $27.00. The Qwest exchange ratio will not be recalculated if the
merger closes anytime after the actual date of the Icon special meeting.
(C) The third column shows the exchange values of the fractional share of
Qwest common stock that would be issued for each share of your Icon common
stock at each of the Qwest average market prices shown
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<PAGE>
in the table. These Qwest exchange values are determined by multiplying the
Qwest average market prices
shown in the first column by the corresponding Qwest exchange ratios shown in
the second column. Note that the Qwest exchange value that you will receive in
the merger will be greater than $12.00 if the Qwest average market price is
greater than $37.50 and that the exchange value for each share of your Icon
common stock will be less than $12.00 if the Qwest average market price is less
than $27.00. The Qwest exchange value does NOT represent the actual cash value
per share of Icon common stock that you could expect to receive from selling
the shares of Qwest common stock that you will receive in the merger. The cash
value may be greater than the Qwest exchange value or less than the Qwest
exchange value, and the cash value will in any case change over time. The cash
amount mainly depends upon the trading price per share of Qwest common stock
when you sell the Qwest shares. The trading price per share of Qwest common
stock will vary depending upon the factors that generally influence the trading
prices of securities. See "RISK FACTORS--Uncertainty of Value of Qwest Common
Stock Received in the Merger."
TABLE OF EXCHANGE VALUES
<TABLE>
<CAPTION>
(C)
(A) (B) QWEST EXCHANGE
QWEST AVERAGE QWEST EXCHANGE VALUE PER SHARE OF
PRICE PER SHARE RATIO ICON COMMON STOCK
--------------- -------------- ------------------
<S> <C> <C>
$50.00 0.3200 $16.0000
$49.00 0.3200 $15.6800
$48.00 0.3200 $15.3600
$47.00 0.3200 $15.0400
$46.00 0.3200 $14.7200
$45.00 0.3200 $14.4000
$44.00 0.3200 $14.0800
$43.00 0.3200 $13.7600
$42.00 0.3200 $13.4400
$41.00 0.3200 $13.1200
$40.00 0.3200 $12.8000
$39.00 0.3200 $12.4800
$38.00 0.3200 $12.1600
-------------------------------------------
$37.50 0.3200 $12.0000
$36.00 0.3333 $12.0000
$35.00 0.3429 $12.0000
$34.00 0.3529 $12.0000
$33.00 0.3636 $12.0000
$32.00 0.3750 $12.0000
$31.00 0.3871 $12.0000
$30.00 0.4000 $12.0000
$29.00 0.4138 $12.0000
$28.00 0.4286 $12.0000
$27.00 0.4444 $12.0000
-------------------------------------------
$26.00 0.4444 $11.5544
$25.00 0.4444 $11.1100
$24.00 0.4444 $10.6560
$23.00 0.4444 $10.2212
$22.00 0.4444 $ 9.7768
$21.00 0.4444 $ 9.3324
$20.00 0.4444 $ 8.8880
</TABLE>
9
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Conditions to the Merger. Icon and Qwest are required to close the merger only
if the following principal conditions, among others, are satisfied at or before
the closing date:
. Holders of a majority of the outstanding shares of Icon common stock have
duly approved the merger and adopted the merger agreement.
. Icon and Qwest have obtained from each governmental body or other person each
material approval that is required or advisable in connection with the merger
agreement and the related transactions.
. No law, rule, regulation or other official action of any governmental body is
in effect that makes the merger illegal or otherwise prohibits the merger or
could reasonably be expected to have a material adverse effect on Icon or
Qwest.
. Neither Icon nor Qwest is in material breach of any law, rule, regulation or
other official action of any governmental body or any agreement, indenture or
other instrument in which its properties or operations may be affected and
neither one has received notice that it would be in breach in connection
therewith.
. The representations and warranties of each other party contained in each
transaction document in connection with the merger to which such other party
is a party are true and correct in all material respects on and as of the
closing date.
. Each other party has performed, in all material respects, all of the
covenants and other obligations required by each transaction document
required to be performed by that party at or before the closing; and
. Icon has received an opinion from its counsel to the effect that the merger
will constitute a tax-free reorganization under the Internal Revenue Code of
1986, as amended.
Termination of the Merger Agreement. Icon and Qwest may terminate the merger
agreement before the merger becomes effective, for the following principal
reasons, among others:
. We may mutually agree to terminate the merger agreement.
. Either Icon or Qwest may terminate on or after March 13, 1999, if the closing
of the merger does not occur for any reason other than a breach or violation
by such party, in any material respect, of any of its representations,
warranties, covenants or agreements set forth in the merger agreement.
. Either Icon or Qwest may terminate on or after January 13, 1999, if such
party is not in breach and has not violated, in any material respect, any of
its representations, warranties, covenants or agreements set forth in the
merger agreement, and the other party is in breach or has violated, in any
material respect, any of its representations, warranties, covenants or
agreements set forth in the merger agreement.
. Either Icon or Qwest may terminate after the date of the Icon special
meeting, if the stockholders of Icon do not approve the merger agreement and
the merger.
. Qwest may terminate, if Icon or its board of directors authorize, recommend
or propose that Icon enter into an agreement with respect to a business
combination transaction with a third party.
. Icon may terminate, prior to the date of the Icon special meeting, if its
board of directors determines that an unsolicited, bona fide written proposal
made by any person is a superior proposal as compared to the terms of the
merger agreement with Qwest, provided that Qwest is given the opportunity to
modify the terms of the merger such that Icon prefers to conclude the merger
in lieu of concluding the unsolicited written proposal by the other person.
. Qwest may terminate, if a business combination transaction involving Icon and
another person closes.
Icon Non-Solicitation Provisions. The merger agreement does not permit Icon or
its officers, directors, employees, financial advisors or other representatives
to solicit, initiate or encourage proposals for alternative business
combination transactions, providing information to or conducting negotiations
or discussions with other persons regarding alternative business combination
transactions, withdrawing the Icon board of directors' approval of the merger
agreement and the merger, recommending that Icon's stockholders approve an
10
<PAGE>
alternative business combination transaction or terminating the merger
agreement to accept an alternative business combination transaction, except in
each case as summarized in the following paragraph.
The merger agreement permits Icon to provide information and conduct
negotiations in connection with written proposals for alternative business
combination transactions that the Icon board of directors believes are
reasonably likely to be superior to the merger. The Icon board may also
withdraw its recommendation that the Icon stockholders approve the merger
agreement and the merger if the Icon board determines that an alternative
business combination proposed by another person is superior to the merger. The
Icon board may also terminate the merger agreement in order to enter into an
agreement providing for an alternative business combination transaction with
another person if the Icon board determines that the alternative transaction is
superior to the merger and if the Icon board first gives Qwest an opportunity
to modify the terms of the merger so that the alternative transaction is not
superior to the merger, as so modified.
The merger agreement sets out a number of factors that the Icon board of
directors must consider in determining whether an alternative transaction is
superior to the merger, either on the terms that have been approved by Icon and
Qwest or on the terms that Qwest may propose in response to an alternative
business combination transaction that the Icon board might otherwise determine
to be a proposal superior to the merger. The Icon board may take any of the
actions referred to in the preceding paragraph with respect to an alternative
business combination transaction proposed by another person only if the Icon
board concludes in good faith, based upon the advice of Icon's legal counsel,
that failure to take the action would breach its fiduciary duties to Icon's
stockholders, other than its affiliates.
Termination Fee. The merger agreement requires Icon to pay Qwest a termination
fee of $7 million if either Icon or Qwest terminates the merger agreement for
the reasons summarized above under the last four bullet points under "--
Termination" above. Icon must also pay a $7 million fee if the parties
terminate the merger agreement for the reason summarized in the second bullet
point in that section if another person has made a proposal for an alternative
business combination transaction at the time of termination and within the
following 12 months Icon enters into a definitive agreement with respect to an
alternative business combination transaction or an alternative business
combination transaction involving Icon closes during that period. Icon's
obligation to pay a termination fee may adversely affect the willingness of
another person to propose an alternative business combination transaction
involving Icon or the price and other terms of such a proposal.
Purchase of Qwest Products and Services. The merger agreement also requires
Icon to purchase from Qwest products and services for an aggregate purchase
price of $30 million if Icon consummates an alternative business combination
with another person within 12 months following the termination of the merger
agreement for any reason other than Qwest's material breach of the merger
agreement. Icon's obligation to purchase products and services from Qwest may
adversely affect the willingness of another person to propose an alternative
business combination transaction involving Icon or the price and other terms of
such a proposal.
OPTION AGREEMENTS (See page 53)
When Icon and Qwest entered into the merger agreement, Qwest also entered into
option agreements with Scott A. Baxter, Chairman of the Board of Directors,
President and Chief Executive Officer of Icon, Richard M. Brown, Vice
President--Information Technologies of Icon, and Scott Harmolin, Senior Vice
President--Senior Technology Officer of Icon, who are also directors of Icon
and who owned 6,550,354 shares of Icon common stock in the aggregate, or
approximately 41.2% of the shares outstanding on the record date. The form of
the option agreements is attached as Exhibit A to the merger agreement.
In each option agreement, the stockholder grants Qwest an option to acquire all
the shares of Icon common stock beneficially owned by him at a price of $12.00
per share. The option may be exercised, in whole or in
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<PAGE>
part, within one year following the consummation of an alternative business
combination transaction involving Icon that occurs after certain option
triggering events. An option triggering event is the first to occur of (1) the
termination or purported termination of the merger agreement without the prior
written approval of Qwest, (2) the time of the occurrence or existence of any
event or circumstance that would entitle any party to exercise its right to
terminate the merger agreement, (3) the public announcement or disclosure of a
bona fide proposal by any third party to engage in a business combination
transaction with any of Icon and its subsidiaries, and (4) the occurrence of a
breach by any stockholder of any obligation under the option agreements or
voting agreements.
In lieu of acquiring any shares, Qwest may elect, in its sole discretion, to
require the stockholder to repurchase the option, or a portion of the option,
for cash in the amount by which the value of consideration per share that would
be received by the stockholder in the alternative business combination
transaction exceeds $12.00. The stockholder also agreed to certain restrictions
in the voting and the sale of the shares of Icon common stock subject to the
option. The voting restrictions terminate upon the termination of the merger
agreement and the payment of any termination fee then required to be paid by
Icon to Qwest.
VOTING AGREEMENTS (See page 54)
When Icon and Qwest entered into the merger agreement, Qwest also entered into
voting agreements and proxies with Messrs. Baxter, Brown and Harmolin. The form
of the voting agreements is attached as Exhibit B to the Merger Agreement.
In each voting agreement, the stockholder agrees to vote all the shares of Icon
common stock beneficially owned by him to approve the merger agreement and the
merger, to vote against any alternative business combination transaction and to
vote against any action or against that would result in a breach of the merger
agreement or impede or delay the merger closing. The stockholder also granted
to Qwest an irrevocable proxy in connection with these matters. The voting
agreement terminates upon the termination of the merger agreement and the
payment of any termination fee then required to be paid by Icon to Qwest.
QWEST CREDIT FACILITY (See page 55)
In the merger agreement, Qwest committed to lend to Icon up to $15 million in
the aggregate. The terms and conditions of the loan are attached as Exhibit D
to the merger agreement. On September 28, 1998, Qwest and Icon entered into a
definitive credit agreement with respect to the loan.
The initial availability date of the loan is January 31, 1999. The proceeds of
the loan will be applied to repay Icon's outstanding indebtedness, acquire
equipment and pay general corporate and operating expenses. The maturity date
of the loan is January 31, 2000. Before the occurrence of a material adverse
condition affecting the business, properties, operations, prospects or
condition (financial or otherwise) of Icon and its subsidiaries, taken as a
whole, interest on the loan will accrue at a floating rate equal to the rate
published in The Wall Street Journal from time to time as the prime rate, plus
1.00%. After the occurrence of a material adverse condition, the interest rate
will be at a floating rate equal to the prime rate plus 8.00%.
The credit agreement contains customary representations, warranties, covenants,
conditions to funding and events of default. The covenants include limitations
on Icon's ability to incur additional debt and to replace its president, chief
executive officer or general counsel, without Qwest's approval, which may not
be unreasonably withheld, conditioned or delayed. The loan will be secured by a
lien on substantially all of Icon's real and personal property and assets. The
events of default, which entitle Qwest to require Icon to pay the loan in full
upon notice, include (1) the consummation of an alternative business
combination transaction with respect to Icon, (2) termination of the merger
agreement on or after January 13, 1999 by Qwest because of a material breach by
Icon of its obligations under the merger agreement or (3) a willful or reckless
breach by Icon of any of its material obligations under the merger agreement.
Under certain circumstances, Qwest may be required to
12
<PAGE>
advance the loan, and Icon would not be in default under the Qwest credit
facility, even if an event occurred that could reasonably be expected to have a
material adverse effect on Icon's business, properties, operations, prospects
or condition.
WARRANTS; REGISTRATION RIGHTS AGREEMENT (See page 56)
When Icon and Qwest entered into the merger agreement, Icon issued to Qwest
warrants to purchase 750,000 shares of Icon common stock exercisable at $12.00
per share for 10 years with registration rights granted pursuant to a
registration rights agreement. Icon issued the warrants in consideration of
Qwest's commitment to make the $15 million loan referred to above. The forms of
the warrants and the registration rights agreement are attached as Exhibits E
and F, respectively, to the merger agreement.
PRIVATE LINE SERVICES AGREEMENT (See page 56)
When Icon and Qwest entered into the merger agreement, they also entered into a
private line services agreement, under which Qwest will provide to Icon
telecommunications capacity and related ancillary services, and a master
collocation license agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (See page 56)
You should be aware that certain directors and executive officers of Icon may
be deemed to have conflicts of interest with respect to the merger. These
interests include (1) new employment agreements, effective when the merger
closes, for Messrs. Baxter, Brown and Harmolin, who are directors and executive
officers of Icon and who as Icon directors voted to approve the merger
agreement and the merger, (2) possible payments for Messrs. Baxter, Brown and
Harmolin and other executive officers in the event such officers' employment is
terminated under certain circumstances, (3) indemnification and liability
insurance for directors and executive officers and (4) the assumption by Qwest
of each unexercised and outstanding Icon stock option issued by Icon to
purchase shares of Icon common stock held by a director or executive officer of
Icon and the conversion of those options into stock options for Qwest common
stock. In addition, Messrs. Baxter, Brown and Harmolin have also entered into
voting agreements and option agreements with Qwest (as described above).
ACCOUNTING TREATMENT OF THE MERGER (See page 53)
The merger will be accounted for using the purchase method of accounting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (See page 52)
Qwest and Icon intend the merger to qualify as a tax-free reorganization for
federal income tax purposes, so that generally no gain or loss will be
recognized by the Icon stockholders on the exchange of Icon common stock for
Qwest common stock, except to the extent that Icon stockholders receive cash in
lieu of fractional shares. Please consult your own tax advisors regarding the
specific tax consequences to you of the merger, including the applicable
federal, state, local and foreign tax consequences of the merger.
NO APPRAISAL RIGHTS (See page 53)
You are not entitled to appraisal rights in connection with the merger or the
other transactions contemplated by the merger agreement.
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth selected comparative per share data for Qwest
and for Icon on both an historical and unaudited pro forma combined basis
giving effect to (1) the proposed acquisition by Qwest of all of the issued and
outstanding shares of capital stock of Icon, as if the acquisition had occurred
as of the balance sheet dates below for purposes of calculating book value per
share amounts, and on January 1, 1997 for purposes of calculating net income
(loss) per share amounts, (2) the acquisition by Qwest of all of the issued and
outstanding shares of capital stock, and capital stock issued at the closing of
the acquisition in October 1997, of SuperNet, Inc. ("SuperNet"), as if the
acquisition had occurred on January 1, 1997 for purposes of calculating net
income (loss) per share amounts, (3) the acquisition by Qwest of all of the
issued and outstanding shares of capital stock of Phoenix Network, Inc.
("Phoenix") in March 1998, as if the acquisition had occurred on January 1,
1997 for purposes of calculating net income (loss) per share amounts and (4)
the acquisition by Qwest of all of the issued and outstanding shares of capital
stock of LCI International, Inc. ("LCI") in June 1998, as if the acquisition
had occurred on January 1, 1997 for purposes of calculating net income (loss)
per share amounts. Items (2), (3) and (4) above, together with the historical
results of operations of Qwest, are referred to in the following table as
"Qwest historical." The following table does not give effect to Qwest's
acquisition of EUnet International Limited ("EUnet") and the joint venture with
KPN Telecom B.V. ("KPN") because such disclosure is not required under Rule 3-
05 of the Securities and Exchange Commission Regulation S-X. None of Qwest,
Icon, LCI, SuperNet or Phoenix has paid cash dividends. Accordingly, no
information is provided with respect to pro forma combined or pro forma
equivalent cash dividends. All share and per share information with respect to
Qwest included herein gives effect to the Qwest two-for-one stock split
effected in February 1998 in the form of a stock dividend. These tables should
be read in conjunction with the historical financial statements of Qwest, Icon,
LCI, Supernet and Phoenix including the respective notes thereto, and the
unaudited pro forma condensed combined financial information, including the
notes thereto, included elsewhere in this Proxy Statement/Prospectus. The
following information is not necessarily indicative of the results of
operations or combined financial position that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as representative of future operations.
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Book value per share
Qwest historical................................... $13.18 $11.28
Icon historical.................................... $(2.80) $ 1.48
Qwest/Icon pro forma combined...................... $13.60 $11.72
Icon pro forma equivalent(1)....................... $ 4.35 $ 3.75
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Net earnings (loss) per share
Qwest historical--basic and diluted................ $(0.15) $(0.10)
Icon historical--basic and diluted................. $(1.90) $(1.28)
Qwest/Icon pro forma combined--basic and diluted... $(0.24) $(0.20)
Icon pro forma equivalent--basic and diluted(1).... $(0.08) $(0.06)
</TABLE>
- --------
(1) The Icon pro forma equivalent represents the Qwest/Icon pro forma combined
book value or net income (loss) per share multiplied by a Qwest exchange
ratio of 0.3200. This Qwest exchange ratio assumes a Qwest average market
price that is equal to or greater than $37.50.
14
<PAGE>
COMPARATIVE MARKET PRICE INFORMATION
Icon became a publicly traded company on February 12, 1998 following Icon's
initial public offering. Icon common stock is quoted on the Nasdaq National
Market under the symbol "ICMT." Qwest became a publicly traded company on June
23, 1997 following Qwest's initial public offering. Qwest common stock is
quoted on the Nasdaq National Market under the symbol "QWST." The table below
sets forth, for the periods indicated, the high and low sales prices per share
of Icon common stock and Qwest common stock as reported on the Nasdaq National
Market (as adjusted for the Qwest two-for-one stock split in February 1998).
For current price information, please consult publicly available sources.
<TABLE>
<CAPTION>
ICON QWEST
----------------- -----------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1998 (ending December 31, 1998):
Fourth Quarter (through December 9,
1998)................................... $14.2500 $10.0000 $45.5625 $26.7500
Third Quarter............................ $21.3750 $ 6.7500 $47.5000 $22.0000
Second Quarter........................... $28.7500 $12.8750 $40.0625 $27.8750
First Quarter............................ $17.6250 $ 8.3750 $41.0625 $29.6250
Fiscal 1997 (ended December 31, 1997):
Fourth Quarter........................... N/A N/A $34.4375 $22.9375
Third Quarter............................ N/A N/A $26.5000 $13.6250
Second Quarter........................... N/A N/A $15.0625 $13.1875
First Quarter............................ N/A N/A N/A N/A
</TABLE>
On September 11, 1998, the last trading day prior to the announcement of the
execution of the merger agreement, the closing price per share of Icon common
stock, as reported on the Nasdaq National Market, was $7.25. On December 9,
1998, the most recent practicable trading day prior to the printing of this
Proxy Statement/Prospectus, the closing price per share of Icon common stock,
as reported on the Nasdaq National Market, was $14.1250. The "equivalent per
share" closing price of Icon common stock was $12.00 as of September 11, 1998
and $14.3693 as of December 9, 1998. This "equivalent per share" price is
determined by multiplying the Qwest exchange ratio as of the relevant date
(determined as if the closing price on such date were the Qwest average market
price) by the Qwest common stock closing price on that date. On the Icon record
date, there were approximately 100 Icon stockholders of record.
On September 11, 1998, the last trading day prior to the announcement of the
execution of the merger agreement, the closing price per share of Qwest common
stock, as reported on the Nasdaq National Market, was $28.8125. On December 9,
1998, the most recent practicable trading day prior to the printing of this
Proxy Statement/Prospectus, the closing price per share of Qwest common stock,
as reported on the Nasdaq National Market, was $44.6250. On October 31 , 1998,
there were approximately 3,239 Qwest stockholders of record.
Icon has not declared or paid cash dividends on Icon common stock since Icon's
initial public offering. The Icon board of directors intends to retain earnings
for use in the development and continued expansion of Icon's business. The
payment of cash dividends by Icon is prohibited under its revolving line of
credit. Any future determination concerning the payment of dividends will be
within the sole discretion of the Icon board and will depend upon the existence
of such restriction, Icon's financial condition, Icon's results of operations
and such other factors as the Icon board of directors deems relevant.
Qwest has not declared or paid cash dividends on Qwest common stock since
Qwest's initial public offering, and Qwest anticipates that any future earnings
will be retained for investment in its business. Any payment of cash dividends
in the future will be at the discretion of the Qwest board of directors and
will depend upon, among other things, Qwest's earnings, financial condition,
capital requirements, extent of indebtedness and contractual restrictions with
respect to the payment of dividends.
See "COMPARATIVE MARKET PRICE INFORMATION."
15
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The selected unaudited pro forma condensed combined statement of operations
data for the year ended December 31, 1997 and for the nine months ended
September 30, 1998 gives effect to the acquisitions of SuperNet, Phoenix, LCI
and Icon as if the acquisitions had occurred on January 1, 1997. The unaudited
pro forma condensed combined balance sheet data as of September 30, 1998 set
forth below gives effect to the proposed acquisition by Qwest of all the issued
and outstanding shares of capital stock of Icon and the assumption of the Icon
stock options and warrants as if the acquisition had occurred on September 30,
1998. The selected unaudited pro forma condensed combined financial data does
not give effect to Qwest's acquisition of EUnet and the joint venture with KPN
because such disclosure is not required under Rule 3-05 of Securities and
Exchange Commission Regulation S-X.
The selected unaudited pro forma condensed combined financial data give effect
to the acquisitions described above under the purchase method of accounting and
are based on the assumptions and adjustments described in the notes to the
Unaudited Pro Forma Condensed Combined Financial Statements contained elsewhere
in this Proxy Statement/Prospectus. The fair value of the consideration will be
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 are based upon
information available at the date of preparation of the 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.
The final allocation of purchase price to the Icon assets acquired and
liabilities assumed is dependent upon an analysis which has not progressed to a
stage at which there is sufficient information to make an allocation in these
pro forma condensed combined financial statements. 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. While conducting transaction due diligence, Qwest
considered Icon's existing intangible assets and items currently being
developed by Icon and other goodwill-type assets. Qwest considered these
intangible assets and in-process R&D in determining the total purchase price
paid by Qwest, but these items did not play a key role in Qwest's acquisition
decision or the amount of the purchase price. Although the appraisal of the
assets is in the initial stages, Qwest believes the portion of Icon purchase
price allocated to in-process R&D and corresponding charge to Qwest's results
of operations will be approximately $10.0 million to $15.0 million.
THE SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA BELOW 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 selected historical financial data of Icon and Qwest as of the end of, and
for each of the years in, the five year period ended December 31, 1997 and as
of September 30, 1998 and 1997 and for the nine months ended September 30, 1998
and 1997 have been taken or derived from the respective historical consolidated
financial statements of Icon and Qwest.
The selected historical consolidated financial data and the selected unaudited
pro forma condensed combined financial data of Icon and Qwest, respectively,
should be read in conjunction with the discussions under
16
<PAGE>
"ICON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and the Historical Consolidated Financial Statements and
Unaudited Interim Financial Statements of Qwest and Icon, and the Unaudited Pro
Forma Condensed Combined Financial Statements included elsewhere in this Proxy
Statement/Prospectus.
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA (UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $2,473 $2,199
Operating expenses................................. 2,211 1,934
Depreciation and amortization...................... 260 230
------ ------
Earnings from operations........................... 2 35
Other expense, net................................. 39 64
------ ------
Earnings before income taxes....................... (37) (29)
Income tax expense................................. 42 36
------ ------
Net loss........................................... $ (79) $ (65)
====== ======
Loss per share--basic and diluted.................. $(0.24) $(0.19)
Shares used in calculating basic and diluted loss
per share......................................... 330 334
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
-------------
<S> <C>
BALANCE SHEET DATA:
Current assets.................................................... $1,157
Property and equipment, net....................................... $2,058
Total assets...................................................... $7,062
Debt.............................................................. $1,623
Total liabilities................................................. $3,103
Total stockholders' equity........................................ $3,959
</TABLE>
17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF QWEST
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------
1993 1994 1995 1996 1997 1997 1998(1)
----- ------ ------ ------ ----- ----- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
AND
OTHER FINANCIAL DATA:
Total revenue............ $ 69 $ 71 $ 125 $ 231 $ 697 $ 490 $1,378
Total operating
expenses................ 80 82 161 243 673 490 2,164
Earnings (loss) from
operations.............. (11) (11) (36) (12) 24 -- (786)
Other (income)
expense(2).............. (123) -- 2 (2) -- (5) 51
Earnings (loss) before
income taxes............ 112 (11) (38) (10) 24 5 (837)
Net earnings (loss)...... $ 69 $ (7) $ (25) $ (7) $ 15 $ 2 $ (823)
===== ====== ====== ====== ===== ===== ======
Earnings (loss) per
share--basic............ $0.40 $(0.04) $(0.15) $(0.04) $0.08 $0.01 $(3.17)
Earnings (loss) per
share--diluted.......... $0.40 $(0.04) $(0.15) $(0.04) $0.07 $0.01 $(3.17)
EBITDA(3)................ $ (1) $ (6) $ (26) $ 7 $ 42 $ 13 $ 214
Net cash provided by
(used in)
operating activities.... $ (7) $ 3 $ (57) $ 33 $ (36) $ (60) $ 106
Net cash provided by
(used in)
investing activities.... $ 107 $ (42) $ (59) $ (53) $(357) $(196) $ (778)
Net cash provided by
(used in)
financing activities.... $ (96) $ 34 $ 114 $ 26 $ 766 $ 436 $ 518
Capital expenditures(4).. $ 4 $ 41 $ 49 $ 86 $ 445 $ 213 $ 751
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998(2)
---- ---- ---- ---- ------ -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Total assets................... $61 $89 $184 $263 $1,398 $ 908 $ 6,834
Long-term debt................. $ 2 $27 $ 69 $109 $ 630 269 1,387
Total stockholders' equity(5).. $12 $25 $ 26 $ 9 $ 382 369 3,752
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Route miles of conduit
installed.............. 3,200 3,650 9,500 7,900 15,979
Route miles of lit fiber
installed.............. 580 900 3,400 2,800 9,052
Total minutes of use.... 237,000,000 382,000,000 669,000,000 433,000,000 6,252,000,000
</TABLE>
- --------
(1) On June 5, 1998, Qwest acquired LCI. The acquisition was accounted for as
a purchase and the results of LCI's operations are included with Qwest's
for the period subsequent to the acquisition.
(2) In November 1993, Qwest sold substantially all of its then owned fiber
optic network capacity and related equipment and assets to a third-party
purchaser for $185.0 million (the "1993 Capacity Sale"). After deducting
the carrying value of the assets sold and direct costs associated with the
1993 Capacity Sale, Qwest recognized a gain of approximately $126.5
million.
(3) EBITDA represents net earnings (loss) before interest, income taxes,
depreciation and amortization, a nonrecurring expense of $2.6 million in
the year ended December 30, 1996 to restructure operations, the gain on
sale of telecommunications agreements of $6.1 million (which is non-
recurring) in the year ended December 31, 1996, the gain on sale of
contract rights of approximately $9.3 million (which is non-recurring) in
the year ended December 31, 1997 and non-recurring expenses of $813
million in the nine
18
<PAGE>
months ended September 30, 1998 related to the LCI merger. EBITDA includes
earnings from the construction contracts for the sale of dark fiber that
Qwest will use to provide cash for the construction cost of the Qwest
Network. EBITDA does not represent cash flow for the periods presented and
should not be considered as an alternative to net earnings (loss) as an
indicator of Qwest's operating performance or as an alternative to cash
flows as a source of liquidity, and may not be comparable with EBITDA as
defined by other companies. Qwest believes that EBITDA is commonly used by
financial analysts and others in the telecommunications industry. Without
the effect of Qwest's growth share plan expense, EBITDA would have been
$115.2 million, $20.0 million, and $1.8 million for the years ended
December 31, 1997, 1996 and 1993, respectively, and $153.4 million and $80.6
million for the nine months ended September 30, 1998 and 1997, respectively.
(4) Capital expenditures include expenditures for property and equipment,
accrued capital expenditures, capital expenditures financed with the
equipment credit facility and initial obligations under capital leases.
(5) Qwest has not declared or paid cash dividends on the Qwest common stock
since becoming a public company in June 1997.
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF ICON
The following selected consolidated financial data for each of the years in the
three-year period ended December 31, 1997 and as of December 31, 1996 and 1997
are derived from, and are qualified by reference to, Icon's audited
consolidated financial statements (the "Icon Financial Statements") included
elsewhere herein. The selected consolidated financial data below as of December
31, 1995 have been derived from audited consolidated financial statements of
Icon that are not included herein. The following selected financial data as of
December 31, 1993 and 1994 and for each year in the two-year period ended
December 31, 1994 are derived from, and are qualified by reference to, Icon's
unaudited consolidated financial statements not included herein. The selected
financial data as of September 30, 1998 and for the nine-month periods ended
September 30, 1997 and 1998 are derived from the unaudited consolidated
financial statements of Icon included elsewhere herein and, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the data presented. The
selected financial data for each three-month period in the two year period
ended September 30, 1998 are derived from, and are qualified by reference to,
Icon's unaudited consolidated financial statements not included herein. The
results for the nine months ended September 30, 1998 are not necessarily
indicative of results for the full year. The information presented below should
be read in conjunction with "ICON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION" and the Icon Financial Statements
included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net:
Services:
Professional........ $ 2,439 $ 3,549 $ 6,388 $11,166 $ 22,484 $ 15,948 $ 24,996
Communications...... -- -- 189 1,268 5,979 3,931 9,875
Media............... -- -- 202 529 89 77 14
------- ------- ------- ------- -------- -------- --------
Total services
revenues......... 2,439 3,549 6,779 12,963 28,552 19,956 34,885
------- ------- ------- ------- -------- -------- --------
Products.............. 10,605 17,083 21,424 29,741 23,769 14,306 24,104
------- ------- ------- ------- -------- -------- --------
Total revenues, net..... 13,044 20,632 28,203 42,704 52,321 34,262 58,989
------- ------- ------- ------- -------- -------- --------
Cost of revenues:
Services.............. 1,251 1,746 3,798 9,213 19,919 13,651 24,878
Products.............. 9,596 14,132 17,653 24,607 19,401 11,676 21,059
------- ------- ------- ------- -------- -------- --------
Total cost of revenues.. 10,847 15,878 21,451 33,820 39,320 25,327 45,937
------- ------- ------- ------- -------- -------- --------
Gross profit............ 2,197 4,754 6,752 8,884 13,001 8,935 13,052
------- ------- ------- ------- -------- -------- --------
Operating expenses:
General and
administrative....... 957 1,839 2,863 7,645 11,826 8,227 14,509
Sales and marketing... 835 1,671 3,782 7,184 10,849 7,351 12,511
Research and
development.......... 69 501 411 969 1,347 920 1,612
Depreciation and
amortization......... 85 110 241 493 1,024 633 1,279
Special transaction
related charges...... -- -- -- -- -- -- 1,921
------- ------- ------- ------- -------- -------- --------
Total operating
expenses............... 1,946 4,121 7,297 16,291 25,046 17,131 31,832
------- ------- ------- ------- -------- -------- --------
Income (loss) from
operations............. 251 633 (545) (7,407) (12,045) (8,196) (18,780)
Net income (loss)....... 201 340 (437) (7,164) (12,566) (8,747) (18,293)
Basic earnings (loss)
per share and diluted
earnings (loss) per
share(a)............... $ 0.03 $ 0.05 $ (0.06) $ (1.06) $ (1.90) $ (1.31) $ (1.28)
Weighted average shares
outstanding used for
basic earnings (loss)
per share and diluted
earnings (loss) per
share(a)............... 7,274 7,274 7,274 7,274 7,274 7,274 14,478
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 193 $ 121 $ 845 $ 722 $ 1,410 $10,026
Working capital......... 241 493 (651) (1,704) (897) 9,429
Total assets............ 2,309 4,950 9,250 14,556 22,157 41,088
Total liabilities....... 1,875 4,199 8,823 12,367 15,324 17,630
Mandatorily redeemable
preferred stock........ -- -- -- 9,881 27,229 --
Stockholders' equity
(deficit).............. 434 752 427 (7,692) (20,396) 23,458
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997 1997 1998 1998 1998
------------ --------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net:
Services:
Professional........... $ 3,845 $ 4,338 $ 5,502 $ 6,108 $ 6,536 $ 7,516 $ 8,231 $ 9,249
Communications......... 583 938 1,233 1,760 2,048 2,813 3,250 3,812
Media.................. 176 77 -- -- 12 14 -- --
------- ------- ------- ------- ------- ------- ------- --------
Total services
revenues............. 4,604 5,353 6,735 7,868 8,596 10,343 11,481 13,061
------- ------- ------- ------- ------- ------- ------- --------
Products............... 7,400 4,795 4,885 4,626 9,463 9,056 7,470 7,577
------- ------- ------- ------- ------- ------- ------- --------
Total revenues, net..... 12,004 10,148 11,620 12,494 18,059 19,399 18,951 20,638
------- ------- ------- ------- ------- ------- ------- --------
Cost of revenues:
Services............... 3,248 3,760 4,331 5,560 6,268 7,226 7,925 9,727
Products............... 6,201 3,813 4,092 3,771 7,725 7,986 6,349 6,723
------- ------- ------- ------- ------- ------- ------- --------
Total cost of revenues.. 9,449 7,573 8,423 9,331 13,993 15,212 14,274 16,450
------- ------- ------- ------- ------- ------- ------- --------
Gross profit............ 2,555 2,575 3,197 3,163 4,066 4,187 4,677 4,188
Operating expenses...... 5,034 5,143 5,779 6,209 7,915 8,871 11,542 11,420
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations.... (2,479) (2,568) (2,582) (3,046) (3,849) (4,684) (6,865) (7,232)
Net loss................ (2,453) (2,935) (2,751) (3,061) (3,819) (4,554) (6,691) (7,049)
Basic loss per share and
diluted loss per
share.................. $ (0.36) $ (0.42) $ (0.41) $ (0.48) $ (0.59) $ (0.41) $ (0.42) $ (0.44)
</TABLE>
- --------
(a) For information concerning the computation of basic and diluted earnings
(loss) per share and weighted average shares of Icon common stock
outstanding, see Note 5 to the Icon Financial Statements.
21
<PAGE>
ICON SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The special meeting of the holders of Icon's common stock (the "Icon
Stockholders") will be held on Thursday, December 31, 1998 at 8:00 a.m., local
time, at Icon's headquarters, 1200 Harbor Boulevard, 8th Floor, Weehawken, New
Jersey 07087, or at any postponement or adjournment thereof (the "Special
Meeting"), to consider and vote upon a proposal to approve the merger and
adopt the merger agreement.
The Board of Directors of Icon (the "Icon Board") has called the Special
Meeting to consider and vote upon a proposal to adopt the Agreement and Plan
of Merger dated as of September 13, 1998 (the "Merger Agreement") among Qwest,
Qwest 1998-I Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Qwest ("Qwest Subsidiary"), and Icon. In accordance with the
Merger Agreement, Qwest Subsidiary will merge with and into Icon (the
"Merger") and Icon will become a subsidiary of Qwest (the "Surviving
Corporation"). In the Merger, each share of Icon's common stock ("Icon Common
Stock") will be converted into the right to receive a number of shares of
Qwest common stock ("Qwest Common Stock") that is equal to the "Exchange
Ratio." The Exchange Ratio will equal $12.00 divided by the average of the
daily volume weighted averages of the trading prices for Qwest Common Stock
for the 15 consecutive trading day period ending on the trading day that is
three business days before the Special Meeting (the "Average Market Price").
However, a share of Icon Common Stock will not be converted into the right to
receive less than 0.3200 shares of Qwest Common Stock (even if the Average
Market Price exceeds $37.50) or more than 0.4444 shares of Qwest Common Stock
(even if the Average Market Price is less than $27.00).
THE ICON BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND THE
MERGER ARE IN YOUR BEST INTERESTS AND THE BEST INTERESTS OF ICON, HAS APPROVED
THE MERGER AND THE MERGER AGREEMENT AND HAS DETERMINED THAT THE MERGER AND THE
MERGER AGREEMENT ARE ADVISABLE. THE BOARD OF DIRECTORS OF ICON UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE MERGER AND THE ADOPTION OF
THE MERGER AGREEMENT. SEE "PLAN OF MERGER--BACKGROUND OF THE MERGER" AND "--
RECOMMENDATION OF THE ICON BOARD; ICON'S REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of Icon Common Stock at the close of business on
November 6, 1998 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting. As of the close of business on the Record Date,
15,899,470 shares of Icon Common Stock were outstanding. Each share entitles
the registered holder thereof to one vote. As of the Record Date, Icon's
directors and executive officers and Icon's affiliates beneficially owned
approximately 51.7% of the outstanding shares of Icon Common Stock.
Scott A. Baxter, Chairman of the Board of Directors, President and Chief
Executive Officer of Icon, Richard M. Brown, Vice President--Information
Technologies of Icon, and Scott Harmolin, Senior Vice President--Senior Chief
Technology Officer of Icon, who are also directors of Icon and who owned
6,550,359 shares of Icon Common Stock in the aggregate on the Record Date, or
approximately 41.2% of the shares then outstanding, have agreed to vote all
their shares of Icon Common Stock to approve the Merger Agreement and the
Merger and against any other business combination transaction and granted to
Qwest an irrevocable proxy in connection therewith. In addition, Icon officers
and directors, SCP Private Equity Partners, L.P., one of Icon's largest
stockholders, and other Icon stockholders, who in the aggregate owned
1,665,421 shares of Icon Common Stock on the Record Date, or approximately
10.5% of the shares then outstanding, have indicated that they will vote their
shares in favor of the Merger and the adoption of the Merger Agreement.
Because the affirmative vote of all such shares (which collectively constitute
approximately 51.7% of the outstanding shares of Icon Common Stock as of the
Record Date) is sufficient to approve the Merger and adopt the Merger
Agreement, it is expected that the Merger will be approved and the Merger
Agreement adopted at the Special Meeting, even if no other Icon Stockholder
votes to approve the Merger and adopt the Merger Agreement.
QUORUM; VOTE REQUIRED
The presence in person or by proxy of holders representing a majority of the
voting power of the Icon Common Stock entitled to vote is necessary to
constitute a quorum for the transaction of business at the Special
22
<PAGE>
Meeting. Adoption of the Merger Agreement by the Icon Stockholders requires
the affirmative vote of at least a majority of the outstanding shares of Icon
Common Stock entitled to vote thereon at the Special Meeting.
A properly executed proxy marked "ABSTAIN" or an abstention at the Special
Meeting will be counted for purposes of determining whether there is a quorum
and will be counted towards the tabulation of votes cast on each proposal
presented to the Icon Stockholders and will have the same effect as a negative
vote. Shares represented by broker non-votes (i.e., shares held by brokers or
nominees which are represented at a meeting but with respect to which the
broker or nominee is not empowered to vote on a particular proposal) although
counted for purposes of determining whether there is a quorum at the Special
Meeting, will not be counted for any purpose in determining whether the Merger
Agreement have been adopted and will therefore have the effect of a vote
against the approval of the Merger and the adoption of the Merger Agreement.
In the event there is an insufficient number of shares of Icon Common Stock
present in person or by proxy at the Special Meeting to approve the Merger and
adopt the Merger Agreement, the Icon Board requests your approval to adjourn
the Special Meeting to a later date. The effect of any such adjournment would
be to permit Icon to solicit additional proxies for approval of the Merger and
adoption of the Merger Agreement. While such an adjournment would not
invalidate any proxies previously filed, including those filed by Icon
Stockholders voting against the Merger, it would afford Icon the opportunity
to solicit additional proxies in favor of the Merger.
THE ICON BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" AUTHORIZING ICON
TO ADJOURN THE SPECIAL MEETING TO SOLICIT ADDITIONAL PROXIES IF THE NUMBER OF
PROXIES SUFFICIENT TO APPROVE THE MERGER AND ADOPT THE MERGER AGREEMENT HAS
NOT BEEN RECEIVED BY THE SCHEDULED DATE OF THE SPECIAL MEETING.
PROXIES
Icon Common Stock represented by properly executed proxies received at or
prior to the Special Meeting that have not been revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. Icon
Common Stock represented by properly executed proxies for which no instruction
is given will be voted "FOR" adoption of the Merger Agreement and "FOR" the
adjournment of the Special Meeting to solicit additional proxies, if
necessary. Shares represented by proxies voting against the proposal to
approve the Merger and adopt the Merger Agreement will be voted against a
proposal to adjourn the Special Meeting for the purpose of soliciting
additional proxies. Icon Stockholders are requested to complete, sign, date
and return promptly the enclosed proxy card in the postage-prepaid envelope
provided for this purpose to ensure that their shares are voted. An Icon
Stockholder may revoke a proxy at any time before it is voted by signing and
returning a later-dated proxy with respect to the same shares, by filing with
the Secretary of Icon a written revocation bearing a later date or by
attending and voting in person at the Special Meeting. Mere attendance at the
Special Meeting will not in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies (except for any
proxies that have theretofore effectively been revoked or withdrawn) will be
voted in the same manner as such proxies would have been voted at the original
convening of the Special Meeting, notwithstanding that such proxies may have
been effectively voted on the same or any other matter at a previous meeting.
The cost of solicitation of proxies for the Special Meeting will be paid by
Icon. In addition to solicitation by mail, proxies may be solicited in person
by directors, officers and employees of Icon or Icon's financial advisors,
without additional compensation, and by telephone, telegram, teletype,
facsimile or similar method. Icon will reimburse brokers, fiduciaries,
custodians and other nominees for reasonable out-of-pocket expenses incurred
in sending this Proxy Statement/Prospectus and other proxy materials to, and
obtaining instructions relating to such materials from, beneficial owners of
Icon Common Stock.
Icon will also reimburse custodians, nominees and fiduciaries for forwarding
proxies and proxy materials to the beneficial owners of Icon Common Stock.
YOU SHOULD NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARDS. AFTER THE
MERGER IS COMPLETED, YOU WILL RECEIVE WRITTEN INSTRUCTIONS FOR EXCHANGING YOUR
ICON COMMON STOCK CERTIFICATES FOR QWEST COMMON STOCK CERTIFICATES. YOU SHOULD
CONTINUE TO HOLD YOUR ICON COMMON STOCK CERTIFICATES UNTIL YOU RECEIVE SUCH
INSTRUCTIONS.
23
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors in evaluating
Qwest, Icon, the Merger and the Merger Agreement. Please carefully review this
Proxy Statement/Prospectus, together with all documents that are incorporated
by reference, before you decide how to vote on the Merger and the Merger
Agreement.
UNCERTAIN VALUE OF QWEST COMMON STOCK RECEIVED IN THE MERGER
Qwest cannot assure you of the value of the shares of Qwest Common Stock to
be issued to them in the Merger. The calculation of the Exchange Ratio is
generally designed to provide the Icon stockholders with $12.00 in value of
Qwest Common Stock for each share of Icon Common Stock converted in the
Merger, but they will receive less than $12.00 in value for each share
converted if the Average Market Price is less than $27.00. In addition, the
value of the shares of Qwest Common Stock to be issued in the Merger is likely
to change after the date the Merger is completed based upon changes in the
business, operations and prospects of Qwest, general market and economic
conditions such as interest rates, regulatory considerations and other factors
beyond the control of Qwest.
TAX TREATMENT
The Merger is intended to be treated as a tax-free "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of 1986 and
generally to be tax free to the Icon stockholders, except to the extent Icon
stockholders receive cash in lieu of fractional shares. The obligation of Icon
to complete the Merger is conditioned on receiving an opinion from its counsel
that the Merger will be treated as a reorganization. Counsel to Icon will rely
upon representations of Qwest and Icon, made as of the effective time of the
Merger. If the representations are untrue or incorrect, the Merger may not be
treated as a reorganization within the meaning of Section 368(a), and the
receipt of Qwest Common Stock in the Merger may be taxable to the Icon
stockholders. See "PLAN OF MERGER--Certain Federal Income Tax Consequences."
INTERESTS OF ICON OFFICERS AND DIRECTORS IN THE MERGER
You should be aware that certain directors and executive officers of Icon
may be deemed to have conflicts of interest with respect to the Merger. These
interests include (1) new employment agreements, effective when the Merger
closes, for Scott A. Baxter, Chairman of the Board of Directors, President and
Chief Executive Officer of Icon, Richard M. Brown, Vice President--Information
Technologies of Icon, and Scott Harmolin, Senior Vice President--Chief
Technology Officer of Icon, who are directors and executive officers of Icon
and who as Icon directors voted to approve the Merger Agreement and the
Merger, (2) possible payments for Messrs. Baxter, Brown and Harmolin and other
executive officers in the event such officers' employment is terminated under
certain circumstances, (3) indemnification and liability insurance for
directors and executive officers and (4) the assumption by Qwest of each
unexercised and outstanding Icon stock option issued by Icon to purchase
shares of Icon common stock held by a director or executive officer of Icon
and the conversion of those options into stock options for Qwest common stock.
In addition, Messrs. Baxter, Brown and Harmolin have also entered into voting
agreements and option agreements with Qwest. These interests, together with
other relevant factors, were considered by the Icon Board in approving the
Merger Agreement and the Merger. See "PLAN OF MERGER--Other Transaction
Documents--Option Agreements," "--Voting Agreements" and "--Interests of
Certain Persons in the Merger."
COMPLETING THE QWEST NETWORK AND INCREASING TRAFFIC VOLUME
Qwest's objective is to become a leading facilities-based provider of multi-
media communications services to businesses, consumers and other
communications providers. Qwest's ability to achieve its objective will depend
largely on completion of Qwest's 18,450 route mile fiber optic communications
network on schedule and within budget, on maintaining the easements and
rights-of-way for the network and on Qwest's achieving substantial traffic
volumes on the network. The construction of the network will be affected by
many factors, such as weather and regulatory approvals, that are beyond
Qwest's control. Qwest cannot assure you that the
24
<PAGE>
entire network will be completed on schedule and within budget. Although Qwest
believes that its cost estimates and build-out schedule are reasonable, the
actual construction costs or time required to complete the Qwest Network could
exceed current estimates. In addition, Qwest must substantially increase its
current traffic volume in order to realize the anticipated cash flow,
operating efficiencies and cost benefits of the network. Qwest cannot assure
you that it will be able to achieve this increased traffic volume. See "--
Competition" and "--Pricing Pressures and Industry Capacity."
OPERATING LOSSES AND WORKING CAPITAL DEFICITS
Qwest's operations have generated operating losses and insufficient cash
flow to enable it to meet its debt service requirements, capital expenditures
and other cash needs. Qwest had a net loss of $822.6 million for the nine
months ended September 30, 1998 (or a net loss of $30.9 million excluding non-
recurring costs associated with recent acquisitions and provisions for in-
process research and development). Qwest had an accumulated deficit of
approximately $854.5 million at September 30, 1998.
Qwest had a working capital deficit of approximately $49.5 million at
September 30, 1998, and expects to incur approximately $510.0 million of total
capital expenditures for the fourth quarter of 1998. Qwest has had working
capital deficits for each of the four fiscal years prior to 1997. Working
capital deficits could limit Qwest's cash resources, resulting in reduced
liquidity. Qwest cannot assure you that it will be able to achieve or sustain
operating profitability in the future. Qwest may require additional capital in
order to offset operating losses and working capital deficits and to support
its objectives. Certain debt instruments to which Qwest and its subsidiaries
are parties limit but do not prohibit its incurrence of additional
indebtedness, and Qwest expects additional indebtedness to be incurred by
Qwest or its subsidiaries in the future. Qwest cannot assure you that it will
be successful in obtaining additional borrowings when required, or that the
terms of future indebtedness will not impair its ability to develop its
business.
Qwest's ability to meet its debt service requirements, capital expenditures
and other cash needs will depend on Qwest's future performance, which is
subject to a variety of factors, uncertainties and contingencies, many of
which are beyond Qwest's control. In addition, the ability of Qwest's
operating subsidiaries to pay dividends or to make other payments to Qwest may
be restricted by the terms of credit arrangements of the operating
subsidiaries or legal restrictions, and the payments may have adverse tax
consequences. Failure to generate sufficient cash flow may impair Qwest's
ability to obtain additional equity or debt financing or to meet its debt
service requirements. In these circumstances, Qwest may be required to
renegotiate the terms of the instruments for its long-term debt or to
refinance all or a portion of that long-term debt. Qwest cannot assure you
that it would be able to renegotiate the terms successfully or refinance its
indebtedness when required or that the terms of any refinancing would be
acceptable to management. If Qwest were unable to refinance its indebtedness
or obtain new financing under these circumstances, it would have to consider
options that include the sale of certain assets to meet its debt service
obligations, the sale of equity, negotiations with its lenders to restructure
applicable indebtedness or other options lawfully available.
ICON'S LIMITED OPERATING HISTORY; HISTORY OF NEGATIVE CASH FLOW AND OPERATING
LOSSES
Founded in 1991, Icon has only a limited operating history available for
evaluating Icon and its prospects. Although Icon has experienced revenue
growth in recent years, it has not been profitable for the last three years.
Icon's recent growth rate may not be sustainable and may not be indicative of
future operating results. To date, Icon has incurred negative cash flow from
operations and substantial and increasing net losses. Net cash used in
operations for the years ended December 31, 1996 and 1997 and the nine months
ended September 30, 1997 and 1998 was $4.4 million, $9.2 million, $8.3 million
and $14.9 million, respectively. Losses from operations for the years ended
December 31, 1996 and 1997 and the nine months ended September 30, 1997 and
1998 were $7.4 million, $12.0 million, $8.2 million and $18.8 million,
respectively. Icon had an accumulated deficit at September 30, 1998 of $39.1
million. Icon expects to continue to incur significant losses.
Neither Qwest nor Icon can assure you that Icon will be successful in
attracting new customers, retaining current customers, increasing revenues,
generating profits or ever achieving profitability. Furthermore, a substantial
portion of its Internet access services is currently resold by a limited
number of resellers. Neither
25
<PAGE>
Qwest nor Icon can assure you that any of these resellers will continue to
actively market Icon's services. Icon's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets. To address these risks, Icon must, among other things,
respond to competitive developments and continue to attract, retain and
motivate qualified persons. It also must continue to upgrade its technologies
and develop commercial services and products that incorporate these
technologies. Neither Qwest nor Icon can assure you that Icon will be
successful in addressing such risks.
COMPETITION
The communications industry is highly competitive. Many of Qwest's existing
and potential competitors have financial, personnel, marketing and other
resources that are significantly greater than those of Qwest, as well as other
competitive advantages. Increased consolidation and strategic alliances in the
industry resulting from the Telecommunications Act of 1996 (the
"Telecommunications Act") also could give rise to significant new competitors
to Qwest.
The success of Qwest's business plan depends on Qwest's ability to increase
significantly its share of the communications services market in the medium
and long term. Qwest's primary competitors in this market are other
communications service providers, including large and small facilities-based
interexchange carriers. For high volume capacity services, Qwest competes
primarily with other coast-to-coast and regional fiber optic network
providers. AT&T Corporation ("AT&T"), MCI WorldCom and Sprint Corporation
("Sprint") currently are the three principal facilities-based long distance
fiber optic networks. Qwest is aware that others are planning additional
networks that, if constructed, could employ similar advanced technology as the
Qwest Network. In addition, Qwest has sold dark fiber along major portions of
Qwest's network to Frontier Corporation ("Frontier") and GTE Corporation
("GTE"). Upon completion of Qwest's network, Frontier and GTE will each have a
fiber network similar in geographic scope and potential operating capability
to that of Qwest. Another competitor is constructing, and has already obtained
a significant portion of the financing for, a fiber optic network. As publicly
announced, the scope of this competitor's network is less than that of Qwest.
Nevertheless, Qwest expects that this competitor's network will compete
directly with Qwest's network for many of the same customers where their
routes overlap. A carrier's carrier announced in January 1998 that it plans to
sell wholesale capacity on its fiber optic network and that it has entered
into an agreement with one of the RBOCs to be the primary user of its network.
Qwest believes that this network, although potentially competitive, is
different in operating capability from Qwest's network. Another potential
competitor, a new telecommunications company, has announced its intention to
create a telecommunications network based on Internet technology.
In the switched services segment of the communications services market,
Qwest sells switched services to businesses, consumers and other
communications carriers. In this market, Qwest competes with facilities-based
carriers such as AT&T, MCI WorldCom and Sprint, all of which have extensive
experience in the long distance market, and some of the regional carriers.
Qwest competes in the switched services market on the basis of price,
transmission quality, network reliability, customer service and support.
Qwest's ability to compete effectively in this market depends on its ability
to maintain high quality services at prices equal to or below those charged by
its major competitors. The Telecommunications Act will allow the RBOCs and
others to enter the long distance market. Qwest cannot assure you that it will
be able to compete successfully with existing competitors or new entrants in
its communications services markets. Failure by Qwest to do so would have a
material adverse effect on Qwest's business, financial condition and results
of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Qwest has substantial business relationships with a few large customers,
primarily for the sale of dark fiber. Frontier, GTE and WorldCom (prior to its
merger with MCI) accounted for approximately 9%, 10% and 2%, respectively, of
total revenues for the nine months ended September 30, 1998, approximately
31%, 37% and 6%, respectively, of total revenues in 1997 and approximately
26%, 0% and 28%, respectively, of total revenues in 1996. Revenues from these
large customers were attributable primarily to construction contracts for the
sale of
26
<PAGE>
dark fiber that extend through 1998 or into 1999. In 1997, Qwest entered into
two substantial construction contracts for the sale of dark fiber to GTE.
Qwest's contracts with Frontier and GTE provide for reduced payments and
varying penalties for late delivery of route segments, and allow the
purchaser, after expiration of grace periods ranging generally from 12 to 18
months, to drop the non-delivered segments from the system route to be
delivered. In such cases the purchaser would not pay Qwest for that portion of
the contract purchase price allocated to the non-delivered segments. A failure
by any of Qwest's dark fiber purchasers to pay the full contract purchase
price due to either the purchaser's breach or the failure of Qwest to timely
deliver certain segments would require Qwest to seek alternative funding
sources for capital expenditures. A significant reduction in the level of
services Qwest provides for any of its large customers could have a material
adverse effect on Qwest's results of operations or financial condition.
Qwest has generated substantial revenues from dark fiber sales. However, as
its network is completed, Qwest anticipates that revenues from dark fiber
sales will substantially decrease in the future. Qwest's business plan assumes
that Qwest will increase its revenue from communications services operations
to fund the expansion of Qwest's network. Qwest is aware that certain
interexchange carriers are constructing or considering new networks.
Accordingly, Qwest cannot assure you that any of Qwest's customers will
increase their use of Qwest's services, or will not reduce or cease their use
of Qwest's services, which could have a material adverse effect on Qwest's
ability to fund the completion of its network.
MANAGING RAPID GROWTH
Part of Qwest's strategy is to achieve rapid growth by using its network to
exploit opportunities that Qwest expects will result from regulatory and
technological changes and other industry developments. Qwest's growth strategy
also includes exploring opportunities for strategic acquisitions. Qwest has
completed four acquisitions since its initial public offering, including the
acquisition of LCI in June 1998 for approximately $3,930.5 million in Qwest
Common Stock. As result of its strategy, Qwest is experiencing rapid expansion
that management expects will continue for the foreseeable future. This growth
has increased the operating complexity of Qwest. To manage its expansion
effectively Qwest must:
. expand, train and manage its employee base, and attract and retain highly
skilled personnel;
. expand and improve its systems for serving and communicating with its
customers;
. continue to develop and market new products and services;
. integrate acquired operations with its existing operations; and
. control its expenses related to the expansion of its business.
Qwest cannot assure you that it will be able to satisfy these requirements,
or otherwise manage its growth effectively, and any failure to do so could
have a material adverse effect on Qwest's business, financial condition and
results of operations.
PRICING PRESSURES AND INDUSTRY CAPACITY
The long distance transmission industry has generally been characterized as
having overcapacity and declining prices since shortly after the AT&T
divestiture in 1984. Qwest believes that increasing demand in the last several
years has resulted in a shortage of capacity and slowed the decline in prices.
However, Qwest also anticipates that prices for communications services will
continue to decline over the next several years. This is due primarily to (1)
recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber and (2) strategic
alliances or similar transactions, such as purchasing alliances for long
distance capacity among RBOCs, that increase the parties' purchasing power.
Also, Qwest's existing and future construction contracts for the sale of dark
fiber with other carriers will increase supply of capacity and
may lower prices for traffic on Qwest's network. These downward pressures on
prices could have a material adverse effect on the business of Qwest and on
its financial condition and results of operations, including its ability to
fund future operations.
27
<PAGE>
YEAR 2000 RISKS
Many existing computer systems, including hardware and software, use only
the last two digits to identify a year. Consequently, as the year 2000
approaches, such systems will not recognize the difference in a year that
begins with "20" rather than "19." As a result of the date change in the year
2000, if any of Qwest's computer systems use only two digits to define the
year, these defective systems may cause disruptions in its network operations
through which Qwest provides communications services to its customers and in
its internal operations. Additionally, Qwest is dependent upon outside sources
to provide communications services to its customers and to bill its customers
for such services. The greatest risk to Qwest's ability to provide
communications services is the failure of third-party service providers to be
year 2000 compliant, especially those third-party service providers that
provide local access and certain of the billing systems upon which the
provision of long distance telecommunications service relies.
Qwest has established a year 2000 compliance group. The objective of the
year 2000 compliance group is to eliminate disruptions as a result of the date
change in the year 2000. The compliance group has developed a five step plan
to identify and repair year 2000 affected systems: (i) identify potentially
date-sensitive systems, including third-party products; (ii) assess such
systems for year 2000 compliance; (iii) modify, upgrade or replace non-
compliant systems; (iv) test the corrected systems; and (v) deploy the
corrected systems.
The year 2000 compliance group has focused mainly on Qwest's domestic
operations and, to a lesser extent, on its international operations.
In addition to reviewing its own systems, the year 2000 compliance group is
submitting requests to third-party service providers to obtain information as
to their compliance efforts.
Qwest currently anticipates that remediation of the systems supporting the
domestic operations will be completed by December 31, 1998. Testing and
deployment of corrected systems is scheduled for completion by June 30, 1999.
Qwest's ability to meet these target dates depends on third parties for
operational testing, as well as Qwest's overall efforts to integrate the
operations of recently acquired businesses, including LCI. Thus, various
factors, including the compliance efforts of third parties, over which Qwest
has no control, may affect these target dates.
Qwest is developing a contingency plan in the event that any of Qwest or its
third party service providers fail to be year 2000 compliant. The contingency
plans are expected to be completed by June 1999.
Qwest estimates the selling, general and administrative ("SG&A") expenses of
implementing its year 2000 plan will be approximately $5.0 million to $7.0
million for the year ending December 31, 1998. During the nine months ended
September 30, 1998, Qwest incurred approximately $3.0 million for the year
2000 compliance costs, included in SG&A expense. Qwest expects to incur an
additional approximately $15.0 million to $20.0 million in SG&A expense in
1999 to implement its year 2000 plan.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. For instance, recent technological advances permit substantial
increases in the transmission capacity of both new and existing fiber. The
introduction of new products or emergence of new technologies also may reduce
the cost and increase the supply of certain services similar to those provided
by Qwest. Qwest believes that for the foreseeable future technology changes
will neither materially affect the continued use of fiber optic cable nor
materially hinder Qwest's ability to acquire necessary technologies. However,
the effect of technological changes on Qwest's operations cannot be predicted
and could have a material adverse effect on Qwest's business, financial
condition and results of operations.
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REGULATION RISKS
Qwest's operations are subject to extensive federal and state regulation.
Communications services are subject to the provisions of the Communications
Act of 1934, as amended (the "Communications Act"), including the
Telecommunications Act and the FCC regulations under the Communications Act.
Communications services also are covered by laws and regulations of the
states, including regulation by PUCs and other state agencies. Generally,
Qwest must obtain and maintain certificates of authority from regulatory
bodies in most states where it offers intrastate services. It also must obtain
prior regulatory approval of tariffs for its intrastate services in most of
these jurisdictions.
Regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. As
deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to Qwest. Some of Qwest's
operations are also subject to a variety of environmental, safety, health and
other governmental regulations. Qwest cannot assure you that future
regulatory, judicial or legislative activities will not have a material
adverse effect on Qwest.
The Telecommunications Act may have potentially significant effects on the
operations of Qwest. The Telecommunications Act allows the RBOCs to enter the
long distance business and enables other entities, including entities
affiliated with power utilities and ventures between local exchange carriers
and cable television companies, to provide an expanded range of
telecommunications services. Entry of these companies into the long distance
business would result in substantial additional competition in communications
services. This may have a material adverse effect on Qwest and its customers
that are communications services providers themselves. However, Qwest believes
that entry by the RBOCs and other companies into the market will create
opportunities for Qwest to sell fiber or lease long distance high volume
capacity.
Qwest monitors compliance with federal, state and local regulations
governing the discharge and disposal of hazardous and environmentally
sensitive materials, including the emission of electromagnetic radiation.
Qwest believes that it is in compliance with these regulations, but it cannot
assure you that any discharge, disposal or emission might not expose Qwest to
claims or actions that could have a material adverse effect on Qwest.
RELIANCE ON KEY PERSONNEL
Qwest's operations are managed by key executive officers. The loss of any of
these executive officers could have a material adverse effect on Qwest. Qwest
believes that its growth and future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. The competition for qualified personnel in the telecommunications
industry is intense. Qwest cannot assure you that it will be able to hire or
retain necessary personnel. The loss of certain key members of senior
management or the failure to recruit additional qualified personnel in the
future could significantly impede Qwest's ability to complete the integration
of acquired businesses and to attain its financial, expansion, marketing and
other objectives.
CONCENTRATION OF VOTING POWER; POTENTIAL CONFLICTS OF INTEREST
Philip F. Anschutz, a director and Chairman of Qwest, beneficially owned
approximately 47.9% of the issued and outstanding shares of Qwest Common Stock
at October 31, 1998 (after giving effect to the transfer of approximately 9.0
million shares to a trust in connection with a transaction announced on
November 28, 1998). Based on the number of shares of Qwest Common Stock and
Icon Common Stock issued and outstanding at October 31, 1998 and the Icon
Record Date, respectively, and assumed Exchange Ratios of 0.3200 and 0.4444,
upon completion of the Merger Mr. Anschutz would beneficially own
approximately 47.2% and 46.9%, respectively, of the issued and outstanding
shares of Qwest Common Stock. As a result, Mr. Anschutz will continue to be in
a position to substantially influence actions that require stockholders'
approval, including the election of the Board of Directors of Qwest. Also, Mr.
Anschutz is a director and holds approximately 5% of the stock of Union
Pacific Railroad Company. Subsidiaries of that company own railroad rights-of-
way on which a significant portion of Qwest's network has been and will be
built.
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ANTI-TAKEOVER PROVISIONS
Qwest's Amended and Restated Certificate of Incorporation and bylaws include
provisions that may have the effect of delaying, deterring or preventing a
future takeover or change in control of Qwest without approval by the Qwest
Board. These provisions may render the removal of directors and management
more difficult. The Qwest Certificate of Incorporation places restrictions on
who may call a special meeting of stockholders. In addition, the Qwest Board
has the authority to issue up to 25,000,000 shares of preferred stock and to
determine the price, rights, preferences, and privileges of those shares
without any further vote or actions by the stockholders. The rights of the
holders of Qwest Common Stock may be adversely affected by the rights of the
holders of any Qwest preferred stock that may be issued in the future. The
issuance of shares of Qwest preferred stock may provide desirable flexibility
in connection with possible acquisitions and may serve other corporate
purposes. However it could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of Qwest or
even may discourage a third party from attempting to do so. In addition, Qwest
is also is covered by anti-takeover provisions of Section 203 of the DGCL.
This provision will prohibit Qwest from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder unless
the business combination is approved in a prescribed manner. The application
of Section 203 also could have the effect of delaying or preventing change of
control of Qwest. Furthermore, Qwest's bylaws include provisions that provide
that the exact number of directors will be determined by a majority of the
Qwest Board and that vacancies on the Qwest Board may be filled by a majority
vote of the directors then in office. These provisions may have the effect of
delaying or preventing changes in control or management of Qwest, and could
adversely affect the market price of the Qwest Common Stock. Additionally,
there are federal regulations that require prior approval of some transfers of
control and could also have the effect of delaying, deferring or preventing a
change of control. See "DESCRIPTION OF QWEST CAPITAL STOCK."
DIVIDEND POLICY; RESTRICTION ON PAYMENT OF DIVIDENDS
Qwest does not anticipate paying cash dividends in the foreseeable future.
The ability of Qwest and its subsidiaries to pay dividends is limited by their
debt instruments.
POSSIBLE VOLATILITY OF STOCK PRICE
Qwest made its initial public offering in June of 1997 and, accordingly, has
a limited history as a public company. Historically, the market prices for
securities of emerging companies in the telecommunications industry have been
highly volatile. The trading price of Qwest Common Stock could be subject to
wide fluctuations in response to numerous factors. These factors include (1)
operating results, (2) competition, (3) announcements of technological
innovations or new products by Qwest or its competitors, (4) product
enhancements by Qwest or its competitors, (5) regulatory changes, and (6) any
differences in actual results and results expected by investors and analysts.
In addition, the stock market has experienced volatility that has affected the
market prices of equity securities of many companies and that often has been
unrelated to the operating performance of those companies. These broad market
fluctuations may adversely affect the market price of the Qwest Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
At October 31, 1998, approximately 335.6 million shares of Qwest Common
Stock were outstanding. The outstanding shares included approximately 173.0
million "restricted" shares that currently are eligible for sale in the public
securities market without registration under the Securities Act to the extent
permitted by Rule 144 under the Securities Act. In addition, at October 31,
1998, approximately 174.4 million shares of Qwest Common Stock beneficially
owned by officers and directors of Qwest who may be "affiliates" of Qwest
under Rule 144 were eligible for sale to the extent permitted by Rule 144.
If one year has elapsed since the later of the date of acquisition of
restricted shares from Qwest or any "affiliate" of Qwest, or if shares are
held by any "affiliate," Rule 144 permits the holder to sell within any
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three-month period a number of shares that does not exceed the greater of (1)
1% of the then-outstanding shares of Qwest Common Stock or (2) the average
weekly trading volume of shares of Qwest Common Stock on all exchanges and
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date when notice of
the sale is filed with the Commission. Sales under Rule 144 are also subject
to restrictions on the manner of sales, notice requirements and the
availability of current public information about Qwest. If two years have
elapsed since the date of acquisition of restricted shares from Qwest or from
any "affiliate" of Qwest, and the holder was not an affiliate of Qwest at any
time during the 90 days preceding a sale, that person would be entitled to
sell that Qwest Common Stock in the public market under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
Qwest has an effective registration statement under the Securities Act with
respect to 35,000,000 shares of Qwest Common Stock reserved for issuance under
its Equity Incentive Plan. All shares issuable under the plan generally may be
resold by non-affiliates in the public market upon issuance without
restriction under the Securities Act. Affiliates may sell the shares to the
extent permitted by Rule 144. As of October 31, 1998, approximately 21.1
million shares of Qwest Common Stock were subject to outstanding options under
the Equity Incentive Plan and 8.6 million shares were issuable under a warrant
held by an affiliate of Anschutz Company. In addition, 0.9 million of the
authorized shares of Qwest Common Stock are reserved for issuance under
Qwest's Growth Share Plan, 2.5 million of the authorized shares of Qwest
Common Stock are reserved for issuance under various 401(k) plans of Qwest and
0.8 million of the authorized shares of Qwest Common Stock are reserved for
issuance under Qwest's Employee Stock Purchase Plan. In addition, Qwest
expects to grant the holders of approximately 9.0 million shares of Qwest
Common Stock certain registration rights.
In connection with the acquisition of EUnet, Qwest has issued or will issue
approximately 3.6 million shares of Qwest Common Stock, in the aggregate, to
stockholders and optionholders of EUnet. The shares have been or will be
issued in a private placement exempt from registration under the Securities
Act and bear restrictive legends. Qwest has undertaken the registration of the
resale of such shares of Qwest Common Stock under the Securities Act. In
connection with the registration, EUnet stockholders will also receive, at
Qwest's option, either (1) approximately $14.4 million in cash plus interest
to the date of payment or (2) additional shares of Qwest Common Stock having
the value of the cash payment, based upon an average of the closing prices for
15 consecutive trading days commencing 20 trading days before the effective
date of the registration. Approximately 0.6 million shares of the shares of
Qwest Common Stock issued in the transaction have been placed in escrow for
two years and may be recovered by Qwest to satisfy any indemnification claims.
Any shares of Qwest Common Stock remaining in escrow after the satisfaction of
any indemnification claims will be transferred to the former EUnet
stockholders.
Sales of a substantial amount of Qwest Common Stock in the public market, or
the perception that the sales may occur, could adversely affect the market
price of Qwest Common Stock and impair Qwest's ability to raise additional
capital through the sale of its equity securities.
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PLAN OF MERGER
BACKGROUND OF THE MERGER
The following summarizes the significant contacts between Icon, Qwest and
certain other potential strategic partners of Icon that resulted in the
execution of the Merger Agreement and certain subsequent events.
On November 7, 1997, Scott A. Baxter, Chairman of the Board of Directors,
President and Chief Executive Officer of Icon and Joseph P. Nacchio, President
and Chief Executive Officer of Qwest, met in Qwest's Morristown, New Jersey
office to learn more about each other's respective companies. They concluded
that there might be some synergies related to a strategic alliance and agreed
to talk further at a later date.
Later in November 1997, Mr. Baxter and Kenneth J. Hall, Senior Vice
President, Chief Financial Officer and Treasurer of Icon, met in Denver,
Colorado with Mr. Nacchio and Marc B. Weisberg, Senior Vice President of Qwest
Communications Corporation, a wholly owned subsidiary of Qwest ("QCC"), Lewis
O. Wilks, President--Business Markets of QCC, and certain other Qwest
representatives. The parties discussed a potential strategic alliance between
Icon and Qwest. After the meeting and following additional discussions between
the parties during November and December 1997, Icon and Qwest decided not to
pursue further discussions at that time.
In March 1998, Icon proposed to enter into a strategic transaction with a
telecommunications company other than Qwest, based on conversations that had
been conducted over the preceding three month period. While limited
discussions ensued, the parties elected not to proceed with a transaction at
that time.
On May 15, 1998, Mr. Weisberg and certain other Qwest representatives met in
Weehawken, New Jersey with Messrs. Baxter and Hall and certain other Icon
representatives. The Qwest parties obtained a general understanding of Icon's
various business units and how they would complement Qwest's capabilities.
These discussions continued through the beginning of June 1998.
In May and June of 1998, Icon had preliminary discussions with a second
telecommunications company other than Qwest with respect to a potential
strategic transaction. While potential synergies were discussed, and due
diligence conducted pursuant to a non-disclosure agreement, the companies
elected not to proceed with a transaction at that time. During this time, Icon
was also contacted by a professional services firm regarding a strategic
transaction. While the parties had preliminary discussions, they ultimately
elected not to pursue such a transaction.
In July 1998, Icon circulated to several carriers a Request for Proposal
(the "RFP") for network services and related communications infrastructure
facilities. During the course of discussions with executives at several of the
carriers who responded to the RFP, including Qwest, Icon explored potential
business combination transactions and other strategic transactions to
complement the services and facilities arrangements contemplated in the RFP.
See "--Reasons for the Merger."
On July 9, 1998, representatives of Icon's communications and corporate
development departments met with representatives of Qwest's sales department
to present and discuss Qwest's response to the RFP. The parties had follow-up
discussions by telephone and email regarding Qwest's response to the RFP.
On July 22, 1998, Mr. Weisberg and Mr. Baxter met in New York City to
discuss the possibility of an alliance between Icon and Qwest and the manner
in which Icon and Qwest could accelerate their respective business plans if
they entered into that alliance.
In July 1998, Icon held a follow-up meeting with the telecommunications
company with which it proposed to enter into a strategic transaction in March
1998, based on conversations and meetings that Icon held with such company in
the intervening months. This company expressed only limited interest in
proceeding with a strategic transaction, and the parties discontinued their
discussions.
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On August 5, 1998, Mr. Weisberg and Mr. Baxter met in New York City to
discuss Qwest's response to the RFP. Messrs. Weisberg and Baxter also
discussed how Icon and Qwest might work together if the companies were
combined. Messrs. Weisberg and Baxter did not discuss the terms of any such
combination.
On August 18, 1998, Mr. Weisberg and Mr. Baxter discussed by telephone the
various components of Icon's operations. Mr. Weisberg asked Mr. Baxter
questions with a view towards determining what value Icon has to Qwest's
operations. Messrs. Weisberg and Baxter did not discuss the terms of any
business combination transaction.
On August 20, 1998, Mr. Weisberg and Mr. Baxter again discussed by telephone
the various components of Icon's operations. Mr. Weisberg told Mr. Baxter that
Qwest might have an interest in pursuing some type of business combination
transaction with Icon. Messrs. Weisberg and Baxter did not discuss the terms
of any such transaction. They agreed to meet again on August 24, 1998.
On August 24, 1998, Messrs. Nacchio, Weisberg and Baxter met in Morristown,
New Jersey, to discuss Icon's current service offerings and how they would fit
with Qwest's service offerings. They discussed the possible synergies that
might be achieved if the operations of Icon and Qwest were combined and
whether Mr. Baxter would be able and willing to run Icon as a division of
Qwest after the combination. Mr. Weisberg said that Qwest was prepared to
deliver to Icon a term sheet for such a transaction and, if the term sheet
were generally acceptable, to undertake all necessary due diligence.
On August 28, 1998, Mr. Weisberg told Mr. Baxter by telephone that Qwest had
an interest in acquiring Icon in an all-stock transaction at a value of $12.00
of Qwest Common Stock for each share of Icon Common Stock. Mr. Baxter said
that Icon would be interested in such a transaction and asked Mr. Weisberg to
summarize the other terms of the transaction. Later that day, Mr. Weisberg
delivered to Mr. Baxter a preliminary term sheet for a business combination
transaction between Icon and Qwest. Mr. Weisberg said that, if the term sheet
were generally acceptable, Qwest could commence its due diligence at Icon's
offices in Weehawken, New Jersey during the week beginning August 31, 1998 and
could deliver a draft merger agreement shortly. Mr. Weisberg said that Qwest
would be in a position to make a firm offer to acquire Icon after completing
the due diligence and negotiating the merger agreement.
On August 30, 1998, Mr. Baxter told Mr. Weisberg by telephone that the term
sheet was generally acceptable to Icon. Mr. Weisberg and Mr. Baxter discussed
the scope and timing of Qwest's due diligence and delivery of a draft merger
agreement.
In August and early September 1998, prior to execution of the Merger
Agreement, Icon conducted discussions with three respondents to the RFP with
respect to potential strategic transactions. The nature of the transactions
discussed included mergers with these companies and equity investments and
equity for services arrangements. After these discussions, Icon's management
determined that such transactions did not offer one or more of the following:
(1) the business capabilities or financial resources that Icon hoped to
obtain, (2) a more liquid and less volatile security than the Icon Common
Stock and (3) a solution to Icon's short term and long term capital needs.
Icon's management further determined that none of these companies indicated a
level of commitment that led Icon's management to believe that the proposed
strategic partner and nature of the transaction offered the kind of advantages
offered by the Qwest transaction or that such company would proceed with a
strategic transaction in a manner satisfactory to Icon.
On September 1, 2 and 3, 1998, Messrs. Weisberg and Wilks, Lawrence J.
Bouman, Executive Vice President--Product Development and Multimedia Services
of QCC, Tom Matthews, Executive Vice President--Human Resources of QCC, and
certain other representatives of Qwest, O'Melveny & Myers LLP, Qwest's legal
counsel, and KPMG Peat Marwick LLP, Qwest's independent public accountants,
met at Icon's offices in Weehawken, New Jersey to conduct due diligence.
Messrs. Baxter and Hall, David L. Goret, Vice President-- Business Affairs and
General Counsel of Icon, and certain other representatives of Icon discussed
due diligence matters with the Qwest representatives. Mr. Weisberg and Mr.
Baxter discussed the term sheet in general terms.
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On September 3, 1998, Qwest's legal counsel delivered a draft merger
agreement to Icon and to Parker Chapin Flauttau & Klimpl, LLP, Icon's legal
counsel.
On September 4, 1998, Mr. Weisberg discussed with Mr. Baxter the progress of
Qwest's due diligence. Mr. Weisberg said that Qwest had not learned any
information that lessened its interest in proposing a business combination
transaction with Qwest. Messrs. Weisberg and Baxter did not discuss the
preliminary term sheet or draft merger agreement delivered by Qwest to Icon.
Messrs. Weisberg and Baxter agreed to meet in New York City on September 10,
1998 to discuss the draft merger agreement and the other terms of a business
combination transaction.
On September 8, 1998, Qwest's legal counsel delivered to Icon and its legal
counsel drafts of option agreements and voting agreements to be entered into
by Mr. Baxter and by Richard M. Brown, Vice President--Information
Technologies of Icon, and Scott Harmolin, Senior Vice President--Chief
Technology Officer of Icon.
On September 10, 11, 12 and 13, 1998, Messrs. Weisberg and Matthews and
Qwest's legal counsel met with Messrs. Baxter, Hall and Goret, Icon's legal
counsel and financial advisors in New York City to negotiate the merger
agreement, the option agreements and the voting agreements and to discuss the
other terms of a business combination transaction. Among the other matters
discussed in these meetings, Icon said that it was prepared to enter into a
merger agreement only if Qwest would commit to provide certain debt financing
and to provide telecommunications capacity and related ancillary services. The
parties negotiated the terms of a credit facility, the terms of warrants that
would be issued by Icon to Qwest in consideration of Qwest's commitment to
provide the credit facility and the terms of a registration rights agreement
relating to the shares of Icon Common Stock that would be issued upon exercise
of the warrants. The parties also negotiated the terms of a private line
services agreement and a colocation facilities license agreement.
On September 13, 1998, Qwest offered to enter into the merger agreement and
related documents on the terms that had been negotiated. Beginning at 12:00
p.m. on that day, the Icon Board met by telephone to consider the Merger, the
Merger Agreement and the related documents. At that meeting, Icon's
management, financial advisor and legal counsel discussed the Merger with the
Icon Board. Icon's legal counsel reviewed the terms of the Merger with the
Icon Board. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") made a
financial presentation to the Icon Board regarding the Merger, and delivered
its opinion with respect to the fairness, from a financial point of view, of
the merger consideration to be received by the Icon Stockholders (other than
Icon Stockholders who are affiliates of Icon). Thereafter, Icon's Board of
Directors unanimously approved the Merger and the Merger Agreement and certain
related matters and accepted Qwest's offer. The parties entered into the
Merger Agreement and related documents later that evening.
On September 28, 1998, Qwest and Icon entered into the Credit Agreement. See
"--Other Transaction Documents--Qwest Credit Facility."
In November and December 1998, DLJ updated Icon's Board of Directors and
management on certain financial matters related to the Merger as well as its
financial advisory services to Qwest's principal stockholder in connection
with an on-going transaction involving the shares of Qwest Common Stock owned
by the principal stockholder. On or about November 13, 1998, in connection
with the printing of this Proxy Statement/Prospectus, Icon requested DLJ to
reissue its fairness opinion. At a meeting of the Icon Board on December 1,
1998, DLJ made a financial presentation to Icon's Board of Directors and
delivered its oral opinion (which was subsequently confirmed by delivery of
its written opinion dated the date of this Proxy Statement/Prospectus, a copy
of which is attached as Annex B to this document) with respect to the
fairness, from a financial point of view, of the merger consideration to be
received by the Icon Stockholders (other than Icon Stockholders who are
affiliates of Icon). Thereafter, Icon's Board of Directors unanimously
reaffirmed its recommendation that the Icon Stockholders approve the Merger
and adopt the Merger Agreement. See "--Recommendation of the Icon Board;
Icon's Reasons for the Merger" and "--Opinion of Icon's Financial Advisor."
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RECOMMENDATION OF THE ICON BOARD; ICON'S REASONS FOR THE MERGER
The Icon Board believes that the Merger offers the Icon Stockholders an
opportunity to receive a significant premium on their shares of Icon Common
Stock in a tax-free transaction and participate in a combined organization
that the Icon Board believes will be a stronger competitor in the
telecommunications industry. The Icon Board has carefully considered the terms
of the proposed Merger and has unanimously determined that the Merger and the
Merger Agreement are in the best interests of Icon and the Icon Stockholders,
has approved the Merger and the Merger Agreement, and unanimously recommends
that the Icon Stockholders vote "FOR" the approval of the Merger and the
adoption of the Merger Agreement.
In reaching its decision to approve the Merger and the Merger Agreement and
to recommend that the Icon Stockholders vote to approve the Merger and adopt
the Merger Agreement, the Icon Board consulted with its financial and legal
advisors and with senior management and considered a number of factors,
including, without limitation, the following:
. Information concerning Qwest's and Icon's respective businesses, assets,
management, competitive position and prospects, including Icon's need
for bandwidth at attractive prices and sufficient capital to continue to
grow and implement its business plan in 1999, Qwest's industry-leading,
high performance IP nationwide OC-48 network and Icon's determination
that Qwest offered Icon the best opportunity to meet Icon's short and
long term capital and facilities needs and strategic business
objectives.
. Enhancement of the strategic and market position of Qwest and Icon
together, beyond that achievable by Icon alone, and the fact that the
Merger will strengthen the combined management team of Qwest and Icon
and will improve the ability of the combined entity to compete in the
Internet services industry and to respond to challenges resulting from
the changing regulatory and technological environment in the domestic
telecommunications industry.
. The potential efficiencies, elimination of redundancies, economies of
scale and other synergies that may be realized as a result of the
combination of Qwest's and Icon's operations, together with the
likelihood that the combined entity would continue to provide career
opportunities and employment for many of the employees of Icon.
. The financial condition, cash flows and results of operations of Qwest
and Icon, both on a historical and prospective basis, and current
industry, economic and market conditions.
. The potential difficulty that Icon could experience raising capital in
light of recent volatility in the capital markets.
. Qwest's commitment to provide debt financing pursuant to the Qwest
Credit Facility and to provide telecommunications capacity and related
ancillary services pursuant to a private line services agreement and a
colocation agreement.
. Historical market prices and trading information with respect to the
Qwest Common Stock and the Icon Common Stock.
. The opportunity for Icon Stockholders to receive Qwest Common Stock
valued at a significant premium over the market price of Icon Common
Stock prevailing prior to the public announcement of the Merger (65.5%
over the closing market price on the last trading day prior to public
announcement of the Merger Agreement and 60.0% over the closing market
price one week prior to public announcement of the Merger Agreement).
. The opportunity for Icon stockholders to receive Qwest Common Stock
which offers a more liquid and less volatile security in a growth
company with a more diversified stream of revenues that, nonetheless,
continues to be focused on data communications.
. The fact that the Merger is designed to be tax-free to Icon
Stockholders.
. The Exchange Ratio and related collar provisions of the Merger
Agreement, which provide that (1) Icon Stockholders will receive Qwest
Common Stock valued at $12.00 per share (based on the Average Market
Price) for each share of Icon Common Stock so long as the Average Market
Price is not less
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than $27.00 or more than $37.50, (2) if the Average Market Price
increases, Icon Stockholders will have the opportunity to participate in
this increased value because they will receive Qwest Common Stock valued
at more than $12.00 for each share of Icon Common Stock (based on the
Average Market Price), and (3) if the Average Market Price decreases
below $27.50, Icon Stockholders will receive Qwest Common Stock valued
at less than $12.00 (based on the Average Market Price). See "--Terms of
the Merger Agreement--Conversion of Icon Common Stock in the Merger."
. The obligation of Qwest and Icon to close the Merger without regard to
the market price of Qwest Common Stock or Icon Common Stock.
. The ability of Icon, subject to certain conditions, (1) to provide
information to, and negotiate with, a third party which has made an
unsolicited acquisition proposal and (2) to terminate the Merger
Agreement if the Icon Board approves a Superior Proposal (as defined
below), subject to payment of a termination fee in an amount that the
Icon Board and its financial advisor believed would not substantially
impair the possibility of a competing transaction. See "--Terms of the
Merger Agreement--Termination."
. The other terms and conditions of the Merger Agreement and the other
Transaction Documents. See "--Terms of the Merger Agreement" and "--
Other Transaction Documents."
. Discussions by Icon's management with other companies regarding
potential business combination transactions and other strategic
transactions to complement the services and facilities arrangements
contemplated by Icon's RFP circulated to several carriers in July 1998
and the belief of the Icon Board that there are very limited number of
potential acquirors that offer the kinds of benefits provided by Qwest,
i.e., its low cost dark fiber network, its superior financial resources
and, for Icon stockholders, a continuing interest in a more liquid and
less volatile growth stock. Moreover, only Qwest submitted a firm
proposal to engage in a business combination.
. Icon's strategic alternatives, including maintaining Icon as an
independent company.
. The financial presentation of DLJ and the DLJ Opinion (as defined
below), including the financial presentation of DLJ on December 1, 1998
and the written opinion of DLJ dated the date of this Proxy
Statement/Prospectus, a copy of which is included as Annex B to this
Proxy Statement/Prospectus. See "--Opinion of Icon's Financial Advisor."
In reaching its decision to reaffirm its recommendation that the Icon
Stockholders approve the Merger and adopt the Merger Agreement, the Icon Board
consulted with its financial and legal advisors and considered a number of
factors, including, without limitation, events that had occurred since
September 13, 1998, the date of its recommendation.
The foregoing discussion of the information and factors considered by the
Icon Board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the Merger, the Icon Board did
not find it practicable to, and did not quantify or otherwise assign relative
weights to, the specific factors considered in reaching its determination. In
addition, individual members of the Icon Board may have given different
weights to different factors. For a discussion of the interest of certain
members of Icon's management and Icon's Board in the Merger, see "--Interests
of Certain Persons in the Merger."
THE ICON BOARD UNANIMOUSLY RECOMMENDS THAT THE ICON STOCKHOLDERS VOTE "FOR"
THE APPROVAL OF THE MERGER AND THE ADOPTION OF THE MERGER AGREEMENT.
OPINION OF ICON'S FINANCIAL ADVISOR
DLJ has acted as financial advisor to Icon in connection with the Merger and
delivered its oral opinion to the Icon Board on September 13, 1998, which was
subsequently confirmed by delivery of a written opinion dated September 13,
1998 (the "DLJ Opinion") to the effect that, as of the date of such opinion
and based upon and subject to the assumptions, limitations and qualifications
set forth therein, the Merger Consideration (as defined below) was fair to the
holders of Icon Common Stock (other than holders of Icon Common Stock who are
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affiliates of Icon) from a financial point of view. DLJ has confirmed its
opinion dated September 13, 1998 by delivery of a written opinion dated the
date of this Proxy Statement/Prospectus. In connection with its opinion dated
the date of this Proxy Statement/Prospectus, DLJ updated certain of the
analyses performed in connection with its earlier opinion and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith.
THE FULL TEXT OF THE WRITTEN OPINION OF DLJ DATED THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS IS SET FORTH AS ANNEX B TO THIS PROXY
STATEMENT/PROSPECTUS AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR
ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND OTHER MATTERS CONSIDERED AND LIMITS
OF THE REVIEW BY DLJ.
The DLJ Opinion was prepared for the Icon Board and addresses only the
fairness of the Merger Consideration to the holders of Icon Common Stock
(other than holders of Icon Common Stock who are affiliates of Icon) from a
financial point of view and does not constitute a recommendation to any
stockholder of Icon as to how such stockholder should vote at the Special
Meeting. DLJ did not express any opinion as to the price at which Qwest Common
Stock will actually trade at any time. The DLJ Opinion did not address the
relative merits of the Merger and the other business strategies considered by
Icon's Board, nor did it address Icon Board's decision to proceed with the
Merger. The type and amount of consideration was determined by arm's length
negotiations between Icon and Qwest. No restrictions or limitations were
imposed upon DLJ with respect to the investigations made or procedures
followed by DLJ in rendering its opinion.
In arriving at the DLJ Opinion, DLJ reviewed the Merger Agreement and the
exhibits thereto. DLJ also reviewed financial and other information that was
publicly available or furnished to it by Icon and Qwest, including information
provided during discussions with the respective managements of Icon and Qwest.
Included in the information provided during the discussions with the
management of Icon were certain financial projections of Icon for the period
beginning December 31, 1997 and ending December 31, 2002 prepared by the
management of Icon. In addition, DLJ compared certain financial and securities
data of Icon and Qwest with various other companies whose securities are
traded in public markets, reviewed the historical stock prices and trading
volumes of Icon Common Stock and Qwest Common Stock, reviewed prices and
premiums paid in certain other business combinations and conducted such other
financial studies, analyses and investigations as DLJ deemed appropriate for
purposes of rendering its opinion. DLJ was not requested to, and did not,
solicit the interest of any other party in acquiring Icon.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to it from public sources, that was provided to it by Icon and Qwest or the
respective representatives of Icon and Qwest, or that was otherwise reviewed
by DLJ. With respect to the financial projections supplied to DLJ, DLJ relied
on the representation of the management of Icon that the financial projections
were reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of Icon as to the future operating
and financial performance of Icon, assuming the Company would be able to
satisfy its anticipated funding needs on satisfactory terms and timing. DLJ
did not assume any responsibility for making an independent evaluation of any
assets or liabilities or for making any independent verification of any of the
information reviewed by DLJ. DLJ relied as to certain legal matters on advice
of counsel to Icon.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on information made available to DLJ
as of, the date of such opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any
obligation to update, revise or reaffirm its opinion.
The following is a summary of the material analyses performed by DLJ in
connection with the DLJ Opinion and presented by DLJ to the Icon Board at the
September 13, 1998 meeting of the Icon Board.
Comparable Company Analysis. To provide comparative market information, DLJ
compared selected historical and projected operating and financial ratios of
Icon to the corresponding data and ratios of selected internet providers whose
securities are publicly traded. Such companies included Concentric Network
Corp., PSI
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Net, Inc., US Web Corp., Verio, Inc., Exodus Communications, Inc., Mindspring
Enterprises, Inc. and Earthlink Network, Inc. (collectively, the "Comparable
Companies"). Of the Comparable Companies, DLJ focused primarily on Concentric
Network Corp., PSI Net, Inc., US Web Corp. and Verio, Inc. (collectively, the
"Most Comparable Companies"). Historical financial information used in
connection with the ratios provided below with respect to Icon and the
Comparable Companies is as of the most recent financial statements publicly
available for each company as of June 30, 1998. Revenue estimates of the
Comparable Companies were derived from publicly available research reports and
revenue estimates for Icon were based on estimates provided by the management
of Icon.
DLJ performed a valuation analysis of Icon by applying certain market
trading statistics for the Most Comparable Companies to Icon's historical and
estimated financial results. DLJ examined certain publicly available financial
data of the Most Comparable Companies, including, among other things,
enterprise value (defined as market value of common equity plus book value of
total debt and preferred stock less cash) as a multiple of (i) latest 12
months ("LTM") revenue, (ii) latest quarter annualized ("LQA") revenue, (iii)
projected calendar year 1998 revenue and (iv) projected calendar year 1999
revenue. For purposes of its valuation, DLJ focused on the implied valuation
of Icon's higher growth, higher margin service revenues. DLJ valued Icon's
lower growth, lower margin revenues by using a 0.75x revenue multiple, in line
with research valuation methodology. DLJ examined Icon's adjusted enterprise
value (excluding the enterprise value of the product revenues) in relationship
to its service revenues for comparative purposes. DLJ believes that looking at
Icon's service revenues is appropriate and consistent with the manner in which
the Comparable Companies are evaluated based on their sales mix. DLJ noted
that as of September 11, 1998, the Most Comparable Companies were trading at
implied multiples of enterprise value in a range of (i) 3.9x to 5.2x for LTM
revenue, (ii) 2.8x to 5.9x for LQA revenue, (iii) 3.9x to 4.2x for projected
calendar year 1998 revenue and (iv) 1.2x to 2.8x for projected calendar year
1999 revenue. Based on the valuation multiples of the Most Comparable
Companies discussed above, DLJ derived a summary valuation range for Icon
Common Stock of $10.75 to $15.50 per share, as compared to the equity value
implied by the Merger Consideration of $12.00 per share.
Comparable Transaction Analysis. DLJ also performed an analysis of selected
merger and acquisition transactions of internet providers consisting of 10
transactions announced and/or consummated during the period from June 1997 to
August 1998. Such transactions included: (Target/Acquiror) CKS Group, Inc. and
US Web Corp.; NTX, Inc. (TABNet) and Verio, Inc.; MCI Internet and Cable &
Wireless plc; Hiway Technologies Inc. and Verio, Inc.; NetSpeed, Inc. and
Cisco Systems, Inc.; GlobalCenter, Inc. and Frontier Corp.; Erol's Internet
Inc. and RCN Corp.; Netcom On-Line Communication Services and ICG
Communications, Inc.; ANS Communications, Inc. and WorldCom Inc. (now MCI
WorldCom Inc.); and Digex, Inc. and Intermedia Communications, Inc.
(collectively, the "Comparable Transactions"). Of these Comparable
Transactions, DLJ focused on CKS Group, Inc. and US Web Corp; Digex, Inc. and
Intermedia Communications, Inc.; and Global Center, Inc. and Frontier Corp.
(the "Most Comparable Transactions"). Multiples reviewed in the Comparable
Transactions consisted of aggregate transaction value (defined as the equity
value of the offer plus book value of total debt and preferred stock less
cash) to, among other things, the LTM revenue as of the time of the
announcement of the acquisition. DLJ noted that the implied multiples of
aggregate transaction value for the Most Comparable Transactions were in a
range of 2.0x to 6.8x for LTM revenue. Based on the multiples paid in the Most
Comparable Transactions discussed above, DLJ derived a summary valuation range
for Icon Common Stock of $6.75 to $15.50 per share, as compared to the equity
value implied by the Merger Consideration of $12.00 per share.
No company, transaction or business utilized in the "Comparable Company
Analysis" or the "Comparable Transaction Analysis" is identical to Icon, Qwest
or the Merger. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical, but necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
companies and other factors that could affect the acquisition, public trading
or other values of the companies, business segments or transactions being
analyzed.
Discounted Cash Flow Analysis. In addition, DLJ performed a discounted cash
flow analysis for the four-year period commencing January 1, 1999 and ending
December 31, 2002 based on the stand-alone unlevered
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free cash flows of Icon. Unlevered free cash flows were calculated as the
after-tax operating income of Icon, plus depreciation and amortization, plus
(or minus) net changes in working capital minus projected capital
expenditures. DLJ calculated terminal values by applying a range of estimated
earnings before interest, tax, depreciation and amortization ("EBITDA")
multiples of 10.0x to 15.0x to the projected EBITDA of Icon in 2002. The
unlevered free cash flows and terminal value were then discounted to the
present using a range of discount rates of 15.0% to 25.0% representing an
estimated range of the weighted average cost of capital of Icon. Based on this
analysis, DLJ calculated per share equity values of Icon ranging from $8.50 to
$16.50, as compared to the equity value implied by the Merger Consideration of
$12.00 per share.
Premium Analysis. DLJ compared the implied premium payable in the Merger
with the premiums paid in selected transactions having transaction values
between $100 million and $300 million over the period September 1997 to
September 1998 based on the closing trading price of the common stock of the
target companies one day, one week and one month prior to public announcement
of such selected transactions. The mean premiums to public market trading
prices one day, one week and one month prior to the announcement of the
selected transactions were 22.3%, 21.4% and 20.3%, respectively. The implied
equity value of the Merger Consideration of $12.00 per share represents
premiums to the trading prices of Icon Common Stock one day, one week and one
month prior to public announcement of the Merger of 65.5%, 60.0% and 0%,
respectively.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ, but describes, in summary form, the principal
elements of the analyses contained in the materials presented by DLJ to the
Icon Board in connection with DLJ rendering its opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these
methods to the particular circumstances and therefore, such an opinion is not
readily susceptible to summary description. Each of the analyses conducted by
DLJ was carried out in order to provide a different perspective on the
transaction and add to the total mix of information available. DLJ did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, DLJ considered
the results of the analyses in light of each other and ultimately reached its
opinion based on the results of the analyses taken as a whole. DLJ did not
place particular reliance or weight on any individual factor, but instead
concluded that its analyses, taken as a whole, supported its determination.
Accordingly, notwithstanding the separate facts summarized above, DLJ believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and the factors considered by it, without considering all
analyses and factors, could create an incomplete or misleading view of the
evaluation process underlying its opinion. The analyses performed by DLJ are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Pursuant to a letter agreement between Icon and DLJ dated September 10,
1998, DLJ is entitled to (1) a retainer fee of $100,000, (2) an opinion fee of
$400,000 and an additional fee of $50,000 for each update of an opinion, and
(3) a fee equal to (x) .85% (if the Merger is consummated and no third party
has made a bona fide proposal for a business combination transaction involving
Icon) or (y) 1.25% (if the Merger or any other business combination
transaction involving Icon is consummated and another party has made a bona
fide proposal for a business combination transaction involving Icon) of the
aggregate value of the fully diluted outstanding common shares, plus
outstanding liabilities in connection with the Merger, which fee amount shall
not be less than $1,200,000, less the amounts paid pursuant to (1) and (2)
above. In addition, Icon has agreed to reimburse DLJ for all reasonable out-
of-pocket expenses (including the reasonable fees and expenses of its counsel)
incurred by DLJ in connection with its engagement thereunder (up to a maximum
of $35,000), and to indemnify DLJ and certain related parties for certain
liabilities and expenses arising out of its engagement or the transactions in
connection therewith, including liabilities under federal securities laws. The
terms of the fee arrangement with DLJ, which DLJ and Icon believe are
customary in transactions of this nature, were negotiated at arm's length
between Icon and DLJ and the Icon Board was aware of such arrangement.
DLJ was selected by Icon to act as its financial advisor in connection with
the Merger based upon DLJ's qualifications, expertise and reputation,
including the fact that DLJ, as part of its investment banking business, is
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regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed
and unlisted securities, private placement and valuations for corporate and
other purposes. In the ordinary course of business, DLJ may trade the
securities of both Qwest and Icon for its own account and for the accounts of
its customers, and, accordingly, may at any time hold a long or short position
in such securities. DLJ has performed investment banking and other services
for Icon in the past and has been compensated for such services. DLJ has in
the past performed, and is currently performing, investment banking and other
services not related to the Merger for Qwest and its principal stockholder,
and has been, and will be, compensated for such services. In particular, DLJ
is performing investment banking services for Qwest's principal stockholder in
connection with an on-going transaction involving Qwest Common Stock, which
was publicly announced on November 28, 1998, and will receive a fee from
Qwest's principal stockholder at the conclusion of that transaction. As a
result of the transaction, the principal stockholder's ownership interest in
Qwest will be reduced to approximately 48% of the outstanding shares of Qwest
Common Stock. Qwest will not receive any proceeds from the transaction. The
amount of DLJ's fee in that transaction is dependent principally on the value
of Qwest Common Stock at the conclusion of the transaction, and may be greater
than the fee payable to DLJ at the consummation of the Merger as described
above.
TERMS OF THE MERGER AGREEMENT
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL TERMS OF THE MERGER
AGREEMENT BUT DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF ALL PROVISIONS OF
THE MERGER AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MERGER AGREEMENT. A COPY OF THE MERGER AGREEMENT IS ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS ANNEX A AND IS INCORPORATED HEREIN BY REFERENCE. YOU
SHOULD READ THE MERGER AGREEMENT CAREFULLY, SINCE IT IS THE LEGAL DOCUMENT
WHICH GOVERNS THE MERGER.
The Merger. Subject to the terms and conditions of the Merger Agreement,
Qwest Subsidiary will merge with and into Icon at the Effective Time (as
defined below). Following the Merger, the separate corporate existence of
Qwest Subsidiary will cease, and Icon will continue as the Surviving
Corporation under the name "Icon CMT Corp."
Conversion of Icon Common Stock in the Merger. At the Effective Time by
virtue of the Merger and without any action on the part of the holder thereof,
each share of Icon Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares of Icon Common Stock owned by Qwest or
Qwest Subsidiary or held by Icon, all of which will be canceled) will be
converted into the right to receive a number of shares of Qwest Common Stock
(the "Merger Consideration") equal to the Exchange Ratio. "Exchange Ratio"
means the quotient (rounded to the nearest 1/10,000) determined by dividing
$12.00 by the average (rounded to the nearest 1/10,000) of the daily volume
weighted averages (rounded to the nearest 1/10,000) of the trading prices of
Qwest Common Stock on the Nasdaq National Market, as reported by Bloomberg
Financial Markets (or such other source as Qwest and Icon shall agree in
writing), for each of the 15 consecutive trading days ending on the trading
day that is three business days before the actual date of the Special Meeting
(the "Average Market Price"). However, the Exchange Ratio shall not be less
than 0.3200 (if the Average Market Price exceeds $37.50) or more than 0.4444
(if the Average Market Price is less than $27.00).
Toll Free Number. Interested persons may call 888-339-9805 from Thursday,
December 17, 1998 until the Effective Time to hear a tape recorded message
stating what the Average Market Price and the Exchange Ratio would be on the
date of the call, as if that date was the date to be used to determine the
Exchange Ratio. The actual determination date will be three Business Days
prior to the actual date of the Special Meeting.
Closing. The Closing will take place on the business day after the
satisfaction or waiver of the conditions (excluding conditions that, by their
terms, cannot be satisfied until the Closing Date) set forth in the Merger
Agreement.
Effective Time of the Merger. As soon as practicable following the Closing,
Qwest and Icon will file a certificate of merger in such form as is required
by and executed in accordance with the relevant provisions of the DGCL and
make all other filings or recordings required under the DGCL. The Merger will
become effective
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at such time (the "Effective Time") as the certificate of merger is duly filed
with the Secretary of State of the State of Delaware or at such subsequent
time as Qwest and Icon agree and specify in the certificate of merger.
Certificate of Incorporation and Bylaws of the Surviving Corporation. The
Merger Agreement provides that the certificate of incorporation of the
Surviving Corporation will be amended in accordance with the DGCL such that
the certificate of incorporation of the Surviving Corporation will consist of
the provisions of the certificate of incorporation of Qwest Subsidiary, except
that it will be amended to reflect the fact that the name of the Surviving
Corporation will be "Icon CMT Corp." The bylaws of Qwest Subsidiary at the
Effective Time will be the bylaws of the Surviving Corporation.
Directors and Officers of the Surviving Corporation. The Merger Agreement
provides that the officers and the directors of Qwest Subsidiary as of the
Effective Time will be the initial officers and the initial directors of the
Surviving Corporation.
Exchange of Certificates. Prior to the Effective Time, Qwest will appoint a
commercial bank or trust company (the "Exchange Agent") to act as exchange
agent under the Merger Agreement for the purpose of exchanging certificates
that immediately prior to the Effective Time represented shares of Icon Common
Stock (each, an "Icon Certificate") for the Merger Consideration. At or prior
to the Effective Time, Qwest will deposit with the Exchange Agent, in trust
for the benefit of Icon Stockholders, certificates representing the Qwest
Common Stock (each, a "Qwest Certificate") issuable in exchange for
outstanding shares of Icon Common Stock. Qwest has agreed to make available to
the Exchange Agent from time to time as needed, cash sufficient to pay cash in
lieu of fractional shares and any dividends and other distributions pursuant
to the Merger Agreement. Any cash and Qwest Certificates deposited with the
Exchange Agent are referred to as the "Exchange Fund."
As soon as practicable after the Effective Time, the Exchange Agent will
mail to each record holder (other than Icon, Qwest, Qwest Subsidiary and their
respective wholly owned subsidiaries) of an Icon Certificate or Icon
Certificates a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss shall pass, only upon proper
delivery of the Icon Certificates to the Exchange Agent) and instructions for
use in effecting the surrender of the Icon Certificates in exchange for the
Merger Consideration. Upon surrender to the Exchange Agent of an Icon
Certificate, together with such letter of transmittal duly executed and
completed in accordance with the instructions thereon, the holder of such Icon
Certificate shall be entitled to receive in exchange therefor (1) a Qwest
Certificate representing that number of whole shares of Qwest Common Stock
which such holder has the right to receive pursuant to Section 1.1(a) of the
Merger Agreement, (2) certain dividends or other distributions in accordance
with Section 1.1(e) of the Merger Agreement and (3) cash in lieu of any
fractional share in accordance with Section 1.1(f) of the Merger Agreement,
and such Icon Certificate will be canceled. No interest shall be paid or
accrued on the Merger Consideration, on any such dividend or other
distribution or on cash payable in lieu of any fractional share of Qwest
Common Stock. All distributions to holders of Icon Certificates shall be
subject to any applicable federal, state, local and foreign tax withholding,
and such withheld amounts shall be treated for all purposes of the Merger
Agreement as having been paid to the holder of Icon Certificates in respect of
which such deduction and withholding was made. If the Merger Consideration is
to be distributed to a person other than the person in whose name the Icon
Certificate surrendered is registered, it shall be a condition of such
distribution that the Icon Certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer (including signature
guarantees, if required by the Surviving Corporation in its sole discretion)
and that the person requesting such distribution shall pay any transfer or
other taxes required by reason of such distribution to a person other than the
registered holder of the Icon Certificate surrendered or, in the alternative,
establish to the satisfaction of the Qwest Subsidiary that such tax has been
paid or is not applicable. The Surviving Corporation shall pay all charges and
expenses, including those of the Exchange Agent, in connection with the
distribution of the Merger Consideration.
No dividends or other distributions with respect to Qwest Common Stock with
a record date after the Effective Time shall be paid to the holder of any
unsurrendered Icon Certificate with respect to the shares of Qwest Common
Stock represented thereby, and no cash payment in lieu of fractional shares
shall be paid to any
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such holder pursuant to Section 1.1(f) of the Merger Agreement, and all such
dividends, other distributions and cash in lieu of fractional shares of Qwest
Common Stock shall be paid by Qwest to the Exchange Agent and shall be
included in the Exchange Fund, in each case until the surrender of such Icon
Certificate in accordance with Section 1.1(d) of the Merger Agreement. Subject
to the effect of applicable escheat or similar laws following surrender of any
such Icon Certificate, there shall be paid to the holder thereof (1) at the
time of surrender, a Qwest Certificate representing whole shares of Qwest
Common Stock issued in exchange therefor, without interest, (2) at the time of
such surrender, the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
shares of Qwest Common Stock and the amount of any cash payable in lieu of a
fractional share of Qwest Common Stock to which such holder is entitled
pursuant to Section 1.1(f) of the Merger Agreement and (3) at the appropriate
payment date, the amount of dividends or other distributions with a record
date after the Effective Time but prior to such surrender and with a payment
date subsequent to such surrender payable with respect to such whole shares of
Qwest Common Stock, without interest. Qwest shall make available to the
Exchange Agent cash for these purposes to the extent sufficient funds are not
then available in the Exchange Fund.
YOU SHOULD NOT FORWARD YOUR ICON CERTIFICATES UNTIL YOU RECEIVE THE LETTER
OF TRANSMITTAL AND INSTRUCTIONS.
Termination of Exchange Fund. Any portion of the Exchange Fund which remains
undistributed to the holders of Certificates for six months after the
Effective Time will be delivered to Qwest, and any holders of the Certificates
who have not complied with Section 1.1 of the Merger Agreement will thereafter
look only to Qwest for the Merger Consideration with respect to the shares of
Icon Common Stock formerly represented thereby, any cash in lieu of fractional
shares of Qwest Common Stock and any dividends or distributions with respect
to shares of Qwest Common Stock to which such holders are entitled pursuant to
the Merger Agreement. Any such portion of the Exchange Fund remaining
unclaimed by Icon Stockholders seven years after the Effective Time (or such
earlier date immediately prior to such time as such amounts would otherwise
escheat to or become property of any Governmental Body (as defined in the
Merger Agreement)) will, to the extent permitted by law, become the property
of Qwest, free and clear of any claims or interest of any person previously
entitled thereto. None of Qwest, Qwest Subsidiary, Icon, the Surviving
Corporation or the Exchange Agent will be liable to any person in respect of
any Merger Consideration delivered from the Exchange Fund to a public official
pursuant to any applicable abandoned property, escheat or similar law.
No Fractional Shares. Pursuant to the Merger Agreement, no Qwest
Certificates or scrip representing fractional shares of Qwest Common Stock
will be issued upon the surrender for exchange of Icon Certificates, no
dividend or distribution of Qwest will relate to such fractional share
interests and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of Qwest. Following the
Effective Time, the Exchange Agent shall determine the excess of the number of
whole shares of Qwest Common Stock delivered to the Exchange Agent by Qwest
pursuant to Section 1.1(a) of the Merger Agreement over the aggregate number
of whole shares of Qwest Common Stock to be distributed to Icon Stockholders
pursuant to Section 1.1(d) of the Merger Agreement. Following the Effective
Time, the Exchange Agent shall, on behalf of former stockholders of Icon, sell
the excess shares at then-prevailing prices on the Nasdaq National Market, all
in the manner provided in Section 1.1(f)(3) of the Merger Agreement.
The Merger Agreement provides that Qwest may by written notice delivered to
Icon before the Effective Time, in lieu of the issuance and sale of the excess
shares and the making of the payments as described above, elect to pay each
Icon Stockholder an amount in cash equal to the product obtained by
multiplying (A) the fractional share interest to which such holder (after
taking into account all shares of Icon Common Stock held at the Effective Time
by such holder) would otherwise be entitled by (B) the closing price of the
Qwest Common Stock on the Closing Date.
As soon as practicable after the determination of the amount of cash, if
any, to be paid to holders of Icon Common Stock with respect to any fractional
share interests, the Exchange Agent shall make available such amounts to such
holders of Icon Common Stock subject to and in accordance with the terms of
Section 1.1(e) of the Merger Agreement.
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Withholding Rights. Pursuant to the Merger Agreement, the Surviving
Corporation and Qwest are entitled to deduct and withhold from the
consideration otherwise payable to any Icon Stockholder such amounts as they
are required to deduct and withhold with respect to the making of such payment
under the Internal Revenue Code of 1986, as amended (the "Code"), and the
rules and regulations promulgated thereunder, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by the
Surviving Corporation or Qwest, as the case may be, such withheld amounts will
be treated as having been paid to the Icon Stockholder in respect of which
such deduction and withholding is made.
Representations and Warranties. The Merger Agreement contains various
representations and warranties of Icon, Qwest and Qwest Subsidiary. In the
Merger Agreement, Icon represents and warrants as to: (1) corporate existence
and power; (2) due authorization of the Transaction Documents (as defined in
the Merger Agreement) and non-contravention with organizational documents and
laws; (3) receipt of approvals; (4) binding effect; (5) financial information;
(6) absence of certain changes or events; (7) taxes; (8) undisclosed
liabilities; (9) litigation; (10) compliance with regulations; (11) licenses;
(12) employee matters; (13) capitalization; (14) subsidiaries; (15) property;
(16) property rights; (17) insurance; (18) environmental matters; (19) books
and records; (20) material contracts; (21) transactions with affiliates; (22)
documents filed with the Commission; (23) this Proxy Statement/Prospectus,
Registration Statement, and other information; (24) approval by Icon Board;
(25) required vote of the stockholders of Icon; (26) Business Combination
Transactions (as defined in the Merger Agreement); (27) fees for financial
advisors, brokers and finders; (28) ownership of Qwest Common Stock; and (29)
certain continuing representations and warranties.
The Merger Agreement also includes representations and warranties by each of
Qwest and Qwest subsidiary as to: (1) corporate existence and power; (2) due
authorization of the Transaction Documents and non-contravention with
organization documents and laws; (3) receipt of approvals; (4) binding effect;
(5) financial information; (6) absence of certain changes or events; (7)
litigation; (8) compliance with regulations; (9) capitalization; (10)
documents filed with the Commission; (11) this Proxy Statement/Prospectus;
(12) the Registration Statement; (13) certain other information; (14)
ownership of Icon capital stock; and (15) certain continuing representations
and warranties.
Certain Covenants of the Parties. In the Merger Agreement each of Icon,
Qwest and Qwest Subsidiary has agreed to (1) preserve and maintain its
corporate existence and good standing; (2) comply with all material legal and
regulatory requirements, including requirements relating to the Hart-Scott-
Rodino Act; (3) use its reasonable best efforts to satisfy the conditions to
the Merger; (4) notify the other parties of a breach of a representation or
warranty or a failure of a condition, covenant or agreement; (5) coordinate
press releases and public filings with the other parties; (6) use reasonable
best efforts to cause the Merger to qualify as a tax-free reorganization; (7)
keep certain information confidential (this covenant will continue
indefinitely); (8) take such further action reasonably requested by any other
party in furtherance of the consummation of the transactions contemplated by
the Merger Agreement; and (9) prepare and file with the Commission this Proxy
Statement/Prospectus and the Registration Statement.
In the Merger Agreement, Icon has agreed that it will, and will cause its
subsidiaries to, (1) take all action to cause Icon Common Stock to continue to
be listed on the Nasdaq National Market; (2) keep adequate books and records;
(3) preserve its material properties; (4) conduct its business only in the
ordinary course; (5) maintain its insurance policies; (6) file all tax returns
and pay all taxes and assessments as they come due; (7) furnish to Qwest and
Qwest Subsidiary (a) prompt notice of an event that does or could reasonably
constitute a Material Adverse Effect or certain other events, (b) monthly,
quarterly and annual financial statements, (c) notice of commencement of
material litigation, and (d) certain other information; (8) provide to Qwest
and Qwest Subsidiary a list of, and certain other information relating to,
"affiliates" of Icon within the meaning of Rule 145 of the Securities Act; (9)
take certain action with respect to certain stock options, warrants and other
rights; (10) use reasonable best efforts to amend and restate the Agreement of
General Partnership of Icon and Teleway Corporation Partners; and (11) take
certain action with respect to and hold the Special Meeting.
In addition, Icon has agreed that it will not, and will cause its
subsidiaries to not, except with the prior written consent of Qwest and Qwest
Subsidiary (which may be granted, withheld, delayed or conditioned in their
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sole discretion), (1) dissolve any of itself or its subsidiaries or amend its
organizational documents; (2) issue any shares of capital stock (other than as
contemplated by the Merger Agreement); (3) incur any liens not permitted by
the Merger Agreement; (4) incur certain liabilities other than in the ordinary
course; (5) settle any material litigation; (6) declare any dividend or make
any other payments to persons other than Icon or its wholly owned
subsidiaries; (7) make any capital expenditures other than in the ordinary
course; (8) make any acquisitions, certain other investments or enter into any
Business Combination Transaction (other than the Transactions); (9) enter into
certain leases or other similar transactions; (10) alter any line of business;
(11) enter into any material
transaction with an affiliated person or other related entity; (12) permit
certain events relating to employee benefit plans to occur; (13) increase
compensation (monetary or otherwise) or benefits to its officers and
employees; (14) employ any new executive officers; (15) enter into or amend
any collective bargaining agreement; (16) change its accounting practices; and
(17) make any tax election or settle any income tax liability.
Reasonable Best Efforts. Subject to the terms and conditions of the Merger
Agreement or the other Transaction Documents, each party has agreed to use its
reasonable best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, and to assist and cooperate with the other parties to the
Merger Agreement or any other Transaction Document in doing all things
necessary, proper or advisable to cause the satisfaction of the conditions to
the conclusion of the transactions contemplated thereby (such transactions,
the "Transactions") as soon as reasonably practicable, including, without
limitation, using its reasonable best efforts to obtain all Approvals (as
defined in the Merger Agreement) that are required or advisable on the part of
any party with respect to the Transactions. Qwest and Icon have agreed to
promptly make an appropriate filing of a Notification and Report Form pursuant
to the Hart-Scott-Rodino Act with respect to the transactions contemplated by
the Merger Agreement and to supply as promptly as practicable any additional
information and documentary material that may be requested pursuant to the
Hart-Scott-Rodino Act and to take all other actions necessary to cause the
expiration or termination of the applicable waiting periods under the Hart-
Scott-Rodino Act as soon as practicable. However, none of Qwest and its
subsidiaries is required to (1) sell or otherwise dispose of any substantial
amount of the assets of any of Qwest, the Company and their respective
subsidiaries, whether as a condition to obtaining any Approval from a
Governmental Body or any other person or for any other reason, or (2) prevent
Qwest from engaging in any activities, discussions or negotiations with
respect to a Business Combination Transaction with respect to any of Qwest and
its subsidiaries, entering into any agreements or other arrangements with
respect to the same or concluding any transactions contemplated by, or
believed by any of Qwest and its subsidiaries to be in furtherance of, such
Business Combination Transaction, and no such actions by any of Qwest and its
subsidiaries with respect to such a Business Combination Transaction shall
constitute a breach of any representation, warranty, covenant or agreement of
Qwest or Qwest Subsidiary in any Transaction Document. On October 19, 1998,
the parties received a notification from the FTC of early termination of the
waiting period under the Hart-Scott-Rodino Act.
In the Merger Agreement, each of Qwest and Icon has agreed to, in connection
with the efforts described in the preceding paragraph, use its reasonable best
efforts to comply (and exchange information with other parties to enable them
to comply) with any applicable requirements under the Hart-Scott-Rodino Act
relating to filing and furnishing information to the Department of Justice and
the Federal Trade Commission, including, without limitation, the following:
(1) assisting in the preparation and filing of each applicable "Antitrust
Improvements Act Notification and Report Form for Certain Mergers and
Acquisitions" and taking all other action required by 16 C.F.R. Parts 801-803
(or any successor form or regulation); (2) complying with any additional
request for documents or information made by the Department of Justice or the
Federal Trade Commission or by a court; and (3) causing all affiliated persons
of the "ultimate parent entity" of the party within the meaning of the Hart-
Scott-Rodino Act to cooperate and assist in such filing and compliance.
Pursuant to the Merger Agreement, each of Qwest, Qwest Subsidiary and Icon
will use its best efforts to cause the Merger to qualify and will not (both
before and after consummation of the Merger) take any actions which to its
knowledge could reasonably be expected to prevent the Merger from qualifying
as a reorganization under the provisions of Section 368 of the Code.
Acquisition Proposals. Pursuant to the Merger Agreement, except as described
below, Icon has agreed that neither it nor any of its subsidiaries nor any of
its officers, directors, employees, financial advisors and other
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representatives will do, any of the following or to enter into an agreement or
other arrangement (other than the Transaction Documents) with respect to any
of the following:
(1) enter into any agreement or other arrangement with respect to, or
take any other action to effect, any Business Combination Transaction
(other than the Transactions) with respect to any of Icon and its
subsidiaries or publicly announce any intention to do any of the foregoing;
(2) solicit, initiate or encourage (including, without limitation, by way
of furnishing information), or take any other action to facilitate, any
inquiry or the making of any proposal to any of Icon, its subsidiaries and
its stockholders from any person (other than Qwest, Qwest Subsidiary or any
affiliate of, or any person acting in concert with, Qwest or Qwest
Subsidiary) which constitutes, or may reasonably be expected to lead to, a
proposal with respect to a Business Combination Transaction (other than the
Transactions) with respect to any of Icon and its subsidiaries, or endorse
any Business Combination Transaction (other than the Transactions) with
respect to any of Icon and its subsidiaries;
(3) continue, enter into or participate in any activities, discussions or
negotiations regarding any of the foregoing, or furnish to any other person
any information with respect to the business, properties, operations,
prospects or condition (financial or otherwise) of any of Icon and its
subsidiaries or any of the foregoing, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any effort or
attempt by any other person to do or seek any of the foregoing; or
(4) recommend that the stockholders of Icon accept or approve any
Business Combination Transaction (other than the Transactions) with respect
to any of Icon and its subsidiaries, modify or amend the Icon Board
Approval in any respect materially adverse to Qwest or Qwest Subsidiary or
withdraw the Icon Board Approval, or publicly announce any intention to do
any of the foregoing.
In each case subject to the limitations described in the following
paragraphs, the Merger Agreement does not prohibit (1) Icon from (A)
furnishing to any person (other than a Principal Stockholder or an affiliate
of, or other person acting in concert with, Icon or a Principal Stockholder)
that has made an unsolicited, bona fide written proposal with respect to a
Business Combination Transaction with respect to any of Icon and its
subsidiaries information concerning Icon and its subsidiaries and the
business, properties, operations, prospects or condition (financial or
otherwise) of Icon and its subsidiaries or (B) engaging in discussions or
negotiations with such a person that has made such written proposal with
respect to a Business Combination Transaction, (2) following receipt of such
written proposal with respect to a Business Combination Transaction, Icon from
taking and disclosing to its stockholders a position contemplated by Rule 14e-
2(a) under the Exchange Act, (3) following receipt of such written proposal
with respect to a Business Combination Transaction, the Board of Directors of
Icon from withdrawing or modifying the Icon Board Approval or (4) following
the payment by Icon of all amounts then owed by Icon to Qwest and Qwest
Subsidiary pursuant to Section 9.2 of the Merger Agreement, the Board of
Directors from terminating the obligations of the parties pursuant to Section
9.1(a)(9) of the Merger Agreement in order to enter into an agreement with any
person (other than Qwest, Qwest Subsidiary or any affiliate of, or any person,
acting in concert with, Qwest or Qwest Subsidiary) to effect a Superior
Proposal (as defined below).
The Merger Agreement permits Icon or the Board of Directors of Icon, as the
case may be:
(x) to take any action described in clauses (3) and (4) of the preceding
paragraph with respect to an unsolicited, bona fide written proposal with
respect to a Business Combination Transaction that is referred to in the
preceding paragraph if such written proposal satisfies each of the
requirements of a Superior Proposal;
(y) to furnish to the person making such written proposal any information
described in clause (1)(A) of the preceding paragraph and engage in the
negotiations or discussions referred to in clause (1)(B) of the preceding
paragraph only if the Board of Directors of Icon shall have determined in
good faith that such written proposal is or is reasonably likely to be a
Superior Proposal, and Icon shall then furnish such information to Qwest
and Qwest Subsidiary (or shall have previously furnished such information
to Qwest or Qwest Subsidiary) and such information shall be so furnished to
such person pursuant to a customary confidentiality agreement; and
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(z) to take any action described in clauses (1), (2) and (3) of the
immediately preceding paragraph only if the Board of Directors of Icon
shall, by written notice delivered to Qwest and Qwest Subsidiary not less
than 24 hours prior thereto, inform Qwest and Qwest Subsidiary of its
intention to take such action. In no event may Icon or the Board of
Directors of Icon take any action described in the clauses (1), (3) and (4)
of the preceding paragraph if the Special Meeting shall have occurred.
In the Merger Agreement, Icon agreed to cease and cause to be terminated any
existing activities, discussions or negotiations with all persons (other than
Qwest, Qwest Subsidiary or any affiliate of, or any person acting in concert
with, Qwest or Qwest Subsidiary) conducted on or before the date of the Merger
Agreement with respect to any Business Combination Transaction, and to Icon
shall inform each of its officers, directors, employees, financial advisors
and other representatives of the obligations undertaken in Section 7.2(z) of
the Merger Agreement. If Icon, or any member of the Board of Directors
thereof, receives a proposal or inquiry, in each case whether written or oral,
with respect to a Business Combination Transaction with respect to any of Icon
and its subsidiaries, then Icon and its financial advisers and independent
counsel are required, by written notice delivered within 24 hours after the
receipt of such proposal or inquiry, to inform Qwest and Qwest Subsidiary of
the terms and conditions of such proposal or inquiry and the identity of the
person making the proposal or inquiry with respect to such Business
Combination Transaction and to keep Qwest and Qwest Subsidiary generally
informed with reasonable promptness of any steps it is taking pursuant to
Section 7.2(z) of the Merger Agreement with respect to such proposal or
inquiry. The Merger Agreement does not permit Icon to terminate any
obligations under the Merger Agreement except pursuant to Article IX of the
Merger Agreement.
For purposes of the Merger Agreement, "Business Combination Transaction"
with respect to any person and its subsidiaries means, whether concluded or
intended to be concluded in one transaction or a series of related
transactions, each of the following: (1) the acquisition from any of such
person and its subsidiaries, or from any holder thereof, of any Equity
Securities (as defined in the Merger Agreement) of any of such person and its
subsidiaries as a result of which the holders of Equity Securities of any of
such person and its subsidiaries immediately before such transaction or series
of transactions would beneficially own less than 80% of the Equity Securities
of such person or such subsidiary, as the case may be, issued and outstanding
immediately after such transaction or series of transactions; (2) the merger
or consolidation of any of such person and its subsidiaries with or into any
person other than such person or its wholly owned subsidiary; (3) the transfer
of a substantial portion of the assets of any of such person and its
subsidiaries to any person or group other than such person or its wholly owned
subsidiary; or (4) any transaction (whether or not any of such person and its
subsidiaries shall be a party thereto) as a result of which a majority of the
members of the board of directors, or similar officials, of such person or
such subsidiary would not be persons who on the day after the closing date of
such transaction were members of the board of directors, or similar officials,
or who were nominated for election or elected with the approval of a majority
of the directors, or similar officials, who were directors, or similar
officials, on that date or whose nomination or election was previously so
approved.
For purposes of the Merger Agreement, "Superior Proposal" means: (A) a
written proposal for (i) the acquisition from Icon or any holder thereof of
Equity Securities of Icon as a result of which the holders of shares of Icon
Common Stock immediately before such transaction or series of transactions
would beneficially own less than 40% of the shares of Icon Common Stock issued
and outstanding immediately after such transaction or series of transactions,
(ii) the merger or consolidation of Icon with or into any person other than a
wholly owned subsidiary or (iii) the transfer of all or substantially all the
assets of Icon and its subsidiaries and (B) with respect to such written
proposal after the Board of Directors of Icon shall have concluded in good
faith that (i) based on the advice of a financial advisor of nationally
recognized reputation, taking into account the terms and conditions of such
proposed Business Combination Transaction and the Merger Agreement
respectively, all other legal, financial, regulatory and other aspects of such
proposed Business Combination Transaction and the Merger, and respectively,
the identity of the person making such written proposal, (a) such proposed
Business Combination Transaction is reasonably capable of being completed and
would, if completed, result in a transaction more favorable to Icon and its
stockholders, other than the Principal Stockholders, from a financial point of
view than would the Merger and (b) financing for such proposed Business
Combination Transaction, to the extent required, is then committed by a
financial institution or other source able to provide such financing and (ii)
based on the advice of independent counsel for Icon, the failure to take such
action would breach its fiduciary duties to the stockholders of Icon, other
than the Principal Stockholders.
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Conditions to the Merger. The obligations of Icon, Qwest and Qwest
Subsidiary to effect the Merger are subject to the satisfaction or waiver on
or prior to the Closing Date of the following conditions:
(a) Holders of a majority of the outstanding shares of Icon Common Stock
shall have approved the Merger Agreement and the Merger in accordance with
the DGCL, the certificate of incorporation and bylaws of Icon and the
regulations of the Nasdaq National Market;
(b) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act and no stop order suspending such
effectiveness shall have been issued and remain in effect;
(c) The shares of Qwest Common Stock issuable in the Merger shall have
been approved for inclusion in the Nasdaq National Market, if necessary,
subject only to official notice of issuance;
(d) Each of Icon, its subsidiaries, Qwest and Qwest Subsidiary shall have
obtained from each Governmental Body or other person each Approval or taken
all actions required to be taken in connection with each Approval, and all
waiting, review or appeal periods under the Hart-Scott-Rodino Act or
otherwise prescribed with respect to each Approval shall have terminated or
expired, as the case may be, in each case with respect to an Approval that
is required or advisable on the part of such person for (1) the due
execution and delivery by such person of each Transaction Document to which
it is or may become a party, (2) the conclusion of the Transactions, (3)
the performance by such person of its obligations with respect to the
Transactions under each Transaction Document to which it is or may become a
party and (4) the exercise by such person of its rights and remedies with
respect to the Transactions under each Transaction Document to which it is
or may become a party or with respect to which it is or may become an
express beneficiary, except in each case referred to in the preceding
clauses (1), (2), (3) and (4) where the failure to obtain such Approval,
individually or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect on such person;
(e) No Regulation (as defined in the Merger Agreement) shall have been
enacted, entered, promulgated or enforced by any Governmental Body which is
in effect and (1) has the effect of making the Merger illegal or otherwise
prohibiting the consummation of the Merger or (2) could reasonably be
expected to have a Material Adverse Effect on any of Icon, its
subsidiaries, Qwest and Qwest Subsidiary;
(f) None of Icon, its subsidiaries, Qwest and Qwest Subsidiary (1) is in
violation or breach of or default with respect to (A) any Regulation of any
Governmental Body or any decision, ruling, order or award of any arbitrator
applicable to it or its business, properties or operations or (B) any
agreement, indenture or other instrument to which it is a party or by which
it or its properties may be bound or affected, (2) would be in violation or
breach of or default with respect to any Regulation of any Governmental
Body or any decision, ruling, order or award of any arbitrator applicable
to it or its business, properties or operations in connection with or as a
result of the conclusion of any of the Transactions or (3) has received
notice that, in connection with or as a result of the conclusion of any of
the Transactions, it is or would be in violation or breach of or default
with respect to any Regulation of any Governmental Body or any decision,
ruling, order or award of any arbitrator applicable to it or its business,
properties or operations, except in each case referred to in the preceding
clauses (1), (2), (3), and (4) for violations, breaches or defaults that,
individually or in the aggregate, could not reasonably be expected to have
a Material Adverse Effect on such person;
(g) each Transaction Document required to be executed and delivered prior
to the Effective Time shall have been so executed and delivered by the
respective parties thereto;
(h) the representations and warranties of each other party contained in
each Transaction Document to which such other party is a party shall be
true and correct in all respects on and as of the Closing Date, with the
same force and effect as though made on and as of the Closing Date (except
for those representations and warranties that address matters only as of a
particular date or only with respect to a particular period of time, which
representations or warranties shall be true and correct as of such date or
with respect to such period), except where the failure of such
representations or warranties to be so true and correct (without giving
effect to any limitation as to "material," "materiality," "Material Adverse
Effect," specified dollar amount thresholds or other similar qualifiers),
individually or in the aggregate, has not had and could not reasonably be
expected to have a Material Adverse Effect on such person;
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(i) each other party shall have performed, in all material respects, all
of the covenants and other obligations required by each Transaction
Document required to be performed by such other party at or before the
Closing;
(j) counsel to Icon shall have received tax representation letters as set
forth in the Merger Agreement and Icon shall have received an opinion from
its counsel as set forth in the Merger Agreement;
(k) each party shall have received from each other party the following,
in the manner as set forth in the Merger Agreement:
(1) a certificate of the Secretary or an Assistant Secretary of such
other party with respect to (A) the certificate of incorporation or
articles of incorporation, as the case may be, of such other party, (B)
the bylaws of such other party, (C) the resolutions of the Board of
Directors of such other party, approving each Transaction Document to
which such other party is a party and the other documents to be
delivered by it under the Transaction Documents, and (D) the names and
true signatures of the officers of such other party who signed each
Transaction Document to which such other party is a party and the other
documents to be delivered by such other party under the Transaction
Documents;
(2) a certificate of the President or a Vice President of such other
party to the effect that (A) the representations and warranties of such
other party contained in the Transaction Documents to which it is a
party are true and correct in all material respects as of the Closing
Date and (B) such other party has performed, in all material respects,
all covenants and other obligations required by the Transaction
Documents to which it is a party to be performed by it on or before the
Closing Date;
(3) with respect to Icon, certified copies, or other evidence
reasonably satisfactory to Qwest and Qwest Subsidiary, of all Approvals
of all Governmental Bodies and other persons with respect to Icon
referred to in the Merger Agreement;
(4) with respect to Qwest, certified copies, or other evidence
reasonably satisfactory to Icon, of all Approvals of all Governmental
Bodies and other persons with respect to Qwest referred to in the
Merger Agreement;
(5) with respect to Qwest Subsidiary, certified copies, or other
evidence reasonably satisfactory to Icon, of all Approvals of all
Governmental Bodies and other persons with respect to Qwest Subsidiary
referred to in the Merger Agreement;
(6) a certificate of the Secretary of State of the jurisdiction in
which such other party is incorporated, dated as of a recent date, as
to the good standing of and payment of taxes by such other party and as
to the charter documents of such other party on file in the office of
such Secretary of State; and
(7) with respect to Icon, a certificate of the President or a Vice
President of Icon with respect to U.S. real property interests, as set
forth in the Merger Agreement; and
(l) Qwest and Qwest Subsidiary shall have received from Icon a written
agreement of each person who is identified as an "affiliate" on the list
furnished by Icon pursuant to the Merger Agreement, without material cost
or other liability to any of Icon, its subsidiaries, Qwest and Qwest
Subsidiary and any other person.
Assumption of Icon Stock Options and Warrants. Each option or warrant
outstanding at the Effective Time to purchase shares of Common Stock granted
or issued by Icon shall be assumed by Qwest and deemed to constitute an option
or warrant, as the case may be, to acquire, on the same terms and conditions,
as were applicable under such option or warrant prior to the Effective Time,
the number of shares of Qwest Common Stock as the holder of such option or
warrant would have been entitled to receive pursuant to the Merger had such
holder exercised such option or warrant in full immediately prior to the
Effective Time (not taking into account whether or not such option or warrant
was in fact exercisable) at a price per share equal to (A) the aggregate
exercise price for Icon Common Stock otherwise purchasable pursuant to such
option or warrant (provided that such aggregate exercise price shall not
exceed $12.00 multiplied by the number of shares of Icon Common Stock
otherwise purchasable pursuant to such option or warrant) divided by (B) the
number of shares of Qwest Common Stock deemed purchasable pursuant to such
assumed option or warrant; provided that the
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number of shares of Qwest Common Stock that may be purchased upon exercise of
any such option or warrant shall not include any fractional share and, upon
exercise of such option or warrant, a cash payment shall be made
for any fractional share based upon the closing price of a share of Qwest
Common Stock on the trading day immediately preceding the date of exercise.
Any adjustments with respect to any Stock Options that are "incentive stock
options" shall be effected in a manner consistent with Section 424(a) of the
Code.
Employee Benefits. Except as otherwise set forth in Section 1.1(l) of the
Merger Agreement, in the case of any Icon Employee Plans (as defined in the
Merger Agreement) under which the employees' interests are based upon the Icon
Common Stock or the market price thereof (but which interests do not
constitute stock options), Icon and Qwest agree that such interests shall,
from and after the Effective Time, be based on Qwest Common Stock determined
in accordance with the Exchange Ratio.
Except as otherwise expressly set forth in any Transaction Document, none of
the Transaction Documents and none of the Transactions shall (1) before or
after the Effective Time, require the continued employment of any person by
any of Icon, Qwest, the Surviving Corporation and their respective
subsidiaries or (2) after the Effective Time, prevent any of Icon, the
Surviving Corporation and their respective subsidiaries from taking any action
or refraining from taking any action with respect to any person that may then
be permitted by law.
Listing of Qwest Common Stock. Pursuant to the Merger Agreement, Qwest has
agreed to take all action required to cause the shares of Qwest Common Stock
to be issued in the Merger and the shares of Qwest Common Stock to be reserved
for issuance upon exercise of any stock options or warrants of Icon to be
approved for quotation, upon official notice of issuance, on the Nasdaq
National Market.
Indemnification. Pursuant to the Merger Agreement, each of the Surviving
Corporation and its subsidiaries will cause to be maintained in effect in its
certificate of incorporation and bylaws (i) for a period of six years after
the Effective Time, the current provisions regarding elimination of liability
of directors and indemnification of officers, directors and employees
contained in the certificate of incorporation and by-laws or other
organizational documents of Icon and its subsidiaries and (ii) for a period of
six years, the policies of directors' and officers' liability insurance and
fiduciary liability insurance in amounts and for coverage agreed by Icon and
Qwest to be appropriate in respect of the activities and operations of Icon
and its subsidiaries.
Termination. The Merger Agreement may be terminated at any time prior to the
Effective Time, and except as provided below, whether before or after approval
of the matters presented in connection with the Merger by the stockholders of
Icon, in each case by:
(1) the agreement of the parties;
(2) Icon, on or after the date that is six months after the date of the
Merger Agreement, if (A) the Closing shall then not have occurred for any
reason other than the breach or violation by Icon, in any material respect,
of any of its representations, warranties, covenants and agreements set
forth in the Merger Agreement (an "Icon Breach"), (B) an Icon Breach shall
not then have occurred and be continuing and (C) Icon shall have paid in
full to Qwest and Qwest Subsidiary all amounts then owed to Qwest and Qwest
Subsidiary pursuant to Section 9.2 of the Merger Agreement;
(3) Qwest or Qwest Subsidiary, on or after the date that is six months
after the date of the Merger Agreement, if (A) the Closing shall then not
have occurred for any reason other than the breach or violation by Qwest or
Qwest Subsidiary, in any material respect, of any of their respective
representations, warranties, covenants and agreements set forth in the
Merger Agreement (a "Qwest Breach") and (B) a Qwest Breach shall then not
have occurred and be continuing;
(4) Icon, on or after the date that is four months after the date of the
Merger Agreement, if (A) a Qwest Breach shall then have occurred and be
continuing and (B) an Icon Breach shall then not have occurred and be
continuing;
(5) Qwest or Qwest Subsidiary, on or after the date that is four months
after the date of the Merger Agreement, if (A) an Icon Breach shall have
occurred and be continuing and (B) a Qwest Breach shall then not have
occurred and be continuing;
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(6) Icon, on or after the date of the Special Meeting, and all
adjournments thereof, if the stockholders of Icon shall not have approved
the Merger Agreement and the Merger and Icon shall have paid in full to
Qwest and Qwest Subsidiary all amounts then owed to Qwest and Qwest
Subsidiary pursuant to Section 9.2 of the Merger Agreement;
(7) Qwest or Qwest Subsidiary, on or after the date of the Special
Meeting, and all adjournments thereof, if the stockholders of Icon shall
not have approved the Merger Agreement and the Merger;
(8) Qwest or Qwest Subsidiary, if Icon or the Board of Directors of Icon
shall have (A) authorized, recommended or proposed (or publicly announced
its intention to authorize, recommend or propose) an agreement with respect
to a Business Combination Transaction (as defined below) with respect to
any of Icon and its subsidiaries (other than the Transactions), (B)
recommended (or publicly announced its intention to recommend) that the
stockholders of Icon accept or approve any such Business Combination
Transaction or (C) modified or amended (or publicly announced its intention
to modify or amend) the Icon Board Approval in any respect materially
adverse to Qwest or Qwest Subsidiary or withdrawn (or publicly announced
its intention to withdraw) the Icon Board Approval; provided that (x) a
communication of Icon to Qwest and Qwest Subsidiary that advises that Icon
has received a written proposal with respect to a Business Combination
Transaction and that takes no position with respect to such proposal or
that advises that Icon is engaging in an activity permitted by clause (1)
or (2) of the proviso to the first sentence of Section 7.2(z) of the Merger
Agreement with respect to a Superior Proposal, shall not be deemed to be a
modification, amendment or withdrawal of Icon Board Approval and (y) a
"stop-look-and-listen" communication of the nature contemplated in Rule
14d-9(e) under the Exchange Act with respect to an unsolicited tender offer
or exchange offer that, if concluded in accordance with the terms thereof,
would constitute or result in a Business Combination Transaction with
respect to any of Icon and its subsidiaries (other than the Transactions),
without more, shall not be deemed to be a modification, amendment or
withdrawal of the Icon Board Approval if, within the time period
contemplated by Rule 14e-2 under the Exchange Act, the Board of Directors
of Icon shall publicly confirm the Icon Board Approval and recommend
against the acceptance of such tender offer or exchange offer by the
stockholders of Icon;
(9) Icon, prior to the date of the Special Meeting, if (A) the Board of
Directors of Icon shall have determined that an unsolicited, bona fide
written proposal made by any person (other than a Principal Stockholder) or
an affiliate of, or other person acting in concert with, the Company or a
Principal Stockholder) with respect to a Business Combination Transaction
with respect to any of Icon and its subsidiaries is a Superior Proposal,
(B) the Board of Directors of Icon shall have complied in all material
respects with Section 7.2(z) of the Merger Agreement with respect to
actions taken or proposed to be taken by Icon or the Board of Directors of
Icon with respect to such Superior Proposal, (C) Icon shall have notified
Qwest and Qwest Subsidiary in writing, in each case not less than three
full Business Days in advance of taking such action, of its election to
terminate the obligations of the parties pursuant to Section 9.1(a)(9) of
the Merger Agreement for the purpose of entering into an agreement to
effect such Superior Proposal concurrently with such termination, (D) Icon
and its advisors and representatives shall have discussed with Qwest and
Qwest Subsidiary the modifications to the terms of the Merger Agreement
that would permit Icon to conclude the Merger in lieu of concluding such
Superior Proposal, (E) at the end of such three Business Day period the
Board of Directors of Icon shall have determined that such Superior
Proposal continues to constitute a Superior Proposal, and (F) Icon shall
have paid in full to Qwest and Qwest Subsidiary all amounts then owed to
Qwest and Qwest Subsidiary pursuant to Section 9.2 of the Merger Agreement;
or
(10) Qwest or Qwest Subsidiary, if there shall have occurred a Business
Combination Transaction (other than the Transactions) with respect to any
of Icon and its subsidiaries.
Effect of Termination; Payment of Termination Fee. In the event of
termination of the Merger Agreement by either Icon or Qwest as provided under
"--Termination," the Merger Agreement will become void and there will be no
liability or obligation on the part of Qwest or Icon or their respective
officers or directors except with respect to certain provisions of the Merger
Agreement regarding payment of broker's fees, maintaining the confidentiality
of non-public information, the payment of expenses, and certain other general
provisions.
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The Merger Agreement requires Icon to pay to Qwest the sum of $7 million
(the "Termination Fee") as follows: (1) in connection with the termination of
the obligations of the parties or of the Merger Agreement pursuant to any of
clauses (6), (7), (8), (9) and (10) of Section 9.1(a) of the Merger Agreement,
or, (2) if (A) Icon or Qwest shall terminate the obligations of the parties or
the Merger Agreement pursuant to any of clauses (2) and (3) of Section 9.1(a)
of the Merger Agreement, (B) at any time after the date of the Merger
Agreement and at or before the time of such termination there shall exist a
proposal for a Business Combination Transaction with respect to any of Icon
and its subsidiaries (or the public announcement of a third party to commence
or of its intention to pursue or engage in such a transaction) and (C) within
12 months of such termination, Icon enters into a definitive agreement with
any third party with respect to a Business Combination Transaction with
respect to any of Icon and its subsidiaries or such a transaction is
consummated.
Fees and Expenses. Except as otherwise provided in Section 9.2 of the Merger
Agreement, whether or not the Merger is concluded, all costs and expenses
incurred or paid by a party (including, without limitation, attorney's fees
and expenses related to the Transactions and the preparation of the
Transaction Documents, the Registration Statement or the Proxy
Statement/Prospectus) shall be paid by the party incurring or paying such
expenses. Notwithstanding the foregoing, each of Icon and Qwest is required to
pay 50% of the costs and expenses of complying with the Securities Act, the
Exchange Act and the Hart-Scott-Rodino Act (other than the attorney's fees and
expenses related thereto or as stated in the preceding sentence).
Purchase of Qwest Products and Services. If a Business Combination
Transaction (other than the Transactions) with respect to any of Icon and its
subsidiaries shall be consummated within 12 months following the termination
of obligations of the parties under the Merger Agreement (other than pursuant
to the termination of the Merger Agreement by Icon, on or after the date that
is four months after the date of the Merger Agreement, if a breach of the
Merger Agreement by Qwest shall then have occurred and be continuing and a
breach of the Merger Agreement by Icon shall then not have occurred or be
continuing, Icon and its subsidiaries are required to purchase from one or
more of Qwest and its subsidiaries products and services (including tariff and
non-tariff services and facilities) selected by Icon in its sole discretion
that are generally offered for sale by Qwest or such subsidiary, at the prices
and on the terms and conditions generally offered by Qwest or such subsidiary
from time to time during such period to customers of similar products and
services at similar volume and commitment levels, for an aggregate purchase
price equal to (A) $30,000,000 less (B) the aggregate purchase price for
products and services purchased by Icon and its subsidiaries from any of Qwest
and its subsidiaries from the termination date of the Merger Agreement to the
date of the consummation of such Business Combination Transaction, provided
that purchases pursuant to commitments or agreements in existence on such date
of consummation that were made by the other parties to such Business
Combination Transaction and their respective affiliates shall not be included
in determining whether Icon shall have satisfied its obligation under this
paragraph. Icon is required to purchase the products and services referred to
in the preceding sentence within a period of months following such date of
consummation that is equal to (A) 12 months less (B) the quotient obtained by
dividing 2 into the number of whole months (determined as periods of 30 or 31
consecutive days, as appropriate) that shall have elapsed between the
termination date of the Merger Agreement and such date of consummation. On
such date of the consummation of the Business Combination Transaction, and as
a condition to such consummation, Icon is required to pay to Qwest a portion
of the amount determined pursuant to the first sentence of this paragraph that
is equal to (A) $2,500,000 times the number of whole months (determined as
periods of 30 or 31 consecutive days, as appropriate) that shall have elapsed
between the termination date of the Merger Agreement and such date of
consummation less (B) the aggregate purchase price for products and services
purchased from any of Qwest and its subsidiaries from the termination date of
the Merger Agreement to such date of consummation.
Amendments and Waivers. The Merger Agreement and the other Transaction
Documents may be amended by the parties thereto, by action taken or authorized
by their respective Boards of Directors, at any time before or after approval
of the matters presented in connection with the Merger by the stockholders of
Icon, but, after any such approval, no amendment may be made which by law
requires further approval by such stockholders without such further approval.
The parties may not amend the Merger Agreement and the other Transaction
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Documents except by an instrument in writing signed on behalf of each of the
parties thereto. At any time prior to the Effective Time, the parties to the
Merger Agreement, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties to
the Merger Agreement, (ii) waive any inaccuracies in the representations and
warranties contained therein or in any document delivered pursuant thereto and
(iii) waive compliance with any of the agreements or conditions contained
therein. Any agreement on the part of a party to the Merger Agreement to any
such extension or waiver will be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to the
Merger Agreement to assert any of its rights under the Merger Agreement or
otherwise will not constitute a waiver of those rights.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material federal income tax
consequences of the Merger. This discussion is based on currently existing
provisions of the Code, Income Tax Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences described herein.
Icon Stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular Icon
Stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities, banks, insurance companies, tax-exempt
organizations, foreign persons, or who acquired their shares in connection
with stock option or stock purchase plans or in other compensatory
transactions. The following discussion only addresses the federal income tax
consequences of the Merger itself. It does not address the tax consequences of
the Merger under foreign, state or local tax laws. ACCORDINGLY, YOU ARE URGED
TO CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO YOU OF THE MERGER IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES.
Neither Qwest nor Icon has requested a ruling from the Internal Revenue
Service (the "IRS") with regard to any of the federal income tax consequences
of the Merger.
It is a condition to the obligations of Qwest and Icon to consummate the
Merger that Icon receive an opinion from Parker Chapin Flattau & Klimpl, LLP,
counsel for Icon, to the effect that the Merger will be treated for federal
income tax purposes as a tax-free "reorganization" within the meaning of
Section 368(a) of the Code and that Qwest and Icon will each be a "party to
the reorganization" within the meaning of Section 368(b) of the Code. The
opinion will provide that, subject to the limitations and qualifications set
forth therein, as a result of the Merger qualifying as a reorganization within
the meaning of Section 368(a) of the Code, the federal income tax consequences
that will result to Icon and the Icon Stockholders will include the following:
(a) Icon will not recognize any gain or loss as a result of the Merger.
(b) No gain or loss will be recognized by Icon Stockholders as a result
of the exchange of their shares of Icon Common Stock for shares of Qwest
Common Stock pursuant to the Merger, except to the extent of any cash
received in lieu of a fractional shares of Qwest Common Stock. Each Icon
Stockholder receiving cash in lieu of a fractional share of Qwest Common
Stock will be treated as having received such fractional share and as
having sold it for the cash received, thereby recognizing gain or loss
equal to the difference between the amount of cash received and that
stockholder's tax basis in the fractional share. Such gain or loss will
generally be capital gain or loss, unless the deemed sale is essentially
equivalent to a dividend within the meaning of Section 302 of the Code.
(c) The tax basis of the shares of Qwest Common Stock received by each
Icon Stockholder (including any fractional share deemed to have been
received by that stockholder) will be equal to the tax basis of such Icon
Stockholder's shares of Icon Common Stock exchanged in the Merger.
(d) The holding period for the shares of Qwest Common Stock received by
each Icon Stockholder (including any fractional share deemed to have been
received by that stockholder) will include the holding period for the
shares of Icon Common Stock of such stockholder exchanged in the Merger.
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The form of the tax opinion is attached as Exhibit 3.1(j)(3) to the Merger
Agreement. In issuing such opinion, counsel will rely upon representations
made by Icon and Qwest as of the Effective Time, which counsel will assume to
be true and correct. If such representations are untrue or incorrect, the
opinion could be adversely affected. The opinion is not binding on the IRS and
there is no assurance that the IRS could not successfully challenge the Merger
as a tax-free reorganization.
In the event of a successful IRS challenge to the Merger as a tax-free
reorganization, there would be significant tax consequences. An Icon
Stockholder would recognize taxable gain or loss with respect to each share of
Icon Common Stock surrendered equal to the difference between the
stockholder's basis in such share and the fair market value of the Qwest
Common Stock received in exchange therefor. In such event, a stockholder's
aggregate basis, as of the Effective Time, in the Qwest Common Stock so
received would equal its fair market value, and the stockholder's holding
period for such stock would begin on the day after the Merger.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for using the purchase method of accounting.
Under the purchase method of accounting, the purchase price is allocated to
the assets and liabilities acquired based upon the estimated fair values of
such assets and liabilities.
REGULATORY APPROVALS
The consummation of the Merger is subject to expiration or termination of
the applicable waiting periods under the Hart-Scott-Rodino Act. The Hart-
Scott-Rodino Act provides that certain merger and acquisition transactions
(including the Merger) may not be consummated until notifications and certain
information have been given to the Antitrust Division and the FTC and certain
waiting period requirements have been satisfied. On October 19, 1998, the
parties received a notification from the FTC of early termination of the
waiting period under the Hart-Scott-Rodino Act. At any time before or after
the consummation of the Merger, the Antitrust Division, the FTC or another
third party could seek to enjoin or rescind the Merger on antitrust grounds.
In addition, at any time before or after the consummation of the Merger, and
notwithstanding that the waiting period under the Hart-Scott-Rodino Act has
been terminated, any state could take action under state antitrust laws that
it deems necessary or desirable in the public interest. See "--Terms of the
Merger Agreement--Conditions to the Merger."
NO APPRAISAL RIGHTS
Under the DGCL, Icon Stockholders will not be entitled to appraisal rights
in connection with the Merger or the other transactions contemplated by the
Merger Agreement.
OTHER TRANSACTION DOCUMENTS
THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL TERMS OF THE OPTION
AGREEMENTS, THE VOTING AGREEMENTS, THE STOCKHOLDERS AGREEMENTS, THE QWEST
CREDIT FACILITY, THE WARRANTS, THE REGISTRATION RIGHTS AGREEMENT AND THE
PRIVATE LINE SERVICES AGREEMENT BUT DOES NOT PURPORT TO BE A COMPLETE
STATEMENT OF ALL PROVISIONS OF SUCH AGREEMENTS. THE DISCUSSION IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH AGREEMENTS. COPIES OF THE AGREEMENTS (OTHER
THAN THE QWEST CREDIT FACILITY AND THE PRIVATE LINE SERVICE AGREEMENT) ARE
ATTACHED AS EXHIBITS TO THE MERGER AGREEMENT AND ARE INCORPORATED HEREIN BY
REFERENCE. YOU SHOULD READ THE AGREEMENTS CAREFULLY.
Option Agreements. Contemporaneously with the execution of the Merger
Agreement, Qwest entered into option agreements with each of Scott A. Baxter,
Chairman of the Board of Directors, President and Chief Executive Officer of
Icon, Richard M. Brown, Vice President--Information Technologies of Icon, and
Scott Harmolin, Senior Vice President--Senior Technology Officer of Icon (each
such agreement, an "Option Agreement"). Messrs. Baxter, Brown and Harmolin,
who are also directors of Icon, beneficially owned 6,550,354 shares of Icon
Common Stock in the aggregate, or approximately 41.2% of the outstanding
shares of
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Icon Common Stock as of the Record Date. Messrs. Baxter, Brown and Harmolin
are collectively referred to as the "Principal Stockholders." The form of the
Option Agreements is attached as Exhibit A to the Merger Agreement and is
incorporated by reference herein.
Each Option Agreement between Qwest and a Principal Stockholder provides
for, among other things, the grant by such Principal Stockholder to Qwest of
an option to acquire all the shares of Icon Common Stock beneficially owned by
such Principal Stockholder (collectively, the "Option Shares") at a price of
$12.00 per share. The option may be exercised, in whole or in part, at any
time during the one year period commencing with the consummation of an
Alternative Transaction following the occurrence of an Option Trigger (as
defined below), by delivery by Qwest to the Principal Stockholder of written
notice (the "Exercise Notice") stating that Qwest is exercising the option in
respect of the number of Option Shares specified therein. In connection with
the delivery of an Exercise Notice, and in lieu of acquiring any Option
Shares, Qwest may elect, in its sole discretion, to require each Principal
Stockholder to repurchase the applicable option, or portion thereof, with
respect to the Option Shares specified in the Exercise Notice for cash in an
amount equal to the excess of the consideration per Option Share that would be
received by the Principal Stockholder in the Alternative Transaction pursuant
to which the option may be exercised over $12.00.
The Option Agreement with each Principal Stockholder also provides for
certain restrictions on the voting and the sale or other transfer of such
Option Shares. The voting restrictions will terminate at the later of the day
following the Termination Date under the Merger Agreement and payment in full
by Icon of all amounts then owing to Qwest and Qwest Subsidiary as set forth
in the Merger Agreement.
For purposes of each Option Agreement, the term "Option Trigger" means the
first to occur of (1) the termination or purported termination of the Merger
Agreement or the obligations of the parties thereunder, in any case without
the prior written approval of Qwest, (2) the time of the occurrence or
existence of any event or circumstance that would entitle any party to the
Merger Agreement to exercise its right to terminate its obligations thereunder
pursuant to Section 9.1 of the Merger Agreement, which is summarized above
under "--Terms of the Merger Agreement--Termination"; (3) the public
announcement (or written communication that is or becomes the subject of
public disclosure) of a bona fide proposal by any person (other than of Qwest
or any affiliate of, or any person acting in concert with, Qwest) with respect
to a Business Combination Transaction (other than the Transactions) with
respect to any of Icon and its subsidiaries, and (4) the occurrence of a
breach by any Principal Stockholder of any obligation under an Option
Agreement or a Voting Agreement.
For purposes of each Option Agreement, the term "Alternative Transaction"
means, whether concluded or intended to be concluded in one transaction or a
series of transactions (other than the Transactions), (1) the acquisition from
Icon or any holder thereof of Equity Securities of Icon as a result of which
the holders of shares of Icon Common Stock immediately before such transaction
or series of transactions would beneficially own less than 40% of the shares
of Icon Common Stock issued and outstanding immediately after such transaction
or series of transactions, (2) the acquisition of shares of Icon Common Stock
from the Principal Stockholder and transferees of shares of Icon Common Stock
pursuant to the Option Agreement as a result of which the Principal
Stockholder and such transferees would beneficially own in the aggregate less
than 50% of the shares of Icon Common Stock beneficially owned by the
Principal Stockholder and such transferees in the aggregate immediately before
such transaction or series of transactions, (3) the merger or consolidation of
Icon with or into any person other than a wholly owned subsidiary or (4) the
transfer of all or substantially all the assets of Icon and its subsidiaries.
Voting Agreements. Contemporaneously with the execution of the Merger
Agreement, Qwest entered into voting agreements and proxies with the Principal
Shareholders (each such agreement and proxy, a "Voting Agreement"). The form
of the Voting Agreements is attached as Exhibit B to the Merger Agreement and
is incorporated by reference herein.
Each Voting Agreement provides for, among other things, (a) the obligation
of the Principal Stockholder to vote all the shares of Icon Common Stock
beneficially owned by such Principal Stockholder to approve the
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Merger Agreement and the Merger, against any Business Combination Transaction
(other than the Transactions) and against any action or agreement that would
result in a breach of the Merger Agreement or impede or delay the conclusion
of the Transactions or materially reduce the benefits of the Transactions to
Qwest or Qwest Subsidiary pursuant to each Option Agreement, (b) the grant by
the Principal Stockholder to Qwest of an irrevocable proxy in connection
therewith, (c) certain other restrictions on the voting and the sale or other
transfer of such shares of Icon Common Stock, (d) certain restrictions on such
Principal Stockholder with respect to Business Combination Transactions (other
than the Transactions) with respect to any of Icon and its subsidiaries and
(e) the obligation of the Principal Shareholder to execute and deliver a
Stockholder Agreement at or before the Closing of the Merger. Each Voting
Agreement and the related proxy will terminate on the later of the day
following the Termination Date under the Merger Agreement and payment in full
by Icon of all amounts then owing to Qwest and Qwest Subsidiary in connection
with the termination of the Merger Agreement, as described above under "--
Terms of the Merger Agreement--Effect of Termination; Payment of Termination
Fee."
Stockholders Agreements. At or before the closing under the Merger
Agreement, Qwest will enter into stockholder agreements with the Principal
Stockholders (each such agreement, a "Stockholder Agreement"). The form of the
Stockholder Agreements is attached as Exhibit C to the Merger Agreement and is
incorporated by reference herein.
The Stockholder Agreement with each Principal Shareholder will provide for
certain restrictions on the sale or other transfer by such Principal
Stockholder of the shares of Qwest Common Stock to be received by such
Principal Shareholder in the Merger (as such shares may be adjusted in the
event of any change in the capital stock of Qwest by reason of stock
dividends, split-ups, reverse split-ups, mergers, recapitalizations,
subdivisions, conversions, exchanges of shares or the like) as described
below.
The Stockholder Agreement with each Principal Stockholder will provide that
the Principal Stockholder may not sell or otherwise transfer (or offer to sell
or otherwise transfer) any of the shares of Qwest Common Stock subject to the
Stockholder Agreement, or any interest therein, if, after giving effect to
such sale or other transfer, the Principal Stockholder would be the sole
beneficial owner of less than 60% of such shares on the first anniversary of
the Closing Date, 40% of such shares on the second anniversary of the Closing
Date or 20% of such shares on the third anniversary of the Closing Date, in
each case free and clear of all liens, subject to certain exceptions set forth
in the Stockholder Agreement. There are no restrictions on transfer after the
third anniversary of the Closing Date.
Qwest Credit Facility. In the Merger Agreement, Qwest committed to lend to
Icon up to $15 million in the aggregate (the "Term Loan"), substantially on
the terms and conditions set forth in the Merger Agreement. On September 28,
1998 Qwest and Icon entered into a definitive credit agreement (the "Credit
Agreement") with respect to the Term Loan (collectively, the "Qwest Credit
Facility"). The terms and conditions of the Qwest Credit Facility are attached
as Exhibit D to the Merger Agreement and are incorporated by reference herein.
The initial funding date of the Term Loan is January 31, 1999. Pursuant to
the terms and conditions of the Qwest Credit Facility, Icon may borrow up to
$15 million of which (i) up to an amount equal to the principal amount of the
indebtedness outstanding under Icon Credit Facilities (as defined in the
Merger Agreement), but no more than $10 million, may be borrowed on the
initial funding date and (ii) up to $2 million may be borrowed upon five days'
notice in one advance during each calendar month thereafter. The proceeds of
the Term Loan will be applied to (a) repay the indebtedness outstanding under
Icon Credit Facilities, (b) pay indebtedness owed under the Access Agreement
(as defined in the Merger Agreement), (c) acquire equipment and (d) pay
general corporate and operating expenses. The maturity date of the Term Loan
is January 31, 2000. Before the occurrence of a Material Adverse Condition (as
defined in the Credit Agreement), interest on the Term Loan will accrue at a
floating rate equal to the rate published in The Wall Street Journal from time
to time as the Prime Rate ("Prime"), plus 1.00%. After the occurrence of a
Material Adverse Condition, the interest rate will be at a floating rate equal
to Prime plus 8.00%.
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The Credit Agreement contains customary representations, warranties,
covenants, conditions to funding and events of default. The convenants include
limitations on Icon's ability to incur additional debt and to replace its
president, chief executive officer, chief financial officer or general
counsel, without Qwest's approval, which may not be unreasonably withheld,
conditioned or delayed. The Term Loan is secured by a lien on substantially
all of Icon's assets, including, without limitation, all of Icon's existing
and after-acquired personal property. The events of default, which entitle
Qwest to accelerate the maturity of the Term Loan, include (1) the
consummation of an alternative Business Combination Transaction with respect
to Icon or its subsidiaries, (2) the termination of the Merger Agreement by
Qwest on or after January 13, 1999 if an Icon Breach shall have occurred and
be continuing and a Qwest Breach shall then not have occurred and be
continuing or (3) a willful or reckless breach or violation by Icon, in any
material respect, of any of Icon's material representations, warranties,
covenants or agreements set forth in the Merger Agreement. Under certain
circumstances, Qwest may be required to advance the Term Loan and Icon would
not be in default under the Qwest Credit Facility, even if an event occurred
that could reasonably be expected to have a Material Adverse Effect with
respect to Icon.
Warrants; Registration Rights Agreement. Contemporaneously with the
execution of the Merger Agreement, Icon issued to Qwest warrants to purchase
750,000 shares Icon Common Stock (the "Series Q Warrants"), exercisable at
$12.00 per share for 10 years with registration rights granted pursuant to a
registration rights agreement (the "Registration Rights Agreement"). Icon
issued the Series Q Warrants in consideration of Qwest's commitment to advance
the Term Loan pursuant to the Qwest Credit Facility. The forms of the Series Q
Warrants and the Registration Rights Agreement are attached as Exhibits E and
F, respectively, to the Merger Agreement and are incorporated by reference
herein.
Private Line Services Agreement. Contemporaneously with the execution of the
Merger Agreement, Icon and Qwest entered into a private line services
agreement, under which Qwest will provide to Icon telecommunications capacity
and related ancillary services, and a master collocation license agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Icon Board that the Icon
Stockholders vote for the approval of the Merger and the adoption of the
Merger Agreement, Icon Stockholders should be aware that certain directors and
officers of Icon have interests in the Merger in addition to their interests
solely as Icon Stockholders, as described below. The Icon Board was aware of
these interests when it considered and approved the Merger Agreement and the
Merger.
Employment Contracts and Other Arrangements
For a description of existing employment agreements between Icon and certain
of its executive officers, see "COMPENSATION OF ICON'S EXECUTIVE OFFICERS--
Employment Agreements."
On September 13, 1998, Qwest entered into an employment agreement with Scott
A. Baxter, pursuant to which he agreed to serve full time as President and
Senior Executive Officer of Icon after the Effective Time. The term of the
employment agreement will be three years. Such term will automatically extend
for successive one-year periods except that any party may terminate the
agreement by giving written notice at least 90 days prior to the commencement
of any such extension. The annual base salary of Mr. Baxter will be $200,000,
$212,500, and $225,000 for the first, second and third years, respectively, of
service under his employment agreement. In addition, Mr. Baxter will receive
an automobile allowance, receive a non-qualified stock option grant of 200,000
shares under Qwest's Equity Incentive Plan and be entitled to participate in
Qwest's Executive Quarterly Bonus Plan.
Pursuant to the employment agreement with Qwest, if Mr. Baxter is terminated
by Icon for Cause (as defined below), he shall be entitled to receive his
salary, reimbursable expenses and benefits owing to him through his date of
termination. "Cause" is defined under the employment agreement as theft from
Qwest, conviction of a felony or other crime involving moral turpitude. If Mr.
Baxter is terminated other than for Cause or he terminates employment for Good
Reason (as defined below), he shall be entitled to receive the Termination
Compensation (as defined below). "Good Reason," as defined in the employment
agreement, shall be deemed
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to exist if one of the following events occurs: (1) there is a reduction in
salary; (2) there is a reduction in the target bonus opportunity; and (3)
there is a requirement to change work location by more than 35 miles. In
certain cases, where there is a substantial material or adverse diminution in
Mr. Baxter's duties and responsibilities and he thereafter terminates
employment, such termination may be deemed to be for Good Reason.
After a Change in Control (as defined in the employment agreement) of Qwest
has occurred, if either Mr. Baxter terminates his employment for any reason
within six months after the Change in Control or Qwest (or any successor
thereto) terminates Mr. Baxter's employment with Qwest within one year after
the Change in Control, he shall be entitled to receive (1) his salary, bonuses
and any amounts due under benefit plans or otherwise through the date of
termination and (2) a lump-sum payment (the "Termination Compensation"), in
cash, in an amount equal to 2.99 times his "base amount" (as such term is
defined in Section 280G(b)(3) of the Code).
On September 13, 1998 and thereafter, Qwest entered into employment
agreements, effective at the Effective Time, with Richard M. Brown, Scott
Harmolin, Frank C. Cicio, Jr., David L. Goret, Michael J. Gold, Kenneth J.
Hall, Susan A. Massaro, Anthony R. Scrimenti and Robert J. Thalman, Jr., each
of whom is an officer of Icon. Qwest also entered into or assumed existing
employment agreements with certain other identified key employees. The
employment agreements provide for, among other things, the payment of an
annual base salary, a quarterly bonus (some of which are guaranteed), a lump
sum amount upon termination for reasons other than cause and the assumption by
Qwest of existing options for shares of Icon Common Stock held by the named
employees. The agreements also provide that the employee is an "at will"
employee and that either Qwest or the employee may terminate employment with
Qwest at any time with or without cause. Certain agreements provide for the
accelerated vesting of these options upon a change of control with respect to
Icon. Certain agreements also provide for the grant by Qwest of options to
purchase shares of Qwest Common Stock.
Certain employees of Icon have entered into agreements with Qwest pursuant
to which each employee agreed (1) to assign to Qwest any inventions relating
to such employee's employment conceived during such employee's employment by
Qwest, (2) not to disclose confidential information to third parties, (3) not
to engage in any business that is competitive with Qwest during the term of
such employee's employment, (4) not to hire any employee of Qwest during such
employee's employment and for a specified period following the termination of
such employee's employment and (5) not to perform services for any customer of
Qwest for a specified period following the termination of such employee's
employment.
Stock Options and Warrants. Pursuant to the Merger Agreement, at the
Effective Time, each Icon stock option and warrant granted or issued, as the
case may be, by Icon to purchase shares of Icon Common Stock which is
outstanding and unexercised will be assumed by Qwest and converted into an
option or warrant to purchase Qwest Common Stock in such amount and at such
exercise price as is described below and otherwise having the same terms and
conditions as are in effect immediately prior to the Effective Time. The
number of shares of Qwest Common Stock to be subject to the new option or
warrant will be equal to the number of shares that the holder of such Icon
stock option or warrant would have been entitled to receive pursuant to the
Merger had such holder exercised such option or warrant in full immediately
prior to the Effective Time (whether or not such option or warrant was in fact
exercisable); provided, however, that the number of shares of Qwest Common
Stock that may be purchased upon exercise of any Icon stock option or warrant
will not include any fractional share and, upon exercise of such Icon stock
option or warrant, a cash payment will be made for any fractional share based
upon the last sale price per share of Qwest Common Stock on the trading day
immediately preceding the date of exercise. The exercise price per share of
Qwest Common Stock under the new option or warrant will be equal to (1) the
aggregate exercise price for Icon Common Stock purchasable pursuant to such
Icon stock option or warrant (provided that the aggregate exercise price shall
not exceed $12.00 multiplied by the number of shares of Icon Common Stock
otherwise purchasable upon exercise of such Icon stock option) divided by (2)
the number of shares of Qwest Common Stock deemed purchasable pursuant to such
Icon stock option or warrant. Any adjustments with respect to any Stock
Options that are "incentive stock options" shall be effected in a manner
consistent with Section 424(a) of the Code.
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Indemnification and Insurance. Pursuant to the Merger Agreement and subject
to certain limitations, the Surviving Corporation will indemnify each person
who was an officer, director, employee or agent of Icon against certain
liabilities. In addition, the Surviving Corporation will maintain, with
certain limitations, policies of directors' and officers' liability insurance
in amounts and for coverage agreed by Qwest and Icon to be appropriate in
respect of the activities and operations of Icon and its subsidiaries for a
period of six years from the Effective Time. See "--Terms of the Merger
Agreement--Indemnification."
Federal Securities Law Consequences
All Qwest Common Stock issued in connection with the Merger will be freely
transferable, except that any Qwest Common Stock received by persons who are
deemed to be "affiliates" (as defined under the Securities Act) of Icon prior
to the Merger may be sold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act, or as otherwise permitted
under the Securities Act. Persons who may be deemed to be affiliates of Icon
generally include individuals or entities that control, are controlled by, or
are under common control with, Icon and may include certain officers and
directors of Icon.
In general, under Rule 145, for one year following the Effective Time, an
affiliate of Icon (together with certain related persons) would be entitled to
sell Qwest Common Stock acquired in connection with the Merger only through
unsolicited "broker transactions" or in transactions directly with a "market
maker," as such terms are defined in Rule 144 under the Securities Act.
Additionally, the number of shares to be sold by an affiliate (together with
certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 may not exceed the greater of 1%
of the outstanding Qwest Common Stock or the average weekly trading volume of
such stock during the four calendar weeks preceding such sale. Rule 145 would
only be available, however, if Qwest remained current with its informational
filings with the Commission under the Exchange Act. After the end of one year
from the Effective Time, an affiliate of Icon would be able to sell Qwest
Common Stock received in the Merger without such manner-of-sale or volume
limitations, provided that Qwest was current with its Exchange Act
informational filings and such person was not then an affiliate of Qwest. Two
years after the Effective Time, an affiliate of Icon would be able to sell
such Qwest Common Stock without any restrictions so long as such person had
not been an affiliate of Qwest for at least three months prior thereto.
Icon has agreed to use all reasonable efforts to cause its affiliates to
agree in writing that they will comply with Rule 145 under the Securities Act.
Litigation
On September 15, 1998, in an action captioned Aaron Parnes v. Scott A.
Baxter, Wayne B. Weisman, Richard M. Brown, Scott Harmolin, Samuel A. Plum,
Icon CMT Corp. and Qwest Communications International Inc., the plaintiff
filed a putative class action complaint in the Court of Chancery of the State
of Delaware in and for New Castle County (the "Court") against Icon, its
directors and Qwest. In the suit, the plaintiff alleges that consummation of
the Merger will subject the Icon Stockholders to the control of Mr. Anschutz,
who will continue to be the majority stockholder of Qwest after the Merger.
The plaintiff further alleges that the Merger constitutes a change in control
of Icon and imposes heightened fiduciary duties on the members of the Icon
Board to maximize stockholder value. The plaintiff also alleges that the
members of the Icon Board violated their fiduciary duties by failing to
auction Icon or to undertake an active "market check" for other potential
bidders. The plaintiff seeks, among other things, to have the Court declare
the suit a proper class action, enjoin the Merger and require the members of
the Icon Board to auction Icon and/or conduct a "market check," and award
monetary damages, together with costs and disbursements. The defendants
consider the action to be without merit and intend to vigorously defend the
action. The defendants have filed answers denying the allegations of the
complaint.
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INDUSTRY OVERVIEW
GENERAL
The telecommunications industry involves the transmission of voice, data and
video communications. The industry has been undergoing rapid change due to
deregulation, the construction of additional infrastructure and the
introduction of new technologies, resulting in increased competition and
demand for telecommunications services.
United States Domestic Long Distance. The structure of the domestic long
distance telecommunications industry was strongly influenced by a 1982 court
decree that required the divestiture by AT&T of its local telephone businesses
into seven RBOCs and divided the country into approximately 200 LATAs that
range in size from metropolitan areas to entire states. The RBOCs were
initially limited to providing local telephone service, access to long
distance carriers and "in-region" long distance service (service within a
LATA). The right to provide inter-LATA service was initially ceded to AT&T and
other long distance carriers, as well as to LECs other than the RBOCs.
However, under the Telecommunications Act, the RBOCs may now provide inter-
LATA long distance service, subject to certain conditions.
For each long distance call, the originating and terminating LECs charge the
long distance carrier an access fee to carry the call across their local
networks. The long distance carrier charges the customer a fee for its
transmission of the call, a portion of which consists of the access fees
charged by the originating and terminating LECs. To encourage the development
of competition in the long distance market, the LECs are required to provide
all long distance carriers with access to local exchange service that is
"equal in type, quality and price" to that provided to AT&T. These "equal
access" and related provisions were intended to prevent preferential treatment
of AT&T and to require that the LECs charge the same access fees to all long
distance carriers, regardless of their volume of traffic. These provisions,
along with the development and evolution of fiber optic technology with its
increased capacity and transmission quality, have helped smaller long distance
carriers emerge as alternatives to the largest companies for long distance
telecommunications services.
United States International Long Distance. The United States international
long distance industry is large and growing. The onset of competition gave
rise to deregulation and a decrease in prices, which led to the initial growth
in the market and improvements in service offerings and customer service.
Subsequent growth has been largely attributable to the worldwide trend toward
deregulation and privatization, technological improvements, the expansion of
telecommunications infrastructure and the globalization of the world's
economies.
The profitability of the United States international long distance market is
principally driven by the difference between settlement rates (i.e., the rates
paid to other carriers to terminate an international call) and billed revenue.
The difference in cost between providing domestic long distance and
international service is minimal, and increased worldwide competition has
already brought about certain reductions in settlement rates and end user
prices, thereby reducing overseas termination costs for United States-based
carriers. However, it is believed that certain foreign countries use
settlement rates to subsidize their domestic call rates, contributing to
significantly higher rates for certain international calls compared to
domestic long distance calls. The FCC recently adopted measures intended to
overhaul the system of international settlements by mandating that U.S.
carriers negotiate settlement rates with foreign correspondents at or below
FCC-mandated benchmark levels. Several parties have filed petitions for
reconsideration with the FCC or court appeals or both following this order, so
it remains subject to modification. Additionally, recent worldwide trade
negotiations may lead to reduced settlement rates.
Multimedia. Continuing developments in multimedia applications are bringing
new entrants to the telecommunications market. Internet service providers and
cable television, entertainment and data transmission companies, for instance,
are potential customers for voice, data and video communications over high
bandwidth networks such as the Qwest Network.
LONG DISTANCE NETWORK SERVICES
Switched voice and data services originate and terminate with end users and
require varying amounts of bandwidth, depending on the nature of the
communication. Traditional telephony services such as "1 Plus"
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dialing require only limited bandwidth (such as 64 Kbps). Emerging broadband
services, such as the Internet, private networks and multimedia applications,
require higher bandwidth for effective communication. Such services are
increasingly transmitted over SONET ring-protected Optical Carrier level paths
(such as OC-48 or OC-192) using advanced transmission protocols, such as Frame
Relay and ATM.
TELECOMMUNICATIONS TECHNOLOGY
The market for video, voice and data communications is served primarily
through fiber optic and coaxial copper cables, microwave systems and
satellites. Before the 1980s, telecommunications traffic generally was
transmitted through satellites, microwave radio or copper cable installed
undersea or buried in the ground. By 1990, copper cable had been largely
replaced by fiber optic systems that provided greater capacity at lower cost
with higher quality and reliability.
. Fiber Optic Systems. Fiber optic systems use laser-generated light to
transmit voice, data and video in digital format through ultra-thin strands of
glass. Fiber optic systems are characterized generally by large circuit
capacity, good sound quality, resistance to external signal interference and
direct interface to digital switching equipment or digital microwave systems.
A pair of modern fiber optic strands, using the most advanced technology
commercially available, is capable of carrying OC-192 level capacity, equal to
over 129,000 simultaneous telephone calls. Because fiber optic signals
disperse over distance, they must be regenerated/amplified at sites located
along the fiber optic cable. Fiber optic systems using earlier generation
fiber, as compared to the more advanced fiber being installed in the Qwest
Network, require frequent intervals between regeneration/amplifier sites,
typically between 20 and 45 miles. Qwest's advanced fiber allows for greater
distances between regeneration/amplifier sites, and the Qwest Network is
designed to use a maximum of 60-mile intervals. Greater distances between
regeneration/amplifier sites generally translate into substantially lower
installation and operating costs.
. Microwave Systems. Although limited in capacity compared with fiber optic
systems, digital microwave systems offer an effective and reliable means of
transmitting lower volume and narrower bandwidths of voice, data and video
signals. Generally no more than 21 DS-3s can be transmitted by microwave
between two antennae. Microwaves are very high frequency radio waves that can
be reflected, focused and beamed in a line-of-sight transmission path. Because
of their electro-physical properties, microwaves can be used to transmit
signals through the air, with relatively little power, in much the same way
that electrical signals are transmitted through a copper wire. To create a
communications circuit, microwave signals are transmitted through a focusing
antenna, received by an antenna at the next station in the network, then
amplified and retransmitted. Microwaves disperse as they travel through the
air, and as a result this transmission process must be repeated at repeater
stations, which consist of radio equipment, antennae and back-up power
sources.
. Satellite Systems. Although satellites initially were used for point-to-
point long distance telephone and television transmissions, fiber optic cables
have proven to be a more cost effective delivery method for high volume point-
to-point applications. Currently, satellites are primarily used for
transmissions that must reach many locations over vast distances
simultaneously, such as the distribution of television programming, for point-
to-point traffic in developing countries lacking terrestrial networks and for
other point-to-point traffic that cannot be connected efficiently or cost-
effectively by terrestrial transmission systems.
TELECOMMUNICATIONS MARKETS
AT&T, MCI WorldCom and Sprint together constitute what are generally
referred to as the "Tier 1" companies in the long distance market.
Long distance companies may generally be categorized as "facilities-based"
carriers and "non-facilities-based" carriers. The three Tier 1 companies are
facilities-based carriers because each operates a network principally using
its own transmission facilities and extensive geographically dispersed
switching equipment. The completed Qwest Network will enable Qwest to become
this type of facilities-based carrier. All of the Tier 1
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carriers, including AT&T, lease some of their transmission facilities from
other carriers to back up their service routing, augment areas where they may
have traffic bottlenecks or cover a particular geographic area not covered by
their own networks.
Medium-sized long distance companies, some with national capabilities,
constitute the "Tier 2" companies in the long distance market. Certain Tier 2
carriers are known as "partial facilities-based" carriers in that they own
some of their own transmission facilities but operate using mostly leased
facilities. However, most Tier 2 carriers are nonfacilities-based carriers in
that they lease substantially all of their transmission facilities. Tier 2
carriers design, manage and operate their own networks just as the Tier 1
carriers, but generally on a smaller scale. These carriers are also generally
referred to as "switch-based" or "switched" because they typically operate
their own switches. Some of these carriers lease high volume DS-3 capacity and
resell lower volume DS-1 capacity to other carriers at higher unit prices. DS-
3 level capacity is generally only sold by carriers that own facilities on the
route on which the service is sold.
The "Tier 3" carriers, often called "switchless" resellers, neither operate
networks nor own facilities, but rather resell "minutes" of service which they
purchase from other carriers. These companies, which vary significantly in
size, are primarily sales and marketing companies that generate their margins
by buying in large volumes to obtain a low price per minute from switch-based
carriers and reselling at higher prices. These companies may receive an
invoice from their underlying carrier and bill the end user or, in some cases,
the underlying carrier may bill the end user directly. The barriers to entry
into this segment of the long distance market are minimal and there are
currently numerous Tier 3 companies providing long distance services. As its
business increases, a Tier 3 company may install its own switch and move into
the Tier 2 category.
Operator services companies concentrate on providing operator services and
other communications services to the long distance industry, private pay phone
operators, hotels and motels, prisons and credit card companies. These
carriers also manage their own networks and switching networks and switching
equipment while leasing virtually all of their facilities.
Competition in the retail long distance industry is based upon pricing,
customer service, network quality and valued-added services, creating
opportunities for smaller long distance providers to compete in certain
segments of the long distance market, and many of them are quickly able to
build sizable customer bases on the strength of their marketing efforts and
distribution channels.
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BUSINESS OF ICON
GENERAL
Icon is an Internet solutions provider that offers a comprehensive range of
services and products that enable corporate customers to implement their
Internet, intranet and extranet strategies. Icon's mission is to provide end-
to-end solutions to its customers by facilitating the distribution of the
customers' information and applications over Icon's communications
infrastructure as well as access to such information and applications. In
order to provide end-to-end solutions, Icon integrates services and products
in three key areas: (1) communications services, including high quality
Internet access and web/server hosting and management; (2) a range of
professional services, including custom application and website development
and design, systems integration and maintenance and support services; and (3)
product resales, including hardware and software, which are an integral
component of systems design and integration and serve as a means of
establishing customer relationships. Icon differentiates itself by integrating
its services and products to provide customized turnkey solutions for the
needs of corporate customers. Icon's customers include major corporations in
the financial services, telecommunications, pharmaceutical and media
industries, such as Alliance Capital Management LP ("Alliance Capital"), Astra
Pharmaceuticals, L.P. (formerly Astra Merck, Inc.), Bear, Stearns & Co. Inc.
("Bear Stearns"), Bell Atlantic Internet Solutions, Inc. ("Bell Atlantic
Internet Solutions") CBS, ING U.S. Financial Services Corporation, C/net: The
Computer Network, Merrill Lynch & Co., Inc. ("Merrill Lynch"), Procter &
Gamble Co. and Fleet Securities, Inc.
Integration Consortium, Inc. ("ICI"), Icon's predecessor, was incorporated
in New York in February 1991. Icon was incorporated in Delaware in February
1995, and ICI was merged with and into Icon in December 1995. Icon's principal
executive offices are located at 1200 Harbor Blvd., Weehawken, New Jersey
07087, and its telephone number is (201) 601-2000. Icon's Internet address is
www.icon.com.
MARKET AND INDUSTRY OVERVIEW
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology,
have significantly increased the demand for providing data communications
applications and services over public networks. At the same time, growth in
client/server and distributed computing, multimedia personal computers and
online computing services and the proliferation of networking technologies
have resulted in a large and growing group of end-users who are accustomed to
using networked computers for a variety of purposes, including electronic
mail, electronic file transfers, online computing, electronic commerce and
electronic financial transactions. These trends have increasingly led
businesses to explore opportunities to provide IP-based applications and
services internally within their organizations via intranets, externally to
selected customers and business partners via extranets and to the general
public via the Internet.
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably web browsing
and electronic mail. Use of the Internet for mission-critical business
applications is increasing even with the limited security and unreliable
performance inherent in the structure and management of the Internet, as well
as the difficulties of integrating web gateways and IP-based networks with
applications traditionally run on legacy systems. Additionally, emerging
applications such as IP-based audio and video applications and certain
multimedia applications require a communications infrastructure that has high
performance characteristics, including low latency (response time) and high
throughput. These factors have resulted in demand from an increasing number of
businesses for high bandwidth Internet access, secure networked systems,
technology-related products and integration and custom application development
services. Revenues generated by the Internet communications services market in
the United States, comprised of access and hosting, are expected to increase
from $6.2 billion in 1997 to $22.4 billion in 2000 according to Forrester
Research, Inc., while the worldwide Internet-related professional services
market is expected to grow from $2.6 billion in 1997 to $8.2 billion in 2000
according to International Data Corporation.
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As the amount of information transmitted over the Internet has grown and the
speed and complexity of networks has increased, IP-based services and products
have become increasingly intertwined. Corporate customers have not only come
to rely on IP-based networks for distributing mission-critical information and
applications to end-users but have become dependent on the technical services
that enable access and distribution of this information, resulting in an
increasing number of outside vendors offering services to corporate customers.
However, given the growth in complexity and expenditures related to
implementation of Internet, intranet and extranet strategies, Icon believes
that customers are increasingly seeking a single-source provider.
STRATEGY
Icon is an Internet solutions provider that offers a comprehensive range of
services and products that enable corporate customers to implement their
Internet, intranet and extranet strategies. Icon's mission is to provide end-
to-end solutions to its customers by facilitating the distribution of
customers' information and applications over Icon's communications
infrastructure as well as access to such information and applications. Unlike
many of its competitors who focus on a single service or product, Icon
continuously expands the breadth of its services and its engineering expertise
to provide customized turnkey solutions to meet the increasingly demanding
requirements of corporate customers. In order to provide end-to-end solutions,
Icon offers communications and professional services, as well as product
resales capabilities. The key strategic initiatives of Icon are to:
Leverage Capability to Provide End-to-End Internet Solutions. Icon's ability
to provide end-to-end solutions is often a decisive factor in attracting and
retaining customers and contributes to generating additional business from its
existing customer base. While some of Icon's customers are initially attracted
to Icon's end-to-end solutions, others seek a specific service or product.
Icon has historically succeeded in migrating many of such customers to become
users of Icon's additional services and products. Icon's relationships with
several customers, such as Bear Stearns, CBS and Group Health, Inc., began
with a single offering and evolved into an end-to-end solution encompassing
multiple communications and professional services. Icon's strategy is to
expand the number of customers who demand end-to-end solutions and to become
an integral component of its customers' information technology infrastructure.
Maintain Reliable and High Performance Communications Infrastructure. Icon
maintains a nationwide communications infrastructure that is managed to deploy
and distribute information and applications. Icon manages its network to
achieve utilization levels that enable it to operate in a reliable and high
performance manner. Icon controls its network and provides hosting and
management services from its state-of-the-art NOC, enabling it to meet
increasingly demanding customer requirements. Icon will continue to develop
its network-centric technological expertise and integrate third party
technologies to optimize network performance and provide value-added network
services to its customers. Icon will seek to continue to develop its
communications infrastructure to enhance the speed, security, reliability and
overall performance of its network. One of Icon's significant considerations
in agreeing to the Merger is the ability of Icon to enhance its communications
infrastructure by leveraging Qwest's network and facilities. Icon's second
network operations center ("NOC") became operational in the fourth quarter of
1998, augmenting Icon's existing communications infrastructure and engineering
capability.
Expand Network Domestically and Overseas. Icon plans to expand its network
to specifically address the growing bandwidth and global reach requirements of
its customers, both in the United States and internationally. Icon's agreement
with MCI WorldCom provides for access to certain MCI WorldCom communications
facilities throughout the country. Icon also has agreements with other vendors
who provide similar services. On September 13, 1998, Icon entered into a
private line services agreement and a colocation facilities license agreement
with Qwest, pursuant to which Icon agreed to purchase network backbone and
provisioning services and co-location facilities to augment its existing
infrastructure. One of Icon's significant considerations in agreeing to the
Merger is the ability of Icon to enhance its communications infrastructure by
leveraging Qwest's network and facilities. During the second quarter of 1998,
Icon circulated the RFP to a number of carriers in order to address its
existing and anticipated bandwidth requirements and to address certain
provisioning problems. Icon currently anticipates replacing MCI WorldCom or
augmenting their network services with another carrier. In the event that the
Merger
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is completed, Icon intends to migrate its backbone traffic to the Qwest
Network and to expand its network's reach to additional Qwest locations. In
the event that the Merger is not completed, Icon intends to select another
carrier to replace or augment MCI WorldCom as its primary backbone carrier.
Icon believes that the private line services agreement between Qwest and Icon
(or such other new agreement if the Merger is not consummated) will enable it
to provide improved network services and facilities at lower prices than are
currently available to it under its current MCI WorldCom agreement. In
November 1997, Icon entered into a joint venture agreement with Teleway
Corporation ("Teleway") that is intended to extend the reach of Icon's network
into Japan. See "--Joint Venture."
Expand and Integrate Professional Services Offerings. Icon's professional
services include software application development, website design and
development, integration with legacy systems, maintenance and support services
and consulting. Unlike many of Icon's competitors, who focus on a single
service or product, Icon continuously expands the breadth of its services and
its engineering expertise to optimize its end-to-end solutions. Icon intends
to continue to develop and leverage both its expertise in designing graphical
user interfaces (so-called "front-end" design) and integrating with legacy
data that resides on databases or mainframe systems (so-called "back-end"
integration).
Continue to Build Efficient Distribution Through Direct and Indirect
Channels. Icon will continue to grow its direct sales force, which has grown
from 29 at the beginning of 1997 to 64 as of September 30, 1998. The direct
sales force targets large accounts with significant revenue-generating
potential. It focuses on information-intensive industries, such as financial
services, media, pharmaceutical and telecommunications. Icon believes that the
organization of its direct sales force along industry lines enables it to
leverage its expertise and develop solutions that can be replicated and
tailored to meet recurring demands of corporate customers throughout a
particular industry. In addition, Icon will continue to expand distribution
relationships that enable it to compete effectively by expanding its customer
base without substantial costs. Icon's indirect sales channels include
relationships with telecommunications providers, such as Bell Atlantic
Internet Solutions, TotalTel USA Communications, Inc. ("TotalTel USA") and
Fiberlink, as well as resellers and master distributors. Bell Atlantic
Internet Solutions offers its customers the option to select Icon as their
global service provider to provide the long distance portion of their Internet
access services offering. Icon's agreement with Bell Atlantic Internet
Solutions contemplates a service offering to requesting Bell Atlantic Internet
Solutions customers in the traditional Bell Atlantic southern region and the
Bell Atlantic northern (previously NYNEX) region. While the service offering
in the southern region commenced in the second half of 1996, the service
offering in the northern region is subject to Bell Atlantic Internet
Solutions' receipt of certain regulatory approvals that Bell Atlantic Internet
Solutions has not yet received. In July 1998, Bell Atlantic, an affiliate of
Bell Atlantic Internet Solutions, announced that it would merge with GTE. The
transaction is subject to regulatory approval. Icon cannot predict what
effect, if any, the proposed transaction will have with respect to Icon's
existing business with Bell Atlantic Internet Solutions. In August 1998, Icon
extended its GSP Agreement through January 2001.
Grow Through Acquisitions. Icon intends to strengthen its market position
through additional acquisitions of companies that bring complementary
expertise in certain segments of the Internet business and maximize value
through cross-selling opportunities. In May, 1998, Icon completed the
acquisition of Frontier Media Group, Inc. ("Frontier Media"), a Malverne,
Pennsylvania-based professional services firm which specializes in providing
Internet-based solutions to companies in the pharmaceutical and financial
services industries. Icon intends to selectively pursue additional
acquisitions of companies with developed expertise in other industries.
JOINT VENTURE
In November 1997, Icon entered into an agreement with Teleway, a Japanese
communications company, pursuant to which they established Icon-Teleway
Internet Corporation ("ITIC"), to operate an Internet solutions business to
market end-to-end solutions to corporate customers in Japan (including
Japanese subsidiaries of United States corporations). Teleway, established in
1984, is one of the largest long distance companies in Japan, with revenues of
approximately $880 million in fiscal year 1998. Teleway holds a 52% equity
stake, and Icon holds the remaining 48% equity stake, in the joint venture
that owns ITIC. The services provided by ITIC will
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be similar to the services provided by Icon in the United States, including
communications services, professional services and product resales. ITIC's
network infrastructure in Japan will be based on Teleway's nationwide ATM
network.
Teleway has agreed to provide ITIC an initial loan of (Yen) 1 billion
(approximately $8.2 million, based upon November 30, 1998 exchange rates) and,
upon request, to make an additional loan for up to (Yen) 500 million
(approximately $4.1 million, based upon November 30, 1998 exchange rates) to
fund operations. In connection with the creation of the venture, Icon licensed
to ITIC the exclusive right to exploit Icon's intellectual property in Japan
for a period of five years. Any after-tax royalties received by Icon (up to a
maximum of $8 million) will be contributed back to ITIC as equity and will be
matched by Teleway such that the relative ownership is maintained. ITIC will
use such equity contributions to repay outstanding loans from Teleway and to
fund operations. Icon and Teleway have agreed to establish a network cross-
connection between Icon's network in the United States and ITIC's network in
Japan. The parties have further agreed to a reciprocal wholesale arrangement,
on a "most favored nations" basis, pursuant to which Icon and ITIC will
purchase communications services (including Internet access) from each other
at a wholesale price and resell such services to customers in their respective
countries. The transaction is subject to third party and governmental
consents. ITIC was organized during the first quarter of 1998 and commenced
operations during the third quarter of 1998.
Kokusai Denshin Denwa Co., Ltd. ("KDD") acquired Teleway on December 1,
1998. Icon cannot predict the effect, if any, such acquisition will have on
ITIC. KDD is engaged in a number of Internet-related businesses which conflict
with the provisions of the Icon-Teleway agreement. The parties have entered
into good faith negotiations with respect to possible changes to the agreement
to reflect the post-KDD merger environment.
COMMUNICATIONS INFRASTRUCTURE
Icon developed its communications infrastructure in recognition of the
market need for commercial-grade Internet access and value-added deployment of
mission-critical information and applications. Icon's customers use Icon's
communications infrastructure for private networks and commercial
applications. Icon's communications infrastructure is a switched IP backbone
based upon dedicated fixed capacity circuits and an ATM architecture.
Customers can connect to Icon's network from major cities across the United
States through dedicated high-speed leased lines. The network is logically
designed as a "cloud," with multiple high-speed paths between switches, so as
to reduce the possibility that any single point of failure will cause network
outage. The network uses state-of-the-art routing platforms, including Cisco
routers. Currently, Icon's backbone consists of 19 nodes, and Icon currently
plans to add additional nodes.
After a customer's data has entered Icon's backbone, it is routed to its
destination, either over Icon's backbone or to another ISP's backbone, which
is facilitated through peering arrangements with other ISPs. In order to peer
with other Tier 1 ISPs, an ISP must demonstrate that its network transports
sufficient volumes of data and that it can peer at geographically diverse
locations. Icon has established Tier 1 peering arrangements with other ISPs
and long distance carriers enabling it to exchange traffic at major peering
points, including MAE-East, MAE-West, Ameritech Advanced Data Services NAP,
Digital Internet Exchange, Commercial Internet Exchange, Sprint Communications
NAP and Pacific Bell NAP. Peered ISPs share routing tables with each other so
that each ISP's customers can have access to the information on a peered-ISP's
network. Although many ISPs have recently been adding to their peering
eligibility requirements, Icon has been successful in qualifying for these
arrangements. Icon believes that the need to enter into peering arrangements
and the increasingly stringent eligibility standards to be met to qualify for
these relationships now provide a significant barrier to entry for other
companies trying to build nationwide backbones to provide Internet access.
Icon believes that its combination of a nationwide backbone and peering
arrangements establishes Icon as a Tier 1 provider, which differentiates Icon
from regional ISPs who, without peering arrangements, may have to pay transit
fees to national Internet carriers in order to exchange network traffic.
Icon's communications network consists of facilities leased from a number of
providers, including MCI WorldCom and certain RBOCs, LECs and CAPs. Icon has
entered into a service agreement with MCI WorldCom
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that provides Icon access to certain of MCI WorldCom's communications
facilities throughout the country. During the first half of 1998, Icon
extended its services and co-location agreements with MCI WorldCom through
September 30, 1999. In connection with the extension, Icon agreed to commit to
pay to MCI WorldCom annual recurring revenues equal to the greater of (i) 110%
of the annual recurring revenue paid by Icon to MCI WorldCom under the
agreement for the period October 1, 1997 through September 30, 1998; or
(ii) $6.6 million. The agreement provides that if Icon fails to pay the annual
recurring revenue amount contemplated above, then Icon must pay an assessment
equal to 15% of the difference between the committed amount and the actual
amounts paid for such period. Pursuant to the agreement, MCI WorldCom also
provides certain additional related services including, upon request by Icon,
the provisioning of local telecommunications services and colocation of
certain of Icon's equipment. Icon has experienced delays in the provisioning
of its Internet access installation service orders by MCI WorldCom. As a
result, Icon has begun purchasing communications infrastructure facilities
from additional suppliers. During the second quarter of 1998, Icon circulated
the RFP to a number of carriers in order to address its existing and
anticipated bandwidth requirements and its provisioning problems. Icon
currently anticipates replacing MCI WorldCom or augmenting their network
services with another carrier. One of Icon's significant considerations in
agreeing to the Merger is the ability of Icon to enhance its communications
infrastructure by leveraging Qwest's network and facilities. In the event that
the Merger is completed, Icon intends to migrate its backbone traffic to the
Qwest Network and to expand its network's reach to additional Qwest locations.
In the event that the Merger is not completed, Icon intends to select another
carrier to replace or augment MCI WorldCom as its primary carrier for network
backbone services. Furthermore, on September 13, 1998, Icon entered into a
private line services agreement with Qwest, pursuant to which Icon agreed to
purchase network backbone and provisioning services and co-location facilities
to augment its existing infrastructure. In November 1997, Icon entered into an
agreement with Teleway pursuant to which they established ITIC to operate an
Internet solutions business to corporate customers in Japan (including
Japanese subsidiaries of United States corporations) and that is intended to
extend the reach of Icon's network into Japan; however, no assurance can be
made at this time that this transaction will be successful.
Icon's network is monitored 24 hours per day, 7 days per week by its NOC,
located at its Weehawken, New Jersey headquarters. The NOC is the primary
control and networking equipment center for all forms of network operations.
Redundant network paths connect the NOC to the backbone, reducing the
possibility that a single point of failure will cause a network outage. The
NOC hosts systems, which consist of networking equipment, hardware and
software, for customers by providing space, connectivity, data protection and
continuous monitoring and maintenance. Icon maintains a second internal secure
network as a dedicated data conduit for backup and restoration of hosted
client data. To date, Icon has not experienced any network-wide outages or
significant losses of customer data. Icon's second NOC became operational in
its San Francisco office during the fourth quarter of 1998.
SERVICES AND PRODUCTS
Icon integrates services and products in three key areas: (i) communications
services, (ii) professional services and (iii) product resales.
COMMUNICATIONS SERVICES
Access Solutions. Icon's network access solutions enable customers to deploy
mission-critical information and applications over the Internet, intranets and
extranets. In some cases, Icon provides guaranteed levels of service for
dedicated Internet access to corporate customers and targets performance
benchmarks for latency levels and network availability. Icon also provides
switched Internet access including ISDN, ADSL and dial-up through Bell
Atlantic Internet Solutions and may, in the future, seek to expand its
switched services to augment its dedicated offerings to its corporate
customers, who may want to provide switched access to their employees or
customers. In July 1998, Icon finalized an interconnection and resale
agreement with IBM Corporation pursuant to which Icon may provide nationwide
dial-up network services in connection with an Icon-developed value-added
access or hosting solution.
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Depending upon the size of the customer and corresponding application and
information needs, bandwidth requirements vary widely. For example, audio and
video applications typically require greater bandwidth than text-based
applications. Icon offers six levels of Internet access to meet the wide range
of bandwidth needs:
.56 Kbps
.Fractional DS-1 (n X 64 Kbps; n less than 24)
.DS-1 (1.544 Mbps)
.Fractional DS-3 (n X 3 Mbps; 1 less than n less than 15)
.DS-3 (45 Mbps)
.OC-3
Hosting and Management Solutions. Hosting and management solutions consist
of the provisioning, installation, maintenance and monitoring of the hardware
and software components that comprise a hosted system. The actual components
of web hosting are the server, the physical workstation or PC upon which the
website or application resides, Icon's NOC which hosts the server, a high-
speed physical connection to Icon's network backbone, server and power backup
to ensure 24 hour functionality, and maintenance, monitoring and management
services to ensure ongoing operation of the server. Within both the NT and
UNIX product lines, Icon offers a variety of hardware, software, network and
service level configuration options to meet the requirements of its
sophisticated customer base. By outsourcing its web server management function
to Icon, a customer can reduce costs while increasing reliability and
performance of its servers. Icon offers 24 hours per day, 7 days per week
monitoring of the server and Internet connection through Icon's technical
staff. In addition, Icon provides upgrades as the customer's speed and
capacity requirements grow. In addition to its existing hosting facility at
its corporate headquarters, Icon's second hosting location in San Francisco
became operational during the fourth quarter of 1998.
Professional Services
Custom Software Application Development. Icon designs and develops
specialized software applications that enable corporations to communicate
business information and conduct commerce through IP-based networks. Icon's
engineering staff is experienced in programming languages such as C, C++ and
Java and works closely with its customers to analyze and design specifications
for IP-based applications. Icon has completed custom application projects for
customers including Group Health, Inc., The Associated Press, Bear Stearns,
CBS and National Preferred Provider Network, Inc.
Website Design and Development. Icon is an established provider of advanced
website design and implementation services. Icon designs websites ranging from
basic "inquiry only" sites to complex, interactive sites featuring
sophisticated graphics, animation, sound and other multimedia content. Icon
has completed website design projects for customers including Swissotel, CBS
News, a division of CBS, Comedy Central and Kobra International (Nicole
Miller).
Integration with Legacy Systems. Icon combines its expertise in
communications services, systems design and custom software and website design
and development to offer integration services. Icon's integration services
enable its customers to access corporate information that resides on legacy
systems, such as IBM or Unix mainframes, that are connected by network
architectures. Icon's technical engineers, whose training and certification
includes Sun Solaris, Netscape, Microsoft NT and Cisco, are skilled at design
and implementation of databases in order to reduce demands on legacy systems
and increase the efficiency of transporting corporate data between legacy and
client/server systems over an IP-based network. Icon has completed integration
projects for customers including The Associated Press, Bear Stearns, CBS News,
Weiss, Peck and Greer, Omnipoint Communications ("Omnipoint"), The Halstead
Property Company, John Wiley & Sons, Inc. ("John Wiley"), J.C. Bradford & Co.
and Fleet Securities, Inc.
Maintenance and Support of Customer IT Infrastructure. Icon's maintenance
and support services organization offers 24 hours per day, 7 days per week
hardware and software maintenance and support for its customers. Services
include call-in support, troubleshooting, software and hardware updates and
on-site helpdesk
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and general support personnel. Engagements of Icon to perform maintenance and
support services have often developed when or after the customer has purchased
products from Icon or used other professional services. Icon has provided
maintenance and support services for customers including Alliance Capital,
Bear Stearns, CBS, Moore Capital Management, Inc., Omnipoint, Tudor Investment
Company and John Wiley.
Product Resales. Product resales are an integral part of providing end-to-
end solutions. Icon identifies and resells hardware and software that become
components of its customers' information technology infrastructure. Icon, in
certain cases, leverages product resales to cross-sell Icon's end-to-end
solutions to a growing customer base. The products include hardware and
networking equipment such as Sun Microsystems servers and Cisco routers, and
software such as Check Point firewalls, Netscape web servers and Oracle,
Informix and Sybase databases.
SALES AND MARKETING
Icon's distribution strategy entails expanding its sales channels to sell
its services and products directly to commercial users and through a network
of indirect distribution channels, including OEM relationships, regional
systems integrators, VARs, distributors and relationships with
telecommunications companies, including Bell Atlantic Internet Solutions,
Fiberlink and Total-Tel USA.
Direct Sales Force. Icon's direct sales force targets large accounts with
significant revenue-generating potential. Icon's sales group focuses on
information-intensive industries, such as financial services, media,
telecommunications and travel and includes customers such as Alliance Capital,
Bear Stearns, CBS and Fleet Securities, Inc. Icon believes that the
organization of its direct sales force along industry lines enables it to
leverage its expertise and develop solutions that can be replicated and
tailored to meet recurring demands of corporate customers throughout a
particular industry. As the size of the direct sales force grows, Icon plans
to expand into additional vertical industries. As a result of Icon's
acquisition of Frontier Media, Icon expanded its reach into the pharmaceutical
industry. Icon has expanded its sales staff from 27 at the beginning of 1997
to 64 as of September 30, 1998. Typically, Icon's sales representatives
receive a compensation package that includes a salary and commissions that are
based on actual sales and oriented toward selling higher margin services.
Indirect Distribution Channels. Icon markets its services and products
through a network of third-party relationships, thereby expanding its customer
base throughout the country without incurring the associated sales, marketing
and administrative costs. Regional systems integrators, VARs and, in some
cases, regional ISPs may also resell Icon's services and products. By
reselling Icon's services and products, these companies are able to expand
their service and product offerings and provide more comprehensive solutions
to their customers. As an example of this strategy, Icon has entered into a
master distribution agreement with Access Graphics, a leading distributor of
Sun Microsystems Computer Company ("Sun") workstations, to bundle Sun web
servers with Icon's Internet access services. Such distributors and resellers
may participate in Icon's indirect distribution channel either by (i)
sublicensing Icon's services and products and reselling them to their
customers or (ii) referring orders to Icon in exchange for an agency
commission.
Icon has also pursued a distribution strategy that enlists the assistance of
telecommunications companies who are already providing communications services
(such as local phone service or cable television) to existing customers. This
strategy enables Icon to leverage not only a substantially larger sales and
marketing infrastructure, but also strong customer relationships. While Icon's
margins are lower in this distribution channel, Icon's resellers absorb all of
the customer-acquisition and administrative costs that would otherwise be
borne by Icon.
In addition to its reseller agreements, pursuant to the arrangement with
Bell Atlantic Internet Solutions, Bell Atlantic Internet Solutions offers its
customers the option to purchase Icon's communications services and bills the
customers on Icon's behalf. Icon's GSP Agreement with Bell Atlantic Internet
Solutions contemplates a service offering to requesting Bell Atlantic Internet
Solutions customers in the traditional Bell Atlantic southern region and the
Bell Atlantic northern (previously NYNEX) region. While the service offering
in the southern
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region became available during the second half of 1996, the service offering
in the northern region is subject to Bell Atlantic Internet Solutions' receipt
of certain regulatory approvals, which Bell Atlantic Internet Solutions has
not yet received. In July 1998, Bell Atlantic, an affiliate of Bell Atlantic
Internet Solutions, announced that it would merge with GTE. The transaction is
subject to regulatory approval. Icon cannot predict what effect, if any, the
proposed transaction will have with respect to Icon's existing business with
Bell Atlantic Internet Solutions. In August 1998, Icon extended its
arrangement with Bell Atlantic Internet Solutions through January 2001. Icon
intends to pursue additional relationships with other telecommunications
providers, including additional "local telco service" providers both using
wireline and wireless facilities, including LECs, RBOCs, CAPs and cable
television companies.
Marketing. Icon employs marketing and public relations personnel and works
with third-party advertising firms and consultants to provide broad coverage
in network computer and vertical industry publications. Icon participates in
nationwide industry trade shows, historically including NetWorld+InterOp,
Internet World and CompTel. Icon also participates in co-branding promotions
with strategic partners including Sun, Cisco and Access Graphics. Recently,
Icon expanded its marketing budget in an effort to increase its brand
recognition among potential customers in its target vertical markets.
COMPETITION
The markets served by Icon are extremely competitive. The influx of new
market entrants is expected to continue in each sector of Icon's business to
meet the growing demand for information technology and communications services
and products. Additionally, Icon believes that such factors as shifting
customer demands and the rapid pace of technological advance will intensify
competition and result in continual pressures to reduce prices, enhance
services and products and develop and exploit new technology. Most of Icon's
current and potential competitors enjoy a greater market presence and possess
substantially greater technical, financial and marketing resources than Icon.
Icon believes that its ability to compete successfully depends upon a number
of factors, including the performance, reliability and security of its
communications infrastructure, continued ability to provide end-to-end
Internet solutions, its ability to maintain and expand its channels of
distribution, its continued expertise in proprietary and third party
technologies, its ability to attract and retain service engineers, the pricing
policies of its competitors and suppliers, the variety of services it offers,
the timing of introductions of new services by Icon and its competitors,
customer support, Icon's ability to support industry standards and industry
and general economic trends.
Communications Services. Icon's current and prospective competitors in the
Internet communications services sector generally may be divided into the
following five groups: (i) telecommunications companies, such as AT&T, MCI
WorldCom, Sprint, Intermedia, GTE and LECs; (ii) online services providers,
such as America Online, (iii) ISPs, such as PSINet, Inc., Globix Corporation,
Concentric Network Corp. and other national and regional providers; (iv) cable
modem connectivity providers such as At Home Corporation; and (v) data center
providers such as Exodus Communications Inc. and Frontier. Most of these
competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to Icon. As a result, they may be able to develop and expand their
communications infrastractures more quickly, adapt more swiftly to new or
emerging technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily, and devote greater resources
to the marketing and sale of their services and products than Icon. In
addition to the companies named above, various organizations have entered into
or are forming joint ventures or consortiums to provide services similar to
those of Icon. Icon believes that competitive factors in the Internet services
market include market presence, network capacity, reliability and security,
price, new products and enhancements and conformity with industry standards.
Certain companies, including MCI WorldCom, Intermedia and GTE, have also
obtained or expanded their Internet access services and products as a result
of acquisitions. In 1996, MFS merged with UUNET, a competitor of Icon in the
area of Internet access. WorldCom acquired MFS, which is also a supplier of
network services to Icon, and WorldCom subsequently acquired MCI, a major
provider of Internet backbone services.
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The combination of MFS, UUNET, WorldCom and MCI (known as MCI WorldCom) means
that one of Icon's major suppliers is also one of its formidable competitors
in providing Internet services. Such acquisitions may permit Icon's
competitors to devote greater resources to the development and marketing of
new competitive products and services and the marketing of existing
competitive products and services. Additionally, certain distributors of
Icon's services and products, such as Bell Atlantic Internet Solutions, may
compete with Icon in the future. In July 1998, Bell Atlantic, an affiliate of
Bell Atlantic Internet Solutions, announced that it would merge with GTE. Icon
cannot predict what effect, if any, the proposed transaction will have with
respect to Icon's existing business with Bell Atlantic Internet Solutions.
Certain companies are also providing high-speed data services using
alternative delivery methods such as cable television, direct broadcast
satellites and wireless cable.
As a result of increased competition and vertical and horizontal integration
and consolidation in the industry, Icon could encounter significant pricing
pressure, which in turn could result in significant reductions in the average
selling price of Icon's services. For example, certain of Icon's competitors
that are telecommunications companies may be able to provide customers with
reduced communications costs in connection with their Internet access services
or private network services, reducing the overall cost of their solutions and
significantly increasing price pressures on Icon. One of Icon's significant
considerations with respect to the Merger was to leverage Qwest's
communications infrastructure to enable it to compete with ISPs that are
strategically aligned with telecommunications companies. There can be no
assurance that Icon will be able to offset the effects of any such price
reductions with an increase in the number of its customers, higher revenue
from enhanced services, cost reductions or otherwise.
Professional Services
The professional services market is highly fragmented and served by numerous
providers, including consulting and systems integration firms, facilities
management and MIS outsourcing companies, applications software firms, major
equipment providers through their professional services units, major
accounting firms, general management consulting firms and website/intranet
design firms. Icon typically encounters competition from mid-sized and
regional consulting and systems integration firms, such as USWeb Corporation,
Cambridge Technology Partners, Inc. and Technology Solutions Co., and
increasingly competes with large-scale systems integrators, such as EDS Corp.
("EDS"). Icon's design group also competes with a variety of interactive
design firms including agency.com (which has announced that it will merge with
Eagle River Interactive Inc.), Razorfish Inc. and CKS Group Inc. (which has
announced that it will be acquired by USWeb Corporation). Icon believes that
the primary competitive factors at work in this market are price, the ability
to fashion and deliver efficient solutions to customer needs, the quality of
service, including project management and ongoing support and maintenance, its
ability to attract and retain service engineers and the availability and
quality of hardware. Accordingly, Icon competes on the basis of its
reputation, personnel, technical sophistication and ability to provide single-
source, end-to-end solutions.
Product Resales
The product resales business is a highly competitive market with low margins
and no substantial barriers to entry. Icon believes that its ability to
compete successfully depends on a number of factors, including its ability to
integrate value-added services with its product resales, the price at which
Icon resells products, the speed and accuracy of delivery, the effectiveness
of sales and marketing programs, credit availability, the ability to tailor
specific solutions to customer needs, the quality and breadth of products
offered, the availability to offer product information and technical support
and industry and general economic trends.
Icon's current and prospective competitors generally can be divided into
three groups: (i) national and regional VARs, such as Entex Information
Services, Inc., and Vanstar Corporation (ii) national and regional systems
integrators, such as EDS, Sapient Corp.; and Andersen Consulting; and (iii)
hardware distributors, such as CHS Electronics Inc. and ITOCHU Corporation.
Many of these competitors have greater market presence and financial resources
than those available to Icon. As a result, they may be able to adapt more
swiftly to changes
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in market prices and customer requirements, provide financing to customers for
purchases, take advantage of acquisition and other opportunities more readily,
and devote greater resources to the marketing and sale of their products than
can Icon. In addition, Icon expects that additional competitive pressure may
arise from manufacturers that have been successful in selling directly to the
end-users without the use of resellers.
PROPRIETARY RIGHTS
Icon believes that factors such as the technical and business expertise of
its personnel, attentive high-quality customer service and strategic alliances
with its suppliers and other vendors, have to date played a predominant role
in promoting its reputation and the growth of its business but recognizes that
its ability to compete effectively and to continue to grow will depend
increasingly on the use and appeal of its proprietary technology.
While Icon relies on patent, trademark, contract, trade secret and copyright
law to protect its proprietary technologies, it is possible for a third party
to copy or otherwise obtain and use Icon's technologies without authorization,
or to develop similar technologies independently. Although Icon has only
registered one trademark, it has applied to register its name and logo design
as trademarks and certain of its product and service names and marks as
trademarks or service marks in the United States. Icon does not own but has
applied for patents on certain of its proprietary technologies. Although Icon
does not believe that its services or products infringe the proprietary rights
of any third parties, there can be no assurance that third parties will not
assert such claims against Icon in the future or that such claims will not be
successful.
In accordance with Icon's policy, all of Icon's employees and consultants
have entered into, and all future employee and consultants are expected to
enter into, agreements containing confidentiality and nonsolicitation
covenants. Similarly, Icon's agreements with customers and suppliers include
provisions prohibiting or restricting the disclosure of proprietary
information and products, and limit, in certain cases, the sublicensing of
software. In addition, Icon sells or licenses its services and products in,
and the Internet and other global networks facilitate the delivery of Icon's
software to, other countries where the laws may not afford adequate protection
of Icon's proprietary rights in such products or provide effective means for
its enforcement of such rights.
Certain technologies used in Icon's solutions are licensed or leased by
Icon, generally on a non-exclusive basis. There can be no assurance that such
technology will continue to be available to Icon on commercially reasonable
terms. The loss of such technology could impair Icon's products or services or
require Icon to obtain substitute technologies of lower quality or performance
standards or at greater cost. See "Risk Factors--Dependence on Proprietary
Technologies".
GOVERNMENT REGULATION
With respect to its existing and proposed Internet offerings, Icon believes
that it is not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other governmental agency. To
date, the FCC has not actively sought to regulate the provision of Internet
services. Except for the stand-alone provision of underlying basic
transmission capability, the offering of Internet services has generally been
considered "enhanced services." Under current law, operators of "enhanced
services" are exempt from FCC regulation, but operators of "basic services"
are not similarly exempt. Whether the FCC will assert regulatory authority
over the Internet and the level of such regulation, if asserted, are pending
issues at the agency, and regulation of the Internet and related services in
general is being considered by lawmakers at many levels of government. Changes
in the legal or regulatory environment relating to the Internet industry,
including regulatory changes that directly or indirectly affect the regulatory
status of Internet services, affect telecommunications costs, including the
application of access or universal service charges to Internet service or
increase the likelihood or scope of competition from RBOCs including Bell
Atlantic or Bell Atlantic Internet Solutions or other companies could also
have a material adverse effect on Icon's business, financial condition and
results of operations.
There are a number of on-going proceedings at the FCC regarding whether the
FCC should regulate the Internet. On April 10, 1998, the FCC reported to
Congress on the meaning of various provisions in the Telecommunications Act of
1996 (the "Telecommunications Act"), including whether the provision of
Internet
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access is a "telecommunications" service. The FCC concluded that Internet
access service, defined as a bundled offering combining various computer
processing and content applications, is an "information service" under the
Telecommunications Act, and the transmission capabilities provided over the
facilities underlying Internet access and other information service offerings
constitute "telecommunications" under the Telecommunications Act, whether
provided by a common carrier or self-provisioned by an Internet service
provider. The FCC noted that IP phone-to-phone telephony appears to be a
"telecommunications service" rather than an "information service," but
reserved making a final determination in a future ad hoc proceeding. The FCC
announced its intention to determine on a case-by-case basis whether to
require Internet telephony service providers to contribute financially to
universal service support mechanisms, which could also subject these services
to other forms of regulation. The FCC also stated that it may require ISP and
Internet backbone providers that use their own transmission facilities to
provide Internet services to contribute to universal service mechanisms. In
mid-September, BellSouth and US WEST announced that they consider IP telephony
services to be telecommunications services and therefore subject to access
charges. A determination by the FCC that these services are subject to
regulation could adversely impact Icon's ability to provide various existing
and planned services and could have a material adverse effect on Icon's
business, financial condition and results of operations.
The FCC also extensively regulates the cable and broadcasting industries.
These regulations address among other things, technical, ownership,
competition and content-related issues. To date, the FCC has not determined
whether or to what extent its regulatory framework can or should be extended
to directly govern analogous communications on the Internet, such as video and
audio streaming. There can be no guarantee that the limited regulatory burdens
on the Internet to date will not increase or that new laws governing the
Internet will not be passed.
In an order released August 7, 1998, the FCC declined to grant petitions
filed by Bell Atlantic and other RBOCs seeking relief from various regulations
that affect the deployment of advanced telecommunications services, including
relief from the obligations contained in Section 271 and Section 251(c) of the
Communications Act of 1934, as amended. However, also on August 7, 1998, the
FCC proposed new rules under which RBOCs could avoid the incumbent local
exchange carrier ("ILEC") regulations in Section 251(c) by providing advanced
services through a separate affiliate. The agency asked for public comment on
what advanced services are "incidental interLATA" services, whether it should
modify LATA boundaries to promote access to advanced services, especially for
schools and libraries and rural consumers and whether it should take other
steps to permit RBOCs to provide advanced interLATA services. In that
proceeding, Bell Atlantic had argued that interLATA information services
(including Internet services) are not covered by the RBOC entry prohibition in
Section 271. The FCC has also invited public comment on a number of Internet-
related issues in a Notice of Inquiry released August 7, 1998, in which it
asks how it can foster the deployment of advanced services and whether it
should regulate peering arrangements. If the FCC allows a separate affiliate
of an ILEC to avoid the Section 251(c) obligations, allows RBOCs to provide
Internet interLATA services or introduces new regulation of Internet services,
Bell Atlantic, Bell Atlantic Internet Solutions, or an affiliate thereof, may
be able to undertake the functions that Icon currently performs for Bell
Atlantic Internet Solutions' customers, and such regulation could have a
material adverse effect on Icon's business, financial condition or results of
operations.
In July 1998, Bell Atlantic filed a petition with the FCC requesting
authority to provide data lines across LATA boundaries in West Virginia
because of inadequate Internet connections in the state. The agency has not
ruled on Bell Atlantic's petition, however, if the FCC permits Bell Atlantic
to provide interLATA data services in West Virginia, Bell Atlantic may be able
to undertake the functions that Icon currently performs for Bell Atlantic
Internet Solutions' customers in West Virginia.
On December 31, 1997, a Federal District Court Judge declared several
provisions of the Telecommunications Act unconstitutional. This decision was
overturned on appeal. It is possible, however, that the appellate court's
decision will be reviewed by the Supreme Court. If the Supreme Court reverses
the appellate court, then Bell Atlantic may be allowed to offer certain
services, which Bell Atlantic Internet Solutions and its affiliates have been
prohibited from offering under the Telecommunications Act, without the FCC
finding Bell Atlantic to be in compliance with the network unbundling and
other competitive requirements set out in the
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Telecommunications Act. Icon currently provides such services for Bell
Atlantic Internet Solutions' customers, and if the decision is upheld on
appeal, Bell Atlantic Internet Solutions or its affiliates may provide such
services directly to their customers.
Bell Atlantic Internet Solutions' relationship with Icon is subject to
review and regulation by state and federal authorities, including the FCC.
Although Icon understands that Bell Atlantic has received the requisite
approvals to provide Internet access service and make Icon's services
available to Bell Atlantic customers who request them (which has only included
customers in the traditional Bell Atlantic southern region through the date
hereof), a petition submitted by MFS in July 1996 for reconsideration of such
FCC approvals is currently pending before the FCC. Additionally, Bell Atlantic
must obtain the necessary state and federal approvals before it will be able
to provide Internet access services in Bell Atlantic's northern region
(formerly NYNEX). To date, Bell Atlantic has not obtained such approvals, and
there can be no assurance that Bell Atlantic will be successful in maintaining
or procuring the requisite regulatory approvals. Failure of Bell Atlantic to
maintain or prospectively procure such approvals at the federal or state level
could adversely affect Icon's existing agreements with Bell Atlantic Internet
Solutions, and as a result, Icon's business, financial condition and results
of operations. The FCC is considering whether to eliminate the requirement
that RBOCs (including Bell Atlantic) must file comparably efficient
interconnection plans and obtain approval for those plans prior to providing
new enhanced services. Elimination of this requirement could lessen certain
regulatory burdens currently imposed on Bell Atlantic Internet Solutions.
Due to the increase in Internet use and publicity, it is possible that laws
and regulations will be adopted with respect to the Internet, including laws
regarding privacy, pricing and characteristics of services or products. Other
legislative initiatives, including laws involving taxation of Internet
services and transactions, Internet regulation and universal service
contribution requirements for Internet providers have been proposed. Lobbying
groups are attempting to initiate legislation that would compel ISPs to pay
access charges for the use of some of the local networks operated by RBOCs.
The adoption of such laws or regulations could inhibit the continued growth of
the Internet or other wide area information networks, impose additional costs
on Icon, expose Icon to greater potential liability from regulatory actions or
private legal proceedings or otherwise adversely affect Icon's business
operations or performance. Icon cannot predict the impact, if any, that those
or other future laws and regulations or legal or regulatory changes may have
on its business.
Federal and state laws and regulations relating to the liability of online
service companies and other Internet service providers for information carried
on or disseminated through their networks are currently unsettled. Several
private lawsuits seeking to impose such liability upon online service
companies and Internet access providers are pending. Legislation has been
enacted and new legislation has been proposed that imposes liability for or
prohibits transmission of certain types of information on the Internet. The
imposition of potential liability on Icon and other ISPs for information
carried on or disseminated through their systems could require Icon to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources or discontinuation of certain service
or product offerings. The increased attention on liability issues as a result
of lawsuits and legislative actions and proposals could impact the growth of
Internet use. While Icon carries professional liability insurance, it may not
be adequate to compensate or may not cover Icon if it becomes liable for
information carried on or disseminated through its networks. Any costs not
covered by insurance incurred as a result of such liability or asserted
liability could have a material adverse effect on Icon's business, financial
condition and results of operations.
LEGAL PROCEEDINGS
Other than as set forth under "PLAN OF MERGER--Litigation," Icon is not a
party to, nor is any of its property the subject of, any material pending
legal proceedings.
EMPLOYEES
As of September 30, 1998, Icon had 388 employees, all of whom were full
time. Of these, 161 were principally engaged in professional services, 70 were
principally engaged in communications services, 74 were
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principally engaged in sales and marketing, 3 were principally engaged in
research and development, 10 were principally engaged in operations and 70
were principally engaged in finance, administration, corporate development,
legal, management information systems and human resources. None of Icon's
employees is represented by a labor union. Icon considers its relations with
its employees to be satisfactory. In certain cases, Icon also engages
independent contractors to service some of its customers.
PROPERTIES
Icon currently occupies approximately 55,000 square feet in Weehawken, New
Jersey, under a lease which expires on February 28, 2006. Icon's NOC is
located at its Weehawken building. Icon also leases approximately 22,000
square feet for its New York City office through October 30, 2008,
approximately 4,500 additional square feet in New York City through April
2000, approximately 14,000 in San Francisco through May 31, 2008, and
approximately 11,000 square feet in Malvern, Pennsylvania through February 28,
2004.
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SELECTED HISTORICAL FINANCIAL DATA OF ICON
The following selected consolidated financial data for each of the years in
the three-year period ended December 31, 1997 and as of December 31, 1996 and
1997 are derived from, and are qualified by reference to, the audited Icon
Financial Statements included elsewhere herein. The selected consolidated
financial data below as of December 31, 1995 has been derived from the audited
consolidated financial statements of Icon which are not included herein. The
following selected financial data as of December 31, 1993 and 1994 and for
each year in the two-year period ended December 31, 1994 are derived from, and
are qualified by reference to, Icon's unaudited consolidated financial
statements not included herein. The selected financial data as of
September 30, 1998 and for the nine-month periods ended September 30, 1997 and
1998 are derived from the unaudited consolidated financial statements of Icon
included elsewhere herein and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the data presented. The results for the nine months ended
September 30, 1998 are not necessarily indicative of results for the full
year. The information presented below should be read in conjunction with
"ICON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the Icon Financial Statements included elsewhere
herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net:
Services:
Professional........... $ 2,439 $ 3,549 $ 6,388 $11,166 $22,484 $15,948 $24,996
Communications......... -- -- 189 1,268 5,979 3,931 9,875
Media.................. -- -- 202 529 89 77 14
------- ------- ------- ------- ------- ------- -------
Total services
revenues............. 2,439 3,549 6,779 12,963 28,552 19,956 34,885
------- ------- ------- ------- ------- ------- -------
Products............... 10,605 17,083 21,424 29,741 23,769 14,306 24,104
------- ------- ------- ------- ------- ------- -------
Total revenues, net..... 13,044 20,632 28,203 42,704 52,321 34,262 58,989
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Services............... 1,251 1,746 3,798 9,213 19,919 13,651 24,878
Products............... 9,596 14,132 17,653 24,607 19,401 11,676 21,059
------- ------- ------- ------- ------- ------- -------
Total cost of revenues.. 10,847 15,878 21,451 33,820 39,320 25,327 45,937
------- ------- ------- ------- ------- ------- -------
Gross profit............ 2,197 4,754 6,752 8,884 13,001 8,935 13,052
------- ------- ------- ------- ------- ------- -------
Operating expenses:
General and
administrative........ 957 1,839 2,863 7,645 11,826 8,227 14,509
Sales and marketing.... 835 1,671 3,782 7,184 10,849 7,351 12,511
Research and
development........... 69 501 411 969 1,347 920 1,612
Depreciation and
amortization.......... 85 110 241 493 1,024 633 1,279
Special transaction
related charges....... -- -- -- -- -- -- 1,921
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,946 4,121 7,297 16,291 25,046 17,131 31,832
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 251 633 (545) (7,407) (12,045) (8,196) (18,780)
Net income (loss)....... 201 340 (437) (7,164) (12,566) (8,747) (18,293)
Basic earnings (loss)
per share and diluted
earnings (loss) per
share(a)............... $ 0.03 $ 0.05 $ (0.06) $ (1.06) $ (1.90) $ (1.31) $ (1.28)
Weighted average shares
outstanding used for
basic earnings (loss)
per share and diluted
earnings (loss) per
share(a)............... 7,274 7,274 7,274 7,274 7,274 7,274 14,478
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 193 $ 121 $ 845 $ 722 $ 1,410 $10,026
Working capital......... 241 493 (651) (1,704) (897) 9,429
Total assets............ 2,309 4,950 9,250 14,556 22,157 41,088
Total liabilities....... 1,875 4,199 8,823 12,367 15,324 17,630
Mandatorily redeemable
preferred stock........ -- -- -- 9,881 27,229 --
Stockholders' equity
(deficit).............. 434 752 427 (7,692) (20,396) 23,458
</TABLE>
- --------
(a) For information concerning the computation of basic and diluted earnings
(loss) per share and weighted average shares of Icon common stock
outstanding, see Note 5 to the Icon Financial Statements.
75
<PAGE>
ICON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Icon
Financial Statements included elsewhere in this Proxy Statement/Prospectus.
This discussion contains forward-looking statements based on current
expectations which involve risks and uncertainties. Actual results and the
timing of certain events may differ significantly from those projected in such
forward-looking statements due to a number of factors, including those set
forth under "Risk Factors" and elsewhere in this Proxy Statement/Prospectus.
OVERVIEW
ICI, Icon's predecessor, was incorporated in New York in February 1991. Icon
was incorporated in Delaware in February 1995, and ICI was merged with and
into Icon in December 1995. ICI was primarily engaged in the design,
marketing, installation and on-going support of high-end network-based
information management systems. ICI also focused on developing, customizing
and integrating both third-party and proprietary software applications.
In 1995, recognizing the emergence of IP as a data transmission standard,
Icon's management redefined Icon's strategy to provide end-to-end solutions
that enable corporate customers to implement their Internet, intranet and
extranet strategies. Icon's revenues are primarily derived from the following
services and products: (i) a range of professional services, including custom
application and website development and design, systems integration and
maintenance and support services; (ii) communications services including high-
quality Internet access and related services, such as web/server hosting and
management; and (iii) product resales, including hardware and software sold as
an integral part of systems design and integration and as a means to sell
integrated communications and professional services and establish customer
relationships.
On May 27, 1998, Icon acquired all of the issued and outstanding shares of
common stock of Frontier Media in exchange for 728,325 shares of Icon Common
Stock. The acquisition has been accounted for as a pooling of interests. The
financial statements of Icon have been restated to reflect the acquisition.
Icon accrued $1.1 million of transaction and other costs associated with the
acquisition of Frontier Media.
On September 13, 1998, Icon agreed to the Merger, subject to stockholder and
regulatory approval, and the satisfaction by Icon and Qwest of certain
conditions. For a description of the Merger, see "PLAN OF MERGER." If the
transaction with Qwest is consummated, Icon will become a wholly owned
subsidiary of Qwest and will cease to report separate financial results.
Statement of Operations
Icon provides professional services to its customers to facilitate the
delivery of their information and applications over Icon's communications
infrastructure, including development, design and integration services and
maintenance and support services. Revenues from development, design and
systems integration contracts are recognized on a percentage-of-completion
basis. Maintenance and support services are typically provided in accordance
with annual agreements that are renewable at the discretion of the customer
and subject to change annually. Maintenance and support revenues are
recognized ratably over the term of the respective agreement.
Revenues from communications services are generated by providing Internet
access and other related communications services, such as web/server hosting
and management. Communications services are generally provided based on
service agreements ranging from one to five years, which are renewable at the
discretion of the customer. Communications services revenues are recognized
ratably over the term of the respective service agreement.
Icon generates products revenues through the reselling of computer and
networking hardware and software, including network servers, routers, firewall
software, and database management software. Products revenues are recognized
upon shipment.
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<PAGE>
Historically, Icon generated limited media revenues from selling
advertisement space on its new-media properties, including Word and Charged.
Icon had experienced operating losses in connection with the ongoing operation
of its media properties and, in March 1998, Icon discontinued their ongoing
operations. In April 1998, Zapata Corporation ("Zapata") purchased all of the
assets of Word and Charged from Icon in exchange for Zapata's commitment to
purchase no less than $2 million in communications and professional services
over the next four years.
Historically Icon has experienced relatively stable gross margins on product
sales. Over the same periods, gross margins on services have fluctuated as
cost of revenues, particularly on communications services, have increased in
advance of revenue growth for such services. Icon anticipates that in the
future services will provide greater opportunities for increased gross
margins.
Professional services cost of revenues consists of the labor and overhead
costs for the personnel performing the service including the cost of project
management, quality control and project review. Cost of communications
services revenues consists primarily of the cost to maintain and operate
Icon's communications infrastructure and customers' hosted web servers, access
charges from Local Exchange Carriers and network and related communications
facilities costs, depreciation of network equipment and rental expenses for
equipment pursuant to operating leases. Icon expects its costs of its services
to continue to increase in dollar amount, while declining as a percentage of
services revenue as Icon expands its customer base and more fully utilizes its
communications infrastructure. Cost of revenues for products consists
primarily of Icon's acquisition cost of computer and networking hardware and
software that is purchased from the manufacturers' distributors.
General and administrative expenses consist primarily of personnel expense
and professional fees, as well as rent and operating costs of Icon's
facilities. Icon expects general and administrative expenses to increase in
dollar amount, reflecting the continued growth of its operations and the costs
associated with being a publicly held entity, but to decrease in future years
as a percentage of total net revenues.
Sales and marketing expenses consist primarily of personnel expenses,
including salary, benefits, commissions, overhead costs and the cost of
marketing programs, such as advertising, trade shows and public relations.
Icon expects sales and marketing expenses to continue to increase in dollar
amount in future years as Icon's business grows and as it increases its
presence at trade shows, increases the size of its sales force and develops
additional materials to reach a larger audience, but to decrease over time as
a percentage of total net revenues.
Research and development expenses consist primarily of personnel and certain
related costs associated with the development of Icon's technologies and
engineering expertise. Icon's expectations of significant revenue growth are
not dependent upon the success of ongoing future research and development
activities. In July 1998, Icon reorganized its research and development group
by reallocating development personnel from the research and development group
to support Icon's professional services and communications services groups. In
light of this, Icon expects to continue to reduce its expenditures in
connection with the ongoing development of proprietary technologies, although
it expects to continue to use its products and/or expertise developed to date
to augment its other service offerings and to continue its related research
activities.
Other
In order to provide nationwide communications services including Internet
access, Icon has entered into an agreement with MCI WorldCom to access certain
of its nationwide communications facilities and related communications
products and services. The terms of the agreement provide for Icon to pay MCI
WorldCom primarily based on the average bandwidth of Icon's traffic
transmitted over MCI WorldCom's communications facilities. During the first
half of 1998, Icon extended its services and colocation agreements with MCI
Worldcom through September 30, 1999. In connection with the extension, Icon
agreed to pay annual recurring revenues of the greater of (i) 110% of the
annual recurring revenue of the period October 1, 1997 through
77
<PAGE>
September 30, 1998; or (ii) $6.6 million. The agreement provides that if Icon
fails to pay the annual recurring revenue amount contemplated above, then Icon
must pay an assessment equal to 15% of the difference between the committed
amount and the actual amounts paid for such period.
Icon has experienced delays in the provisioning of its Internet access
installation service orders by MCI WorldCom. One of Icon's significant
considerations in agreeing to the Merger is the ability of Icon to enhance its
communications infrastructure by leveraging Qwest's network and facilities. In
the event that the Merger is completed, Icon intends to migrate its backbone
traffic to the Qwest Network and to expand its network reach to additional
Qwest locations. In the event that the Merger is not completed, Icon intends
to enter into an agreement with another supplier or suppliers to replace or
augment the services it is currently purchasing from MCI WorldCom. Icon
believes that the private line services agreement between Qwest and Icon (or
such other new agreement if the Merger is not consummated) will enable it to
provide improved network services and facilities at lower prices than are
currently available to it under the MCI WorldCom agreement.
Icon, which had been profitable prior to 1995, has incurred net losses and
negative cash flow from operations since transitioning its strategy to provide
end-to-end Internet solutions and expects to continue to operate at a loss and
experience negative cash flow from operations at least through 1999. Icon's
attainment of profitability and positive cash flow from operations is
dependent upon its ability to substantially grow its revenue base and achieve
related operating efficiencies.
Icon will continue to focus on growing its professional services and
communications services businesses, which could require it to significantly
increase its expenses for personnel and marketing.
Icon has historically served major customers in information intensive
industries, such as financial services, telecommunications, media and, with
the acquisition of Frontier Media, serves many companies in the pharmaceutical
industry. Revenues attributable to Bear Stearns comprised 26%, 27%, 44% and
42%, respectively, of Icon's total net revenues for the years ended December
31, 1995, 1996 and 1997 and the nine months ended September 30, 1998,
respectively, and in each year represented a significant component of services
and products revenues. Revenues attributable to Nomura Securities comprised
14% and 12% of Icon's total net revenues in 1995 and 1996, respectively, and
in each such period represented a significant component of products revenues.
No other customers represented over 10% of Icon's total net revenues in the
same time periods. Management expects revenue concentration to decline as Icon
grows its services revenues.
Historically, Icon has marketed and sold its services and products through
its direct sales force and through indirect channels. In May 1996, Icon
entered into an arrangement with Bell Atlantic Internet Solutions whereby Bell
Atlantic Internet Solutions agreed to provide billing services in connection
with the offering of Icon's communications services to requesting Bell
Atlantic Internet Solutions customers for both dedicated and switched access,
including residential customers. Revenues from customers acquired through Bell
Atlantic Internet Solutions represented 40% and 31%, respectively, of
communications services revenues for the nine months ended September 30, 1998
and year ended December 31, 1997, respectively. Icon believes that revenues
from this arrangement will continue to grow at least until such time that Bell
Atlantic Internet Solutions or its affiliates receives regulatory relief from
the FCC from various regulations that affect the development of advanced
telecommunications services by the RBOCs and that this relationship will
represent a significant element of Icon's distribution strategy in Bell
Atlantic's southern region. In October 1997, Icon extended its arrangement by
entering into an updated GSP agreement with Bell Atlantic Internet Solutions
to continue to make its services available in the traditional Bell Atlantic
southern region for switched and dedicated services and to expand Icon's reach
with respect to dedicated services into the Bell Atlantic northern (previously
NYNEX) region through October 1999. In August 1998, Icon extended its GSP
Agreement through January 2001. Icon's agreement with Bell Atlantic Internet
Solutions contemplates a service offering to requesting Bell Atlantic Internet
Solutions customers in the Bell Atlantic northern region, subject to Bell
Atlantic Internet Solutions' receipt of certain regulatory approvals. To date,
Bell Atlantic Internet Solutions, has not received such approvals. In July
1998, Bell Atlantic, an affiliate of Bell Atlantic Internet Solutions,
announced that it would
78
<PAGE>
merge with GTE. The transaction is subject to regulatory approval. Icon cannot
predict what effect, if any, the proposed transaction will have with respect to
Icon's existing business with Bell Atlantic Internet Solutions. In August 1998,
Icon extended the GSP Agreement with Bell Atlantic Internet Solutions through
January 2001. Icon also has agreements with Fiberlink Communications Corp.,
TotalTel, Inc. and other resellers to resell Icon's communications services.
Icon has incurred losses in 1995, 1996, 1997 and the first nine months of
1998 that have generated net operating loss carry forwards of approximately
$36.7 million at September 30, 1998 for federal and state income tax purposes.
These carry forwards are available to offset future taxable income and expire
in 2011 through 2018 for federal income tax purposes.
RESULTS OF OPERATIONS
The following table shows various items on Icon's Statement of Operations as
a percentage of total net revenues (except where otherwise noted).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
--------------------------------- ------------
1993 1994 1995 1996 1997 1997 1998
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Services:
Professional.............. 18.7% 17.2% 22.7% 26.2% 43.0% 46.5% 42.4%
Communications............ -- -- 0.6 3.0 11.4 11.5 16.7
Media..................... -- -- 0.7 1.2 0.2 0.2 --
----- ----- ----- ----- ----- ----- -----
Total services
revenues............... 18.7 17.2 24.0 30.4 54.6 58.2 59.1
----- ----- ----- ----- ----- ----- -----
Products.................... 81.3 82.8 76.0 69.6 45.4 41.8 40.9
----- ----- ----- ----- ----- ----- -----
Total revenues, net........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Services(a)................. 51.3% 49.2% 56.0% 71.1% 69.8% 68.4% 71.3%
Products(b)................. 90.5 82.7 82.4 82.7 81.6 81.6 87.4
Total cost of revenues........ 83.2 77.0 76.1 79.2 75.2 73.9 77.9
Gross profit.................. 16.8 23.0 23.9 20.8 24.8 26.1 22.1
Operating expenses:
General and administrative.. 7.3 8.9 10.2 17.9 22.6 24.0 24.6
Sales and marketing......... 6.4 8.1 13.4 16.8 20.7 21.5 21.2
Research and development.... 0.5 2.4 1.4 2.3 2.6 2.7 2.7
Depreciation and
amortization............... 0.7 0.5 0.9 1.1 2.0 1.8 2.1
Special transaction related
charges.................... -- -- -- -- -- -- 3.3
----- ----- ----- ----- ----- ----- -----
Total operating expenses...... 14.9 19.9 25.9 38.1 47.9 50.0 53.9
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................... 1.9 3.1 (2.0) (17.3) (23.1) (23.9) (31.8)
Net income (loss)............. 1.5 1.6 (1.5) (16.8) (24.0) (25.5) (31.0)
</TABLE>
- --------
(a) As a percentage of total services revenues.
(b) As a percentage of products revenues.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Revenues. Total net revenues were $59.0 million for the nine months ended
September 30, 1998, an increase of $24.7 million, or 72%, over total net
revenues of $34.3 million for the nine months ended September 30, 1997.
79
<PAGE>
Professional services revenues were $25.0 million and $15.9 million for the
nine months ended September 30, 1998 and 1997, respectively, representing an
increase in 1998 of 57%. This increase was attributable to the growing demand
for professional services in Icon's existing customer base and the acquisition
of several new customers, a high renewal rate of existing maintenance
contracts, an increased number of systems engineers available to perform these
services and a higher average billing rate per systems engineer.
Communications services revenues were $9.9 million and $3.9 million for the
nine months ended September 30, 1998 and 1997, respectively, representing an
increase in 1998 of over 151%. This increase was primarily attributable to the
acquisition of new customers and the arrangement with Bell Atlantic Internet
Solutions under which Icon began providing service in the third quarter of
1996. Revenues derived from the Bell Atlantic Internet Solutions arrangement
comprised 40% of communications revenues for the nine months ended September
30, 1998.
Products revenues were $24.1 million and $14.3 million for the nine months
ended September 30, 1998 and 1997, respectively, representing an increase of
68%.
Cost of revenues. Total cost of revenues were $45.9 million and $25.3
million for the nine months ended September 30, 1998 and 1997, respectively,
representing 78% and 74% of total net revenues, respectively.
Services cost of revenues were approximately $24.9 million and $13.7 million
for the nine months ended September 30, 1998 and 1997, respectively. Such
costs increased to 71% as a percentage of services revenues in the nine months
ended September 30, 1998 from 68% in the nine months ended September 30, 1997,
due to the continued expansion of Icon's communications infrastructure.
Service costs include $0.5 million and $1.7 million in the nine months ended
September 30, 1998 and 1997, respectively, associated with Icon's discontinued
media services product offerings.
Products cost of revenues were $21.1 million and $11.7 million for the nine
months ended September 30, 1998 and 1997, respectively, representing 87% and
82% of products revenues for the nine months ended September 30, 1998 and
1997, respectively.
General and administrative. General and administrative expenses were $14.5
million and $8.2 million for the nine months ended September 30, 1998 and
1997, respectively. This higher level of expenses reflected an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business, as well as rent and operating costs of
Icon's facilities. General and administrative expenses as a percentage of
total net revenues increased to 25% during the nine months ended September 30,
1998 from 24% in the nine months ended September 30, 1997.
Sales and marketing. Sales and marketing expenses were $12.5 million and
$7.4 million for the nine months ended September 30, 1998 and 1997,
respectively. The 70% increase in the nine months ended September 30, 1998
reflected hiring of additional sales and marketing personnel and increased
spending on advertising and trade shows. Sales and marketing expenses as a
percentage of total net revenues remained at 21% for the nine months ended
September 30, 1998 and 1997.
Research and development. Research and development expenses were $1.6
million and $0.9 million for the nine months ended September 30, 1998 and
1997, respectively. This higher level of expense reflected an overall increase
in the number of personnel required to develop new technologies that enhance
the performance and reliability of Icon's network. In July 1998, Icon
reorganized its research and development group by reallocating development
personnel from the research and development group to support Icon's
professional services and communications services groups. In light of this,
Icon expects to reduce its expenditures in connection with the ongoing
development of proprietary technologies, although it expects to continue to
use its products and/or expertise developed to date to augment its other
service offerings and to continue its related research activities.
80
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total net revenues were $52.3 million for the year ended December
31, 1997, an $9.6 million increase over total net revenues of $42.7 million
for the year ended December 31, 1996.
Professional services revenues were $22.5 million and $11.2 million for the
years ended December 31, 1997 and 1996, respectively, representing an increase
in 1997 of 101%. This increase was attributable to the growing demand for
professional services in its existing customer base and the acquisition of
several new customers, a high renewal rate of existing maintenance contracts,
an increased number of systems engineers available to perform these services
and a higher utilization and average billing rate per systems engineer.
Communications services revenues were $6.0 million and $1.3 million for the
years ended December 31, 1997 and 1996, respectively, representing an increase
in 1997 of over 372%. This increase is primarily attributable to the
acquisition of new customers and the arrangement with Bell Atlantic Internet
Solutions under which Icon began providing service in the third quarter of
1996. Revenues derived from the Bell Atlantic Internet Solutions arrangement
were a significant component of communications revenues for the year ended
December 31, 1997.
Products revenues were $23.8 million and $29.7 million for the years
December 31, 1997 and 1996, respectively, representing a decrease of
approximately 20.1%. This decrease was due primarily to the transition of
Icon's focus from its historical role as a VAR to providing IP network-related
services.
Cost of Revenues. Total cost of revenues were $39.3 million and $33.8
million for the years ended December 31, 1997 and 1996, respectively,
representing 75.2% and 79.2% of total net revenues, respectively. The overall
margin improvement was primarily attributable to the continued successful
implementation of Icon's strategy to sell higher-margin professional services.
Services cost of revenues were approximately $19.9 million and $9.2 million
for the year ended December 31, 1997 and 1996, respectively. This growth is
primarily attributable to the hiring of additional professional services
personnel and the continued expansion of Icon's communications infrastructure.
Such costs decreased to 69.8% as a percentage of services revenues in 1997
from 71.1% in 1996.
Products cost of revenues were $19.4 million and $24.6 million for the year
ended December 31, 1997 and 1996, respectively, representing 81.6% and 82.7%
of products revenues for the years ended December, 1997 and 1996,
respectively. The slight decrease in margin was due primarily to a change in
the mix of resold products.
General and Administrative. General and administrative expenses were $11.8
million and $7.6 million for the years ended December 31, 1997 and 1996,
respectively. This higher level of expenses reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business, as well as rent and operating costs of
Icon's facilities. General and administrative expenses as a percentage of
total net revenues increased to 22.6% in 1997 from 17.9% in 1996 due to
expansion of Icon's administrative infrastructure necessary to manage the
rapid growth of Icon's services business.
Sales and Marketing. Sales and marketing expenses were $10.8 million and
$7.2 million for the years ended December 31, 1997 and 1996, respectively. The
51.0% increase in 1997 reflects increased spending including the development
of new marketing materials. Sales and marketing expenses as a percentage of
total net revenues increased to 20.7% in 1997 from 16.8% in 1996 as a result
of the higher sales commissions and increased marketing and promotional
activities.
Research and Development. Research and development expenses were $1.3
million and $1.0 million for the years ended December 31, 1997 and 1996,
respectively. This higher level of expense reflects an overall increase in the
number of personnel required to develop new technologies that enhance the
performance and reliability of Icon's network.
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<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total net revenues were $42.7 million in 1996, an $14.5 million
increase over total net revenues of $28.2 million in 1995.
Professional services revenues were $11.2 million and $6.4 million in 1996
and 1995, respectively, representing an increase of 74.8%. This increase was
attributable to the growing demand for professional services in Icon's
existing customer base and the acquisition of several new customers, a high
renewal rate of existing maintenance contracts, the increased number of
systems engineers available to perform these services and a higher utilization
and average billing rate per systems engineer.
Communications services revenues increased to $1.3 million in 1996 from $0.2
million in 1995, representing an increase of 570%. This increase is primarily
attributable to the acquisition of new customers, the rollout of the Bell
Atlantic Internet Solutions arrangement in the second half of 1996 and the
continued cross-selling of communications services to Icon's existing
professional services and products customers.
Products revenues were $29.7 million and $21.4 million in 1996 and 1995,
respectively, representing an increase of 38.8%. This increase was due
primarily to hardware and software resales related to large scale systems
integration projects for customers in the financial services industry.
Cost of Revenues. Total cost of revenues were $33.8 million and $21.5
million in 1996 and 1995, respectively, representing 79.2% and 76.1% of total
net revenues, respectively. This decline in margin is primarily attributable
to the expansion of Icon's network, resulting in significant fixed costs with
minimal communications services revenues.
Services cost of revenues were $9.2 million and $3.8 million in 1996 and
1995, respectively. This growth is primarily attributable to the hiring of
professional services personnel, expansion of Icon's communications
infrastructure and costs associated with Icon's media properties. Such costs
increased to 71.1% as a percentage of services revenues in 1996 from 56.0% in
the prior year, reflecting the significant fixed costs involved in expanding
Icon's communications infrastructure.
Products cost of revenues were $24.6 million and $17.7 million in 1996 and
1995, respectively, representing 82.7% and 82.4%, respectively, of products as
a percentage of products revenues in 1996 and 1995, respectively.
General and Administrative. General and administrative expenses were $7.6
million and $2.9 million in 1996 and 1995, respectively. This higher level of
expense reflects an increase in personnel and professional fees necessary to
manage the financial, legal and administrative aspects of the business as well
as rent and operating costs of Icon's facilities. General and administrative
expenses as a percentage of total net revenues increased to 17.9% from 10.2%
in the year earlier period due to expansion of Icon's administrative
infrastructure necessary to manage the rapid growth of Icon's services
business.
Sales and Marketing. Sales and marketing expenses were $7.2 million and $3.8
million in 1996 and 1995, respectively. The 90.0% increase in 1996 reflects an
increase in sales commissions resulting from increased services and products
revenues combined with increased marketing and promotional activities,
including advertising and trade shows. Sales and marketing expenses as a
percentage of total net revenues increased to 16.8% in 1996 from 13.4% in 1995
as a result of the higher sales commissions and increased marketing and
promotional activities.
Research and Development. Research and development expenses were $1.0
million and $0.4 million in 1996 and 1995, respectively. This higher level of
expenses reflected an increase in personnel to develop new technologies that
allow Icon's network to more efficiently transport data.
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QUARTERLY RESULTS OF OPERATIONS
Icon's quarterly operating results have in the past and may in the future
vary significantly depending upon factors such as the timing and installation
of significant orders, which in the past have been and will in the future be,
delayed from time to time by delays in the provisioning of telecommunications
services and products by subcontractors. Additional factors contributing to
variability of quarterly operating results include the pricing and mix of
products and services sold by Icon, terminations of service, new services and
products introductions by Icon and its competitors, market acceptance of new
and enhanced versions of Icon's services and products, changes in pricing or
marketing policies by its competitors and Icon's responses thereto, Icon's
ability to obtain sufficient supplies of sole source or limited source
components, changes in Icon's communications infrastructure costs, as a result
of demand variation or otherwise, the lengthening of Icon's sales cycle,
access to capital and the timing of the expansion of Icon's communications
infrastructure.
The following tables set forth the statement of operations data for each of
the eight quarters through September 30, 1998, as well as such operations data
as a percentage of Icon's revenues. This information has been derived from
Icon's unaudited consolidated financial statements. In the opinion of
management, the unaudited information set forth below includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the information set forth herein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997 1997 1998 1998 1998
------------ --------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues, net:
Services:
Professional........... $ 3,845 $ 4,338 $ 5,502 $ 6,108 $ 6,536 $ 7,516 $ 8,231 $ 9,249
Communications......... 583 938 1,233 1,760 2,048 2,813 3,250 3,812
Media.................. 176 77 -- -- 12 14 -- --
------- ------- ------- ------- ------- ------- ------- --------
Total services
revenues.............. 4,604 5,353 6,735 7,868 8,596 10,343 11,481 13,061
------- ------- ------- ------- ------- ------- ------- --------
Products............... 7,400 4,795 4,885 4,626 9,463 9,056 7,470 7,577
------- ------- ------- ------- ------- ------- ------- --------
Total revenues, net..... 12,004 10,148 11,620 12,494 18,059 19,399 18,951 20,638
------- ------- ------- ------- ------- ------- ------- --------
Cost of revenues:
Services............... 3,248 3,760 4,331 5,560 6,268 7,226 7,925 9,727
Products............... 6,201 3,813 4,092 3,771 7,725 7,986 6,349 6,723
------- ------- ------- ------- ------- ------- ------- --------
Total cost of revenues.. 9,449 7,573 8,423 9,331 13,993 15,212 14,274 16,450
------- ------- ------- ------- ------- ------- ------- --------
Gross profit............ 2,555 2,575 3,197 3,163 4,066 4,187 4,677 4,188
Operating expenses...... 5,034 5,143 5,779 6,209 7,915 8,871 11,542 11,420
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations.... (2,479) (2,568) (2,582) (3,046) (3,849) (4,684) (6,865) (7,232)
Net loss................ (2,453) (2,935) (2,751) (3,061) (3,819) (4,554) (6,691) (7,049)
Basic loss per share and
diluted loss per
share.................. $ (0.36) $ (0.42) $ (0.41) $ (0.48) $ (0.59) $ (0.41) $ (0.42) $ (0.44)
STATEMENT OF OPERATIONS
DATA:
Revenues, net:
Services:
Professional........... 32.0% 42.7% 47.4% 48.9% 36.2% 38.7% 43.4% 44.8%
Communications......... 4.9 9.2 10.6 14.1 11.3 14.5 17.2 18.5
Media.................. 1.5 0.8 -- -- 0.1 0.1 -- --
------- ------- ------- ------- ------- ------- ------- --------
Total services
revenues.............. 38.4 52.7 58.0 63.0 47.6 53.3 60.6 63.3
------- ------- ------- ------- ------- ------- ------- --------
Products............... 61.6 47.3 42.0 37.0 52.4 46.7 39.4 36.7
------- ------- ------- ------- ------- ------- ------- --------
Total revenues, net..... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= ======= ========
Cost of revenues:
Services(a)............ 70.5% 70.2% 64.3% 70.7% 72.9% 69.9% 69.0% 74.5%
Products(b)............ 83.8 79.5 83.8 81.5 81.6 88.2 85.0 88.7
Total cost of revenues.. 78.7 74.6 72.5 74.7 77.5 78.4 75.3 79.7
Gross profit............ 21.3 25.4 27.5 25.3 22.5 21.6 24.7 20.3
Operating expenses...... 41.9 50.7 49.7 49.7 43.8 45.7 60.9 55.3
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations.... (20.6) (25.3) (22.2) (24.4) (21.3) (24.1) (36.2) (35.0)
Net loss................ (20.4) (28.9) (23.7) (24.5) (21.1) (23.5) (35.3) (34.2)
</TABLE>
- --------
(a) As a percentage of services revenues.
(b) As a percentage of products revenues.
83
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Icon had an accumulated deficit of $39.1 million at September 30, 1998 and
has used cash of $28.5 million in the aggregate to fund operations during
1996, 1997 and the nine month period ended September 30, 1998. Prior to
consummation of Icon's initial public offering (the "IPO") on February 18,
1998, Icon had satisfied its cash requirements primarily through the sale of
preferred stock and borrowings under credit agreements. Icon's principal uses
of cash are to fund operations, working capital requirements and capital
expenditures. At September 30, 1998, Icon had $10.0 million in cash and cash
equivalents and working capital of $9.4 million. Net cash used in operating
activities for the nine months ended September 30, 1998 and 1997 was $14.9
million and $8.3 million, respectively. Net cash used in investing activities
for the nine months ended September 30, 1998 and 1997 was $10.4 million and
$2.8 million, respectively. For the nine months ended September 30, 1998 and
1997, cash of $33.9 million and $15.1 million, respectively, was provided by
financing activities. Cash provided by financing activities for the nine
months ended September 30, 1998 includes $34.3 million in net proceeds from
the issuance of common stock from Icon's IPO.
Icon maintains a secured line of credit with The CIT Group/Business Credit,
Inc. ("CIT") for $10.0 million, which automatically renewed on August 13, 1998
and expires on August 13, 1999. Borrowings under this line are secured by
substantially all of the assets of Icon and are limited to a specific
percentage of qualifying accounts receivable less outstanding obligations of
Icon owed to CIT, including outstanding letters of credit. Under this secured
line of credit, Icon may not, among other things, pay cash dividends, pledge
any of its assets to third parties, borrow money from third parties or merge
or consolidate with third parties without CIT's prior written consent.
Borrowings under this line amounted to $1.0 million at December 31, 1997.
There were no borrowings under the line of credit at September 30, 1998.
Interest expense amounted to $0.1 and $0.4 million for the nine months ended
September 30, 1998 and 1997, respectively. Interest is payable monthly at an
annual rate equal to the prime rate plus one percent. Following a change in
the prime rate, the rate adjusts on the first of the month following any
change. As of September 30, 1998, there was approximately $5.6 million
available under this line.
On September 28, 1998, Icon and Qwest entered into a credit facility,
maturing January 31, 2000, whereby Qwest has agreed to lend Icon, commencing
January 31, 1999, up to an aggregate of $15.0 million to fund working capital
and other corporate purposes. In connection with the credit facility, Icon has
issued to Qwest warrants to purchase an aggregate of 750,000 shares of Icon's
common stock. The exercise price of the warrants is $12.00 per share.
The Merger Agreement requires Icon to pay Qwest a termination fee of $7.0
million if either Icon or Qwest terminates the Merger Agreement for certain
reasons. The Merger Agreement also requires Icon to purchase from Qwest
products and services for an aggregate purchase price of $30.0 million if Icon
consummates an alternative business combination with another person within 12
months following the termination of the Merger Agreement for any reason other
than Qwest's material breach of the Merger Agreement.
As of September 30, 1998, trade payables and accrued expenses to a vendor in
the amount of $5.0 million were secured by a lien on substantially all of
Icon's assets.
Icon has made capital investments in its network, network operating centers
and other capital assets totaling $10.5 million in the nine months ended
September 30, 1998. Icon expects to make additional capital investments
approximating $1.5 million during the remainder of 1998 to expand and enhance
its operations. The foregoing expectation with respect to capital investment
is a forward-looking statement that involves risks and uncertainties and the
actual amount of capital investment could vary materially as a result of a
number of factors.
Icon sold 3.85 million shares of Icon Common Stock in its IPO in February
1998 at a price of $10.00 per share, providing gross proceeds to Icon of $38.5
million and net proceeds, after deducting underwriting discounts, commissions
and offering expenses paid by Icon, of approximately $34.3 million. Since Icon
expects to incur additional operating losses, Icon intends to continue to use
the net proceeds from the IPO to meet its
84
<PAGE>
short-term capital requirements. Icon currently believes that proceeds from
the IPO, combined with borrowings available under the secured line of credit
with CIT, will be sufficient to meet its anticipated cash needs for working
capital and for the acquisition of capital equipment to either the
availability date of the Qwest credit facility or to the consummation of the
Merger with Qwest. However, there can be no assurance that Icon will not
require additional financing within this time frame or that such additional
financing will be available on commercially reasonable terms, or at all.
Icon's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. Icon may be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional financing, if needed, will be available on commercially
reasonable terms, or at all. Furthermore, any additional equity financing may
be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require Icon to relinquish its rights to certain of its
technologies.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("FAS
131"), which establishes standards for the way that public business
enterprises report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. FAS 131 is effective for fiscal years beginning
after December 31, 1997. The adoption of the provisions of FAS 131 is not
expected to have a material impact on Icon's existing disclosures.
YEAR 2000
Icon recently completed an internal review of its Year 2000 Compliance
status. As reasonably necessary and appropriate, Icon is in the process of
modifying or replacing software components that it uses so that such software
will properly recognize dates beyond December 31, 1999 ("Year 2000
Compliance"). The cost for such modifications and replacements is not
currently expected to be material. If Icon is not successful in implementing
the necessary Year 2000 changes, it expects to then develop contingency plans
to address any matters not corrected in a timely manner. A significant risk to
Icon's ability to provide communications services is the failure of third-
party service providers to be year 2000 compliant, including those third-party
service providers that provide network backbone and local access services.
Icon has initiated formal communications with its significant vendors and
certain of its customers to determine the extent to which Year 2000 Compliance
issues of such parties may affect Icon. To the extent that responses to such
communications with Icon's vendors are unsatisfactory, Icon expects to take
steps to ensure that its vendors' products have demonstrated Year 2000
Compliance. Icon has recently compiled information concerning the Year 2000
Compliance of certain of its significant customers' systems and expects to
contact other customers. There can be no guarantee that the systems of Icon's
vendors and customers will be timely converted or that such conversion will be
compatible with Icon's systems without a material adverse effect on Icon's
business, financial condition or results of operations.
85
<PAGE>
MANAGEMENT OF ICON
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information (as of October 31, 1998)
concerning each of Icon's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Scott A. Baxter.......... 36 President, Chief Executive Officer and Chairman
of the Board of Directors
Richard M. Brown......... 49 Vice President--Information Technologies,
Secretary and Director
Scott Harmolin........... 39 Senior Vice President, Chief Technology Officer
and Director
Kenneth J. Hall.......... 40 Senior Vice President, Chief Financial Officer
and Treasurer
Susan A. Massaro......... 43 Senior Vice President--Professional Services
Frank C. Cicio, Jr. ..... 44 Senior Vice President--Sales and Business
Development
Anthony R. Scrimenti..... 44 Senior Vice President--Communications Services
David L. Goret........... 35 Vice President--Business Affairs, General
Counsel and Assistant Secretary
Robert J. Thalman, Jr. .. 45 Vice President--Strategic Marketing
Michael J. Gold.......... 34 Vice President--Corporate Development
Samuel A. Plum........... 54 Director
Wayne B. Weisman......... 42 Director
</TABLE>
Scott A. Baxter, a founder of Icon, has served as President, Chief Executive
Officer and Chairman of the Board of Directors of Icon since its inception in
1991. From June 1987 to February 1991, Mr. Baxter was an account executive at
Sun Microsystems, Inc. From 1984 to 1987, Mr. Baxter was an account executive
at Data General Corporation ("Data General").
Richard M. Brown, a founder of Icon, has served as Vice President--
Information Technologies, Secretary and a director of Icon since its inception
in 1991. From November 1986 to February 1991, Mr. Brown was President of
Custom Applied System Techniques Inc., a consulting firm that specialized in
computer systems.
Scott Harmolin, a founder of Icon, has served as Senior Vice President,
Chief Technology Officer and a director of Icon since its inception in 1991.
From November 1986 to February 1991, Mr. Harmolin was Vice President of Custom
Applied System Techniques Inc., a consulting firm that specialized in computer
systems.
Kenneth J. Hall has served as Icon's Senior Vice President, Chief Financial
Officer and Treasurer since April 1997. From February 1996 to March 1997, he
was the Chief Financial Officer of Global DirectMail Corp, an international
direct marketer of computer products and office supplies. Prior to such time,
Mr. Hall was employed by National Football League Properties, Inc. as Vice
President of Finance and Administration and Chief Financial Officer from 1992
to 1995 and Director of Finance from 1990 to 1991. Mr. Hall's experience also
includes management positions with Price Waterhouse LLP and Coopers & Lybrand
L.L.P.
Susan A. Massaro has served as Icon's Senior Vice President--Professional
Services since March 1996. From January 1979 to March 1996, Ms. Massaro worked
for Data General, a computer hardware and software manufacturer, where she
held many technical and business management positions, including the U.S.
Director of Professional Services, Eastern U.S. Director of Systems
Engineering, Northeast Technical Services Manager, and various Systems
Engineering consultant and management positions. Prior to joining Data
General, Ms. Massaro held Programmer/Analyst positions at LeCroy Research
Systems, a test and measurement instrumentation manufacturer, and STC Systems,
a business application solutions provider and integrator. Ms. Massaro is the
spouse of Anthony R. Scrimenti.
86
<PAGE>
Frank C. Cicio, Jr. has served as Icon's Senior Vice President--Sales and
Strategic Business Development since February 1997. Mr. Cicio served from July
1993 to February 1997 as Executive Vice President of Sales and Marketing of
Logic Works Incorporated, a computer software company. Prior to joining Logic
Works, Mr. Cicio was Director of Strategic Alliances at Bachman Information, a
computer software company, and served in various capacities at MAI Systems, a
manufacturer of application software and hardware products for the retail,
distribution and financial markets, beginning as an engineering project
manager in 1977 and rising to General Manager of the North American Industry
Business Unit in 1989.
Anthony R. Scrimenti has served as Icon's Senior Vice President--
Communications Services since November 1997 and was its Chief Information
Officer from August 1994 to November 1997. From October 1993 to August 1994,
Mr. Scrimenti was employed by Novell, Inc., a networking software
manufacturer, as a senior systems consultant. From January 1986 to October
1993, Mr. Scrimenti was employed by Data General, a computer hardware and
software manufacturer, in various capacities, including as Manager, Network
Services. Mr. Scrimenti is the spouse of Ms. Massaro.
David L. Goret has served as Icon's General Counsel since February 1996 and
Vice President--Business Affairs since February 1997. From July 1992 to
January 1996, Mr. Goret served as Vice President--Business Affairs and General
Counsel of Interfilm, Inc., a public company that he co-founded, that produced
interactive motion pictures. From May 1991 to July 1992, Mr. Goret served as
Director of Business Affairs for Controlled Entropy Entertainment, an
entertainment production company. From October 1989 to July 1992, Mr. Goret
served as Director of Business Affairs for Tour-Toiseshell, Inc., the
production company of the Teenage Mutant Ninja Turtles live shows. Mr. Goret
was an attorney at Haythe & Curley from September 1988 to October 1989. Mr.
Goret is admitted to practice in New York and New Jersey.
Robert J. Thalman, Jr. has served as Icon's Vice President--Strategic
Marketing since January 1997. Prior to joining Icon, Mr. Thalman spent 16
years with Turner Broadcasting System, where he oversaw strategic marketing
for both international (1991-1996) and domestic (1986-1990) network
distribution.
Michael J. Gold has served as Icon's Vice President--Corporate Development
since August 1997. From October 1996 to May 1997, Mr. Gold was the Chief
Executive Officer of Tumble Interactive Media, Inc., an interactive media
agency. From May 1993 to February 1996, he was the President and founder of
Beyond Fitness, a multimedia fitness-information services company. From August
1986 to April 1993, Mr. Gold was employed by AT&T and Bell Laboratories in
various capacities, including Manager, New Business Development in the
electronic commerce area and District Manager, Sales.
Samuel A. Plum has been a director of Icon since May 1997 and a Managing
General Partner of the general partner of SCP Private Equity Partners, L.P.
("SCP"), a private equity investment fund, since its inception in August 1996.
Mr. Plum was a Managing Director of Safeguard Scientifics Inc., an information
technology company, from 1993 to 1996. From February 1989 to January 1993, Mr.
Plum served as President of Charterhouse Inc. and Charterhouse North America
Securities, Inc., the U.S. investment banking and broker-dealer arms,
respectively, of Charterhouse PLC, a merchant bank in the U.K. From 1973 to
1989, Mr. Plum served in various capacities at the investment banking division
of PaineWebber, Inc. and Blyth Eastman Dillon & Co., Inc.
Wayne B. Weisman has been a director of Icon since May 1997 and a partner of
the general partner of SCP, a private equity investment fund, since its
inception in August 1996. He has been Vice President of CIP Capital, L.P., a
licensed Small Business Investment Company, since its formation in 1990. From
January 1992 to May 1994, Mr. Weisman was an Executive Vice President of
Affinity Biotech, Inc., a healthcare technology company, and Vice President
and General Counsel of its successor, IBAH, Inc., a clinical trials management
company. He formerly practiced law with the Philadelphia firm of Saul, Ewing,
Remick & Saul. Mr. Weisman is a director of CinemaStar Luxury Theaters, Inc.
Icon's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee of Icon. The Board of Directors currently consists of five members
87
<PAGE>
and is divided into three classes, whose members serve for staggered three
year terms. Messrs. Baxter and Weisman are Class I Directors and are serving a
term ending at Icon's annual meeting of stockholders in 1998, and until their
respective successors are elected and qualified. Messrs. Brown and Harmolin
and Class II Directors and are serving a one-year term ending at Icon's annual
meeting of stockholders in 1999, and until their respective successors are
elected and qualified. Mr. Plum is a Class III Director and is serving a two-
year term ending at Icon's annual meeting of stockholders in 2000, and until
his successor is elected and qualified. At each annual meeting of
stockholders, the appropriate number of directors will be elected for a three-
year term to succeed the directors of the same class whose terms are then
expiring. Other than as set forth above, there are no family relationships
between any of the directors or executive officers of Icon.
COMMITTEES OF THE BOARD OF DIRECTORS
Icon has an Audit Committee of the Board of Directors. The function of the
Audit Committee is to oversee the auditing procedures of Icon, receive and
accept the reports of Icon's independent certified public accountants, oversee
Icon's internal systems of accounting and management controls and make
recommendations to the Board as to the selection and appointment of the
auditors for Icon. The members of the Audit Committee are Messrs. Harmolin,
Plum and Weisman. Icon also has a Compensation Committee of the Board. The
members of the Compensation Committee are Messrs. Baxter, Brown, Harmolin and
Weisman. The function of the Compensation Committee is to administer, upon
delegation of the Board of the power to administer, Icon's stock option plans,
make other relevant compensation decisions of Icon and such other matters
relating to compensation as may be prescribed by the Board.
COMPENSATION OF DIRECTORS
Directors who are employees of Icon are not entitled to receive any fees for
serving as directors. All directors are reimbursed for out-of-pocket expenses
related to their service as directors. Under the 1995 Option Plan, non-
employee directors are entitled to receive grants of stock options.
88
<PAGE>
COMPENSATION OF ICON'S EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following summary compensation table specifies the components of the
compensation packages of Icon's Chief Executive Officer and the four other
most highly compensated executive officers (the "named executive officers")
for the fiscal years ended December 31, 1997 and December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM COMPENSATION
COMPENSATION(A) AWARDS
------------------ -----------------------
NUMBER OF
SHARES
NAME AND PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
------------------ ------ --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Scott A. Baxter.............. 1997 185,000 120,000 -- 1,275
Chief Executive Officer and 1996 176,981 120,000 109,091 --
President
Richard M. Brown............. 1997 173,807 40,000 -- 1,361
Vice President--Information 1996 157,077 35,000 -- 5,376
Technologies and Secretary
Frank C. Cicio, Jr........... 1997 171,539 50,000 109,091 --
Senior Vice President--Sales 1996 -- -- -- --
and Business Development
Scott Harmolin............... 1997 173,807 40,000 -- 1,286
Senior Vice President and 1996 157,577 35,000 -- 5,820
Chief Technology Officer
Robert J. Thalman, Jr........ 1997 169,615 40,000 32,727 --
Vice President--Strategic 1996 -- -- -- --
Marketing
</TABLE>
- --------
(a) Does not indicate supplementary compensation amounts less than the
greater of 10% of the named executive officer's salary and bonus or
$50,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to the named executive officers for the year ended December 31, 1997:
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PER PRICE VALUATION FOR
UNDERLYING EMPLOYEES SHARE OPTION TERM
OPTIONS IN FISCAL EXERCISE EXPIRATION ---------------------
NAME GRANTED YEAR PRICE DATE 5% 10%
---- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frank C. Cicio, Jr. .... 109,091 21.3% $6.02(a) 2/17/07 $1,120,000 $2,173,000
Robert J. Thalman,
Jr. ................... 32,727 6.4 6.02(a) 1/15/07 336,000 652,000
</TABLE>
- --------
(a) Reflects the repricing of such options in June 1997 when the exercise
price of such options was reduced from $14.27 to $6.02 per share.
FISCAL YEAR-END VALUE OF UNEXERCISED OPTIONS
The following table contains information concerning the value of unexercised
options (which includes the value of such options after giving effect to the
repricing of such options in June 1997) of the named executive officers at
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Scott A. Baxter............. -- 109,091 -- $368,000
Frank C. Cicio, Jr.......... -- 109,091 -- 434,000
Robert J. Thalman, Jr....... -- 32,727 -- 130,000
</TABLE>
89
<PAGE>
EMPLOYMENT AGREEMENTS
In December 1995, Icon entered into five-year employment agreements with
Messrs. Baxter, Brown and Harmolin. In May 1997, each of the agreements was
amended to extend the employment term until May 2002. The agreements provide
for Mr. Baxter to serve as Icon's Chief Executive Officer and President, for
Mr. Brown to serve as Icon's Vice President--Information Technologies and
Secretary and for Mr. Harmolin to serve as Icon's Senior Vice President and
Chief Technology Officer at a minimum annual base salary of $185,000, $180,000
and $180,000, respectively. Mr. Baxter's agreement also provides for the
payment of a guaranteed quarterly bonus in the amount of $30,000, and Mr.
Brown's and Mr. Harmolin's agreements each provide for the payment of a
guaranteed quarterly bonus in the amount of $10,000. Each also receives
additional salary increases and bonuses as the Board of Directors may grant,
as well as those benefits generally provided to other executive officers of
Icon, and an automobile allowance. In the event of termination of employment
of any of such executives following a change of control (as defined in such
employment agreements) of Icon, Icon has agreed to pay the respective
executive severance in an amount equal to 2.99 multiplied by his base amount
(as defined in section 280G(b)(3) of the Code). Each executive has also agreed
not to compete against Icon during the term of his employment, and not to
solicit or perform services for any customers or solicit any employee of Icon
during the term of his employment and for a period of 12 months after the
termination of his employment.
In February and March 1997, Icon entered into employment agreements with
Messrs. Cicio and Hall, respectively, pursuant to which they are employees-at-
will. The agreements provide for each to be paid a minimum annual base salary
of $200,000 and a performance-based bonus. If either is terminated without
cause, he is entitled to receive his salary compensation otherwise payable for
a period of six months; provided, however, that if Icon has extended such
employee's related non-compete agreement, then such employee is entitled to
receive his salary compensation otherwise payable for a period of 12 months.
Pursuant to such agreements, Messrs. Cicio and Hall were each granted an
option to purchase 109,091 and 87,273 shares of Common Stock, respectively.
On September 13, 1998, Qwest entered into an employment agreement with Scott
A. Baxter, pursuant to which he agreed to serve full time as President and
Senior Executive Officer of Icon after the Effective Time. Certain other
directors and officers of Icon have entered into employment agreements with
Qwest that will be effective at the Effective Time. The terms of the
employment agreement are summarized under "THE MERGER--Interests of Certain
Persons in the Merger."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Icon did not have a compensation committee during the fiscal year ended
December 31, 1996; its function was performed by the Stock Option Committee.
Messrs. Baxter, Brown and Harmolin, as the three members of the Board of
Directors, each participated in deliberations concerning executive officer
compensation. In June 1997, Icon established a Compensation Committee and an
Audit Committee. The members of the Compensation Committee are Messrs. Baxter,
Brown, Harmolin and Weisman and the members of the Audit Committee, which was
reconstituted upon completion of Icon's initial public offering, are Messrs.
Harmolin, Plum and Weisman.
1995 OPTION PLAN
In October 1995, the Board of Directors adopted and the stockholders of Icon
approved the 1995 Option Plan. The 1995 Option Plan, as subsequently amended
and restated, provides for the grant of options that are intended to qualify
as incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Code, and nonqualified stock options that do not so
qualify. The 1995 Option Plan provides for the grant of such options to key
employees (including directors and officers who are key employees) of, and
consultants to, Icon and its subsidiaries. The total number of shares of Icon
Common Stock for which options may be granted under the 1995 Option Plan is
3,000,000 shares.
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<PAGE>
The 1995 Option Plan is administered by the Board of Directors, which has
the authority to determine to whom options are granted, the number of shares
subject to such options, and the terms, exercise prices and other terms and
conditions of the exercise thereof. Non-employee directors of Icon are
permitted to receive grants of options under the 1995 Option Plan upon terms
and conditions approved by the Board of Directors.
The exercise price of any Incentive Stock Option granted under the 1995
Option Plan must be at least equal to the fair market value of the shares
subject to such option on the date of grant, while the exercise price of any
Incentive Stock Option granted to any participant who owns stock possessing
more than 10% of the total combined voting power of Icon's outstanding capital
stock must be at least equal to 110% of the fair market value of the shares
subject to such option on the date of grant. The fair market value of Icon
Common Stock is equal to the average of the high and low sales price for Icon
Common Stock on the date of grant. The term of each Incentive Stock Option
granted pursuant to the 1995 Option Plan cannot exceed ten years, while the
term of any Incentive Stock Option granted to a participant who owns stock
possessing more than 10% of the total combined voting power of Icon's
outstanding capital stock cannot exceed five years. Options become exercisable
at such times and in such installments as is provided in the option contract
for each individual option. No option granted under the 1995 Option Plan is
transferable by the optionee other than by will or the laws of descent and
distribution and each option is exercisable during the lifetime of the
optionee only by such optionee or the optionee's legal representative.
Pursuant to option contracts granted to certain executive officers and
certain key employees of Icon, the vesting of certain unvested options granted
to such individuals will accelerate (i) upon such individual's termination of
employment without cause, as a result of death or as a result of disability
and (ii) upon certain changes in control (each, an "Acceleration Date").
Pursuant to such agreements, the options otherwise exercisable within up to
three years (depending on the terms of the option contract such individual has
negotiated with Icon) will vest upon the occurrence of an Acceleration Date.
As of the date of this Proxy Statement/Prospectus, under the 1995 Option
Plan, certain of its current and former employees had outstanding options to
purchase up to 1,583,806 shares of Icon Common Stock, in the aggregate, at
exercise prices between $6.02 and $18.50 per share. Of such options, options
to purchase 301,563 shares were exercisable on the date of this Proxy
Statement Prospectus and the balance thereof will become exercisable at
various times thereafter.
The Merger Agreement provides that, at the Effective Time, each Icon stock
option or warrant, as the case may be, to purchase shares of Icon Common Stock
which is outstanding and unexercised shall be assumed by Qwest and converted
into an option or warrant to purchase Qwest Common Stock pursuant to the terms
of the Merger Agreement. See "PLAN OF MERGER--Terms of the Merger Agreement--
Assumption of Icon Stock Options and Warrants."
AGREEMENTS WITH EMPLOYEES
Each employee of Icon is required to enter into an agreement with Icon
pursuant to which such person agrees (i) to assign to Icon any inventions
relating to such person's employment conceived during such person's employment
by Icon, (ii) not to disclose confidential information to third parties, (iii)
not to engage in any business that is competitive with Icon during the term of
such person's employment, (iv) not to hire any employee of Icon during such
person's employment and for a period of 12 months following the termination of
such person's employment and (v) not to perform services for any customer of
Icon for a period of 12 months following the termination of such person's
employment. The agreement also provides that the employee is an "at will"
employee and that either Icon or the employee may terminate employment with
Icon at any time with or without cause.
401(K) PLAN
In January 1993 Icon adopted a tax-qualified employee savings and retirement
plan (the "401(k) Plan") covering Icon's employees. Pursuant to the 401(k)
Plan, employees may elect to reduce their current
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compensation by up to the lesser of 10% of eligible compensation or the
statutorily prescribed annual limit ($9,500 in 1997) and have the amount of
such reduction contributed to the 401(k) Plan. The trustees under the 401(k)
Plan, at the direction of each participant, invest the assets of the 401(k)
Plan. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by employees to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn.
PROFIT SHARING PLAN
Icon has a profit sharing plan covering substantially all full-time
employees. Contributions by Icon to the profit sharing plan amounted to
$129,000 and $28,000 in 1994 and 1996, respectively. There were no
contributions to the profit sharing plan during 1995, 1997 or the nine months
ended September 30, 1998.
CERTAIN TRANSACTIONS
On August 30, 1995, Icon made loans of $50,000 to Messrs. Baxter, Brown and
Harmolin. Interest accrues at an annual rate of 7%. The loans including
accrued interest are due on demand.
On March 19, 1997, Tudor BVI Futures, Ltd. ("Tudor BVI"), as agent and
holder on behalf of itself and each of The Raptor Global Fund L.P. ("Raptor
L.P."), The Raptor Global Fund Ltd. ("Raptor Ltd.") and Tudor Arbitrage
Partners L.P. ("TAP"), loaned to Icon an aggregate principal amount of $1.0
million pursuant to a convertible note bearing interest at a rate of 10% per
annum. In consideration for such loan, Icon granted to such lenders a warrant
to purchase an aggregate of 41,511 shares of Common Stock at an exercise price
of $6.02 per share. On May 30, 1997, such lenders converted the $1.0 million
note and $20,000 of accrued but unpaid interest thereon into an aggregate of
10,200 shares of Icon's 10% PIK Series B Convertible Participating Preferred
Stock, par value $.01 per share ("Series B Preferred Stock"). Such Series B
Preferred Stock converted into an aggregate of 169,364 shares of Icon Common
Stock upon consummation of the IPO.
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SECURITY OWNERSHIP OF ICON MANAGEMENT AND OTHERS
The following table sets forth certain information regarding ownership of
the Icon Common Stock as of the Record Date, by (1) each person or entity who
owns of record or beneficially five percent or more of Icon Common Stock, (2)
each director and executive officer of Icon and (3) all directors and
executive officers of Icon as a group. To the knowledge of Icon, each of such
stockholders has sole voting and investment power as to the shares shown
unless otherwise noted. Unless otherwise noted, the address of each beneficial
owner named below is Icon's corporate address.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIAL OWNER SHARES(A) PERCENT
---------------- --------- -------
<S> <C> <C>
Scott A. Baxter(b)(c)....................................... 2,203,636 13.8
Richard M. Brown(b)......................................... 2,186,718 13.8
Scott Harmolin(b)........................................... 2,181,818 13.7
Kenneth J. Hall(d).......................................... 26,800 *
Susan A. Massaro(e)......................................... 17,092 *
Frank C. Cicio, Jr.(f)...................................... 27,273 *
Anthony R. Scrimenti(g)..................................... 13,091 *
David L. Goret(h)........................................... 10,910 *
Robert J. Thalman, Jr.(i)................................... 10,909 *
Michael J. Gold(j).......................................... 9,090 *
Samuel A. Plum(k)(l)........................................ 2,502,912 14.9
Wayne B. Weisman(k)(m)...................................... 3,273 --
SCP Private Equity Partners, L.P.(k)(n)..................... 2,499,639 14.9
Mellon Ventures, L.P.(o).................................... 830,220 5.2
MVMA, Inc.(o)(p)............................................ 830,220 5.2
Qwest Communications International Inc.(q).................. 7,322,172 43.9
All directors and executive officers as a group (12
persons)(r)................................................ 9,193,522 54.5
</TABLE>
- --------
* Less than 1%.
(a) Pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), includes shares of Icon Common
Stock that may be purchased within 60 days of November 6, 1998 upon
exercise of outstanding options.
(b) Shares are subject to Option Agreement and Voting Agreement with Qwest.
See "THE MERGER--Other Transaction Agreements--Option Agreements" and "--
Voting Agreements."
(c) Includes 21,818 shares of Icon Common Stock that may be issued upon
exercise of options.
(d) Includes 21,819 shares of Icon Common Stock that may be issued upon
exercise of options.
(e) Includes 17,092 shares of Icon Common Stock that may be issued upon
exercise of options.
(f) Includes 27,273 shares of Icon Common Stock that may be issued upon
exercise of options.
(g) Includes 13,091 shares of Icon Common Stock that may be issued upon
exercise of options.
(h) Includes 10,910 shares of Icon Common Stock that may be issued upon
exercise of options.
(i) Includes 10,909 shares of Icon Common Stock that may be issued upon
exercise of options.
(j) Includes 9,090 shares of Icon Common Stock that may be issued upon
exercise of options.
(k) The address for the beneficial owner is 800 The Safeguard Building, 435
Devon Park Drive, Wayne, Pennsylvania 19087.
(l) Includes 839,199 shares of Icon Common Stock that may be issued upon
exercise of warrants and are beneficially owned by SCP. Mr. Plum is a
general partner of the general partner of SCP and disclaims beneficial
ownership of all of Icon's securities beneficially owned by SCP. Also
includes 3,273 shares of Icon Common Stock that may be issued upon
exercise of options.
(m) Includes 3,273 shares of Icon Common Stock that may be issued upon
exercise of options.
(n) Includes 839,199 shares of Icon Common Stock that may be issued upon
exercise of warrants.
(o) The address for the beneficial owner is Plymouth Meeting Executive Campus,
610 West Germantown Pike, Suite 200, Plymouth Meeting, Pennsylvania 19462.
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(p) MVMA, Inc. ("MVMA") is the general partner of the general partner of
Mellon Ventures L.P. ("Mellon Ventures"). MVMA disclaims beneficial
ownership of shares of Icon Common Stock owned by Mellon Ventures.
(q) Includes 6,572,172 shares of Icon Common Stock subject to Option
Agreements and Voting Agreements with each of Scott A. Baxter, Richard M.
Brown and Scott Harmolin, respectively, including 21,818 shares of Icon
Common Stock that may be issued to Mr. Baxter upon the exercise of vested
options. See "The Merger Agreement--Other Transaction Agreements--Option
Agreements" and "--Voting Agreements." Also includes 750,000 shares of
Icon Common Stock that may be issued upon the exercise of Series Q
Warrants. See "THE MERGER--Other Transaction Agreements--Warrants;
Registration Rights Agreement." The address for the beneficial owner is
700 Qwest Tower, 555 Seventeenth Street, Denver, Colorado 80202. As of
October 31, 1998, Philip F. Anschutz is the sole beneficial owner of
approximately 47.9% of the shares of Qwest Common Stock (after giving
effect to the transfer of approximately 9.0 million shares to a trust in
connection with a transaction announced on November 28, 1998) and shares
with Qwest the beneficial ownership of 7,322,172 shares of Icon Common
Stock. The address for Mr. Anschutz is 2400 Qwest Tower, 555 Seventeenth
Street, Denver, Colorado 80202.
(r) Includes options to purchase 138,548 shares of Icon Common Stock that may
be issued upon exercise of options and 839,199 shares of Icon Common Stock
that may be issued upon exercise of warrants. Mr. Plum disclaims
beneficial ownership of all of Icon's securities beneficially owned by
SCP.
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BUSINESS OF QWEST
Qwest is a facilities-based provider of a full range of multimedia
communications services to businesses, consumers and communications entities
("Communications Services"). In addition, Qwest is constructing and installing
fiber optic communications systems for interexchange carriers and other
communications entities, as well as for its own use ("Construction Services").
Qwest is expanding its existing long distance network into an approximately
18,450 route-mile coast-to-coast, technologically advanced, fiber optic
telecommunications network (the "Qwest Network"). Qwest will employ,
throughout substantially all of the Qwest Network, a self-healing SONET ring
architecture equipped with the most advanced commercially available fiber and
transmission electronics manufactured by Lucent Technologies and Northern
Telecom Inc., respectively. The Qwest Network's advanced fiber and
transmission electronics are expected to provide Qwest with lower
installation, operating and maintenance costs than older fiber systems
generally in commercial use today. In addition, Qwest has entered into
contracts for the sale of dark fiber along the route of the Qwest Network,
which will reduce Qwest's net cost per fiber mile with respect to the fiber it
retains for its own use. As a result of these cost advantages, Qwest believes
it will be well-positioned to capture market share and take advantage of the
rapidly growing demand for long haul voice and data transmission capacity and
services.
Under Qwest's current plan, the Qwest Network will extend approximately
18,450 route-miles coast-to-coast and connect approximately 130 metropolitan
areas that represent approximately 80% of the originating and terminating long
distance traffic in the United States. Presently, Qwest provides services to
its customers through owned and leased digital fiber optic facilities and more
than 15 switches strategically located throughout the United States,
connecting Qwest to metropolitan areas that account for more than 95% of U.S.
call volume. Construction of the Qwest Network is scheduled to be completed in
1999. Through a combination of the Qwest Network and leased facilities, Qwest
will continue to offer interstate services in all 48 contiguous states. In
April 1998, Qwest 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. Qwest is also expanding its network to carry
international data and voice traffic into Mexico and Europe. Completion of the
Mexico network is scheduled for early 1999. The network expansion into Europe
includes capacity on three submarine systems. The transatlantic capacity
includes eight STM-1s (the European equivalent to SONET OC-3) from New York
City to London and other European destinations.
Qwest believes that demand from interexchange carriers and other
communications entities for advanced, high bandwidth voice, data and video
transmission capacity will increase over the next several years due to
regulatory and technological changes and other industry developments. These
anticipated changes and developments include: (1) continued growth in capacity
requirements for high-speed data transmission, ATM (asynchronous transfer
mode) and Frame Relay services, Internet and multimedia services and other new
technologies and applications; (2) continued growth in demand for existing
long distance services; (3) entry into the market of new communications
providers; (4) requirements of the three principal nationwide carriers (AT&T
Corporation, MCI WorldCom and Sprint Corporation) to replace or augment
portions of their older systems and (5) reform in regulation of domestic
access charges and international settlement rates, which Qwest expects will
lower long distance rates and fuel primary demand for long distance services.
Certain other important information related to Qwest and its subsidiaries is
attached as Annex C and Annex D to this Proxy Statement/Prospectus. See
"ANNEXED DOCUMENTS."
The executive offices of Qwest are located at 700 Qwest Tower, 555
Seventeenth Street, Denver, Colorado 80202, and its telephone number is (303)
992-1400. Qwest's Internet address is www.qwest.net.
RECENT DEVELOPMENTS
KPN Joint Venture. On November 19, 1998, Qwest and KPN entered into a letter
of intent to form a joint venture company to create a pan-European IP-based
fiber optic network linked to Qwest's network in North
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America for data, video and voice services. The venture is expected to be
formed in the first quarter of 1999, subject to definitive documentation and
customary regulatory approvals.
The venture will offer wholesale, private line and IP-based services,
including intranets, extranets, web hosting, IP-virtual private networks,
Internet access, data and voice services. The venture will also sell EuroRings
dark fiber and plans to offer Frame Relay and ATM-based services. Customers
for the venture will include Internet service and content providers,
multinational firms in Europe and North America as well as telecommunications
carriers, operators and others who want to buy wholesale or retail network
capacity, fiber or services.
KPN and Qwest will each own 50% of the venture. The venture will be governed
by a six-person supervisory board. KPN and Qwest each will name three members
to the board. KPN will contribute to the venture two bi-directional, self-
healing fiber optic rings (EuroRings 1 and 2) in the United Kingdom, Germany,
France, Belgium and the Netherlands, covering more than 3,500 km (2,200
miles). EuroRings 1 and 2 serve London, Amsterdam, Rotterdam, Antwerp,
Brussels, Paris, Dusseldorf, Frankfurt and Strasbourg. Qwest will contribute
to the venture its European subsidiary, EUnet, which it acquired in April 1998
and is a leading European business Internet service provider with more than
80,000 customers in 14 European countries. KPN and Qwest will also contribute
transatlantic cable capacity to the venture that will connect EuroRings with
Qwest's network in North America. Qwest and KPN will contribute approximately
$70 million and $20 million, respectively, to fund the completion of EuroRings
1 and 2, and Qwest will contribute an additional $7.8 million to the venture.
LCI Transaction. On June 5, 1998, Qwest acquired LCI, a communications
provider, for approximately $3.9 billion in Qwest Common Stock. As part of the
acquisition, 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.
In connection with the acquisition, Qwest allocated $682 million to in-
process research and development ("R&D"), $318 million to existing technology,
$65 million to other intangible assets and $3,026.0 million to goodwill.
Combined 1997 Qwest and LCI revenues totaled $2,338.0 million. The merger is
expected to deliver greater network efficiencies, eliminate duplicate efforts
to build sales and systems infrastructure, avoid duplication of capital
spending programs and accelerate the companies' data and international
strategies. The acquisition is expected to lower net earnings of Qwest in 1998
as a result of the one-time R&D write-off and other adjustments resulting from
purchase accounting. Qwest expects to realize revenue and cost synergies
beginning in 1998 from the combination of the two companies.
Qwest will complete final allocation of the 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 purchase price will not
differ materially from the preliminary allocation.
Credit Facility Commitment. On November 5, 1998, Qwest executed a commitment
letter with its three lead banks to syndicate an unsecured, $500.0 million to
$750.0 million credit facility. Each of the lead banks has agreed to commit up
to $100.0 million, with a minimum aggregate commitment of $250.0 million. The
new credit facility would be structured to include a $250.0 million 364-day
revolving credit facility, with the balance as a five-year revolving credit
facility. The 364-day facility would be extendable for an additional 364 days
on the lenders' approval or convertible at Qwest's option to a term loan
terminating at the same time as the five-year facility. Borrowings under the
new credit facility would bear interest at a variable rate based on LIBOR plus
an applicable margin. Consummation of the new credit facility is conditioned,
among other things, on the execution of a mutually satisfactory credit
agreement. Qwest and the three lead banks are working toward a December 1998
closing, but there can be no assurance that the new credit facility will be in
place before the expiration of Qwest's existing $250 million credit facility
on December 31, 1998.
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Issuances of Notes. On November 4, 1998, Qwest issued and sold $750.0
million in principal amount of 7.50% Senior Notes, due 2008 (the "7.50%
Notes"), and on November 27, 1998, Qwest issued and sold $300.0 million in
principal amount of 7.25% Senior Notes, due 2008 (the "7.25% Notes"). The
aggregate net proceeds from the two offerings to Qwest were approximately
$1,038.5 million, after deducting offering costs. Interest on the 7.50% Notes
and the 7.25% Notes is payable semiannually in arrears on May 1 and November 1
of each year, commencing May 1, 1999. The 7.50% Notes and the 7.25% Notes are
subject to redemption at the option of Qwest, in whole or in part, at any time
at specified redemption prices.
In connection with the sale of the 7.50% Notes and the 7.25% Notes, Qwest
agreed to make an offer to exchange new notes, registered under the Securities
Act and with terms identical in all materials respects to the original notes,
for the original notes or, alternatively, to file a shelf registration
statement under the Securities Act with respect to the original notes.
Redemption of Notes. On December 2, 1998, Qwest announced that it will
redeem on December 31, 1998, $87.5 million of its 10 7/8% Senior Notes Due
2007 ("10 7/8% Notes"). Bankers Trust Company, the Trustee for the 10 7/8%
Notes, issued the required notice to affected noteholders on December 1, 1998.
Under the terms of the Indenture for the 10 7/8% Notes, dated August 28, 1997,
Qwest may redeem up to 35%, or $87.5 million, of the $250 million principal
amount of the 10 7/8% Notes.
Other. In August 1998, Qwest announced its participation in a consortium of
communications companies that is building a submarine cable system connecting
the United States to Japan. Scheduled for completion by the second quarter of
2000, the 13,125-mile, four-fiber pair cable will ultimately possess the
capability to transmit information at the rate of 640 gigabits per second.
In September 1998, Qwest announced that in November 1998 it planned to make
available for use the nation's first OC-48 native IP network along the Qwest
Network. Along this OC-48 network, Qwest will offer high-speed dedicated
Internet access, web hosting, IP-based virtual private network services and
expanded availability of voice over IP long distance services. Additionally,
Qwest's European subsidiary, EUnet, will provide the first pan-European
Internet broadcasting network. The new services will allow customers in Europe
to broadcast video, data and voice globally.
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DESCRIPTION OF QWEST CAPITAL STOCK
The following summary description of the capital stock of Qwest does not
purport to be complete and is subject to the provisions of Qwest's Amended and
Restated Certificate of Incorporation (the "Qwest Certificate of
Incorporation") and Bylaws (the "Qwest Bylaws"), which are included as
exhibits to the Registration Statement of which this Proxy
Statement/Prospectus forms a part and by the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Qwest Certificate of Incorporation, Qwest has authority to
issue 625,000,000 shares of capital stock, consisting of 600,000,000 shares of
Qwest Common Stock and 25,000,000 shares of preferred stock (the "Qwest
Preferred Stock").
As of October 31, 1998, 335.6 million shares of Qwest Common Stock and no
shares of Qwest Preferred Stock were issued and outstanding. The rights of the
holders of Qwest Common Stock discussed below are subject to such rights as
the Board of Directors of Qwest (the "Qwest Board") may hereafter confer on
the holders of Qwest Preferred Stock; accordingly, rights conferred on holders
of Qwest Preferred Stock that may be issued in the future under the Qwest
Certificate of Incorporation may adversely affect the rights of the holders of
Qwest Common Stock.
Effective May 23, 1997, Qwest sold to the Anschutz Family Investment Company
LLC a warrant to acquire 8,600,000 shares of Qwest Common Stock, exercisable
on May 23, 2000.
COMMON STOCK
Voting Rights. Each stockholder of Qwest (a "Qwest Stockholder") is entitled
to attend all special and annual meetings of the stockholders of Qwest and,
together with the holders of all other classes of stock entitled to attend and
vote at such meetings, to vote upon any matter or thing (including, without
limitation, the election of one or more directors) properly considered and
acted upon by the stockholders. Qwest Stockholders are entitled to one vote
per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of Qwest, whether voluntary or involuntary, Qwest Stockholders and holders
of any class or series of stock entitled to participate therewith, will become
entitled to participate in the distribution of any assets of Qwest remaining
after Qwest shall have paid, or provided for payment of, all debts and
liabilities of Qwest and after Qwest shall have paid, or set aside for
payment, to the holders of any class of stock having preference over the Qwest
Common Stock in the event of dissolution, liquidation or winding up the full
preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Qwest Common Stock and on any class
or series of stock entitled to participate therewith when and as declared by
the Qwest Board.
AUTHORIZED QWEST PREFERRED STOCK
The Qwest Certificate of Incorporation authorizes the Qwest Board, from time
to time and without further stockholder action, to provide for the issuance of
up to 25,000,000 shares of Qwest Preferred Stock in one or more series, and to
fix the relative rights and preferences of the shares, including voting
powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the Qwest Board has not provided
for the issuance of any series of such Qwest Preferred Stock. Through its
broad discretion with respect to the creation and issuance of Qwest Preferred
Stock without stockholder approval, the Qwest Board could adversely affect the
voting power of the Qwest Stockholders and, by issuing shares of Qwest
Preferred Stock with certain voting, conversion or redemption rights or all of
them, could discourage any attempt to obtain control of Qwest.
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CERTAIN CHARTER AND STATUTORY PROVISIONS
The Qwest Certificate of Incorporation and Qwest Bylaws include certain
provisions that may have the effect of delaying, deterring or preventing a
future takeover or change in control of Qwest unless such takeover or change
in control is approved by the Qwest Board. See "RISK FACTORS--Anti-Takeover
Provisions."
The Qwest Certificate of Incorporation places certain restrictions on who
may call a special meeting of stockholders. In addition, the Qwest Board has
the authority to issue up to 25,000,000 shares of Qwest Preferred Stock and to
determine the price, rights, preferences and privileges of those shares
without any further vote or actions by the stockholders. The rights of the
Qwest Stockholders will be subject to, and may be adversely affected by, the
rights of the holders of any Qwest Preferred Stock that may be issued in the
future. The issuance of such shares of Qwest Preferred Stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and serving other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or may discourage a
third party from attempting to acquire, a majority of the outstanding voting
stock of Qwest.
Qwest is subject to the provisions of Section 203 of the DGCL. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the person became an interested stockholder, unless (i) prior to
such time, the board approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in such
person becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding, for purposes of determining the number of
shares outstanding, shares owned by certain directors or certain employee
stock plans), or (iii) on or after the time the stockholder became an
interested stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote (and not by written consent)
of at least two-thirds of the outstanding voting stock excluding any stock
owned by the interested stockholder. A "business combination" includes a
merger, asset sale and certain other transactions resulting in a financial
benefit to the interested stockholder. In general, an "interested stockholder"
is a person who (other than the corporation and any direct or indirect
majority owned subsidiary of the corporation), together with affiliates and
associates, owns (or, is an affiliate or associate of the corporation and,
within three years prior, did own) 15% or more of the corporation's
outstanding voting stock. The application of Section 203 of the DGCL could
have the effect of delaying or preventing a change of control of Qwest.
The Qwest Certificate of Incorporation allows Qwest to require
certifications with respect to beneficial ownership of Qwest Common Stock by
"aliens." For purposes of this restriction, the term "alien" means aliens and
their representatives, foreign governments and their representatives and
corporations organized under the laws of a foreign country. The Communications
Act of 1934 limits the ownership by non-U.S. citizens, foreign corporations
and foreign governments of an entity directly or indirectly holding a common
carrier radio license.
Certain provisions of the Qwest Bylaws may have the effect of delaying or
preventing changes in control or management of Qwest. See "RISK FACTORS--Anti-
Takeover Provisions."
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COMPARATIVE MARKET PRICE INFORMATION
Icon became a publicly traded Company on February 12, 1998 following Icon's
initial public offering. Icon Common Stock is quoted on the Nasdaq National
Market under the symbol "ICMT." Qwest became a publicly traded company on June
23, 1997 following the Qwest initial public offering. Qwest Common Stock is
quoted on the Nasdaq National Market under the symbol "QWST." The table below
sets forth, for the periods indicated, the high and low sales prices per share
of Icon Common Stock and Qwest Common Stock as reported on the Nasdaq National
Market (as adjusted for the Qwest two-for-one stock split in February 1998).
For current price information, please consult publicly available sources.
<TABLE>
<CAPTION>
ICON QWEST
----------------- -----------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1998 (Ending December 31, 1998):
Fourth Quarter (through December 9,
1998)................................... $14.2500 $10.0000 $45.5625 $26.7500
Third Quarter............................ $21.3750 $ 6.7500 $47.5000 $22.0000
Second Quarter........................... $28.7500 $12.8750 $40.0625 $27.8750
First Quarter............................ $17.6250 $ 8.3750 $41.0625 $29.6250
Fiscal 1997 (Ended December 31, 1997):
Fourth Quarter........................... $ N/A $ N/A $34.4375 $22.9375
Third Quarter............................ $ N/A $ N/A $26.5000 $13.6250
Second Quarter........................... $ N/A $ N/A $15.0625 $13.1875
First Quarter............................ $ N/A $ N/A N/A N/A
</TABLE>
On September 11, 1998, the last trading day prior to the announcement of the
execution of the Merger Agreement, the closing price per share of Icon Common
Stock, as reported on the Nasdaq National Market, was $7.25. On December 9,
1998, the most recent practicable trading day prior to the printing of this
Proxy Statement/Prospectus, the closing price per share of Icon Common Stock,
as reported on the Nasdaq National Market, was $14.1250. The "equivalent per
share" closing price of Icon Common Stock was $12.00 as of September 11, 1998
and $14.3693 as of December 9, 1998. The "equivalent per share" price is a
determined by multiplying the Exchange Ratio as of the relevant date
(determined as if the closing price on such date were the Average Market
Price) by the Qwest Common Stock closing price on that date. On the Record
Date, there were approximately 100 Icon Stockholders of record.
On September 11, 1998, the last trading day prior to the announcement of the
execution of the Merger Agreement, the closing price per share of Qwest Common
Stock, as reported on the Nasdaq National Market, was $28.8125. On December 9,
1998, the most recent practicable trading day prior to the printing of this
Proxy Statement/Prospectus, the closing price per share of Qwest Common Stock,
as reported on the Nasdaq National Market, was $44.6250. On October 31, 1998,
there were approximately 3,239 Qwest Stockholders of record.
Icon has not declared or paid cash dividends on the Icon common stock since
the Icon's initial public offering. The Icon Board intends to retain earnings
for use in the development and continued expansion of Icon's business. The
payment of cash dividends by Icon is prohibited under its revolving line of
credit. Any future determination concerning the payment of dividends will be
within the sole discretion of the Icon Board and will depend upon the
existence of such restriction, Icon's financial condition, Icon's results of
operations and such other factors as the Icon Board deems relevant.
Qwest has not declared or paid cash dividends on Qwest Common Stock since
the Qwest's initial public offering, and Qwest anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Qwest Board and will
depend upon, among other things, Qwest's earnings, financial condition,
capital requirements, extent of indebtedness and contractual restrictions with
respect to the payment of dividends.
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COMPARATIVE RIGHTS OF QWEST STOCKHOLDERS
AND ICON STOCKHOLDERS
Both Qwest and Icon are incorporated under the laws of the State of Delaware
and, accordingly, the rights of Icon Stockholders and Qwest Stockholders are
governed by the DGCL. The rights of Icon Stockholders and Qwest Stockholders
are also governed by their respective certificates of incorporation and
bylaws. In accordance with the Merger Agreement, at the Effective Time, Icon
Stockholders will become Qwest Stockholders and, as such, their rights will be
governed by the Qwest Certificate of Incorporation and the Qwest Bylaws.
Although it is not practical to compare all the differences between Icon's
Restated Certificate of Incorporation (the "Icon Certificate of
Incorporation") and Icon's Restated Bylaws (the "Icon Bylaws"), with the Qwest
Certificate of Incorporation and the Qwest Bylaws, the following is a summary
of certain material differences which may affect the rights of Icon
Stockholders.
Authorized Capital. The total number of authorized shares of capital stock
of Icon is 51,000,000 consisting of 50,000,000 shares of Icon Common Stock and
1,000,000 shares of preferred stock, par value $.01 per share (the "Icon
Preferred Stock"). The authorized capital of Qwest is as set forth under
"DESCRIPTION OF CAPITAL STOCK OF QWEST." As of October 31, 1998, 335.6 million
shares of Qwest Common Stock were issued and outstanding and, as of the Record
Date, 15,899,470 shares of Icon Common Stock were issued and outstanding.
Pursuant to the Qwest Certificate of Incorporation and Icon Certificate of
Incorporation, the Qwest Board and the Icon Board, respectively, have the
authority to issue any authorized shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or actions by the Qwest Stockholders or Icon Stockholders, as
applicable.
Special Meetings. The Icon Certificate of Incorporation and the Icon Bylaws
provide that a special meeting of the Icon Stockholders may be called at any
time by the Icon Board, the chairman or the president, and shall be called
only by the Icon Board, the chairman or the president pursuant to a resolution
approved by a majority of the members of the Icon Board. A special meeting of
Qwest Stockholders may be called by the chairman of the Qwest Board, a
majority of the members of the Qwest Board or the chairman upon the written
request of the holders of 25% of the outstanding shares of capital stock of
Qwest voting as a single class.
Board of Directors. The Icon Bylaws provide that the number of directors
shall be not less than three nor more than 15, with the exact number of
directors to be determined by the Icon Board. Currently, the Icon Board
consists of 5 members. The Qwest Bylaws provide that the number of directors
shall be determined by the resolution of the Qwest Board. Currently, the Qwest
Board consists of 13 members. Icon has provided for the classification of the
Icon Board such that the whole Icon Board is divided into three classes with
each class of directors being elected to serve for three years. The Qwest
Board is not so classified, with each director of Qwest being elected at the
annual meeting and serving until the next annual meeting.
Removal of Directors. Under the Icon Bylaws, a director can be removed
either for cause or without cause by the affirmative vote of a majority of the
outstanding shares of Icon Common Stock. Likewise, the Qwest Bylaws provide
that a director may be removed with or without cause by the affirmative vote
of a majority of the outstanding shares of Qwest Common Stock.
Compromise or Arrangement with Creditors or Stockholders. As permitted by
the DGCL, the Icon Certificate of Incorporation provides that a Delaware court
of equitable jurisdiction may, upon application of Icon, its creditors or
stockholders or certain receivers or trustees appointed for the benefit of
Icon, order a meeting of creditors of Icon and/or Icon Stockholders for the
purpose of considering and voting upon any proposed compromise or arrangement
between Icon on the one hand and its creditors and/or stockholders on the
other. If a majority in number representing three-fourths in value of the
affected creditors and/or stockholders agrees to the proposed compromise or
arrangement and to any reorganization resulting therefrom, and if the court
approves, the transaction will be binding on all affected creditors and/or
stockholders as well as Icon for all purposes. The Qwest Certificate of
Incorporation does not contain a similar provision.
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Actions of Stockholders Without a Meeting. Neither the Icon Bylaws nor the
Icon Certificate of Incorporation contain any provision with respect to
actions of stockholders without a meeting. Under such circumstances, the DGCL
permits actions of stockholders without a meeting. Pursuant to the Qwest
Bylaws, any action required or permitted to be taken at any meeting of the
stockholders may be taken without a meeting, without prior written notice and
without a vote, if the written consent of the minimum number of votes that
would be necessary to authorize or take such action at a meeting is obtained.
Pursuant to the DGCL, prompt notice of the taking of the corporate action
without a meeting by less than unanimous consent is required to be given to
those stockholders who have not consented in writing thereto.
Amendment of Certificate of Incorporation and Bylaws. Section 242 of the
DGCL provides that stockholders may amend their corporation's certificate of
incorporation if a majority of the outstanding stock entitled to vote thereon,
and a majority of the outstanding stock of each class entitled to vote thereon
as a class, has been voted in favor of the amendment. The DGCL also provides
that after a corporation has received any payment for its stock, the power to
adopt, amend or repeal bylaws resides with the stockholders entitled to vote.
A corporation may grant to its board of directors in its certificate of
incorporation concurrent power to adopt, amend or repeal bylaws. Icon and
Qwest have granted such power to their respective boards of directors.
The Icon Certificate of Incorporation provides that the stockholders may
amend their corporation's certificate of incorporation if a majority of the
outstanding stock entitled to vote thereon has been voted in favor of the
amendment, provided, that an affirmative vote of the holders of at least two-
thirds of the outstanding stock entitled to vote thereon is needed to amend
certain provisions of the Icon Certificate of Incorporation concerning special
meetings of the stockholders, terms and elections of the directors, and
amendments to the Icon Bylaws and the Icon Certificate of Incorporation. In
addition, the Icon Certificate of Incorporation provides that the Icon Bylaws
may be amended either by an affirmative vote of a majority of the outstanding
stock entitled to vote thereon or by an affirmative vote of a majority of the
members of the Icon Board, provided, that an affirmative vote of the holders
of at least two-thirds of the outstanding stock entitled to vote thereon is
needed to amend certain provisions of the Icon Bylaws concerning meetings of
the stockholders and directors, terms and elections of the directors and
amendments to the Icon Bylaws.
Indemnification of Directors and Officers. Under the DGCL, a corporation may
indemnify a director, officer, employee or agent of the corporation against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In the case of an action brought by or in the right of a
corporation, the corporation may indemnify a director, officer, employee or
agent of the corporation against expenses (including attorneys' fees) actually
and reasonably incurred by him or her if he or she acted in good faith and in
a manner he or she reasonably believed to be in the best interests of the
corporation, except that no indemnification will be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless the court in which such action or suit was
brought or, the Delaware Court of Chancery determines that, in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. Each of the Qwest
Bylaws and the Icon Bylaws provide that its respective officers, directors,
employees and agents shall be indemnified to the full extent authorized by the
DGCL. The Qwest Certificate of Incorporation and the Icon Certificate of
Incorporation provide that no member of the Icon Board shall be personally
liable to Icon or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to Icon and its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Section 203 of the DGCL. Generally, Section 203 of the DGCL prohibits
certain Delaware corporations from engaging in a "business combination with an
"interested stockholder" for a period of three years after the person became
an interested stockholder, unless (i) prior to such time the board approved
either the business
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combination or the transaction that resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction that
resulted in such person becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain
directors or certain employee stock plans), or (iii) on or after the time the
stockholder became an interested stockholder, the business combination is
approved by the board of directors and authorized by the affirmative vote (and
not by written consent) of at least two-thirds of the outstanding voting stock
excluding any stock owned by the interested stockholder. A "business
combination" includes a merger, asset sale and certain other transactions
resulting in a financial benefit to the interested stockholder. In general, an
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority owned subsidiary of the corporation), together
with affiliates and associates, owns (or, is an affiliate or associate of the
corporation and, within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. A Delaware corporation may "opt out"
from the application of Section 203 of the DGCL through a provision in its
certificate of incorporation. Neither the Qwest Certificate of Incorporation
nor the Icon Certificate of Incorporation contains any such provision, and
neither Qwest nor Icon has "opted out" from the application of Section 203 of
the DGCL.
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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, SuperNet, Inc. ("SuperNet"), Phoenix Network, Inc. ("Phoenix"), LCI and
Icon. The unaudited pro forma condensed combined balance sheet as of September
30, 1998 gives pro forma effect to the proposed 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 or the joint venture with KPN 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") expire at 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
purchase price will not differ materially from the preliminary allocation.
The final allocation of purchase price to the Icon assets acquired and
liabilities assumed is dependent upon an analysis which has not progressed to
a stage at which there is sufficient information to make an allocation in
these pro forma condensed combined financial statements. 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. While conducting transaction due diligence, Qwest
considered Icon's existing intangible assets and items currently being
developed by Icon and other goodwill-type assets. Qwest considered these
intangible assets and in-process R&D in determining the total purchase price
paid by Qwest, but these items did not play a key role in Qwest's acquisition
decision or the amount of the purchase price. Although the appraisal of the
assets is in the initial stages, Qwest believes the portion of Icon purchase
price allocated to in-process R&D and the corresponding charge to Qwest's
results of operations will be approximately $10.0 million to $15.0 million.
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.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA PRO FORMA
QWEST LCI PHOENIX ICON(4) ADJUSTMENTS COMBINED
------ ---- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Communications
services.............. $ 884 $745 $17 $ 59 -- $1,705
Construction services.. 494 -- -- -- -- 494
------ ---- --- ---- ---- ------
1,378 745 17 59 2,199
------ ---- --- ---- ---- ------
Operating expenses:
Access and network
operations............ 556 445 13 46 -- 1,060
Construction services.. 334 -- -- -- -- 334
Selling, general and
administrative........ 341 163 7 29 -- 540
Depreciation and
amortization.......... 120 45 1 1 $ 32 (7) 230
16 (8)
1 (9)
14 (5)
Merger costs........... 63 -- -- 2 (65)(10) --
Provision for in-
process R&D........... 750 -- -- -- (750)(10) --
------ ---- --- ---- ---- ------
2,164 653 21 78 (752) 2,164
------ ---- --- ---- ---- ------
Earnings (loss) from
operations.............. (786) 92 (4) (19) 752 35
Other expense (income):
Interest expense, net.. 51 14 -- (1) -- 64
------ ---- --- ---- ---- ------
Earnings (loss) before
income taxes............ (837) 78 (4) (18) 752 (29)
Income tax expense
(benefit)............... (14) 30 -- -- 20 (15) 36
------ ---- --- ---- ---- ------
Net earnings (loss)...... $ (823) $ 48 $(4) $(18) $732 $ (65)
====== ==== === ==== ==== ======
Loss per share--basic and
diluted................. $(3.17) $(0.19)
====== ======
Weighted average shares
used for calculating
loss per share--basic
and diluted............. 260 334
====== ======
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------- PRO FORMA PRO FORMA
QWEST LCI PHOENIX ICON(4) ADJUSTMENTS COMBINED
----- ------ ------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Communications
services............... $ 115 $1,642 $ 77 $ 52 $ 6 (11) $1,892
Construction services... 581 -- -- -- -- 581
----- ------ ---- ---- ---- ------
696 1,642 77 52 6 2,473
----- ------ ---- ---- ---- ------
Operating expenses:
Access and network
operations............. 91 986 57 39 3 (11) 1,176
Construction services... 397 -- -- -- -- 397
Selling, general and
administrative......... 164 417 30 24 3 (11) 638
Depreciation and
amortization........... 20 96 4 1 2 (9) 260
1 (11)
3 (12)
76 (7)
38 (8)
19 (5)
Merger costs............ -- 45 -- -- (45)(13) --
----- ------ ---- ---- ---- ------
672 1,544 91 64 100 2,471
----- ------ ---- ---- ---- ------
Earnings (loss) from
operations............... 24 98 (14) (12) (94) 2
Other expense (income):
Interest expense, net... 7 36 1 1 1 (14) 46
Other................... (7) -- -- -- -- (7)
----- ------ ---- ---- ---- ------
Earnings (loss) before
income taxes............. 24 62 (15) (13) (95) (37)
Income tax expense ....... 9 31 -- -- 2 (15) 42
----- ------ ---- ---- ---- ------
Net earnings (loss)....... $ 15 $ 31 $(15) $(13) $(97) $ (79)
===== ====== ==== ==== ==== ======
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............. 191 330
===== ======
Weighted average shares
used for calculating
earnings (loss) per
share--diluted........... 194 330
===== ======
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 1998
(Unaudited)
(Amounts in Millions)
<TABLE>
<CAPTION>
HISTORICAL
------------- PRO FORMA PRO FORMA
QWEST ICON ADJUSTMENTS COMBINED
------- ---- ----------- ---------
<S> <C> <C> <C> <C>
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 -- $ 187 (6) 3,391
Other, net............................ 456 -- -- 456
------- ---- ----- -------
Total Assets............................ $ 6,834 $ 41 $ 187 $ 7,062
======= ==== ===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 1,180 $ 17 $ 4 (6) $ 1,201
Long-term debt and capital lease
obligations............................ 1,387 -- -- 1,387
Other long-term liabilities............. 515 -- -- 515
------- ---- ----- -------
Total liabilities..................... 3,082 17 4 3,103
Commitments and contingencies
Stockholders' equity:
Preferred stock....................... -- -- -- --
Common stock.......................... 3 -- -- 3
Additional paid-in capital............ 4,603 63 207 (6) 4,810
(63)(6)
Accumulated deficit .................. (854) (39) 39 (6) (854)
------- ---- ----- -------
Total stockholders' equity............ 3,752 24 183 3,959
------- ---- ----- -------
Total Liabilities and Stockholders'
Equity................................. $ 6,834 $ 41 $ 187 $ 7,062
======= ==== ===== =======
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE>
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.
<TABLE>
<CAPTION>
(AMOUNTS
IN MILLIONS)
<S> <C>
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
======
</TABLE>
(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,
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NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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:
. 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.
. 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 $3 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.
. 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.
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<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 September 13, 1998 Qwest and Icon entered into a definitive merger
agreement (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 will be determined by
dividing $12 by a 15-day volume weighted average of trading prices for
Qwest Common Stock prior to the Icon stockholders meeting that will be
held prior to closing, but will not be less than .3200 shares (if Qwest's
average stock price exceeds $37.50) or more than .4444 shares (if Qwest's
average stock price is less than $27.00). Assuming 15.9 million shares of
Icon common stock outstanding and an exchange ratio of 0.3220, the
estimated number of shares of Qwest Common Stock to be issued to Icon
stockholders is 5 million shares (excluding 0.8 million shares to be
issued upon the exercise of outstanding Icon stock options and warrants
assumed by Qwest). The proposed acquisition is subject to certain closing
conditions, including approval by the stockholders of Icon.
110
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(5) Represents the amortization of intangible assets from the preliminary Icon
purchase price allocation. The amortization is calculated using an
estimated useful life of 10 years. See note 6.
(6) The pro forma adjustment represents the purchase of the outstanding shares
of Icon common stock by Qwest, the incurrence of related transaction costs
and the initial purchase price allocation. The initial purchase price was
based upon an estimated value of $207.0 million for the Qwest Common Stock
to be issued in exchange for the outstanding shares of Icon common stock
and the assumption of the Icon stock options and an estimated $3.5 million
in transaction costs.
(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. 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, the reversal of
historical merger costs and the amortization of 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.
111
<PAGE>
LEGAL OPINION
The legality of the Qwest Common Stock to be issued in connection with the
Merger is being passed upon for Qwest by O'Melveny & Myers LLP.
TAX OPINION
Certain of the tax consequences of the Merger are being passed upon for Icon
by Parker Chapin Flattau & Klimpl, LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Qwest Communications
International Inc. and subsidiaries as of December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997 have been
included herein and in the Registration Statement in reliance upon the report
pertaining to such consolidated financial statements, dated February 24, 1998,
except as to note 22, which is as of March 8, 1998, and the report dated
February 24, 1998 pertaining to such schedule, of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and in
the Registration Statement, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements and schedules of LCI International,
Inc. and subsidiaries as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997 included in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report dated February 16, 1998
(except with respect to the matter discussed in Note 15, as to which the date
is March 16, 1998) with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing in
giving said reports.
The consolidated financial statements of Phoenix Network, Inc. as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997 included herein and in the Registration Statement have
been audited by Grant Thornton LLP, independent certified public accountants,
as indicated in its reports with respect thereto, and are included herein in
reliance on the reports of Grant Thornton LLP and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of SuperNet, Inc. as of June 30, 1997 and for the
year ended June 30, 1997 have been included in the Registration Statement in
reliance upon the report, dated September 26, 1997 of Dollinger, Smith & Co.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Icon CMT Corp. as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 included in this Proxy Statement/Prospectus, except as they relate to the
financial statements of Frontier Media Group, Inc. as of December 31, 1996 and
1997 and for each of the two years in the period ended December 31, 1997 have
been audited by PricewaterhouseCoopers LLP, independent accountants, and
insofar as they relate to Frontier Media Group, Inc. as of December 31, 1996
and 1997 and for each of the two years in the period ended December 31, 1997,
by Ernst & Young LLP, independent accountants, whose reports thereon appear
herein. Such financial statements have been so included in reliance on the
reports of such independent accountants given on the authority of such firms
as experts in auditing and accounting.
112
<PAGE>
AVAILABLE INFORMATION
Icon and Qwest are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New
York, New York 10048. Please call the Commission at 1-800-SEC-0330 for further
information relating to the public reference rooms. Copies of such information
may be obtained at the prescribed rates from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
the Commission maintains a Web site (http://www.sec.gov) that contains certain
reports, proxy statements and other information regarding Icon and Qwest. Icon
Common Stock and Qwest Common Stock are traded on the Nasdaq National Market.
Material filed by Icon and Qwest, respectively, may also be inspected at the
offices of the National Association of Securities Dealers, Inc., Market
Listing Section, 1735 K Street, N.W., Washington, D.C. 20006.
THIS PROXY STATEMENT/PROSPECTUS IS PART OF A REGISTRATION STATEMENT ON FORM
S-4 (TOGETHER WITH ANY AMENDMENTS OR SUPPLEMENTS THERETO, THE "REGISTRATION
STATEMENT") FILED BY QWEST PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), IN CONNECTION WITH THE ISSUANCE OF SHARES OF COMMON
STOCK OF QWEST IN THE MERGER. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONTAIN
ALL THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENT, CERTAIN PARTS OF
WHICH ARE OMITTED IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE
COMMISSION. THE REGISTRATION STATEMENT AND ANY AMENDMENTS THERETO, INCLUDING
EXHIBITS FILED AS A PART THEREOF, ALSO ARE AVAILABLE FOR INSPECTION AND
COPYING AS SET FORTH ABOVE. STATEMENTS CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS OR IN ANY DOCUMENT INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT OR OTHER
DOCUMENT REFERRED TO HEREIN OR THEREIN ARE NOT NECESSARILY COMPLETE, AND IN
EACH INSTANCE REFERENCE IS MADE TO THE COPY OF SUCH CONTRACT OR OTHER DOCUMENT
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH SUCH STATEMENT BEING
QUALIFIED IN ALL RESPECTS BY SUCH REFERENCE.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Proxy
Statement/Prospectus other than those contained herein or in the documents
incorporated by reference herein. Any information or representations with
respect to such matters not contained herein or therein must not be relied
upon as having been authorized by Qwest or Icon. This Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Proxy Statement/Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of Qwest or Icon since the date hereof or that the information
in this Proxy Statement/Prospectus or in the documents incorporated by
reference herein is correct as of any time subsequent to the date hereof or
thereof.
ALL INFORMATION CONCERNING ICON CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS
HAS BEEN FURNISHED BY ICON AND ALL INFORMATION CONCERNING QWEST CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS HAS BEEN
FURNISHED BY QWEST.
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<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains or incorporates by reference
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act that include, among others (1)
statements by Qwest or Icon, as the case may be, 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 Qwest and Icon together after the closing of the
Merger, (2) Qwest'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 Qwest or Icon, as the case
may be, of expectations, beliefs, future plans and strategies, anticipated
developments and other matters that are not historical facts. The managements
of Qwest and Icon, respectively, caution 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," "PLAN OF
MERGER--Recommendation of the Icon Board; Icon's Reasons for the Merger" and
"ICON'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" in this Proxy Statement/Prospectus and under "RISK FACTORS" and
"QWEST'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" in Qwest's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 attached as Annex C to this Proxy
Statement/Prospectus. The most important factors that could prevent Qwest or
Icon, as the case may be, from achieving its stated goals include, but are not
limited to, (a) failure by Qwest 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 Qwest's or Icon's communications services market, (d)
Qwest's ability to achieve Year 2000 compliance, (e) rapid and significant
changes in technology and markets, (f) adverse changes in the regulatory or
legislative environment affecting Qwest or Icon, and (g) failure by Qwest and
Icon to consummate the Merger on a timely basis or at all. These cautionary
statements should be considered in connection with any subsequent written or
oral forward-looking statements that may be issued by Qwest or persons acting
on its behalf. Neither Qwest nor Icon 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.
ANNEXED DOCUMENTS
Certain important information related to Qwest, Icon, their respective
subsidiaries and the Merger is included in the materials attached to this Proxy
Statement/Prospectus. Such materials are specifically incorporated herein and
made part hereof. You should read these materials carefully. These materials
are:
<TABLE>
<C> <S>
Annex A The Merger Agreement.
Annex B The written opinion of DLJ dated the date of this Proxy
Statement/Prospectus.
Annex C Qwest's Quarterly report on Form 10-Q for the quarter ended
September 30, 1998.
Annex D Excerpted information regarding Qwest and its subsidiaries from
Amendment No. 1 to the Registration Statement on Form S-4 (File No.
333-49915) of Qwest filed May 13, 1998, and the Registration
Statement on Form S-4 (File No. 46145) of Qwest filed February 12,
1998.
</TABLE>
Qwest's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 speaks only as of its date (or such other date as stated therein) and not
as of the date of this Proxy Statement/Prospectus. In addition, the excerpted
information contained in Annex D speaks only as of the date of the respective
registration statements (or such other date as stated therein) and not as of
the date of this Proxy Statement/Prospectus. If there are any inconsistencies
between the text of this Proxy Statement/Prospectus and the information
contained in Annex D, you should give precedence to the text of this Proxy
Statement/Prospectus.
114
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GLOSSARY
ADSL (Asymmetric Digital
Subscriber Line)........ A modem technology that increases the digital speed
of ordinary telephone lines by a substantial factor
over common modems.
ATM (Asynchronous
Transfer Mode).......... An information transfer standard that is one of a
general class of packet technologies that relay
traffic by way of an address contained within the
first five bytes of a standard fifty-three-byte
long packet or cell. The ATM format can be used by
many different information systems, including local
area networks, to deliver traffic at varying rates,
permitting a mix of voice, data and video
(multimedia).
Backbone................. A centralized high-speed network that connects
smaller, independent networks.
Bandwidth................ The relative range of analog frequencies or digital
signals that can be passed through a transmission
medium, such as glass fibers, without distortion.
The greater the bandwidth, the greater the
information carrying capacity.
CAP...................... Competitive Access Provider. A data and/or voice
service provider that competes with LECs. CAPs
typically offer regional service rather than
national service.
CIX...................... Commercial Internet Exchange Association. A non-
profit trade association of Internet access
providers that promotes and encourages development
of the public data communications internetworking
services industry and that operates a router at the
Digital Internet Exchange.
Client/server system..... An interconnected system of computers centered
around a server, such as minicomputer, which stores
data and applications and distributes them to user
stations.
Cloud.................... A network designed such that each of its nodes is
logically connected to every other node.
Code..................... The Internal Revenue Code of 1986, as amended.
Common Carrier........... A government-defined group of private companies
offering telecommunications services or facilities
to the general public on a non discriminatory
basis.
Communications Act....... The Communications Act of 1934, as amended.
DGCL..................... The General Corporation Law of the State of
Delaware.
Digital.................. Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission/switching technologies employ a
sequence of discrete, distinct pulses to represent
information, as opposed to the continuously
variable analog signal.
DS-1..................... A data communications line with transmission speeds
of up to 1.54 Mbps.
DS-3..................... A data communications line with transmission speeds
of up to 45 Mbps.
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DS-3 miles...............
A measure of the total capacity and length of a
transmission path, calculated as the capacity of
the transmission path in DS-3s multiplied by the
length of the path in miles.
Distributed computing.... The process by which data and applications are
distributed to minicomputers, workstations and
personal computers within a network rather than
maintained on a centralized mainframe.
Equal access............. The basis upon which customers of interexchange
carriers are able to obtain access to their Primary
Interexchange Carriers' (PIC) long distance
telephone network by dialing "1", thus eliminating
the need to dial additional digits and an
authorization code to obtain such access.
Exchange Act............. The Securities Exchange Act of 1934, as amended.
Extranet................. A network that enables two or more institutions to
privately share resources and communicate over the
Internet in their own virtual space. This
technology is typically used to enhance business-
to-business communications.
Firewall................. A gateway between two networks that buffers and
screens all information that passes between such
networks.
Frame Relay.............. A high-speed, data packet switching service used to
transmit data between computers. Frame Relay
supports data units of variable lengths at access
speeds ranging from 56 kilobits per second to 1.5
megabits per second. This service is well-suited
for connecting local area networks, but is not
presently well-suited for voice and video
applications due to the variable delays which can
occur. Frame Relay was designed to operate at high
speeds on modem fiber optic networks.
Gateway.................. Hardware and/or software that enables communication
between dissimilar systems.
Graphical user A means of communicating with a computer by
interface............... manipulating Icons and windows rather than using
text commands.
HSR Act.................. Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, 15 U.S.C. (S)18a.
Hosting.................. Housing and managing a user's website or
application.
HTML..................... HyperText Markup Language. The programming language
used to create World Wide Web pages.
Internetworking.......... The process of communicating between and among
networks.
Interexchange carrier.... A company providing inter-LATA or long distance
services between LATAs on an intrastate or
interstate basis.
Intranet................. A private network within an institution that uses
Internet software only for internal use. For
example, many companies have web servers that are
available only to employees. An intranet may simply
be a network.
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IP.......................
Internet protocol.
IP Address............... Internet Protocol Address. The address or
identification number of a host computer or other
intelligent device on the Internet.
ISDN..................... Integrated Services Digital Network. A digital
network that combines voice and digital network
services through a single medium, making it
possible to offer customers digital data services
as voice connections.
ISP...................... Internet Service Provider. An institution that
provides access to the Internet.
Java..................... A programming language intended to be used in
networked environments.
Kbps..................... Kilobits per second, which is a measurement of
speed for digital signal transmission expressed in
thousands of bits per second.
LAN...................... Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a
localized environment.
LATAs (Local Access and
Transport Areas)........ The approximately 200 geographic areas that define
the areas between which the RBOCs currently are
prohibited from providing long distance services.
Leased Line.............. A dedicated telecommunications line rented for use
along a predetermined route.
LEC...................... Local Exchange Carrier. A local telephone company
for a given geographic area. In return for being
given a monopoly over residential connections to
the telephone network, the LEC is subject to strict
regulation of the services it offers and rates it
may charge for those services. The 1996
Telecommunications Act formed two types of LECs:
Incumbent Local Exchange Carriers (ILEC), including
RBOCs, and Competitive Local Exchange Carriers
(CLEC).
Local loop............... The last mile or last several miles from an
Internet access provider's backbone to a customer's
phone or modem. Operation of the local loop is the
responsibility of the LEC.
MAE-East................. Metropolitan Area Ethernet. Network access peering
point located in Washington, D.C.
MAE-West................. Metropolitan Area Ethernet. Network access peering
point located in San Jose, California.
Mbps..................... Megabits per second. A measure of digital
information transmission rates. One megabit equals
1,000 kilobits.
Microwave System......... This term has the meaning stated on page of the
Proxy Statement/Prospectus.
NAP......................
Network access point. The peering points at which
major Internet access providers connect and
exchange Internet traffic.
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Nodes....................
An interlinked group of modems, routers and/or
other computer equipment, located in a particular
city or metropolitan area.
On-line services......... Commercial information services that offer a
computer user access through a modem to specified
information, entertainment and communications.
OEM...................... Original Equipment Manufacturer. An institution
that typically sells its product to other companies
or resellers for integration into systems.
Peering.................. The exchange of routing announcements between two
Internet access providers for the purpose of
ensuring that traffic from the first can reach all
customers of the second, and vice-versa. Peering
takes place predominantly at NAPs and MAEs.
Protocol................. A formal description of message formats and the
rules two or more machines must follow in order to
exchange such messages.
PUC...................... State public utilities commission.
RBOCs (Regional Bell
Operating Companies).... The seven local telephone companies (formerly part
of AT&T) established as a result of the AT&T
Divestiture Decree.
Regeneration/amplifier... Devices which automatically re-transmit or boost
signals on an out-bound circuit.
Reseller................. A carrier that does not own transmission
facilities, but obtains communications services
from another carrier for resale to the public.
Routing Table............ A list that provides the path to an IP address.
Router................... A device that receives and transmits data packets
between segments in a network or different
networks.
Securities Act........... The Securities Act of 1933, as amended.
Server................... A computer that offers a service to another
computer. In addition, such term means the software
which resides on the computer.
SONET (Synchronous
Optical Network An electronics and network architecture for
Technology)............. variable-bandwidth products which enables
transmission of voice, data and video (multimedia)
at very high speeds.
SONET ring............... A network architecture which provides for
instantaneous restoration of service in the event
of a fiber cut by automatically rerouting traffic
the other direction around the ring. This occurs so
rapidly (in 50 milliseconds) it is virtually
undetectable to the user.
Source code.............. Software that is in the format in which it was
originally programmed and has not been compiled or
interpreted into machine code to run on end users'
computers. Typically, software cannot be modified
once it is compiled.
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Switch...................
A device that selects the paths or circuits to be
used for transmission of information and
establishes a connection. Switching is the process
of interconnecting circuits to form a transmission
path between users and it also captures information
for billing purposes.
Telecommunications Act... The Telecommunications Act of 1996.
Tier 1 ISP............... Tier 1 Internet Service Provider. An ISP that
controls its own backbone, is directly connected to
the Internet and directly exchanges Internet
traffic with other Tier 1 ISPs. Other non-Tier 1
ISPs typically lease their connections and possibly
other services from Tier 1 providers.
VAR......................
Value Added Reseller. An institution that sells OEM
product to other companies.
WAN...................... Wide Area Network. A communications network which
connects geographically dispersed users.
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INDEX TO ICON CMT CORP. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of PricewaterhouseCoopers LLP.................................... F-2
Report of Ernst & Young LLP............................................. F-3
Consolidated Balance Sheet as of December 31, 1996 and 1997............. F-4
Consolidated Statement of Operations for the years ended December 31,
1995, 1996 and 1997.................................................... F-5
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1995, 1996 and 1997....................... F-6
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 1998 and
December 31, 1997...................................................... F-23
Condensed Consolidated Statement of Operations for the three months and
the nine months ended September 30, 1998 and September 30, 1997........ F-24
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998 and September 30, 1997.............................. F-25
Notes to Condensed Consolidated Financial Statements.................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Icon CMT Corp.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the consolidated statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Icon CMT
Corporation and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1995, 1996 and 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Frontier Media Group, Inc. as of and for the years ended December 31, 1996 and
1997, which statements reflect total assets of $1,264 and $1,723 at December
31, 1996 and 1997, respectively, and total revenues of $4,596 and $5,344 for
the years ended December 31, 1996 and 1997, respectively. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts
included for Frontier Media Group, Inc. as of and for the years ended December
31, 1996 and 1997, is based solely on the report of the other auditors. We
conducted our audits of the consolidated financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Stamford, Connecticut
March 6, 1998, except as to the acquisition and restatement described in Note
2, which is as of September 30, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Frontier Media Group, Inc.
We have audited the balance sheets of Frontier Media Group, Inc. as of
December 31, 1997 and 1996, and the related statements of income,
stockholders' equity, and cash flows for the years then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Frontier Media Group, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 14, 1998
F-3
<PAGE>
ICON CMT CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 722 $ 1,410
Accounts receivable, net of allowance for doubtful
accounts of $442, and $455, respectively............. 8,080 10,237
Unbilled costs and accrued earnings................... 265 1,119
Notes receivable...................................... 167 178
Inventories........................................... 92 104
Prepayments and other current assets.................. 752 1,379
Deferred financing costs.............................. -- 824
Deferred tax asset.................................... 430 --
---------- ----------
Total current assets................................. 10,508 15,251
Fixed assets, net...................................... 3,956 6,675
Other assets........................................... 92 231
---------- ----------
Total assets......................................... $ 14,556 $ 22,157
========== ==========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 6,808 $ 9,124
Accrued expenses...................................... 2,523 4,542
Short-term borrowings................................. 2,294 1,000
Deferred revenue...................................... 587 658
---------- ----------
Total current liabilities............................ 12,212 15,324
Deferred tax liability................................ 155 --
---------- ----------
Total liabilities.................................... 12,367 15,324
---------- ----------
Commitments (Note 14)..................................
Mandatorily redeemable 10% PIK Series B Convertible
Participating Preferred Stock ($.01 par value; 415,000
shares authorized, none issued and outstanding in
1996, 180,240 shares issued and outstanding in 1997)
(liquidation preference of $18,866 at December 31,
1997)................................................. -- 16,628
Mandatorily redeemable Series A Convertible Participat-
ing
Preferred Stock ($.01 par value; 450,000 shares
authorized, 422,607 issued and outstanding in 1996 and
1997) (liquidation preference of $10,401 and $10,993,
respectively)......................................... 9,881 10,601
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares
authorized).......................................... -- --
Common stock ($.001 par value; 50,000,000 shares au-
thorized, 7,273,779 shares issued and outstanding in
1996 and 1997)........................................ 8 8
Additional paid-in capital............................ 58 533
Accretion of mandatorily redeemable preferred stock... (89) (388)
Accumulated deficit................................... (7,669) (20,549)
---------- ----------
Total stockholders' deficit.......................... (7,692) (20,396)
---------- ----------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' deficit..................... $ 14,556 $ 22,157
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ICON CMT CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues, net:
Services:
Professional.................. $ 6,388 $ 11,166 $ 22,484
Communications................ 189 1,268 5,979
Media......................... 202 529 89
------------- ------------- --------------
Total services revenues..... 6,779 12,963 28,552
------------- ------------- --------------
Products....................... 21,424 29,741 23,769
------------- ------------- --------------
Total revenues, net......... 28,203 42,704 52,321
------------- ------------- --------------
Cost of revenues:
Services...................... 3,798 9,213 19,919
Products...................... 17,653 24,607 19,401
------------- ------------- --------------
Total cost of revenues...... 21,451 33,820 39,320
------------- ------------- --------------
Gross profit.................... 6,752 8,884 13,001
------------- ------------- --------------
Operating expenses:
General and administrative.... 2,863 7,645 11,826
Sales and marketing........... 3,782 7,184 10,849
Research and development...... 411 969 1,347
Depreciation and
amortization................. 241 493 1,024
------------- ------------- --------------
Total operating expenses.... 7,297 16,291 25,046
------------- ------------- --------------
Loss from operations............ (545) (7,407) (12,045)
------------- ------------- --------------
Other income (expense):
Interest income............... 16 126 111
Interest expense.............. (91) (93) (376)
------------- ------------- --------------
Total other income
(expense).................. (75) 33 (265)
------------- ------------- --------------
Loss before income taxes........ (620) (7,374) (12,310)
------------- ------------- --------------
Provision (benefit) for income
taxes.......................... (183) (210) 256
------------- ------------- --------------
Net loss........................ $ (437) $ (7,164) $ (12,566)
============= ============= ==============
Basic loss per share and diluted
loss per share................. $ (0.06) $ (1.06) $ (1.90)
============= ============= ==============
Weighted average shares
outstanding used for
basic loss per share and diluted
loss per share.................. 7,274 7,274 7,274
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ICON CMT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCRETION OF RETAINED TOTAL
COMMON STOCK ADDITIONAL MANDATORILY EARNINGS STOCKHOLDERS'
---------------- PAID-IN REDEEMABLE (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL PREFERRED STOCK DEFICIT) (DEFICIT)
--------- ------ ---------- --------------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1995................... 7,273,779 $ 8 $ 348 $ 395 $ 751
Issuance of
compensatory stock
options to employee... -- -- 133 -- 133
Distributions to
stockholders.......... -- -- (20) -- (20)
Net loss............... -- -- -- (437) (437)
--------- --- ------ -------- --------
BALANCE AT DECEMBER 31,
1995................... 7,273,779 8 461 (42) 427
Issuance of warrants in
connection with sale
of Series A
convertible
participating
preferred stock....... -- -- 166 -- 166
Accretion of
mandatorily redeemable
convertible preferred
stock to redemption
value................. -- -- (569) $ (89) -- (658)
Distributions to
stockholders.......... -- -- -- -- (463) (463)
Net loss............... -- -- -- -- (7,164) (7,164)
--------- --- ------ ----- -------- --------
BALANCE AT DECEMBER 31,
1996................... 7,273,779 8 58 (89) (7,669) (7,692)
Issuance of warrants in
connection with sale
of 10% PIK Series B
convertible
participating
preferred stock....... -- -- 2,362 -- -- 2,362
Expenses related to
issuance of 10% PIK
Series B convertible
participating
preferred stock....... -- -- (500) -- -- (500)
Accretion of
mandatorily redeemable
convertible preferred
stock to redemption
values................ -- -- (1,387) (299) -- (1,686)
Distributions to
stockholders.......... -- -- -- -- (314) (314)
Net loss............... -- -- -- -- (12,566) (12,566)
--------- --- ------ ----- -------- --------
BALANCE AT DECEMBER 31,
1997................... 7,273,779 $ 8 $ 533 $(388) $(20,549) $(20,396)
========= === ====== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ICON CMT CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (437) $(7,164) $(12,566)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 278 1,180 2,370
Deferred income taxes, net........................ (198) (62) 275
Noncash expenses.................................. 133 -- 20
Changes in assets and liabilities:
Accounts receivable............................... (2,234) (1,783) (2,157)
Unbilled costs and accrued earnings............... (33) (203) (854)
Inventories....................................... 223 (71) (12)
Prepayments and other current assets.............. (352) (402) (638)
Other assets...................................... (72) -- (14)
Accounts payable.................................. 797 3,201 2,316
Accrued expenses.................................. 833 744 2,019
Income taxes payable.............................. (316) -- --
Deferred revenue.................................. 295 145 71
------ ------- --------
Net cash used in operating activities........... (1,083) (4,415) (9,170)
------ ------- --------
Cash flows from investing activities:
Capital expenditures.............................. (1,022) (3,932) (5,089)
Investment in joint venture....................... -- -- (125)
------ ------- --------
Net cash used in investing activities........... (1,022) (3,932) (5,214)
------ ------- --------
Cash flows from financing activities:
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock........... -- 9,389 16,504
Proceeds from the issuance of short-term notes.... 3,000 2,194 7,750
Net repayments of short-term notes................ -- (3,000) (8,044)
Deferred financing costs.......................... -- -- (824)
Distributions and loans to stockholders........... (171) (359) (314)
------ ------- --------
Net cash provided by financing activities....... 2,829 8,224 15,072
------ ------- --------
Net increase (decrease) in cash..................... 724 (123) 688
Cash and cash equivalents at beginning of period.... 121 845 722
------ ------- --------
Cash and cash equivalents at end of period.......... $ 845 $ 722 $ 1,410
====== ======= ========
Cash paid (received) for:
Income taxes.................................... $ 461 $ (175) $ (22)
====== ======= ========
Interest........................................ $ 69 $ 93 $ 346
====== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS
Organization
Icon CMT Corp. (the "Company" or "Icon") was incorporated in February 1995
under the laws of the State of Delaware for the purpose of merging with
Integration Consortium, Inc. (the "Predecessor"), which was incorporated in
1991 under the laws of the State of New York. In July 1995, the stockholders
of the Predecessor exchanged their shares of the Predecessor for 6,545,454
shares of the common stock of Icon and the Predecessor became a wholly owned
subsidiary of Icon. A merger of Icon and the Predecessor was effected in
December 1995, and pursuant to the merger agreement, Icon was the surviving
entity. The share exchange and subsequent merger has been accounted for in a
manner similar to a pooling of interests.
Business
From inception through 1994, the Company was primarily engaged in the
design, marketing, sale, installation and on-going support of information
management systems and distribution of information over networks. Through
1994, the Company primarily generated revenue through the sales of hardware
and services to migrate its customers' networks to local client/server
environments and by managing, maintaining and expanding those networks.
During 1995, the Company began its transition to become an end-to-end
Internet solutions provider to corporate customers. The Company currently
derives its revenues from the following services and products: (i)
professional services including strategic planning and creative development,
custom application and website development and design, systems integration and
maintenance and support services, (ii) high quality Internet access and
related communications services such as web/server hosting and management and
(iii) product resales, including hardware and software, as a part of systems
design and integration.
2. ACQUISITION AND RESTATEMENT
On May 27, 1998, the Company acquired all of the issued and outstanding
shares of common stock of Frontier Media Group, Inc. ("Frontier") in exchange
for 728,325 shares of the Company's common stock. The acquisition has been
accounted for as a pooling of interests. Frontier is an interactive marketing
company that combines strategic planning, creative development and technical
implementation to assist its customers to manage relationships with their
customers and business partners. Frontier's deliverables include Internet,
Intranet, extranet, e-commerce, CD-ROM and touchscreen kiosk programs. The
Company issued approximately 0.26 shares of its common stock for each of
Frontier's 2,800,000 outstanding shares of common stock. The financial data
included in these financial statements has been restated to reflect the
acquisition of Frontier. There were no material transactions between the
Company and Frontier during the periods prior to the acquisition.
F-8
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of certain statement of operations data of the
separate companies for the periods prior to the acquisition:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues, net:
Icon........................................... $26,212 $38,108 $ 46,977
Frontier....................................... 1,991 4,596 5,344
------- ------- --------
$28,203 $42,704 $ 52,321
======= ======= ========
Net (loss) income:
Icon........................................... $ (440) $(8,038) $(12,997)
Frontier....................................... 3 874 431
------- ------- --------
$ (437) $(7,164) $(12,566)
======= ======= ========
</TABLE>
There were no significant adjustments to the net assets or results of
operations of Frontier for any of the periods presented to adopt the
accounting policies of the Company.
The Company incurred $1,094 of transaction and other costs associated with
the acquisition of Frontier. Such costs were expensed in 1998 upon
consummation of the acquisition.
3. LIQUIDITY
The Company has incurred significant operating losses for the years ended
December 31, 1996 and 1997. At December 31, 1996 and 1997 the Company had an
accumulated deficit of $7,669 and $20,549, respectively, and a working capital
deficit of $1,704 and $897, respectively. Such losses have resulted
principally from general and administrative and selling and marketing expenses
associated with the Company's expanded level of operations. The Company
expects that its cash and working capital requirements will continue to
increase as the Company's operations continue to expand. In order to fund
these efforts, the Company completed private placements of its mandatorily
redeemable Series A Convertible Participating Preferred Stock (the "Series A
Preferred") during 1996 (Note 8) and its mandatorily redeemable 10% PIK Series
B Convertible Participating Preferred Stock (the "Series B Preferred") during
1997. The Company utilized the net proceeds from these issuances for the
repayment of short-term debt and working capital, including marketing and
product line expansions. In addition, the Company has borrowed $1,000 under a
secured line of credit at December 31, 1997 (Note 7) to meet its working
capital requirements.
In February 1998, the Company completed an initial public offering of its
common stock and management believes that the net proceeds of such offering
will provide sufficient funding to meet the Company's planned business
objectives through December 31, 1998 (Note 15).
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and Frontier. All intercompany accounts and transactions have been
eliminated in consolidation.
F-9
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Services Revenue
Revenue from custom software development, database design, outsourcing and
corporate website production is recognized as the services are rendered or on
a percentage of completion basis for contracts requiring milestone
achievements prior to invoicing.
Revenue from communications services, such as Internet access, hosting
services, on-site maintenance, product enhancements and telephone support, is
recognized ratably over the period of the underlying agreement as the services
are provided, ranging from one to three years.
Revenue from sponsorships of digital publications is recognized ratably over
the period in which the sponsorship is displayed on a website or webzine
produced by the Company.
Unbilled costs and accrued earnings consist primarily of services performed
which were not billed at the end of the period due to specific contractual
terms established with certain customers.
Products Revenue
Revenue from the resale of products, which consist of high-end non-
proprietary network hardware and software products, is recognized upon
shipment to the customer when no significant vendor obligations exist and
collectibility is probable.
Deferred Revenue
Deferred revenue consists principally of billings in advance for services
not yet provided.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Inventories
Inventories, which consist principally of purchased computer hardware, are
stated at the lower of cost (determined on a first-in, first-out basis) or
market value.
Deferred Financing Costs
On October 16, 1997, the Board of Directors of the Company authorized
management to pursue an underwritten sale of shares of the Company's common
stock in an initial public offering (the "IPO") pursuant to the Securities Act
of 1933. In connection with the Company's proposed IPO, the Company has
incurred certain costs which have been deferred at December 31, 1997 (Note
15).
F-10
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Fixed Assets
Fixed assets are stated at cost. Depreciation and amortization are provided
on a straight-line basis over the estimated useful lives of the respective
assets, generally three to five years. Depreciation expense related to
equipment used solely for communications-related services is included in
services cost of revenues.
Research and Development
The Company charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities.
Deferred tax assets and liabilities reflect the tax rates expected to be in
effect for the years in which the differences are expected to reverse. A
valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
Effective May 27, 1998, in conjunction with its acquisition by the Company,
Frontier became subject to taxation as a "C Corporation". Prior to the
acquisition, the stockholders of Frontier had elected to be treated as an "S
Corporation" for Federal income tax purposes as provided for under section
1362(a) of the Internal Revenue Code. The election resulted in each Frontier
stockholder being responsible for their pro-rata share of Frontier's taxable
income. The amount of deferred income taxes resulting from the termination of
Frontier's S Corporation status was insignificant.
Frontier's policy, prior to its acquisition by the Company, had been to make
annual distributions to its stockholders to pay federal taxes based on their
share of allocable taxable income. Frontier's distributions to stockholders
for Federal taxes amounted to $20, $463 and $314 in 1995, 1996 and 1997,
respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform with their 1997
presentation.
Fair Value of Financial Instruments
The carrying value of accounts receivable, notes receivable, accounts
payable, accrued expenses and short-term borrowings approximate their fair
values due to the relatively short maturity of these instruments.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"), which requires the presentation of the components of
comprehensive income in a company's financial statements for reporting periods
beginning subsequent to December 15, 1997. Comprehensive income is defined as
the change in a company's equity during a financial reporting period from
transactions and other circumstances from nonowner sources (including
cumulative translation adjustments, minimum pension liabilities and unrealized
gains/losses on available-for-sale securities). The adoption of FAS 130 is not
expected to have a material impact on the Company's financial statements.
F-11
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure About Segments of an Enterprise and Related Information"
("FAS 131"), which requires that public business enterprises report certain
information about operating segments. It also requires that public business
enterprises report certain information about products and services, geographic
areas in which they operate and major customers. FAS 131 is effective for
fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
adoption of FAS 131 is not expected to have a material impact on the Company's
existing disclosures.
5. LOSS PER COMMON SHARE
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS") by all entities that have publicly traded common
stock or potential common stock (i.e., options, warrants, convertible
securities or contingent stock arrangements). Basic EPS is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period.
The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings.
All prior periods presented have been restated for the adoption of FAS 128.
The adoption of FAS 128 did not have a significant impact on the loss per
share of prior periods. The computations of basic loss per share and diluted
loss per share for the years ended December 31, 1995, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss................................ $ (437) $ (7,164) $ (12,566)
Accrued dividends on Series A Preferred
and
Series B Preferred..................... -- (542) (1,234)
---------- ---------- ----------
Loss available to common stockholders... $ (437) $ (7,706) $ (13,800)
========== ========== ==========
Weighted average shares outstanding used
for basic loss per share and diluted
loss per share......................... 7,273,779 7,273,779 7,273,779
Basic loss per share and diluted loss
per share.............................. $ (0.06) $ (1.06) $ (1.90)
========== ========== ==========
</TABLE>
At December 31, 1997, outstanding options to purchase 1,241,150 shares of
common stock, with exercise prices ranging from $6.02 to $14.27 have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 948,891 shares of common stock,
with exercise prices ranging from $0.01 to $6.02, were also antidilutive and
excluded from the computation of diluted loss per share at December 31, 1997.
Common shares issuable upon conversion of Series A Preferred and Series B
Preferred have also been excluded from the computation of diluted loss per
share at December 31, 1997 as they are antidilutive.
F-12
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. FIXED ASSETS
Fixed assets are comprised of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Computer equipment......................................... $ 5,013 $ 9,336
Furniture and fixtures..................................... 411 483
Vehicles................................................... 35 35
Leasehold improvements..................................... 130 824
------- -------
5,589 10,678
Less: accumulated depreciation and amortization............ (1,633) (4,003)
------- -------
$ 3,956 $ 6,675
======= =======
</TABLE>
7. NOTES PAYABLE
Secured Lines of Credit
On August 14, 1995, the Company obtained a secured line of credit with a
bank for $3,000 which expired on June 30, 1996. Borrowings under this line
were secured by certain assets of the Company. At December 31, 1995,
borrowings under this line amounted to $3,000. Interest was charged at the
bank's prime rate plus one percent, which was 9.5% at December 31, 1995.
Interest expense amounted to $78 and $25 in 1995 and 1996, respectively. This
line of credit was repaid in full on January 31, 1996.
On August 13, 1996, the Company obtained a secured line of credit with a
lending institution for $10,000 which expired on August 13, 1998. Such line
was renewed on August 13, 1998 and expires on August 13, 1999. Borrowings
under this line are secured by substantially all of the assets of the Company.
Borrowings under this line are limited to a specified percentage of qualifying
accounts receivable less outstanding obligations of the Company owed to the
lending institution including outstanding letters of credit. The payment of
cash dividends is prohibited under this secured line of credit. At December
31, 1996 and 1997, borrowings under this line amounted to $2,194 and $1,000,
respectively. Interest is payable monthly at an annual rate equal to the
lending institution's prime rate plus one percent, which was 9.25% and 9.50%
at December 31, 1996 and 1997, respectively. The rate adjusts on the first of
the month following any change. Interest expense amounted to $50 and $324 for
the years ended December 31, 1996 and 1997, respectively. The agreement
requires an annual commitment fee of approximately $28. At December 31, 1997,
amounts available under this secured line of credit were $4,143.
At December 31, 1997, irrevocable letters of credit of $1,000 were issued
under this agreement which are being maintained as security for performance
under long-term property lease agreements.
Frontier had a $600 secured line of credit which expired on May 30, 1998.
There were no outstanding borrowings under the line at December 31, 1997.
Borrowings under this line were limited to a specific percentage of Frontier's
qualifying receivables. The line was secured by substantially all assets of
Frontier. Interest was payable monthly at an annual rate equal to the prime
rate plus a quarter percent.
Bridge Financing
In March 1997, the Company obtained a $1,000 unsecured bridge loan which
bore interest at a rate of 10% per annum from a holder of the Series A
Preferred. The terms of the loan provided for a rate of interest of 10%
F-13
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
per annum through June 30, 1997 and 18% per annum from July 1, 1997, payable
monthly. The loan was payable upon demand by the holder at any time after the
earliest of the following to occur: (i) the closing of initial public offering
in the amount of $8,000 or greater, (ii) the closing of a private placement of
any class of the Company's capital stock equal to or exceeding $8,000, (iii) a
"Disposal Event" as defined by the loan agreement, or (iv) September 30, 1997.
The loan agreement also provided that upon completion of a public offering
or private placement equal to or exceeding $8,000, the holder of the loan had
the option to convert the outstanding principal amount of the note and accrued
and unpaid interest into the class of capital stock issued in the public or
private offering. In May 1997, the holder of the loan converted the loan plus
accrued interest thereon, in the amount of $20, into 10,200 shares of Series B
Preferred.
In further consideration of the loan, upon completion of the Series B
Preferred financing, the Company issued a warrant to the Series A Preferred
holder to purchase 41,511 shares of common stock at an initial exercise price
of $6.02 per share. The warrant is exercisable for a period of ten years from
the date of issuance. The fair value of the warrant, in the amount of $103,
has been recorded as additional paid-in capital.
8. COMMON STOCK AND CONVERTIBLE PARTICIPATING PREFERRED STOCK
Common Stock Split, Increase in Authorized Common Shares, Change to Par Value
of Common Stock, and Reverse Stock Split
Effective May 30, 1997, the Company implemented a six-for-one stock split
applicable to all issued and outstanding shares of the Company's common stock
and increased the number of authorized shares of common stock from 10,000,000
to 50,000,000. In addition, the par value of the Company's common stock was
changed from $.01 per share to $.001 per share.
In connection with the IPO, on October 16, 1997 the Company's Board of
Directors approved a 1-for-2.75 reverse stock split to be applicable to all
issued and outstanding shares of the Company's common stock, which split
became effective on December 15, 1997.
All common shares, stock options, warrants and related per share data,
reflected in the consolidated financial statements and notes thereto, have
been presented as if the stock split had occurred on January 1, 1995.
Series A Convertible Participating Preferred Stock
In January 1996, the Company issued 422,607 shares of Series A Preferred at
$23.33 per share providing gross proceeds of $9,859 and net proceeds, after
deducting expenses, of $9,389. Each share of Series A Preferred is convertible
at the option of the holder into the number of shares of common stock
determined by dividing $23.33 by the conversion price. The initial conversion
price was $10.70, which is subject to adjustment to the share price of any
security issuances at a per share price lower than $10.70 prior to the second
anniversary of the date of issuance of the Series A Preferred stock.
Subsequent to the second anniversary of the issuance of the Series A Preferred
the Series A shares are subject to weighted average anti-dilution provisions.
Upon issuance of the initial Series B Preferred on May 30, 1997 (see below),
the conversion price of the Series A Preferred was adjusted to $6.02 per
share. The Series A Preferred shares converted into common stock upon the
consummation of the Company's IPO.
F-14
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
If the Series A Preferred shares had not been converted upon the
consummation of the Company's IPO, then each holder, at their option, at any
time after the fifth anniversary of the date of issuance of the Series A
Preferred, could have sold such shares to the Company at a redemption price of
$23.33 per share plus a redemption premium equal to $1.40 per annum accruing
from the date of issuance to the redemption date, less any dividends paid
thereon prior to the redemption date and including the amount of any dividends
or other distributions declared but unpaid on the Series A Preferred. The
excess of the redemption value over the carrying value was recorded by
periodic charges to stockholders' equity through the earliest date at which
the Series A Preferred holders may require redemption of the Series A
Preferred.
The holders of Series A Preferred were entitled to vote on matters which
holders of common stock have the right to vote.
In connection with this transaction, the Company issued a warrant for the
purchase of 15,542 shares of the Company's common stock, at an initial
exercise price of $0.03 per share, as a placement fee to a financial advisor.
The fair value of the warrant in the amount of $166 has been recorded to
additional paid-in capital. The warrant is exercisable for a period of ten
years from the date of issuance.
10% PIK Series B Convertible Participating Preferred Stock
On May 30, 1997, the Company issued and sold 100,000 shares of the Series B
Preferred at $100.00 per share providing gross proceeds of $10,000 and net
proceeds, after deducting expenses, of $9,601. Subsequent to the initial
issuance, and prior to the first anniversary of the closing date, subject to
certain closing conditions, the Company had the option to issue and sell up to
an additional 50,000 shares to the original investors at a price per share of
$100.00. As of December 31, 1997, the Company had not exercised this option.
This option lapsed upon the closing of the IPO. In connection with this
transaction, the Company issued a warrant for the purchase of 838,199 shares
of the Company's common stock, at an initial exercise price of $6.02 per
share, to the original investors of the Series B Preferred. The warrant is
exercisable for a period of ten years from the date of issuance. The fair
value of the warrant, in the amount of $1,958, has been recorded as additional
paid-in capital.
The holders of the Series B Preferred had the right to convert such shares
into common stock at an initial conversion rate of $100.00 divided by a
conversion price of $6.02 per share. In the event the Company had exercised
its option to sell the additional 50,000 shares of Series B Preferred to the
original investors, the conversion price would have been amended to $4.51 per
share. Such shares converted into common stock upon the consummation of the
IPO.
If the Series B Preferred shares had not been converted upon the
consummation of the Company's IPO, then each holder, at their option, at any
time after the fifth anniversary of the date of issuance of the Series B
Preferred, could have sold such shares to the Company at a redemption amount,
and in the event of a liquidation of the Company the holders of the Series B
Preferred were entitled to a senior liquidation preference (each as defined).
An in-kind dividend accrued at an annual rate of 10%. The excess of
redemption value over carrying value, was recorded by periodic charges to
stockholders' equity through May 30, 2002, the earliest date the Series B
Preferred holders could have required redemption of the Series B Preferred.
The holders of Series B Preferred were entitled to participate equally per
share in any dividends to holders of common stock or the Series A Preferred in
excess of an annual rate of 10% and were entitled to vote on matters which
holders of common stock have the right to vote.
F-15
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Also in connection with the initial issuance of Series B Preferred, the
Company issued a warrant to a financial advisor for the purchase of 50,042
shares of common stock at an exercise price of $0.03 per share. The fair value
of the warrant, in the amount of $301, has been recorded to additional paid-in
capital.
Prior to the initial issuance of the Series B Preferred, the original Series
B Preferred investors advanced amounts to the Company in the form of bridge
loans totaling $5,750 bearing interest at an annual rate of 10%. Such advances
were repaid with interest in the amount of $16, upon the closing of the
initial issuance of the Series B Preferred.
During the period from June 1997 to December 1997, the Company issued and
sold an additional 70,040 shares of the Series B Preferred at $100.00 per
share, providing gross proceeds of $7,004 and net proceeds, after deducting
expenses, of $6,904.
9. TRANSACTIONS WITH RELATED PARTIES
On July 17, 1995, the three founders and principal stockholders of the
Company entered into an agreement whereby, among other things, each of these
stockholders agreed to grant to the other two stockholders the right of first
refusal to purchase any shares of the Company's common stock they propose to
sell on substantially the same terms as a potential third-party is offering
and, upon their death, the right to purchase any or all of their shares of
common stock of the Company at the fair market value on the date of death.
Upon consummation of the IPO, the agreement was terminated.
In August 1995, the Company made loans in the amount of $50 to each of its
three principal stockholders. The loans bear interest at a rate of 7% per
annum. Interest income from such loans amounted to $3, $10, and $11 for the
years ended December 31, 1995, 1996 and 1997, respectively. The loans, and
accrued interest thereon, are due on demand.
On December 4, 1995, the Company entered into employment agreements with
each of its three principal stockholders and founders, which expire five years
from the date of the agreement. The employment agreements, which provide for
base salaries and guaranteed bonuses, contain certain non-compete clauses
which are in effect for a period of one year following termination of
employment. In the event of termination of employment of any of such principal
stockholders following a change in control (as defined in the employment
agreements), that has not been approved by the Board of Directors, the
principal stockholders will receive a termination payment equal to 2.99 times
their respective base salary. On June 2, 1997, the employment agreements were
amended by the Company. As a result of these amendments, the expiration dates
of the agreements were extended to May 29, 2002.
10. STOCK OPTION, DEFINED CONTRIBUTION AND PROFIT SHARING PLANS
Stock Option Plans
In July 1995, the Company adopted a stock option plan (the "July Plan")
which was subsequently terminated by the Company's Board of Directors on
October 23, 1995. Pursuant to the July Plan, the Company granted certain
employees options to purchase 552,000 shares of the Company's common stock at
$0.27 per share. The Company recorded $133 of compensation expense during 1995
related to the grant of such options. As of the date of grant, 65,455 options
were exercisable, and none were exercised prior to October 23, 1995, the date
on which the July Plan and all options granted pursuant thereto were canceled.
On October 23, 1995, the Company implemented its 1995 Stock Option Plan (the
"Plan"), whereby incentive and nonqualified options to purchase up to
1,090,909 shares of the Company's common stock may be
F-16
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
granted to key employees, directors and consultants. On March 14, 1997, the
Board of Directors approved an amendment to the Plan whereby the aggregate
number of shares of common stock for which options may be granted under the
Plan was increased to 1,636,363. The exercise and vesting periods and the
exercise price for options granted under the Plan are determined by a
Committee of the Board of Directors. The Plan stipulates that no option may be
exercisable after ten years from the date of grant. The fair market value of
the Company's common stock is determined by the Board of Directors. Options
granted under the Plan generally vest in equal installments over periods
ranging from one to five years.
Under the Plan, each non-employee director, upon their initial appointment,
shall be granted options to purchase 3,273 shares of the Company's common
stock at a price equal to its fair market value at the date of grant.
Additionally, options to purchase 2,182 shares of the Company's common stock
at the then fair market value shall be granted immediately following each
annual meeting of the stockholders. These options are exercisable for five
years from the date of grant. No such options have yet been granted as of
December 31, 1997.
On June 18, 1997 outstanding employee stock options, with exercise prices
ranging from $6.42 to $14.27, to purchase 868,364 shares of common stock were
repriced at $6.02 per share, which was the fair market value as determined by
the Board of Directors at such date. Outstanding stock options to purchase
109,091 shares of common stock held by an employee who is also a principal
stockholder were also repriced on such date from $11.76 to $6.63 per share.
The following table summarizes activity regarding stock options for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
--------- ---------
<S> <C> <C>
Options outstanding at December 31, 1995................. 614,182 $ 6.42
Granted at $11.00-$11.74............................... 479,127 11.17
Forfeited at $6.42..................................... (148,364) 6.42
Forfeited at $11.00.................................... (35,127) 11.00
---------
Options outstanding at December 31, 1996 at:
$6.42.................................................. 465,818 6.42
$11.00-$11.74.......................................... 444,000 11.19
---------
Total options outstanding at December 31, 1996........... 909,818 8.74
Granted at $10.00-$14.27............................... 402,968 13.54
Cancelled at $6.42-$14.27.............................. (977,455) 9.92
Re-granted at $6.02-$6.63.............................. 977,455 6.09
Granted at $6.02....................................... 106,364 6.02
Forfeited at $6.02-$11.00.............................. (178,000) 9.13
---------
Options outstanding at December 31, 1997 at:
$10.00-$14.27.......................................... 173,877 12.58
$6.02-$6.63............................................ 1,067,273 6.08
---------
Total options outstanding at December 31, 1997........... 1,241,150 6.99
=========
Exercisable at December 31, 1997......................... 274,364 7.99
=========
Options available for grant at December 31, 1997......... 395,214
=========
Weighted average remaining contractual life for options
at:
$6.02-$6.63............................................ 2.3 years
$10.00-$14.27.......................................... 2.3 years
</TABLE>
F-17
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its Plan and other stock-based compensation issued to employees and directors.
During the years ended December 31, 1996 and 1997, the Company was not
required to recognize compensation expense for options granted to employees.
Had compensation cost for options grants to employees been determined based
upon the fair value at the date of grant for awards under the Plan consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," the Company's
net loss for the years ended December 31, 1995, 1996 and 1997 would have
increased by approximately $35, $529 and $561, respectively.
The fair values of options granted to employees during the years ended
December 31, 1995, 1996 and 1997 has been determined on the date of the
respective grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Dividend yield.................................. None None None
Weighted average risk free interest rate on date
of grant....................................... 6.3% 6.3% 6.3%
Forfeitures..................................... None None None
Expected life................................... 5 years 5 years 5 years
</TABLE>
Defined Contribution and Profit Sharing Plans
The Company has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code, for employees
meeting certain service requirements. Participants may contribute up to 10% of
their gross wages not to exceed, in any given year, a limitation set by
Internal Revenue Service regulations. The Plan provides for discretionary
contributions to be made by the Company as determined by the Company's Board
of Directors. The Company has not made any contributions to the Plan during
periods presented. The Company also has a profit sharing plan (the "PSP")
covering substantially all full-time employees. Contributions by the Company
to the PSP amounted to $28 in 1996. There were no contributions to the PSP
during 1995 and 1997.
In 1997, Frontier implemented a defined contribution 401(k) employee savings
plan (the "Frontier Plan") covering all full-time eligible employees, as
defined in such plan. The Frontier Plan provides for discretionary
contributions as determined by the Company's Board of Directors. For the year
ended December 31, 1997, contributions in the amount of $10 were made by the
Company to the Frontier Plan.
11. CONCENTRATION OF RISK AND CUSTOMER INFORMATION
A significant percentage (54%, 60% and 59% in the years ended December 31,
1995, 1996, and 1997, respectively) of the Company's revenues are derived from
third-party domestic financial services companies. Financial instruments which
potentially subject the Company to concentrations of credit risk are primarily
cash, accounts receivable, notes receivable, accounts payable and short-term
notes payable. The Company generally does not require collateral and the
majority of its trade receivables are unsecured. The Company is directly
affected by the well being of the financial services industry; however, the
Company does not believe significant credit risk exists at December 31, 1997.
The Company relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality required by the Company, are
available only from a limited number of sources. The Company is also dependent
upon local exchange carriers to provide telecommunications services to the
Company and its customers. There can be no assurance that the Company will be
able to obtain such services on the scale and within the time frames required
by the Company at an acceptable cost, or at all.
F-18
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The network-based information management systems sold by the Company are
provided primarily by one manufacturer for whom the Company serves as a value-
added reseller. Termination or loss of the Company's agreement with this
manufacturer may have a material adverse impact on the Company's financial
position and results of operations.
Revenues attributable to a single customer comprised 26%, 27% and 44% of the
Company's total net revenues in 1995, 1996 and 1997, respectively. Revenues
attributable to a second customer comprised 14% and 12% of the Company's total
net revenues in 1995 and 1996, respectively.
12. INCOME TAXES
The Company has incurred losses during 1995, 1996, and 1997. At December 31,
1997, the Company has available for federal income tax purposes net operating
loss carryforwards of approximately $19,182 that expire in 2011 through 2012.
At December 31, 1997 the Company also had research and development tax credit
carryforwards in the amount of $87 which expire in 2001. These losses and
credits are subject to limitation on future years utilization as a result of
certain ownership changes. In general, a change in ownership occurs when
greater than a 50 percent change in ownership takes place. The annual
utilization of net operating loss carryforwards generated prior to the change
in ownership is limited, in any one year, to a percentage of the fair value of
the Company at the time of the change in ownership.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $8,778 at December 31,
1997. The Company's operating plans anticipate taxable income in future
periods; however, such plans make significant assumptions which cannot be
reasonably assured including continued market acceptance of the Company's
products and services by customers. Therefore, in consideration of the
Company's accumulated losses and the uncertainty of its ability to utilize
this deferred tax benefit in the future, the Company has recorded a valuation
allowance in the amount of $8,778 at December 31, 1997 to offset the deferred
tax benefit amount.
Significant components of the current and noncurrent deferred tax assets at
December 31, 1996, and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves............................. $ 185 $ 197
Net operating loss....................................... 3,296 8,392
Accruals................................................. 245 135
Research and development credits......................... -- 87
Depreciation............................................. -- 4
------- -------
Total deferred tax assets.............................. 3,726 8,815
------- -------
Deferred tax liabilities:
Depreciation............................................. (117) --
Other.................................................... (38) (37)
------- -------
Total deferred tax liabilities......................... (155) (37)
------- -------
Net deferred tax asset..................................... 3,571 8,778
Less: valuation allowance.................................. (3,296) (8,778)
------- -------
Deferred tax asset, net.................................... $ 275 $ --
======= =======
</TABLE>
F-19
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Current taxes:
Federal....................................... -- $ (148) --
State and city................................ $ 15 -- --
-------- -------- -------
Total current taxes......................... 15 (148) --
-------- -------- -------
Deferred taxes:
Federal....................................... (114) (51) $ 174
State and city................................ (84) (11) 82
-------- -------- -------
Total deferred taxes........................ (198) (62) 256
-------- -------- -------
Provision (benefit) for income taxes............ $ (183) $ (210) $ 256
======== ======== =======
</TABLE>
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to loss before
taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Federal income tax statutory rate............ (35.0)% (35.0)% (35.0)%
State income taxes, net of federal tax
benefit..................................... (7.2) (9.6) (8.8)
Stock compensation........................... 7.4 -- --
Other nondeductible items.................... 5.3 1.8 2.9
Valuation allowance.......................... -- 40.0 43.0
------- ------- -------
Income tax rate as recorded.................. (29.5)% (2.8)% 2.1 %
======= ======= =======
</TABLE>
13. JOINT VENTURE
In November 1997, the Company entered into a Joint Venture agreement with
Teleway, a Japanese communications company, pursuant to which they agreed to
establish Icon-Teleway Internet Corporation ("ITIC"). ITIC will operate an
Internet solutions business to market end-to-end solutions to corporate
customers in Japan. Teleway and the Company will hold equity stakes of 52% and
48%, respectively, in ITIC, which was formally established during the first
quarter of 1998. The services provided ITIC will be similar to the services
provided by the Company in the United States, including communications
services, professional services and product resales.
Teleway has agreed to provide ITIC an initial loan of (Yen)1 billion
(approximately $7,900) and, upon request, to make an additional loan for up to
(Yen)500 million (approximately $4,000) to fund operations. In connection with
the creation of ITIC, the Company licensed to ITIC the exclusive right to
utilize the Company's intellectual property in Japan for a period of five
years.
As consideration of the rights granted to ITIC by the Company, ITIC will pay
royalties to the Company in an amount equal to 3.5% and 1.0% of net income
generated by ITIC through the leasing and sublicensing or sale of the
Company's services and communications products, respectively. Any royalties
received by the Company (up to a maximum of $8,000) will be contributed back
to ITIC as equity and will be matched by Teleway so that their respective
ownership interests will remain constant.
F-20
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In connection with the formation of ITIC the Company was required to make a
capital contribution of $125, which has been recorded in Other assets at
December 31, 1997.
14. COMMITMENTS
Leases
Future minimum payments under non-cancelable operating leases, which
primarily relate to network capacity and office space, with initial or
remaining terms of one year or more, consist of the following as of December
31, 1997:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998................................. $ 1,861
1999................................. 1,377
2000................................. 1,247
2001................................. 1,263
2002................................. 1,291
2003 and thereafter.................. 3,879
-------
$10,918
=======
</TABLE>
Rent expense amounted to $294, $676 and $913 for 1995, 1996 and 1997,
respectively.
Other
In February 1997, the Company entered into an agreement to purchase
interexchange telecommunications services through February 29, 2000. Pursuant
to this agreement the Company has a monthly commitment, before discounts, of
$50. These purchase commitments are not expected to exceed usage requirements
in any of the months covered by the agreement.
At December 31, 1997 trade payables and accrued expenses to a vendor in the
amount of $3,800 were secured by substantially all of the assets of the
Company. The security agreement is subordinated to the security interests of a
lending institution in connection with a secured line of credit (Note 7).
15. SUBSEQUENT EVENTS
Initial Public Offering
On February 18, 1998, the Company completed the IPO, selling 3,850,000
shares of common stock at a price of $10.00 per share providing gross proceeds
to the Company of $38,500 and net proceeds, after deducting underwriting
discounts, commissions and estimated offering expenses payable by the Company,
of approximately $34,505.
Upon completion of the offering, the shares available for grant under the
1995 Stock Option Plan were increased from 1,636,364 to 2,181,818.
Upon the closing of the IPO, all outstanding shares of Series A and Series B
Preferred Stock converted into an aggregate of 4,629,831 shares of common
stock.
F-21
<PAGE>
ICON CMT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Discontinued Product Line
In March 1998, the Company discontinued its media services product
offerings. The Company generated revenues of $202, $529 and $89 from the
selling of advertising space on its new media properties in 1995, 1996 and
1997, respectively. The cost of revenues associated with media services during
1995, 1996 and 1997 was $147, $1,504 and $2,316, respectively.
16. SUBSEQUENT EVENT--MERGER AGREEMENT (UNAUDITED)
On September 13, 1998, the Company agreed, subject to stockholders approval,
to merge with Qwest Communications International Inc. ("Qwest"). Under the
terms of the merger agreement each share of the outstanding common stock of
the Company will be exchanged for no less than 0.32 shares of Qwest common
stock (if Qwest's average per share stock price exceeds $37.50) or no more
than 0.4444 shares of Qwest common stock (if Qwest's average per share stock
price is less than $27.00). The final ratio of exchange will be determined by
dividing $12 by a 15-day volume weighted average of consecutive trading prices
of Qwest common stock prior to the three business days before the Company's
stockholders' meeting that will be called to approve the transaction. If the
merger is terminated prior to consummation the Company will be required, under
certain circumstances, to pay a $7,000 termination fee.
Pursuant to the merger agreement the Company and Qwest have agreed to enter
into a credit facility, maturing January 31, 2000, whereby Qwest will lend the
Company up to an aggregate of $15,000 to fund working capital and for other
corporate purposes. In connection with the credit facility, the Company has
issued to Qwest ten year warrants to purchase an aggregate of 750,000 shares
of the Company's common stock. The exercise price of the warrants is $12.00
per share. The Company's three founders and principal stockholders entered
into agreements with Qwest to vote to approve the merger so long as a superior
proposal has not been accepted by the Company's Board of Directors and to
grant Qwest an option on their shares.
Also, pursuant to the merger agreement, the Company entered into a private
line service agreement and related master collocation license agreement for
the use of certain of Qwest's communications related facilities.
On September 15, 1998, a class action complaint was filed against the
Company, its directors and Qwest. The complaint alleges, among other things,
that the members of the Company's Board of Directors violated their fiduciary
duties by failing to auction the Company or to seek other potential bidders.
The Company considers the action to be without merit and intends to vigorously
defend the action.
F-22
<PAGE>
ICON CMT CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 10,026 $ 1,410
Accounts receivable, net of allowance of $523 and
$455, respectively............................... 11,926 10,237
Unbilled costs and accrued revenue................ 1,743 1,119
Inventories....................................... 851 104
Prepaid expenses and other current assets......... 2,385 2,381
-------- --------
Total current assets............................ 26,931 15,251
Fixed assets, net................................... 14,049 6,675
Other noncurrent assets............................. 108 231
-------- --------
Total assets.................................... $ 41,088 $ 22,157
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 11,178 $ 9,124
Accrued expenses.................................. 4,956 4,542
Deferred revenue.................................. 1,368 658
Note payable...................................... -- 1,000
-------- --------
Total current liabilities....................... 17,502 15,324
Long term obligations............................... 128 --
-------- --------
Total liabilities............................... 17,630 15,324
-------- --------
Mandatorily Redeemable 10% PIK Series B Convertible
Participating Preferred Stock ($.01 par value,
415,000 shares
authorized, none issued and outstanding at
September 30, 1998, 180,240 shares issued and
outstanding at December 31, 1997).................. -- 16,628
Mandatorily Redeemable Series A Convertible
Participating Preferred Stock ($.01 par value,
450,000 shares authorized, none issued and
outstanding at September 30, 1998, 422,607 shares
issued and outstanding at December 31, 1997)....... -- 10,601
Stockholders' equity:
Preferred stock ($.01 par value; 1,000,000 shares
authorized)...................................... -- --
Common stock ($.001 par value; 50,000,000 shares
authorized, 15,884,378 and 7,273,779 shares
issued and outstanding, respectively)............ 16 8
Additional paid-in-capital........................ 62,537 533
Accretion of mandatorily redeemable preferred
stock............................................ -- (388)
Accumulated deficit............................... (39,095) (20,549)
-------- --------
Total stockholders' equity (deficit)............. 23,458 (20,396)
-------- --------
Total liabilities, mandatorily redeemable
convertible
preferred stock and stockholders' equity....... $ 41,088 $ 22,157
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
ICON CMT CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE THREE MONTHS
MONTHS ENDED SEPTEMBER
ENDED SEPTEMBER 30, 30,
-------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Revenues, net
Services:
Professional...................... $ 9,249 $ 6,108 $ 24,996 $15,948
Communications.................... 3,812 1,760 9,875 3,931
Media............................. -- -- 14 77
--------- --------- -------- -------
Total services revenues......... 13,061 7,868 34,885 19,956
--------- --------- -------- -------
Products............................ 7,577 4,626 24,104 14,306
--------- --------- -------- -------
Total revenues, net............... 20,638 12,494 58,989 34,262
--------- --------- -------- -------
Cost of revenues:
Services............................ 9,727 5,560 24,878 13,651
Products............................ 6,723 3,771 21,059 11,676
--------- --------- -------- -------
Total costs of revenues........... 16,450 9,331 45,937 25,327
--------- --------- -------- -------
Gross profit 4,188 3,163 13,052 8,935
--------- --------- -------- -------
Operating expenses:
General and administrative.......... 5,754 2,814 14,509 8,227
Sales and marketing................. 3,912 2,814 12,511 7,351
Research and development............ 445 361 1,612 920
Depreciation and amortization....... 482 220 1,279 633
Special transaction related
charges............................ 827 -- 1,921 --
--------- --------- -------- -------
Total operating expenses.......... 11,420 6,209 31,832 17,131
--------- --------- -------- -------
Loss from operations.................. (7,232) (3,046) (18,780) (8,196)
--------- --------- -------- -------
Other income (expense):
Interest income..................... 194 45 680 68
Interest expense.................... (11) (60) (68) (363)
Other, net.......................... -- -- (125) --
--------- --------- -------- -------
Total other income (expense)...... 183 (15) 487 (295)
--------- --------- -------- -------
Loss before income taxes.............. (7,049) (3,061) (18,293) (8,491)
Provision for income taxes............ -- -- -- 256
--------- --------- -------- -------
Net loss.............................. $ (7,049) $ (3,061) $(18,293) $(8,747)
========= ========= ======== =======
Basic and diluted loss per share...... $ (0.44) $ (0.48) $ (1.28) $ (1.31)
========= ========= ======== =======
Weighted average shares outstanding
used for
basic and diluted loss per share..... 15,882 7,274 14,478 7,274
========= ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
ICON CMT CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Loss............................................... $ (18,293) $ (8,747)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization......................... 3,288 1,516
Deferred taxes and other.............................. -- 295
Changes in assets and liabilities, net................. 80 (1,336)
---------- ---------
Net cash used in operating activities............... (14,925) (8,272)
---------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (10,503) (2,773)
Other................................................. 125 --
---------- ---------
Net cash used in investing activities............... (10,378) (2,773)
---------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock............ 34,337 --
Net proceeds from exercise of stock options........... 834 --
Borrowings of short-term notes........................ 1,772 7,323
Repayments of short-term notes........................ (2,772) (8,617)
Net proceeds from issuance of preferred stock......... -- 16,508
Other................................................. (252) (110)
---------- ---------
Net cash provided by financing activities........... 33,919 15,104
---------- ---------
Net increase in cash.................................... 8,616 4,059
Cash and cash equivalents at beginning of period........ 1,410 722
---------- ---------
Cash and cash equivalents at end of period.............. $ 10,026 $ 4,781
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
ICON CMT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for the three and nine month
periods ended September 30, 1998 and 1997 have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Annual Report on Form 10-K of Icon CMT Corp. ("Icon" or the
"Company") for the year ended December 31, 1997.
2. INITIAL PUBLIC OFFERING
On February 18, 1998, the Company completed its initial public offering (the
"IPO"), selling 3,850,000 shares of common stock at a price of $10.00 per
share, providing gross proceeds to the Company of $38,500 and net proceeds,
after deducting underwriting discounts, commissions and estimated offering
expenses payable by the Company, of approximately $34,337.
Upon the closing of the IPO, all outstanding shares of the Company's Series
A and Series B Preferred Stock converted into an aggregate of 4,629,831 shares
of common stock.
3. DISCONTINUED PRODUCT LINE
In March 1998, the Company discontinued its media services product
offerings. The Company generated revenues of $14 and $77 from selling
advertising space on its media properties for the nine months ended September
30, 1998 and 1997, respectively. The cost of revenues associated with media
services for the three months ended September 30, 1997 and the nine months
ended September 30, 1998 and 1997 was $669, $548 and $1,723, respectively.
4. ACQUISITION OF FRONTIER MEDIA GROUP, INC.
On May 27, 1998, the Company acquired all of the issued and outstanding
shares of common stock of Frontier Media Group, Inc., in exchange for 728,325
shares of the Company's common stock. For accounting purposes, the acquisition
has been accounted for using the pooling of interests method and prior periods
have been restated to include the results of Frontier on a comparable basis.
In connection with the acquisition of Frontier, the Company accrued $1,094 of
transaction and other costs during the second quarter of 1998 associated with
the business combination.
5. LOSS PER COMMON SHARE
Effective December 31, 1997, the Company adopted Financial Accounting
Standard No. 128, "Earnings per Share" ("FAS 128"), which requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings
per share ("Diluted EPS") by all entities that have publicly traded common
stock or potential common stock (i.e., options, warrants, convertible
securities or contingent stock arrangements). Basic EPS is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period.
The computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings.
F-26
<PAGE>
ICON CMT CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The computation of basic and diluted loss per share for the three and nine
months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net Loss..................... $ (7,049) $ (3,061) $ (18,293) $ (8,747)
Accrued dividends on Series A
Preferred and Series B
Preferred Stock............. -- (423) (202) (811)
----------- ---------- ----------- ----------
Loss available to common
stockholders................ $ (7,049) $ (3,484) $ (18,495) $ (9,558)
=========== ========== =========== ==========
Weighted average shares
outstanding used
for basic and diluted loss
per share................... 15,882,000 7,274,000 14,478,000 7,274,000
Basic and diluted loss per
share....................... $ (0.44) $ (0.48) $ (1.28) $ (1.31)
=========== ========== =========== ==========
</TABLE>
At September 30, 1998, outstanding options to purchase 1,474,505 shares of
common stock, with exercise prices ranging from $6.02 to $18.50 have been
excluded from the computations of diluted loss per share as they are
antidilutive. At September 30, 1998, outstanding warrants to purchase
1,683,350 shares of common stock, with exercise prices ranging from $0.01 to
$12.00, were also antidilutive and excluded from the computations of diluted
loss per share .
6. MERGER AGREEMENT WITH QWEST COMMUNICATIONS INTERNATIONAL INC.
On September 13, 1998, the Company agreed, subject to stockholders and
regulatory approval, to merge with Qwest Communications International Inc.
("Qwest"). Under the terms of the merger agreement, each share of the
outstanding common stock of the Company will be exchanged for no less than
0.32 shares of Qwest common stock (if Qwest's average per share stock price
exceeds $37.50) or no more than 0.4444 shares of Qwest common stock (if
Qwest's average per share stock price is less than $27.00). The final ratio of
exchange will be determined by dividing $12 by a 15-day volume weighted
average of consecutive trading prices of Qwest common stock prior to the three
business days before the Company's stockholders meeting that will be called to
approve the transaction. If the merger is terminated prior to consummation the
Company will be required, under certain circumstances, to pay a $7,000
termination fee.
Pursuant to the merger agreement, on September 28, 1998, the Company and
Qwest entered into a credit facility, maturing January 31, 2000, whereby Qwest
will lend the Company, commencing January 31, 1999, up to an aggregate of
$15,000 to fund working capital and for other corporate purposes. In
connection with the credit facility, the Company has issued to Qwest warrants
to purchase an aggregate of 750,000 shares of the Company's common stock. The
exercise price of the warrants is $12.00 per share. In connection with the
merger agreement, the Company's three founders and principal stockholders
entered into agreements with Qwest to vote to approve the merger so long as a
"superior proposal" (as defined in the merger agreement) has not been accepted
by the Company's Board of Directors, and to grant Qwest an option to purchase
their shares at $12.00 per share.
Also, pursuant to the merger agreement, the Company entered into a private
line service agreement and related master collocation license agreement for
the use of certain of Qwest's communications related facilities.
In connection with the merger agreement the Company has incurred $827
through September 30, 1998 of transaction related costs.
On September 15, 1998, a putative class action complaint was filed against
the Company, its directors and Qwest. The complaint alleges, among other
things, that the members of the Company's Board of Directors violated their
fiduciary duties by failing to auction the Company or to seek other potential
bidders. The Company considers the action to be without merit, intends to
vigorously defend the action and believes that the outcome will not have a
material adverse effect on the operations or the financial position of the
Company.
F-27
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 13, 1998
AMONG
ICON CMT CORP.,
QWEST COMMUNICATIONS INTERNATIONAL INC.
AND
QWEST 1998-I ACQUISITION CORP.
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
<C> <S> <C>
THE TRANSACTIONS......................................... A-6
Section 1.1 The Merger............................................... A-6
Section 1.2 Qwest/Principal Stockholders Transactions................ A-11
Section 1.3 Qwest Credit Transactions................................ A-12
Section 1.4 Qwest Private Line Service Agreement..................... A-12
ARTICLE II
CLOSING.................................................. A-12
Section 2.1 Time of Closing.......................................... A-12
Section 2.2 Location of Closing...................................... A-12
ARTICLE III
CONDITIONS OF CLOSING.................................... A-12
Section 3.1 Conditions Precedent to Closing.......................... A-12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............ A-14
Section 4.1 Corporate Existence and Power............................ A-14
Section 4.2 Authorization; Contravention............................. A-15
Section 4.3 Approvals................................................ A-15
Section 4.4 Binding Effect........................................... A-15
Section 4.5 Financial Information.................................... A-15
Section 4.6 Absence of Certain Changes or Events..................... A-17
Section 4.7 Taxes.................................................... A-18
Section 4.8 Undisclosed Liabilities.................................. A-19
Section 4.9 Litigation............................................... A-19
Section 4.10 Compliance with Regulations.............................. A-20
Section 4.11 Licenses................................................. A-20
Section 4.12 Employee Matters......................................... A-20
Section 4.13 Capitalization........................................... A-24
Section 4.14 Subsidiaries............................................. A-25
Section 4.15 Property................................................. A-26
Section 4.16 Proprietary Rights....................................... A-26
Section 4.17 Insurance................................................ A-27
Section 4.18 Environmental Matters.................................... A-27
Section 4.19 Books and Records........................................ A-28
Section 4.20 Material Contracts....................................... A-28
Section 4.21 Transactions with Affiliates............................. A-29
Section 4.22 SEC Documents............................................ A-30
Proxy Statement/Prospectus; Registration Statement; Other
Section 4.23 Information.............................................. A-30
Section 4.24 Company Board Approval................................... A-30
Section 4.25 Required Vote............................................ A-31
Section 4.26 Business Combination Transactions........................ A-31
Section 4.27 Fees for Financial Advisors, Brokers and Finders......... A-31
Section 4.28 Ownership of Qwest Common Stock.......................... A-31
Section 4.29 Continuing Representations and Warranties................ A-31
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
ARTICLE V
<C> <S> <C>
REPRESENTATIONS AND WARRANTIES OF QWEST AND QWEST
SUBSIDIARY............................................... A-32
Section 5.1 Corporate Existence and Power............................ A-32
Section 5.2 Authorization; Contravention............................. A-32
Section 5.3 Approvals................................................ A-32
Section 5.4 Binding Effect........................................... A-32
Section 5.5 Financial Information.................................... A-32
Section 5.6 Absence of Certain Changes or Events..................... A-33
Section 5.7 Litigation............................................... A-33
Section 5.8 Compliance with Regulations.............................. A-33
Section 5.9 Capitalization........................................... A-34
Section 5.10 SEC Documents............................................ A-34
Proxy/Statement/Prospectus; Registration Statement; Other
Section 5.11 Information.............................................. A-34
Section 5.12 Ownership of Company Common Stock........................ A-35
Section 5.13 Continuing Representations and Warranties................ A-35
ARTICLE VI
COVENANTS OF THE PARTIES................................. A-35
Section 6.1 Covenants of the Parties................................. A-35
Section 6.2 Proxy Statement/Prospectus; Registration Statement....... A-37
Section 6.3 Letters of Accountants................................... A-38
ARTICLE VII
ADDITIONAL COVENANTS OF THE COMPANY...................... A-38
Section 7.1 Affirmative Covenants of the Company..................... A-38
Section 7.2 Negative Covenants of the Company........................ A-41
ARTICLE VIII
ADDITIONAL COVENANTS OF QWEST............................ A-46
Section 8.1 NASDAQ Listing........................................... A-46
Section 8.2 Directors' and Officers' Insurance; Indemnification...... A-46
Section 8.3 Employee Benefits Matters................................ A-47
Section 8.4 Access to Information.................................... A-47
ARTICLE IX
TERMINATION.............................................. A-48
Section 9.1 Termination.............................................. A-48
Section 9.2 Costs, Expenses and Fees................................. A-49
ARTICLE X
MISCELLANEOUS............................................ A-50
Section 10.1 Notices.................................................. A-50
Section 10.2 No Waivers; Remedies; Specific Performance............... A-50
Section 10.3 Amendments, Etc.......................................... A-51
Section 10.4 Successors and Assigns; Third Party Beneficiaries........ A-51
Section 10.5 Accounting Terms and Determinations...................... A-51
Section 10.6 Governing Law............................................ A-51
Section 10.7 Counterparts; Effectiveness.............................. A-51
Section 10.8 Severability of Provisions............................... A-51
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 10.9 Headings and References................................... A-51
Section 10.10 Entire Agreement.......................................... A-52
Section 10.11 Survival.................................................. A-52
Section 10.12 Exclusive Jurisdiction.................................... A-52
Section 10.13 Waiver of Jury Trial...................................... A-52
Section 10.14 Affiliate................................................. A-52
Section 10.15 Non-Recourse.............................................. A-52
</TABLE>
A-4
<PAGE>
ANNEX
<TABLE>
<CAPTION>
<C> <S> <C>
Annex 1 -- Definitions...................................... A-55
EXHIBITS
Exhibit A -- Form of Option Agreement......................... A-65
Exhibit B -- Form of Voting Agreement and Proxy............... A-76
Exhibit C -- Form of Stockholder Agreement.................... A-84
Exhibit D -- Term Sheet....................................... A-90
Exhibit E -- Form of Warrants................................. A-93
Exhibit F -- Form of Registration Rights Agreement............ A-107
Exhibit 3.1(j)(1) -- Form of Qwest Tax Representation Letter.......... A-122
Exhibit 3.1(j)(2) -- Form of Company Tax Representation Letter........ A-125
Exhibit 3.1(j)(3) -- Form of Tax Opinion.............................. A-128
-- Form of U.S. Real Property Interest
Exhibit 3.1(k)(7) Certification....................................... A-130
-- Form of Affiliate Letter for Affiliates of the
Exhibit 3.1(l) Company............................................. A-131
</TABLE>
A-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of September 13, 1998 among ICON CMT
Corp., a Delaware corporation (together with its successors and assigns, the
"Company"), Qwest Communications International Inc., a Delaware corporation
(together with its successors and assigns, "Qwest"), and Qwest 1998-I
Acquisition Corp., a Delaware corporation (together with its successors and
assigns, "Qwest Subsidiary").
Terms not otherwise defined in this Agreement have the meanings stated in
Annex 1 attached hereto.
RECITALS
A. The respective Boards of Directors of the Company, Qwest and Qwest
Subsidiary have approved and have declared advisable the merger of Qwest
Subsidiary with and into the Company (the "Merger"), upon the terms and
subject to the conditions set forth in this Agreement, whereby each issued and
outstanding share of common stock, par value $.001 per share, of the Company
(the "Company Common Stock") not owned by the Company, Qwest, Qwest Subsidiary
or their respective Wholly-Owned Subsidiaries will be converted into the right
to receive shares of common stock, par value $.01 per share, of Qwest (the
"Qwest Common Stock") in accordance with the provisions of this Agreement, and
have determined that the Merger and the other transactions contemplated by
this Agreement are consistent with, and in furtherance of, their respective
business strategies and goals.
B. The parties desire to make certain representations, warranties, covenants
and agreements in connection with the Merger and also to prescribe various
conditions to the Merger.
C. For federal income tax purposes, the parties intend that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
AGREEMENT
The parties agree as follows:
ARTICLE I
The Transactions
Section 1.1 The Merger.
(a) Merger. Subject to the terms and conditions set forth in this Agreement,
on the Closing Date the Company and Qwest Subsidiary shall file a certificate
of merger (the "Certificate of Merger") with the Secretary of State of the
State of Delaware, and make all other filings or recordings required by the
DGCL to effect the Merger. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of State of the
State of Delaware or at such later time as is specified in the Certificate of
Merger (the "Effective Time"). At the Effective Time:
(1) Qwest Subsidiary shall be merged with and into the Company in
accordance with the DGCL, whereupon (A) the separate existence of Qwest
Subsidiary shall cease, (B) the Company shall be the surviving corporation
(together with its successors and assigns, the "Surviving Corporation"),
having all the rights, privileges and powers and being subject to all of
the restrictions, disabilities and duties of the Company and Qwest
Subsidiary, all as provided in the DGCL, (C) the bylaws of Qwest Subsidiary
as in effect immediately prior to the Merger shall be the bylaws of the
Surviving Corporation, (D) the certificate of incorporation of Qwest
Subsidiary as in effect immediately prior to the Merger shall be the
certificate of incorporation of the Surviving Corporation, except that
Article I of the certificate of incorporation of the
A-6
<PAGE>
Surviving Corporation shall be amended to read in its entirety as follows:
"The name of this Corporation is "Icon CMT Corp."' and (E) the directors
and officers of Qwest Subsidiary, in each case at the Effective Time,
shall, from and after the Effective Time, be the initial directors and
initial officers, respectively, of the Surviving Corporation until their
successors shall have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the
certificate of incorporation and bylaws of the Surviving Corporation;
(2) each outstanding share of Company Common Stock shall cease to be
outstanding and, subject to the exceptions in Sections 1.1(a)(4), shall be
converted into the right to receive that number of shares of Qwest Common
Stock equal to the Exchange Ratio (as defined below) (the "Merger
Consideration"). The "Exchange Ratio" is determined as follows:
(a) if the Average Market Price (as defined below) is equal to a
price that is not more than $37.50 or less than $27.00, the Exchange
Ratio shall be equal to (x) $12.00 divided by (y) the Average Market
Price;
(b) if the Average Market Price is more than $37.50, the Exchange
Ratio shall be equal to 0.3200; and
(c) if the Average Market Price is less than $27.00, the Exchange
Ratio shall be equal to 0.4444.
The "Average Market Price" means the average (rounded to the nearest
1/10,000) of the daily volume weighted averages (rounded to the nearest
1/10,000) of the trading prices of Qwest Common Stock on the NASDAQ as
reported by Bloomberg Financial Markets (or such other source as the
parties shall agree in writing), for each of the 15 consecutive trading
days ending on the trading day that is three Business Days before the date
of the Company Stockholder Meeting;
(3) the stock transfer books of the Company shall be closed and there
shall be no further registration of transfers of shares of Company Common
Stock on the records of the Company;
(4) any shares of Company Common Stock held by the Company, Qwest, Qwest
Subsidiary or their respective Wholly-Owned Subsidiaries shall be cancelled
and no consideration shall be delivered in exchange therefor; and
(5) each outstanding share of common stock of Qwest Subsidiary shall be
converted into and exchangeable for one share (or such greater number of
shares as Qwest shall determine before the Effective Time) of common stock
of the Surviving Corporation.
(b) No Further Ownership Rights in Company Common Stock. From and after the
Effective Time, holders of a certificate or certificates that immediately
before the Effective Time represented shares of Company Common Stock (the
"Certificates") shall have no right to vote or to receive any dividends or
other distributions with respect to any shares of Company Common Stock that
were theretofore represented by such Certificates, other than any dividends or
other distributions payable to holders of record as of a date prior to the
Effective Time, and shall have no other rights in respect thereof other than
as provided herein or by law. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be cancelled and exchanged
for Merger Consideration as provided in Section 1.1(d). Until surrendered in
accordance with the provisions of Section 1.1(d), each Certificate (other than
Certificates representing shares of Company Common Stock held by any of the
Company, Qwest, Qwest Subsidiary and their respective Wholly-Owned
Subsidiaries) shall represent for all purposes only the right to receive (1)
certificates representing the number of whole shares of Qwest Common Stock
into which such shares shall have been converted pursuant to Section 1.1(a)
(the "Qwest Certificates"), without interest, (2) certain dividends and other
distributions in accordance with Section 1.1(e), without interest, and (3)
cash in lieu of fractional shares of Qwest Common Stock in accordance with
Section 1.1(f), without interest. Holders of unsurrendered Certificates shall
have no right to vote or consent with respect to shares of Qwest Common Stock
exchangeable therefor.
(c) Exchange Agent. Prior to the Effective Time, Qwest Subsidiary shall or,
in the event Qwest Subsidiary shall fail to do so, Qwest shall (1) designate a
bank or trust company to act as exchange agent in the Merger (the
A-7
<PAGE>
"Exchange Agent") and shall enter into a mutually acceptable agreement with
the Exchange Agent pursuant to which, after the Effective Time, the Exchange
Agent will distribute the Merger Consideration on a timely basis and (2)
according to the terms of the agreement with Exchange Agent, deposit or cause
to be deposited with the Exchange Agent as of the Effective Time, for the
benefit of the holders of shares of Company Common Stock, for exchange in
accordance with this Section 1.1, through the Exchange Agent, Qwest
Certificates representing the number of whole shares of Qwest Common Stock
issuable pursuant to Section 1.1(a) in exchange for outstanding shares of
Company Common Stock. Such shares of Qwest Common Stock, together with any
dividends or distributions with respect thereto with a record date after the
Effective Time, any Excess Shares and any cash (including cash proceeds from
the sale of the Excess Shares) payable in lieu of any fractional shares of
Qwest Common Stock are referred to as the "Exchange Fund."
(d) Exchange Procedures. As soon as practicable after the Effective Time,
the Exchange Agent shall be instructed to mail to each record holder (other
than the Company, Qwest, Qwest Subsidiary and their respective Wholly-Owned
Subsidiaries) of a Certificate or Certificates a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss shall
pass, only upon proper delivery of the Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender to the Exchange Agent of
a Certificate, together with such letter of transmittal duly executed and
completed in accordance with the instructions thereon, the holder of such
Certificate shall be entitled to receive in exchange therefor (1) a Qwest
Certificate representing that number of whole shares of Qwest Common Stock
which such holder has the right to receive pursuant to the provisions of
Section 1.1(a), (2) certain dividends or other distributions in accordance
with Section 1.1(e) and (3) cash in lieu of any fractional share in accordance
with Section 1.1(f), and such Certificate shall forthwith be cancelled. No
interest shall be paid or accrued on the Merger Consideration, on any such
dividend or other distribution or on cash payable in lieu of any fractional
share of Qwest Common Stock. All distributions to holders of Certificates
shall be subject to any applicable federal, state, local and foreign tax
withholding, and such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of Certificates in respect of
which such deduction and withholding was made. If the Merger Consideration is
to be distributed to a person other than the person in whose name the
Certificate surrendered is registered, it shall be a condition of such
distribution that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer (including signature guarantees, if
required by the Surviving Corporation in its sole discretion) and that the
person requesting such distribution shall pay any transfer or other taxes
required by reason of such distribution to a person other than the registered
holder of the Certificate surrendered or, in the alternative, establish to the
satisfaction of the Qwest Subsidiary that such tax has been paid or is not
applicable. The Surviving Corporation shall pay all charges and expenses,
including those of the Exchange Agent, in connection with the distribution of
the Merger Consideration.
(e) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Qwest Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Qwest Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 1.1(f), and all such dividends, other distributions and
cash in lieu of fractional shares of Qwest Common Stock shall be paid such
dividends, other distributions and cash in lieu of fractional shares of Qwest
Common Stock shall be paid by Qwest to the Exchange Agent and shall be
included in the Exchange Fund, in each case until the surrender of such
Certificate in accordance with Section 1(d). Subject to the effect of
applicable escheat or similar laws following surrender of any such
Certificate, there shall be paid to the holder thereof (1) at the time of
surrender, a Qwest Certificate representing whole shares of Qwest Common Stock
issued in exchange therefor, without interest, (2) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Qwest Common Stock and the amount of any cash payable in lieu of a fractional
share of Qwest Common Stock to which such holder is entitled pursuant to
Section 1.1(f) and (3) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time
but prior to such surrender and with a payment date subsequent to such
surrender payable with respect to such whole shares of Qwest Common Stock,
without interest. Qwest shall
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make available to the Exchange Agent cash for these purposes to the extent
sufficient funds are not then available in the Exchange Fund.
(f) No Fractional Shares.
(1) No Qwest Certificates or scrip representing fractional shares of
Qwest Common Stock shall be issued upon the surrender for exchange of
Certificates, no dividend or distribution of Qwest shall relate to such
fractional share interests and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
Qwest.
(2) As promptly as practicable following the Effective Time, the Exchange
Agent shall determine the excess (the "Excess Shares") of (A) the number of
whole shares of Qwest Common Stock delivered to the Exchange Agent by Qwest
pursuant to Section 1.1(a) over (B) the aggregate number of whole shares of
Qwest Common Stock to be distributed to holders of Company Common Stock
pursuant to Section 1.1(d). Following the Effective Time, the Exchange
Agent shall, on behalf of former stockholders of Company, sell the Excess
Shares at then-prevailing prices on NASDAQ, all in the manner provided in
Section 1.1(f)(3).
(3) The sale of the Excess Shares by the Exchange Agent shall be executed
on NASDAQ through one or more member firms of the NASD and shall be
executed in round lots to the extent practicable. The Exchange Agent shall
use reasonable efforts to complete the sale of the Excess Shares as
promptly following the Effective Time as, in the Exchange Agent's sole
judgment, is practicable consistent with obtaining the best execution of
such sales in light of prevailing market conditions. Until the net proceeds
of such sale or sales have been distributed to the holders of Company
Common Stock, the Exchange Agent shall hold such proceeds in trust for the
holders of the Company Common Stock. The Surviving Corporation shall pay
all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of the Excess Shares. The Exchange Agent shall
determine the portion of such trust to which such holder of Company Common
Stock is entitled, if any, by multiplying the amount of the aggregate net
proceeds comprising such trust by a fraction, the numerator of which is the
amount of the fractional share interest to which such holder of Company
Common Stock is entitled (after taking into account all shares of Company
Common Stock held at the Effective Time by such holder) and the denominator
of which is the aggregate amount of fractional share interests to which all
holders of Company Common Stock are entitled.
(4) Notwithstanding the provisions of Section 1.1(f)(2) and (3), Qwest
may by written notice delivered to the Company before the Effective Time,
in lieu of the issuance and sale of Excess Shares and the making of the
payments contemplated by Sections 1.1(f)(2) and (3), elect to pay each
holder of Company Common Stock an amount in cash equal to the product
obtained by multiplying (A) the fractional share interest to which such
holder (after taking into account all shares of Company Common Stock held
at the Effective Time by such holder) would otherwise be entitled by (B)
the Closing Price of the Qwest Common Stock on the Closing Date, and, in
such case, all references herein to the cash proceeds of the sale of the
Excess Shares and similar references will be deemed to mean and refer to
the payments calculated as set forth in this Section 1.1(f)(4).
(5) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Company Common Stock with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts to such holders of Company Common Stock subject to and in
accordance with the terms of Section 1.1(e).
(g) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to Qwest, upon demand, and any holders
of the Certificates who have not theretofore complied with this Section 1.1
shall thereafter look only to Qwest as general creditors thereof for payment
of their claim for Merger Consideration or shares, any cash in lieu of
fractional shares of Qwest Common Stock and any dividends or distributions
with respect to Qwest Common Stock.
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(h) No Liability. None of the Company, Qwest, Qwest Subsidiary and the
Exchange Agent shall be liable to any person in respect of any shares of Qwest
Common Stock (or dividends or distributions with respect thereto) or cash from
the Exchange Fund in each case delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificate
shall not have been surrendered prior to seven years after the Effective Time
(or immediately prior to such earlier date of which any Merger Consideration,
any cash payable to the holder of such Certificate pursuant to this Section
1.1 or any dividends or distributions payable to the holder of such
Certificate would otherwise escheat to or become the property of any
governmental body or authority) any such Merger Consideration or cash,
dividends or distributions in respect of such Certificate shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of the claims or interest of any person previously entitled
thereto.
(i) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Qwest, on a daily basis. Any
interest and other income arising from such investments shall be paid to
Qwest.
(j) Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall deliver in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, the Merger Consideration with
respect to such Certificates as may be required pursuant to Section 1.1(a);
provided that the Surviving Corporation may, in its sole discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against any
of Qwest, the Surviving Corporation and the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
(k) Adjustments. The Merger Consideration shall be adjusted in the event of
any change in Qwest Common Stock by reason of split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, dividends or other
distributions of Equity Securities of the Company, exchanges of shares or the
like occurring after the date of this Agreement and before the Effective Time,
such that, after the record date therefor the Merger Consideration shall be
equal to the number and class of shares or other securities or property that
would have been received in respect of a share of Company Common Stock, as the
case may be, if the Effective Time had occurred immediately prior to such
record date.
(l) Assumption of Company Stock Options and Warrants.
(1) Each option outstanding at the Effective Time to purchase shares of
Company Common Stock (a "Company Stock Option") granted under the Company
Stock Option Plan shall be assumed by Qwest and deemed to constitute an
option to acquire, on the same terms and conditions, mutatis mutandis, as
were applicable under such Company Stock Option prior to the Effective
Time, the number of shares of Qwest Common Stock as the holder of such
Company Stock Option would have been entitled to receive pursuant to the
Merger had such holder exercised such Company Stock Option in full
immediately prior to the Effective Time (not taking into account whether or
not such option was in fact exercisable) at a price per share equal to (A)
the aggregate exercise price for Company Common Stock otherwise purchasable
pursuant to such Company Stock Option (provided that such aggregate
exercise price shall not exceed $12.00 multiplied by the number of shares
of Company Common Stock otherwise purchasable pursuant to such Company
Stock Option) divided by (B) the number of shares of Qwest Common Stock
deemed purchasable pursuant to such assumed Company Stock Option; provided
that the number of shares of Qwest Common Stock that may be purchased upon
exercise of any such Company Stock Option shall not include any fractional
share and, upon exercise of such Company Stock Option, a cash payment shall
be made for any fractional share based upon the Closing Price of a share of
Qwest Common Stock on the Trading Day immediately preceding the date of
exercise. Within three Business Days after the Effective Time, Qwest shall
cause to be delivered to each holder of an outstanding Company Stock Option
an appropriate notice setting forth such holder's rights pursuant thereto,
and such assumed Company Stock Option (as adjusted with respect to exercise
price and the number of shares of Qwest Common Stock purchasable) shall
continue in effect on the same terms and conditions. From and after the
Effective Time, Qwest shall comply with the
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terms of the Company Stock Option Plan pursuant to which the Company Stock
Options were granted. The adjustments provided in this Section 1.1(k) with
respect to any Stock Options that are "incentive stock options" (as defined
in Section 422 of the Code) shall be effected in a manner consistent with
Section 424(a) of the Code.
(2) At the Effective Time, each warrant to purchase shares of Company
Common Stock (a "Company Warrant") shall be assumed by Qwest and deemed to
constitute a warrant to acquire, on the same terms and conditions, mutatis
mutandis, as were applicable under such Company Warrant prior to the
Effective Time, the number of shares of Qwest Common Stock as the holder of
such Company Warrant would have been entitled to receive pursuant to the
Merger had such holder exercised such Company Warrant in full immediately
prior to the Effective Time (not taking into account whether or not such
Company Warrant was in fact exercisable) at a price per share equal to (A)
the aggregate exercise price for Company Common Stock otherwise purchasable
pursuant to such Company Warrant divided by (B) the number of shares of
Qwest Common Stock deemed purchasable pursuant to such assumed Company
Warrant; provided that the number of shares of Qwest Common Stock that may
be purchased upon exercise of any such Company Warrant shall not include
any fractional share and, upon exercise of such Company Warrant, a cash
payment shall be made for any fractional share based upon the Closing Price
of a share of Qwest Common Stock on the Trading Day immediately preceding
the date of exercise.
(3) Qwest shall cause to be taken all corporate action necessary to
reserve for issuance a sufficient number of shares of Qwest Common Stock
for delivery upon exercise of Company Stock Options and Company Warrants in
accordance with this Section 1.1(l). Within 30 Business Days after the
Effective Time, Qwest shall cause the Qwest Common Stock subject to Company
Stock Options to be registered under the Securities Act pursuant to a
registration statement on Form S-8 (or any successor or other appropriate
forms), and shall use its reasonable best efforts to cause the
effectiveness of such registration statement (and the current status of the
prospectus or prospectuses contained therein) to be maintained for so long
as the Company Stock Options remain outstanding.
(m) Tax Matters. The parties intend that the Merger qualify as a tax-free
reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. The
parties hereby accept this Agreement as a "plan of reorganization" within the
meanings of sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
Section 1.2 Qwest/Principal Stockholders Transactions.
(a) Concurrently with the execution and delivery of this Agreement, Qwest
and each of the Principal Stockholders are executing and delivering an Option
Agreement substantially in the form of Exhibit A attached hereto
(collectively, the "Option Agreements"), pursuant to which, among other
things, such Principal Stockholder is (1) granting to Qwest an option (an
"Option") to acquire all the shares of Company Common Stock beneficially owned
by such Principal Stockholder (collectively, the "Option Shares") and (2)
agreeing to certain restrictions on the voting and the sale or other transfer
of such Option Shares.
(b) Concurrently with the execution and delivery of this Agreement, Qwest
and each of the Principal Stockholders are executing and delivering a Voting
Agreement and Proxy substantially in the form of Exhibit B attached hereto
(collectively, the "Voting Agreements"), pursuant to which, among other
things, each of the Principal Stockholders is (1) agreeing to vote all the
shares of Company Common Stock beneficially owned by such Principal
Stockholder to approve this Agreement and the Merger and against any Business
Combination Transaction (other than the Transactions), (2) granting to Qwest
an irrevocable proxy in connection therewith, (3) agreeing to certain other
restrictions on the voting and the sale or other transfer of such shares of
Company Common Stock, (4) agreeing to certain restrictions on such Principal
Stockholder with respect to Business Combination Transactions (other than the
Transactions) with respect to any of the Company and its Subsidiaries and (5)
agreeing to execute and deliver a Stockholder Agreement, as contemplated by
Section 1.2(d).
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(c) At or before the Closing, Qwest and each of the Principal Stockholders
shall enter into a Stockholder Agreement substantially in the form of Exhibit
C attached hereto (collectively, the "Stockholder Agreements"), pursuant to
which each such person shall be subject to certain restrictions on the sale or
other transfer of the shares of Qwest Common Stock payable to such person
pursuant to the Merger.
Section 1.3 Qwest Credit Transactions.
(a) Qwest commits to lend to the Company up to $15,000,000 in the aggregate
on the terms and conditions set forth in the term sheet attached as Exhibit D
hereto, subject to the execution of definitive loan and security documentation
in form and substance satisfactory to the Company and Qwest. The Company and
Qwest shall use reasonable best efforts to negotiate and enter into definitive
loan and security documentation, including, without limitation, a credit
agreement, schedules, exhibits and ancillary documentation (collectively, the
"Qwest Credit Facility"), as soon as practicable but in no event later than
October 7, 1998. The commitment stated in this Section 1.3 terminates on the
Termination Date if definitive loan and security documentation shall then not
have been executed. Notwithstanding anything herein to the contrary, a binding
agreement with respect to the Qwest Credit Facility and the loan to be
advanced thereunder will result only from the execution of such definitive
documentation and in each case subject to the terms and conditions stated
therein, and this Agreement, the issuance of the Warrants and the Registration
Rights Agreement do not create by estoppel or otherwise a contract with
respect to the Qwest Credit Facility.
(b) Concurrently with execution and delivery of this Agreement, the Company
is issuing to Qwest Series Q Warrants to purchase 750,000 shares of Common
Stock substantially in the form of Exhibit E attached hereto (the "Series Q
Warrants").
(c) Concurrently with the execution and delivery of this Agreement, the
Company and Qwest are entering into a Registration Rights Agreement
substantially in the form of Exhibit F attached hereto (the "Registration
Rights Agreement") to provide for, among other things, the registration under
the Securities Act of the disposition of the shares of Company Common Stock
issuable upon exercise of the Series Q Warrants.
Section 1.4 Qwest Private Line Service Agreement. Concurrently with the
execution and delivery of this Agreement, Qwest and the Company are entering
into the Qwest Private Line Service Agreement, pursuant to which Qwest will
provide certain services to the Company.
ARTICLE II
Closing
Section 2.1 Time of Closing. The closing of the Merger shall take place (the
"Closing") on the Business Day following the date on which all the conditions
precedent to the obligations of the parties under this Agreement with respect
thereto (other than conditions that, by their terms, cannot be satisfied until
the Closing Date) shall have been satisfied or waived, as the case may be, or
such later date as the parties may agree (the "Closing Date").
Section 2.2 Location of Closing. The Closing shall take place at the offices
of O'Melveny & Myers LLP, 153 East 53rd Street, New York, New York 10022, or
at such other location as approved by the parties.
ARTICLE III
Conditions of Closing
Section 3.1 Conditions Precedent to Closing. The respective obligations of
each party under this Agreement with respect to the Merger are subject to the
satisfaction of each of the following conditions, unless waived by each of the
parties that is the beneficiary of the satisfaction of such condition, at or
before the Closing:
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(a) holders of a majority of the outstanding shares of Company Common
Stock shall have approved this Agreement and the Merger in accordance with
the DGCL, the certificate of incorporation and bylaws of the Company and
the Regulations of the NASDAQ;
(b) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act and no stop order suspending such
effectiveness shall have been issued and remain in effect;
(c) the shares of Qwest Common Stock issuable in the Merger shall have
been approved for inclusion in NASDAQ, if necessary, subject only to
official notice of issuance;
(d) each of the Company, its Subsidiaries, Qwest and Qwest Subsidiary
shall have obtained from each Governmental Body or other person each
Approval or taken all actions required to be taken in connection with each
Approval, and all waiting, review or appeal periods under the Hart-Scott-
Rodino Act or otherwise prescribed with respect to each Approval shall have
terminated or expired, as the case may be, in each case with respect to an
Approval that is required or advisable on the part of such person for (1)
the due execution and delivery by such person of each Transaction Document
to which it is or may become a party, (2) the conclusion of the
Transactions, (3) the performance by such person of its obligations with
respect to the Transactions under each Transaction Document to which it is
or may become a party and (4) the exercise by such person of its rights and
remedies with respect to the Transactions under each Transaction Document
to which it is or may become a party or with respect to which it is or may
become an express beneficiary, except in each case referred to in the
preceding clauses (1), (2), (3) and (4) where the failure to obtain such
Approval, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on such person;
(e) no Regulation shall have been enacted, entered, promulgated or
enforced by any Governmental Body which is in effect and (1) has the effect
of making the Merger illegal or otherwise prohibiting the consummation of
the Merger or (2) could reasonably be expected to have a Material Adverse
Effect on any of the Company, its Subsidiaries, Qwest and Qwest Subsidiary;
(f) none of the Company, its Subsidiaries, Qwest and Qwest Subsidiary (1)
is in violation or breach of or default with respect to (A) any Regulation
of any Governmental Body or any decision, ruling, order or award of any
arbitrator applicable to it or its business, properties or operations or
(B) any agreement, indenture or other instrument to which it is a party or
by which it or its properties may be bound or affected, (2) would be in
violation or breach of or default with respect to any Regulation of any
Governmental Body or any decision, ruling, order or award of any arbitrator
applicable to it or its business, properties or operations in connection
with or as a result of the conclusion of any of the Transactions or (3) has
received notice that, in connection with or as a result of the conclusion
of any of the Transactions, it is or would be in violation or breach of or
default with respect to any Regulation of any Governmental Body or any
decision, ruling, order or award of any arbitrator applicable to it or its
business, properties or operations, except in each case referred to in the
preceding clauses (1), (2), (3), and (4) for violations, breaches or
defaults that, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on such person;
(g) each Transaction Document required to be executed and delivered prior
to the Effective Time shall have been so executed and delivered by the
respective parties thereto;
(h) the representations and warranties of each other party contained in
each Transaction Document to which such other party is a party shall be
true and correct in all respects on and as of the Closing Date, with the
same force and effect as though made on and as of the Closing Date (except
for those representations and warranties that address matters only as of a
particular date or only with respect to a particular period of time, which
representations or warranties shall be true and correct as of such date or
with respect to such period), except where the failure of such
representations or warranties to be so true and correct (without giving
effect to any limitation as to "material," "materiality," "Material Adverse
Effect," specified dollar amount thresholds or other similar qualifiers),
individually or in the aggregate, has not had and could not reasonably be
expected to have a Material Adverse Effect on such person;
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(i) each other party shall have performed, in all material respects, all
of the covenants and other obligations required by each Transaction
Document required to be performed by such other party at or before the
Closing;
(j) counsel to the Company shall have received tax representation letters
substantially in the form of Exhibits 3.1(j)(1) and 3.1(j)(2) attached
hereto, and the Company shall have received an opinion from its counsel on
the Closing Date dated as of the Closing Date, substantially in the form of
Exhibit 3.1(j)(3) attached hereto;
(k) each party shall have received from each other party the following,
each dated the Closing Date, in form and substance reasonably satisfactory
to the receiving party:
(1) a certificate of the Secretary or an Assistant Secretary of such
other party with respect to (A) the certificate of incorporation or
articles of incorporation, as the case may be, of such other party, (B)
the bylaws of such other party, (C) the resolutions of the Board of
Directors of such other party, approving each Transaction Document to
which such other party is a party and the other documents to be
delivered by it under the Transaction Documents, and (D) the names and
true signatures of the officers of such other party who signed each
Transaction Document to which such other party is a party and the other
documents to be delivered by such other party under the Transaction
Documents;
(2) a certificate of the President or a Vice President of such other
party to the effect that (A) the representations and warranties of such
other party contained in the Transaction Documents to which it is a
party are true and correct in all material respects as of the Closing
Date and (B) such other party has performed, in all material respects,
all covenants and other obligations required by the Transaction
Documents to which it is a party to be performed by it on or before the
Closing Date;
(3) with respect to the Company, certified copies, or other evidence
reasonably satisfactory to Qwest and Qwest Subsidiary, of all Approvals
of all Governmental Bodies and other persons with respect to the
Company referred to in Section 4.3;
(4) with respect to Qwest, certified copies, or other evidence
reasonably satisfactory to the Company, of all Approvals of all
Governmental Bodies and other persons with respect to Qwest referred to
in Section 5.3;
(5) with respect to Qwest Subsidiary, certified copies, or other
evidence reasonably satisfactory to the Company, of all Approvals of
all Governmental Bodies and other persons with respect to Qwest
Subsidiary referred to in Section 5.3;
(6) a certificate of the Secretary of State of the jurisdiction in
which such other party is incorporated, dated as of a recent date, as
to the good standing of and payment of taxes by such other party and as
to the charter documents of such other party on file in the office of
such Secretary of State; and
(7) with respect to the Company, a certificate of the President or a
Vice President of the Company with respect to U.S. real property
interests, substantially in the form of Exhibit 3.1(k)(7) attached
hereto; and
(l) Qwest and Qwest Subsidiary shall have received from the Company a
written agreement of each person who is identified as an "affiliate" on the
list furnished by the Company pursuant to Section 7.1(h), which is
substantially in the form of Exhibit 3.1(l) attached hereto, without
material cost or other liability to any of the Company, its Subsidiaries,
Qwest and Qwest Subsidiary and any other person.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to Qwest and Qwest Subsidiary as
follows:
Section 4.1 Corporate Existence and Power. Each of the Company and its
Subsidiaries (1) is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction of its
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incorporation, (2) has all necessary corporate power and authority and all
material licenses, authorizations, consents and approvals required to own,
lease, license or use its properties now owned, leased, licensed or used and
proposed to be owned, leased, licensed or used and to carry on its business as
now conducted and proposed to be conducted, in each case as described in the
Company SEC Documents filed with the SEC prior to the date hereof, (3) is duly
qualified as a foreign corporation under the laws of each jurisdiction in
which qualification is required either to own, lease, license or use its
properties now owned, leased, licensed and used or to carry on its business as
now conducted, except where the failure to effect or obtain such
qualification, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect, and (4) has all necessary
corporate power and authority to execute and deliver each Transaction Document
to which it is or may become a party and to perform its obligations
thereunder.
Section 4.2 Authorization; Contravention. Subject to obtaining the Approvals
referred to in Section 4.3, except as expressly disclosed in Section 4.3 of
the Company's Disclosure Schedule, the execution and delivery by each of the
Company and its Subsidiaries of each Transaction Document to which it is or
may become a party and the performance by it of its obligations under each of
those Transaction Documents have been duly authorized by all necessary
corporate action and do not and will not (1) contravene, violate, result in a
breach of or constitute a default under (A) its certificate of incorporation,
articles of incorporation or bylaws, as applicable, (B) any Regulation of any
Governmental Body or any decision, ruling, order or award of any arbitrator by
which any of the Company and its Subsidiaries or any of their properties may
be bound or affected, including, without limitation, the Exchange Act, the
Hart-Scott-Rodino Act and the DGCL, or (C) any agreement, indenture or other
instrument to which any of the Company and its Subsidiaries is a party or by
which any of the Company and its Subsidiaries or their properties may be bound
or affected, (2) result in or require the creation or imposition of any Lien
on any of the properties now owned or hereafter acquired by any of the Company
and its Subsidiaries or (3) to the knowledge of the representing party, impair
or disadvantage the business of any of the Company and its Subsidiaries or
adversely affect any Company License, except in each case referred to in the
preceding clauses (1), (2) and (3) for contraventions, violations, breaches,
defaults or Liens that, individually or in the aggregate, could not reasonably
be expected to have a Material Adverse Effect.
Section 4.3 Approvals. Except as expressly referred to in this Agreement or
otherwise disclosed in Section 4.3 of the Company's Disclosure Schedule, no
Approval of any Governmental Body or other person is required or advisable on
the part of any of the Company and its Subsidiaries for (1) the due execution
and delivery by the Company or such Subsidiary, as the case may be, of any
Transaction Document to which it is or may become a party, (2) the conclusion
of the Transactions, (3) the performance by the Company or such Subsidiary, as
the case may be, of its obligations under each Transaction Document to which
it is or may become a party and (4) the exercise by Qwest or Qwest Subsidiary,
as the case may be, of its rights under each Transaction Document to which
Qwest or Qwest Subsidiary, as the case may be, is or may become a party,
except in each case referred to in the preceding clauses (1), (2), (3) and (4)
where the failure to obtain such Approval, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.
Section 4.4 Binding Effect. Each Transaction Document to which any of the
Company and its Subsidiaries is or may become a party is, or when executed and
delivered in accordance with this Agreement will be, the legally valid and
binding obligation of the Company or such Subsidiary, as the case may be,
enforceable against it in accordance with its terms, except as may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally and general principles of
equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of
specific performance or injunctive relief, regardless of whether considered in
a proceeding in equity or at law.
Section 4.5 Financial Information.
(a) The consolidated balance sheet of the Company and its consolidated
Subsidiaries as of December 31, 1997 (the "Company Balance Sheet") and the
related consolidated statements of income (loss) and
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stockholders' equity and cash flows for the fiscal year then ended, reported
on by PricewaterhouseCoopers LLP, true and complete copies of which have been
delivered to Qwest and Qwest Subsidiary, fairly present the consolidated
financial position of the Company and its consolidated Subsidiaries as of that
date and their consolidated results of operations and cash flows for the year
then ended, in accordance with GAAP applied on a consistent basis except as
described in the footnotes to the financial statements or as disclosed in
Section 4.5(a) of the Company's Disclosure Schedule.
(b) The unaudited financial statements of the Company and its consolidated
Subsidiaries as of June 30, 1998 filed with the SEC in the Company's quarterly
report on Form 10-Q for the quarter then ended, true and complete copies of
which have been delivered to Qwest and Qwest Subsidiary, fairly present,
subject to normal year-end adjustments, the consolidated financial position of
the Company and its consolidated Subsidiaries as of that date and their
consolidated results of operations and cash flows for the six months then
ended.
(c) The unaudited consolidated balance sheet of the Company and its
consolidated Subsidiaries as of July 31, 1998 and the related consolidated
statements of income (loss) and stockholders' equity and cash flows for the
seven months then ended, true and complete copies of which have been delivered
to Qwest and Qwest Subsidiary, fairly present, subject to normal year-end
adjustments, the consolidated financial position of the Company and its
consolidated Subsidiaries as of that date and their consolidated results of
operations and cash flows for the seven months then ended.
(d) At the respective dates of the balance sheets referred to in this
Section 4.5, none of the Company and its Subsidiaries had any material
Liability that, in accordance with GAAP applied on a consistent basis, should
have been shown or reflected in the balance sheets but was not, except for the
omission of notes in unaudited balance sheets with respect to contingent
liabilities that in the aggregate did not materially exceed those so reported
in the latest audited balance sheets previously delivered and that were of
substantially the same type as so reported.
(e) All receivables of the Company and its Subsidiaries (including accounts
receivable, loans receivable and advances) which are reflected in the balance
sheets referred to in this Section 4.5, and all such receivables which have
arisen thereafter and prior to the Effective Time, have arisen or will have
arisen in all material respects from bona fide transactions in the Ordinary
Course, the carrying value of such receivables approximate their fair market
values in all material respects and adequate reserves for the Company's
receivables have been established on the balance sheets in accordance with
prior practice and GAAP.
(f) Except as disclosed in Section 4.5(f) of the Company's Disclosure
Schedule, since December 31, 1997, none of the Company and its Subsidiaries
has provided any material special promotions, discounts or other incentives to
its employees, agents, distributors or customers in connection with the
solicitation of new orders for goods or services provided by the Company or
any Subsidiary except in the Ordinary Course, nor has any customer pre-paid
any material amount for goods or services to be provided by the Company or any
Subsidiary in the future, except in the Ordinary Course.
(g) The Company has made available to Qwest and Qwest Subsidiary copies of
each management letter delivered to any of the Company and its Subsidiaries by
PricewaterhouseCoopers LLP in connection with the financial statements
referred to in this Section 4.5 or relating to any review by them of the
internal controls of the Company and its Subsidiaries during the two years
ended December 31, 1996 and December 31, 1997, respectively, and has made
available for inspection and, subject to the approval of
PricewaterhouseCoopers LLP, after the date of this Agreement will make
available for inspection all reports and working papers produced or developed
by them or management in connection with their examination of those financial
statements, as well as all such reports and working papers for prior periods
for which any liability of any of the Company and its Subsidiaries for Taxes
has not been finally determined or barred by applicable statutes of
limitation.
(h) Since January 1, 1996, there has been no material disagreement (within
the meaning of Item 304(a)(1)(iv) of Regulation S-K under the Securities Act)
between any of the Company and its Subsidiaries, on
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the one part, and any of its independent accountants, on the other part, with
respect to any aspect of the manner in which the Company or such Subsidiary,
as the case may be, maintained or maintains its books and records or the
manner in which the Company or the Subsidiary, as the case may be, has
reported upon the financial condition and results of operations of any of the
Company and its Subsidiaries since such date, that has not been resolved to
the satisfaction of the relevant independent accountants.
Section 4.6 Absence of Certain Changes or Events.
(a) Except as disclosed in Section 4.6(a) of the Company's Disclosure
Schedule or the Company SEC Documents filed with the SEC prior to the date
hereof, since December 31, 1997, no circumstance has existed and no event has
occurred that has had, will have or could reasonably be expected to have a
Material Adverse Effect.
(b) Except as disclosed in Section 4.6(b) of the Company's Disclosure
Schedule or the Company SEC Documents filed with the SEC prior to the date
hereof, since December 31, 1997, none of the Company and its Subsidiaries has
done the following or entered into any agreement or other arrangement with
respect to the following, except in each case with respect or pursuant to each
Transaction Document to which it is or may become a party:
(1) acquired or transferred any material asset, except in each case for
fair value and in the Ordinary Course; or
(2) incurred, assumed or guaranteed any Liability or paid, discharged or
satisfied any Liability, except in each case in the Ordinary Course; or
(3) created, assumed or suffered the existence of any Lien (other than
Permitted Liens), except in each case in the Ordinary Course; or
(4) waived, released, cancelled, settled or compromised any debt, claim
or right of any material value, except in each case in the Ordinary Course;
or
(5) declared, made or set aside any amount for the payment of any
Restricted Payment to any person other than any of the Company and its
Wholly-Owned Subsidiaries; or
(6) transferred or waived any right under any lease, license or agreement
or any Proprietary Right or other intangible asset, except in each case in
the Ordinary Course; or
(7) paid or agreed to pay any bonus, extra compensation, pension,
continuation, severance or termination pay, or otherwise increased the
wage, salary, pension, continuation, severance or termination pay or other
compensation (of any nature) to its stockholders, directors or executive
officers, officers or employees, except for increases made in the Ordinary
Course or as required by law; or
(8) to the knowledge of the representing party, suffered (A) any damage,
destruction or casualty loss (whether or not covered by insurance) of
property the greater of cost or fair market value of which exceeds $50,000
individually or $100,000 in the aggregate for the Company and its
Subsidiaries or (B) any taking by condemnation or eminent domain of any of
its property or assets the greater of cost or fair market value of which
exceeds $50,000 individually or $100,000 in the aggregate for the Company
and its Subsidiaries; or
(9) made any loan to or entered into any transaction with any of its
stockholders having beneficial ownership of 5.0% or more of the shares of
Company Common Stock then issued and outstanding, directors, officers or
employees giving rise to any claim or right of, by, or against any person
in an amount or having a value in excess of $25,000 individually or $50,000
in the aggregate for the Company and its Subsidiaries; or
(10) entered into any material agreement, arrangement, commitment,
contract or transaction (including, without limitation, any letter of
intent or other agreement with respect to a Business Combination
Transaction), amended or terminated any of the same, received any notice of
termination or purported
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termination with respect to the same or otherwise conducted any of its
affairs, except in each case in the Ordinary Course; or
(11) made any contribution to any Company Employee Plan, other than
regularly scheduled contributions and contributions required to maintain
the funding levels of any Company Employee Plan, or made or incurred any
commitment to establish or increase the obligation of the Company or a
Subsidiary to any Company Employee Plan; or
(12) except as disclosed in the footnotes to the financial statements
referred to in Section 4.5 or in Section 4.6 of the Company's Disclosure
Schedule, changed any accounting methods or principles used in recording
transactions on the books of the Company or a Subsidiary or in preparing
the financial statements of the Company or a Subsidiary;
and none of the events disclosed in Section 4.6 of the Company's Disclosure
Schedule, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect; provided that the representations made in this
Section 4.6 with respect to Frontier Media Group, Inc. are made, with respect
to all events or facts occurring or existing before May 27, 1998, to the
knowledge of the representing party.
(c) Except as disclosed in Section 4.6 of the Company's Disclosure Schedule
or in the Company SEC Documents filed with the SEC prior to the date hereof,
the occurrence of any fire, explosion, accident, strike, lockout, or other
labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the
public enemy, or other casualty (whether or not covered by insurance),
individually or in the aggregate, has not had and could not reasonably be
expected to have a Material Adverse Effect.
Section 4.7 Taxes. Except as disclosed in Section 4.7 of the Company's
Disclosure Schedule:
(a) Each of the Company and its Subsidiaries has (1) filed (or has caused to
be filed) all Tax Returns that are required to be filed with any Governmental
Body with respect to each of the Company and its Subsidiaries, except for the
filing of Tax Returns as to which the failure to file, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect,
and (2) paid (or has caused to be paid) all Taxes of or with respect to each
of the Company and its Subsidiaries required to be paid when due whether or
not shown on such Tax Returns and all assessments received by it, except Taxes
being contested in good faith by appropriate proceedings, for which adequate
reserves or other provisions are maintained in accordance with GAAP and which
Taxes are specified in Section 4.7(a) of the Company's Disclosure Schedule, or
amounts of Taxes and assessments which, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.
(b) Federal income tax returns of the Company and its Subsidiaries are
closed through the year ended December 31, 1994, either by the expiration of
the applicable statute of limitations or closing agreement. None of the
Company and its Subsidiaries know of any basis for the assessment of any
material amount of Taxes for any period covered by the Tax Returns that are
referred to in Section 4.7(a) that is not reflected on those Tax Returns. None
of the Company and its Subsidiaries is a party to any pending Action by any
Governmental Body with respect to the payment of Taxes of or with respect to
any of the Company and its Subsidiaries, and no claim has been asserted in
writing, or to the knowledge of the Company, threatened against it for
assessment or collection of any Taxes which has not been resolved, other than
Actions or claims which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect. None of the Company
and its Subsidiaries has executed or filed with the Internal Revenue Service
or any other taxing authority any agreement extending the period of assessment
or collection of any Taxes which has not expired or any consent to have the
provisions of Section 341(f) of the Code (or any similar provision of state,
local or foreign law) applied to it.
(c) All Taxes that the Company or a Subsidiary is required to withhold or
collect have been withheld or collected and, to the extent required, have been
paid over to the proper Governmental Body on a timely basis, and each of the
Company and its Subsidiaries has withheld proper amounts from its employees,
independent contractors, creditors, stockholders or other third parties for
all periods in full compliance with tax withholding
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provisions of applicable Regulations, except for withholdings or collections
as to which the failure to withhold or collect, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
(d) No portion of the real property or plant, structures, fixtures or
improvements of the Company or a Subsidiary is subject to any special
assessment, the liability with respect to which, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect.
None of the Company and its Subsidiaries has any knowledge of any proposal for
any such assessment.
(e) None of the Company or its Subsidiaries is obligated to make, or is a
party to an agreement or arrangement that obligates it to make, any payment
that will not be deductible for federal income tax purposes by virtue of
Section 280G of the Code.
(f) None of the Company and its Subsidiaries has any liability for the Taxes
of any person other than the Company and its Subsidiaries (1) under Treasury
Regulations (S)1.1502-6 (or any similar provision of state, local or foreign
law), (2) as a transferee or successor, (3) by contract or (4) otherwise.
(g) None of the Company and its Subsidiaries has adopted a plan of complete
liquidation.
(h)(1) None of the Company and its Subsidiaries is obligated under any
agreement with respect to industrial development bonds or other obligations
with respect to which the excludability from gross income of the holder for
federal or state income tax purposes could be affected by the execution and
delivery of the Transaction Documents or the conclusion of any of the
Transactions, (2) none of the Company and its Subsidiaries has filed or been
included in a combined, consolidated or unitary return (or substantial
equivalent thereof) of any person other than the Company and its Subsidiaries,
(3) with respect to Wholly-Owned Subsidiaries, none of the Company and its
Subsidiaries is a party to any joint venture, partnership or other arrangement
or contract which is treated as a partnership for United States federal income
tax purposes, (4) the prices for any property or services (or for the use of
property) provided by any of the Company and its Subsidiaries to any other
Subsidiary or to the Company have been arm's length prices determined using a
method permitted by the Treasury Regulations under Section 482 of the Code,
and (5) none of the Company and its Subsidiaries has made an election or is
required to treat any of its assets as owned by another person for federal
income tax purposes or as tax-exempt bond financed property or tax-exempt use
property within the meaning of Section 168 of the Code (or any similar
provision of state, local or foreign law.
Section 4.8 Undisclosed Liabilities. Except as disclosed in Section 4.8 of
the Company's Disclosure Schedule, none of the Company and its Subsidiaries
has any material Liabilities, except Liabilities (1) shown or reflected in the
Company Balance Sheet or the notes thereto, (2) expressly contemplated by the
Transaction Documents or (3) in an aggregate amount not greater than $25,000.
Section 4.9 Litigation.
(a) Except as disclosed in Section 4.9(a) of the Company's Disclosure
Schedule or in the Company SEC Documents filed with the SEC prior to the date
hereof, there is no Action pending or, to the knowledge of the representing
party, threatened against any of the Company and its Subsidiaries, that (1) as
of the date of this Agreement involves any of the Transactions or (2)
individually or in the aggregate, if determined adversely to any of them,
could reasonably be expected to result in a liability to any of them in an
amount that exceeds $25,000 individually or $50,000 in the aggregate.
(b) Except as disclosed in Section 4.9(b) of the Company's Disclosure
Schedule or in the Company SEC Documents filed with the SEC prior to the date
hereof, there is no Action pending against any of the Company and its
Subsidiaries or, to the knowledge of the representing party, threatened
against any of the Company and its Subsidiaries or any other person that
involves any of the Transactions or any property owned, leased, licensed or
used by the Company or such Subsidiary, as the case may be, that, individually
or in the aggregate, if determined adversely to any of them, could reasonably
be expected to have a Material Adverse Effect.
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(c) Except as disclosed in Section 4.9(c) of the Company's Disclosure
Schedule or in the Company SEC Documents filed with the SEC prior to the date
hereof, other than billing disputes with customers arising in the ordinary
course of business that in the aggregate involve immaterial amounts, there is
no Action pending against any of the Company and its Subsidiaries or, to the
knowledge of the representing party, threatened against any of the Company and
its Subsidiaries, one stated purpose of which is to seek, facilitate or effect
(1) a reduction of rates charged to customers, (2) a reduction of earnings or
(3) refunds of amounts previously charged to customers, except in each case
referred to in the preceding clauses (1), (2) and (3) for Actions that,
individually or in the aggregate, if determined adversely to any of the
Company and its Subsidiaries, could not reasonably be expected to have a
Material Adverse Effect.
Section 4.10 Compliance with Regulations.
(a) None of the Company and its Subsidiaries is in, and none of them has
received written notice of, a violation of or default with respect to, any
Regulation of any Governmental Body or any decision, ruling, order or award of
any arbitrator applicable to it or its business, properties or operations,
including individual products or services sold or provided by it, except for
violations or defaults that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
(b) Each of the Company and its Subsidiaries has filed or caused to be filed
with each applicable Governmental Body all reports, applications, documents,
instruments and information required to be filed by it pursuant to all
applicable Regulations, other than those as to which the failure to file,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
Section 4.11 Licenses.
(a) To the knowledge of the representing party, one or more of the Company
and its Subsidiaries are the registered holders of each License that is
required to be held by the Company or such Subsidiary, as the case may be, so
that it may carry on its business as now conducted and proposed to be
conducted, the failure to hold which License, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect
(each such License, a "Company License").
(b) To the knowledge of the representing party, each Company License is
validly issued, in good standing and in full force and effect, unimpaired by
any act or omission by the Company or such Subsidiary, as the case may be.
Each of the Company and its Subsidiaries is in compliance with such Company
License. None of the Company and its Subsidiaries has suffered a revocation,
termination, suspension or material and adverse modification of a License that
was, at the time of such event, a Company License. There is no Action pending
or, to the knowledge of the representing party, threatened against any of the
Company and its Subsidiaries, and no other circumstance exists or event has
occurred (whether or not with the giving of notice or the passage of time or
both), that could reasonably be expected to result in the revocation,
termination, suspension or material and adverse modification of any Company
License. If a Company License is subject to termination upon the expiration of
a term, the existence of another circumstance or the occurrence of another
event, the representing party does not have any reason to believe that such
Company License will not be renewed in the ordinary course. No Company License
is subject to renegotiation by any Governmental Body. The execution and
delivery of the Transaction Documents and the conclusion of any of the
Transactions will not (and will not give any Governmental Body a right to)
terminate or modify any rights of, or accelerate or increase any obligation
of, the Company or any Subsidiary under any Company License.
Section 4.12 Employee Matters.
(a) Employment and Labor Relations.
(1) Except as disclosed in Section 4.12(a) of the Company's Disclosure
Schedule or in the Company SEC Documents filed with the SEC prior to the
date hereof:
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(A) none of Company and its Subsidiaries is a party to any collective
bargaining agreement or other labor agreement with any union or labor
organization, and no union or labor organization has been recognized by
any of the Company and its Subsidiaries as a bargaining representative
for employees of any of the Company and its Subsidiaries;
(B) there is no representation claim or petition pending before the
National Labor Relations Board respecting the employees of any of the
Company and its Subsidiaries, nor does Company have any knowledge of
any significant activity or proceeding of any labor organization (or
representative thereof) or employee group to organize any such
employees;
(C) there is no unfair labor practice charge or complaint against any
of the Company and its Subsidiaries pending or, to the knowledge of the
representing party, threatened before the National Labor Relations
Board or any similar Governmental Body;
(D) there has not occurred nor has there been threatened since
January 31, 1994, a labor strike, labor dispute, request for
representation, work stoppage, work slowdown or lockout of or by
employees of any of the Company and its Subsidiaries;
(E) no grievance or arbitration proceeding arising out of any
collective bargaining agreement to which any of the Company and its
Subsidiaries is a party is pending;
(F) no charge with respect to or relating to any of the Company and
its Subsidiaries is pending before the Equal Employment Opportunity
Commission or any state, local or foreign agency responsible for the
prevention of unlawful employment practices;
(G) no claim relating to employment or loss of employment with any of
the Company and its Subsidiaries is pending in any federal, state or
local court or in any other adjudicatory body and, to the knowledge of
the representing party, no such claim against any of the Company and
its Subsidiaries has been threatened;
(H) none of the Company and its Subsidiaries has received notice of
the intent of any federal, state, local or foreign agency responsible
for the enforcement of labor or employment Regulations to conduct an
investigation of or relating to any of the Company and its
Subsidiaries, and no such investigation is in progress;
(I) since the enactment of the Worker Adjustment and Retraining
Notification Act of 1988 (the "WARN Act"), none of the Company and its
Subsidiaries has effectuated (1) a "plant closing" (as defined in the
WARN Act) affecting any site of employment or one or more facilities or
operating units within any site of employment or facility of the
Company or any of its Subsidiaries or (2) a "mass layoff" (as defined
in the WARN Act) affecting any site of employment or facility of the
Company or any of its Subsidiaries; and none of the Company and its
Subsidiaries has been affected by any transaction or engaged in layoffs
or employment terminations sufficient in any number to trigger
application of any similar Regulation;
(J) none of the Company and its Subsidiaries is delinquent in any
material respect in payments to any of its current or former officers,
directors, employees, consultants or agents for any wages, salaries,
commissions or other direct compensation for any services performed by
them or amounts required to be reimbursed to such officers, directors,
employees, consultants, or agents;
(K) in the event of termination of the employment or service of any
of its current or former officers, directors, employees, consultants or
agents, none of the Company, its Subsidiaries, Qwest and Qwest
Subsidiary will be liable to any such persons for severance,
continuation or termination pay pursuant to any agreement or by reason
of any action taken or not taken by any of the Company and its
Subsidiaries prior to the Effective Time; and
(L) since December 31, 1997, there has not been any termination of
employment of any officer, director or employee of any of the Company
and its Subsidiaries receiving annual base salary in excess of
$150,000.
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(2) Section 4.12(a) of the Company's Disclosure Schedule sets forth a
correct and complete list of (A) all employment, consulting, severance pay,
continuation pay, termination pay or indemnification agreements or other
agreements of any nature whatsoever between any of the Company and its
Subsidiaries, on the one part, and any current officer, director, employee,
consultant or agent thereof, on the other part, in each case whether
written or oral, to which any of the Company and its Subsidiaries is a
party or by which any of them is bound, except with respect to agreements
approved by Qwest in writing, and (B) all collective bargaining, labor and
similar agreements (other than any Employee Plans), in each case whether
written or oral, currently in effect or under negotiation, to which any of
the Company and its Subsidiaries is a party or by which any of them is
bound or proposed to be bound, as the case may be. The Company has provided
to Qwest and Qwest Subsidiary true and complete copies of all such
agreements. Each of the Company and its Subsidiaries has complied with its
obligations related to, and is not in default under, any of such
agreements, except where the failure to comply with or a default under such
agreements, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
(3) Except as disclosed in Section 4.12(a) of the Company's Disclosure
Schedule, the execution and delivery of the Transaction Documents and the
conclusion of the Transactions (A) will not require any of the Company and
its Subsidiaries to make a payment to, or obtain any consent or waiver
from, any current or former officer, director, employee, consultant or
agent of any of the Company and its Subsidiaries and (B) will not result in
any change in the nature of any rights of any current or former officer,
director, employee, consultant or agent of any of the Company and its
Subsidiaries under any agreement referred to in Section 4.12(a)(2),
including any acceleration or change in the award, grant, vesting or
determination of stock options, stock purchase, stock appreciation rights,
phantom stock, restricted stock or other stock-based rights (other than
exercise price and number of shares adjusted in accordance with Section
1.1(l)), severance pay, continuation pay, termination pay or other
contingent obligations of any nature whatsoever of any of the Company and
its Subsidiaries, or a change in the term of any such agreement.
(4) Except as disclosed in Section 4.12(a) of the Company's Disclosure
Schedule, each of the Company and its Subsidiaries is, and at all times
since December 31, 1997 has been, in compliance with all applicable
Regulations respecting employment and employment practices, terms and
conditions of employment, wages and hours, and occupational safety and
health, and is not, and since January 31, 1994 has not, engaged in any
unfair labor practices, except where the failure to so comply or such
engagement, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
(b) Company Employee Plans.
(1) Section 4.12(b) of the Company's Disclosure Schedule sets forth a
correct and complete list of all Company Employee Plans. The Company has
made available to Qwest Subsidiary true and complete copies of the Company
Employee Plans and all related summary descriptions, including, without
limitation, copies of any employee handbooks listing or describing any
Company Employee Plans and summary descriptions of any Company Employee
Plan not otherwise in writing.
(2) Except for any failure or default that could not reasonably be
expected to have a Material Adverse Effect, each of the Company and its
Subsidiaries has fulfilled or has taken all actions necessary to enable it
to fulfill when due all of its obligations under each Company Employee
Plan, and there is no existing default or event of default or any event
which, with or without the giving of notice or the passage of time, would
constitute a default by it under any Company Employee Plan. No Regulation
currently in effect or, to the knowledge of the representing party,
proposed to be in effect materially or adversely affects, or if adopted
would materially or adversely affect, the rights or obligations of any of
the Company and its Subsidiaries under any Company Employee Plan. There are
no material negotiations, demands or proposals which are pending or which
have been made to any of the Company and its Subsidiaries which concern
matters now covered, or that would be covered, by any Company Employee
Plan.
(3) Each of the Company and its Subsidiaries is in full compliance with
all Regulations applicable to each Company Employee Plan, except where
noncompliance could not reasonably be expected to have a Material Adverse
Effect. There has been no Employee Plan Event which is continuing or in
respect of which
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there is any outstanding liability of any of the Company or its
Subsidiaries that, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect, and no such Employee Plan Event
is reasonably expected to occur, with respect to any Company Employee Plan.
(4) Except as disclosed in Section 4.12(b) of the Company's Disclosure
Schedule, the execution and delivery of the Transaction Documents and the
conclusion of the Transactions will not cause the acceleration of vesting
in, or payment of, any benefits under any Company Employee Plan.
(5) None of the Company and its Subsidiaries has any formal plan or
commitment, whether legally binding or not, to create any additional
Employee Plan or to modify or change any existing Employee Plan that would
affect any current or former employee of any of the Company and its
Subsidiaries and that could reasonably be expected to result in a material
liability.
(6) All employment, consulting, deferred compensation, bonus, stock
option, stock appreciation rights, phantom stock, severance, termination or
indemnification agreements, arrangements or understandings, or other
Employee Plans, between any of the Company and its Subsidiaries, on the one
part, and any current or former officer or director of any of the Company
and its Subsidiaries, on the other part, which are required to be disclosed
under the Securities Act or the Exchange Act have been disclosed.
(c) Employee Plans of the Company's ERISA Affiliates. Section 4.12(c) of the
Company's Disclosure Schedule sets forth a correct and complete list of all
ERISA Plans and Multiemployer Plans of any person that is an ERISA Affiliate
of the Company or its Subsidiaries, other than any such ERISA Plans or
Multiemployer Plans disclosed pursuant to Section 4.12(b). There has been no
Employee Plan Event with respect to any ERISA Plan or Multiemployer Plan of
any person that is an ERISA Affiliate of the Company or its Subsidiaries or
who was an ERISA Affiliate of the Company or its Subsidiaries at any time
since January 31, 1992, other than any ERISA Plan or Multiemployer Plan
disclosed in Section 4.12 of the Company's Disclosure Schedule, in respect of
which there is any outstanding liability, or, to the knowledge of the Company,
in respect of which any liability could be expected to be incurred by any of
the Company and its Subsidiaries. At no time since the organization of the
Company or any of its Subsidiaries has any entity (other than the Company or
any such Subsidiaries) been an ERISA Affiliate of any of the Company and its
Subsidiaries.
(d) Company Qualified Plans.
(1) Each Company Qualified Plan satisfies, in all material respects, the
requirements of Section 401(a) of the Code, and each trust under each such
plan is exempt from Tax under Section 501(a) of the Code. To the knowledge
of the Company, no event has occurred that will or could reasonably be
expected to give rise to disqualification or loss of tax-exempt status of
any such plan or trust under such sections.
(2) The Company has made available to Qwest and Qwest Subsidiary for each
Company Qualified Plan copies of the following documents: (A) the Form 5500
filed for each of the three most recent plan years, including all schedules
thereto and financial statements with attached opinions of independent
accountants; (B) the most recent determination letter from the IRS; (C) the
consolidated statement of assets and liabilities of such plan as of its
most recent valuation date; and (D) the statement of changes in fund
balance and in financial position or the statement of changes in net assets
available for benefits under such plan for the most recently ended plan
year. Such financial statements fairly present the financial condition and
the results of operations of each Company Qualified Plan as of such dates,
in accordance with GAAP.
(3) No Company Employee Plan is an employee stock ownership plan (an
"ESOP") within the meaning of Section 4975(e)(7) of the Code.
(e) Company ERISA Plans and Multiemployer Plans. No Company Employee Plan
is, and no employee benefit plan formerly maintained by any of the Company and
its Subsidiaries was, an ERISA Plan. Neither the Company nor any of its
Subsidiaries has ever contributed to, or withdrawn in a complete or partial
withdrawal from, any Multiemployer Plan or incurred any contingent liability
under Section 4204 of ERISA.
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Section 4.13 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of the
Company consists of 50,000,000 shares of Company Common Stock and 1,000,000
shares of preferred stock, par value $.01 per share, of the Company (the
"Company Preferred Stock").
(b) As of the date of this Agreement, there are (1) 15,884,378 shares of
Company Common Stock issued and outstanding, of which 6,550,354 shares are
registered in the names of the Principal Stockholders, (2) no shares of
Company Preferred Stock issued and outstanding, (3) no shares of Company
Common Stock held in the treasury of the Company, (4) 1,445,405 shares of
Company Common Stock reserved for issuance upon exercise of outstanding
Company Stock Options issued to current or former employees and directors of
the Company and its Subsidiaries pursuant to the Company Stock Option Plan,
(5) 621,186 shares of Company Common Stock reserved for issuance upon exercise
of authorized but unissued Company Stock Options pursuant to the Company Stock
Option Plan and (6) 1,683,349 shares of Company Common Stock reserved for
issuance upon exercise of outstanding Company Warrants, including 750,000
shares of Company Common Stock reserved for issuance upon exercise of the
Series Q Warrants.
(c) All outstanding shares of Company Common Stock are and all shares of
Company Common Stock issuable upon the exercise of the Company Stock Options
and Company Warrants, including, without limitation, the Series Q Warrants,
upon issuance thereof in accordance with the terms of such Company Stock
Options and Company Warrants, as the case may be, will be duly authorized,
validly issued, fully paid and nonassessable, free from any Liens created by
the Company with respect to the issuance and delivery thereof and not subject
to preemptive rights.
(d) Except with respect to the outstanding shares of Company Common Stock,
the Company Stock Options and the Company Warrants, there are no outstanding
bonds, debentures, notes or other indebtedness or other securities of the
Company having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders of
the Company may vote.
(e) Except with respect to the Company Stock Options and the Company
Warrants, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which the Company is a party or by which the Company is bound obligating the
Company to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock or other Equity Securities of the Company
or obligating the Company to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking. Section 4.13(e) of the Company's Disclosure Schedule sets forth a
correct and complete list of the outstanding Company Stock Options and Company
Warrants.
(f) Except as disclosed in Schedule 4.13(f) of the Company's Disclosure
Schedule and except with respect to the Transaction Documents, to the
knowledge of the representing party, there is no agreement or arrangement (1)
restricting the voting or transfer of any of the Equity Securities of the
Company, (2) restricting (A) the acquisition of any shares of Company Common
Stock or other securities pursuant to any Option (B) the acquisition of any
shares of Company Common Stock pursuant to the Series Q Warrants or (C) the
voting or transfer of any shares of Company Common Stock or other securities
so acquired, (3) that affords to any person "drag-along" or "tag-along" rights
with respect to the sale or other transfer of any shares of Company Common
Stock or other securities acquired by Qwest and its permitted assigns pursuant
to the exercise of any Option or Series Q Warrant, or (4) that would impose
limitations on the legal rights to be enjoyed by any of Qwest and its
permitted assigns, as a stockholder of the Company, upon the acquisition of
shares of Company Common Stock or other securities pursuant to the exercise of
any Option or Series Q Warrant.
(g) Except with respect to the Company Stock Options and the Company
Warrants, there are no outstanding contractual obligations, commitments,
understandings or arrangements of any of the Company and its
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Subsidiaries to repurchase, redeem or otherwise acquire, require or make any
payment in respect of any shares of Equity Securities of the Company.
(h) Except as disclosed in Section 4.13(h) of the Company's Disclosure
Schedule and with respect to the Company Credit Facilities, the Transaction
Documents and statutory restrictions of general application, there are no
legal, contractual or other restrictions on the payment of dividends or other
distributions or amounts on or in respect of any of the Equity Securities of
the Company.
(i) Except as disclosed in Section 4.13(i) of the Company's Disclosure
Schedule and with respect to the Transaction Documents, there are no
agreements or arrangements to which the Company or any of its Subsidiaries is
a party pursuant to which the Company is or could be required to register
shares of Company Common Stock or other securities under the Securities Act.
(j) All outstanding Equity Securities of the Company were issued in
compliance with all applicable Regulations, including, without limitation, the
registration provisions of applicable federal and state securities laws.
Equity Securities of the Company that were issued and reacquired by the
Company were so reacquired (and, if reissued, so reissued) in compliance with
all applicable Regulations, and the Company has no liability with respect to
the reacquisition or reissuance of such Equity Securities.
Section 4.14 Subsidiaries.
(a) Section 4.14(a) of the Company's Disclosure Schedule sets forth a
correct and complete list of each of its Subsidiaries and the directors and
officers of the Subsidiary as of the date of this Agreement. All outstanding
shares of capital stock or other equity interests of each Subsidiary are duly
authorized, validly issued, fully paid and nonassessable or, with respect to
partnership interests, limited liability company membership interests or their
equivalent, are validly issued, the consideration therefor has been paid and
no unmet calls for capital contributions or similar payments are outstanding.
(b) All shares of capital stock or other equity interests of each
Subsidiary, are owned beneficially and of record by the Company, free and
clear of all Liens other than Permitted Liens. No other Equity Securities of
any Subsidiary are outstanding.
(c) Except with respect to the outstanding shares of capital stock or other
Equity Securities of each Subsidiary, there are no outstanding bonds,
debentures, notes or other indebtedness or other securities of such Subsidiary
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which stockholders of such
Subsidiary may vote.
(d) There are no outstanding securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which any
of the Company and its Subsidiaries is a party or by which any of them is
bound obligating any of the Company and its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other Equity Securities of any of the Subsidiaries or obligating any
of the Company and its Subsidiaries to issue, grant, extend or enter into any
such security, option, warrant, call, right, commitment, agreement,
arrangement or undertaking.
(e) Except with respect to the Transaction Documents, there is no agreement
or arrangement restricting the voting or transfer of any of the Equity
Securities of any of the Subsidiaries.
(f) There are no outstanding contractual obligations, commitments,
understandings or arrangements of any of the Company and its Subsidiaries to
repurchase, redeem or otherwise acquire, require or make any payment in
respect of any of the Equity Securities of any of the Subsidiaries.
(g) Except with respect to the Company Credit Facilities, the Transaction
Documents and statutory restrictions of general application, there are no
legal, contractual or other restrictions on the payment of dividends or other
distributions or amounts on or in respect of any of the Equity Securities of
any of the Subsidiaries.
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(h) All outstanding Equity Securities of each of the Subsidiaries were
issued in compliance with all applicable Regulations, including, without
limitation, the registration provisions of applicable federal and state
securities laws. Equity Securities of any of the Subsidiaries that were issued
and reacquired by such Subsidiary were so reacquired (and, if reissued, so
reissued) in compliance with all applicable Regulations, and none of the
Company and its Subsidiaries has any liability with respect to the
reacquisition or reissuance of such Equity Securities.
Section 4.15 Property.
(a) Each of the Company and its Subsidiaries owns, leases or licenses all
real property and personal property, tangible or intangible, that are used or
useful in its business and operations as now conducted and proposed to be
conducted, the failure to own, lease or license which real or personal
property, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect (collectively, the "Company Properties").
(b) All Company Properties are reflected in the financial statements
referred to in Section 4.5 in the manner and to the extent required to be
reflected therein by GAAP (other than any Company Properties disposed of in
the Ordinary Course).
(c) All tangible Company Properties are in such condition and repair, and
are suitable, sufficient in amount, size and type and so situated, as is
appropriate and adequate for the uses for which they are used and intended and
to carry on the business of the Company or such Subsidiary, as the case may
be, as now conducted and as proposed to be conducted.
(d) To the knowledge of the representing party, all Company Properties
comply in all material respects with the terms and conditions of all
agreements relating to such real property and personal property and are in
conformity in all material respects with all Regulations of any Governmental
Body currently in effect, scheduled to come into effect or proposed to be
adopted, entered or issued, as the case may be, and all decisions, rulings,
orders and awards of any arbitrator applicable to it or its business,
properties or operations, except where the failure to so comply or conform,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect. Except as disclosed in Section 4.15(d) of the
Company's Disclosure Schedule, there exists no default by any party under any
lease agreement with respect to any Company Property, which default,
individually or together with other defaults under the same lease agreement or
other lease agreements, could reasonably be expected to have a Material
Adverse Effect.
(e) The interest of any of the Company and its Subsidiaries in each Company
Property is free and clear of all Liens other than Permitted Liens, except
where the absence of such title, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.
(f) None of the hardware or software used or useful in the business and
operations of any of the Company and its Subsidiaries as now conducted and
proposed to be conducted contains imbedded logic or code that will fail to
recognize the year 2000 as such, or that might fail or cause other hardware or
software to cease to perform according to specifications or to the needs of
the business of the Company or the Subsidiary, as the case might be, by reason
of the date change after December 31, 1999, or cannot accurately and correctly
process data, including dates, from different countries, except where such
condition, individually or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect.
Section 4.16 Proprietary Rights.
(a) Each of the Company and its Subsidiaries owns or licenses all
Proprietary Rights that are used or useful in its business and operations as
now conducted and proposed to be conducted, the failure to own or license
which Proprietary Rights could reasonably be expected to have a Material
Adverse Effect (collectively, the "Company Proprietary Rights").
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(b) One or more of the Company and its Subsidiaries have good title to each
of the interests created by, or an implied license to use, the Company
Proprietary Rights. None of the Company and its Subsidiaries has received
notice that the validity of any such Company Proprietary Right or its title to
or use of any Company Proprietary Right is being questioned in any Action. The
right, title and interest of the Company or a Subsidiary in and to each such
Company Proprietary Right and the authority to use the same are free and clear
of all Liens other than Permitted Liens. To the knowledge of the representing
party, no use has been or is being made of any Company Proprietary Right by
any person other than the Company, the Subsidiary or a person duly authorized
to make that use. All Company Proprietary Rights used by the Company or a
Subsidiary but previously owned or held by any of its directors, officers,
employees or agents have been duly transferred to the Company or the
Subsidiary, as the case may be. There is no liability or obligation of the
Company or a Subsidiary with respect to any Company Proprietary Right that is
required to have been paid or otherwise performed, as of the date of this
Agreement, that has not been paid or otherwise performed in full.
(c) The representing party has no knowledge of any valid grounds for any
bona fide claims (1) to the effect that the sale, licensing or use of any
product or service as now sold, licensed or used, or proposed for sale,
license or use, by any of the Company and its Subsidiaries infringes on any
Proprietary Right, (2) against the use by any of the Company and its
Subsidiaries of any Company Proprietary Rights used in the business and
operations of any of the Company and its Subsidiaries as now conducted or as
proposed to be conducted or (3) challenging the ownership, validity,
effectiveness or right of use of any of the Company Proprietary Rights.
(d) The execution and delivery of the Transaction Documents and the
conclusion of any of the Transactions will not (and will not give any person a
right to) terminate or modify any rights of, or accelerate or increase any
obligation of, any of the Company and its Subsidiaries under any Company
Proprietary Right.
Section 4.17 Insurance. One or more of the Company and its Subsidiaries
maintain insurance with reputable insurance companies in such amounts and
covering such risks as are usually carried by companies engaged in the same or
similar business and similarly situated. There are no currently outstanding
material losses for which the Company or such Subsidiary, as the case may be,
has failed to give or present notice or claim under any policy. There are no
requirements by any insurance company or by any board of fire underwriters or
other body exercising similar functions or by any Governmental Body of which
the representing party has knowledge requiring any repairs or other work to be
done to any of the properties owned, leased, licensed or used by the Company
or such Subsidiary, as the case may be, or requiring any equipment or
facilities to be installed on or in connection with any of the properties, the
failure to complete which could result in the cancellation of the policy of
insurance. Policies for all the insurance are in full force and effect and
none of the Company and its Subsidiaries is in default in any material respect
under any of the policies. The representing party has no knowledge of the
cancellation or proposed cancellation of any of the insurance or of any
proposed increase in the contributions for workers' compensation applicable to
each employee or unemployment insurance or of any conditions or circumstances
applicable to the business of the Company or such Subsidiary, as the case may
be, which might result in a material increase in those contributions. The
Company has delivered to Qwest and Qwest Subsidiary true and complete copies
of policies for all material fire and casualty, general liability, business
interruption, product liability and other insurance maintained by any of the
Company and its Subsidiaries.
Section 4.18 Environmental Matters.
(a) Each of the Company and its Subsidiaries has obtained all environmental,
health and safety permits, authorizations and other Licenses required under
all Environmental Laws to carry on its business as now conducted or proposed
to be conducted, except to the extent failure to have any such permit,
authorization or other License would not have a Material Adverse Effect. Each
of such permits, authorizations and other Licenses is in full force and effect
and each of the Company and its Subsidiaries is in compliance with the terms
and conditions thereof, and is also in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any applicable Environmental Law
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<PAGE>
or in any regulation, code, plan, order, decree, judgment, injunction, notice
or demand letter issued, entered, promulgated or approved thereunder, except
to the extent failure to comply therewith could not reasonably be expected to
have a Material Adverse Effect.
(b) None of the Company and its Subsidiaries has generated, used,
transported, treated, stored, released or disposed of, or has permitted anyone
else to generate, use, transport, treat, store, release or dispose of, any
Hazardous Substance in a manner which has created or might reasonably be
expected to create any liability or which would require reporting or giving
notice to any Governmental Body, except for such events or occurrences for
which the Company or its Subsidiaries would not reasonably be expected to
incur liability or costs, individually or in the aggregate, in excess of
$150,000 (exclusive of any amount with respect to which a reserve has been
taken by the Company or a Subsidiary on or before December 31, 1997).
Section 4.19 Books and Records.
(a) The records and books of account of each of the Company and its
Subsidiaries are correct and complete in all material respects, have been
maintained in accordance with good business practices and are reflected
accurately in the financial statements referred to in Section 4.5. Each of the
Company and its Subsidiaries has accounting controls sufficient to insure that
its transactions are (1) executed in accordance with management's general or
specific authorization and (2) recorded in conformity with GAAP so as to
maintain accountability for assets.
(b) The minute books of each of the Company and its Subsidiaries true and
correct copies of which have been made available to Qwest and Qwest
Subsidiary, contain accurate records of all meetings and accurately reflect
all corporate action of the stockholders and the board of directors (including
committees) of the Company or such Subsidiary, as the case may be.
(c) The stock books and ledgers of each of the Company and its Subsidiaries,
true and correct copies of which have been made available to Qwest and Qwest
Subsidiary, correctly record all transfer and issuances of all capital stock
of the Company or the Subsidiary.
Section 4.20 Material Contracts.
(a) Section 4.20(a) of the Company's Disclosure Schedule sets forth a
correct and complete list of the following agreements to which any of the
Company and its Subsidiaries is a party (collectively, the "Company Material
Contracts"), true and correct copies of which have been delivered to Qwest and
Qwest Subsidiary:
(1) agreements with investment bankers, brokers, finders, consultants and
advisers engaged by the Company or a Subsidiary (including, without
limitation, the Company's Financial Advisor) with respect to the
Transactions, other Business Combination Transactions, the purchase or sale
by the Company or a Subsidiary of assets not in the ordinary course of
business or the issuance and sale by the Company or a Subsidiary of any
Equity Securities;
(2) Company Affiliate Agreements;
(3) agreements made by any of the Company and its Subsidiaries not in the
Ordinary Course that may require the payment or provision by or to any of
the Company and its Subsidiaries of money in an aggregate amount, or goods
or services having an aggregate value, in each case in excess of $100,000;
(4) agreements made by any of the Company and its Subsidiaries since
December 31, 1997, whether or not in the Ordinary Course, contemplating the
acquisition by the Company or the Subsidiary, as the case may be, of any
Equity Securities of any person or all or substantially all of the assets
of any person;
(5) agreements that by their terms may be cancelled, terminated, amended
or modified, or pursuant to which payments might be required or
acceleration of benefits may be required, in connection with or as the
result of the execution and delivery of the Transaction Documents or the
conclusion of any of the
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Transactions, in each case the consequence of which could reasonably be
expected to adversely affect any of the Company and the Subsidiaries in an
amount in excess of $100,000;
(6) agreements that provide for the acceleration or payment of benefits
upon the occurrence of a change of control (however defined), whether or
not resulting from the execution and delivery of the Transaction Documents
or the conclusion of any of the Transactions;
(7) agreements that provide for the indemnification by any of the Company
and its Subsidiaries of any director, officer, employee or agent of any of
the Company and its Subsidiaries, other than agreements referred to in the
preceding clause (1);
(8) agreements that grant a power of attorney, agency or similar
authority to another person;
(9) joint venture, partnership and limited liability agreements;
(10) agreements giving any person the right to renegotiate or require an
increase or reduction in the price of goods or services provided by or to
any of the Company and its Subsidiaries, an increase in amounts previously
paid by any of the Company and its Subsidiaries with respect to any goods
or services or the repayment by any of the Company and the Subsidiaries of
amounts previously paid to any of them with respect to any goods or
services;
(11) agreements with any Governmental Body; and
(12) agreements requiring the payment or provision by or to any of the
Company and its Subsidiaries of money in an aggregate amount, or goods or
services having an aggregate value, in each case in excess of $250,000
during the year ending December 31, 1998.
(b) Each Company Affiliate Agreement is in full force and effect, and except
as disclosed in Section 4.20(b) of the Company's Disclosure Schedule, no term
or condition thereof has been amended, modified or waived after the execution
thereof, in each case in any material respect, except in accordance with this
Agreement. Each such Company Affiliate Agreement is the legally valid and
binding obligation of the parties thereto, enforceable against such parties in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally and by general principles of equity, including, without
limitation, concepts of materiality, reasonableness, good faith and fair
dealing and the possible unavailability of specific performance or injunctive
relief, regardless of whether considered in a proceeding in equity or law.
(c) Each agreement referred to in Sections 4.20(a)(5) and 4.20(a)(12) has,
to the knowledge of the representing party with respect to parties other than
the Company or the Subsidiary, as the case may be, been duly authorized,
executed and delivered by the parties to such agreement, is in full force and
effect and constitutes the legally valid and binding obligation of the parties
to such agreement or their respective successors or assigns, enforceable
against them in accordance with the terms of such agreement. Except as
disclosed in Section 4.20(c) of the Company's Disclosure Schedule, there is no
liability or obligation of the Company or a Subsidiary with respect to any
such agreement referred to in Section 4.20(a)(5) or Section 4.20(a)(12) that,
under the terms of such agreement, has not been paid or otherwise performed in
full. The right, title and interest of the Company or a Subsidiary in, to and
under each such agreement is free and clear of all Liens other than Permitted
Liens. Except as disclosed in Section 4.20(c) of the Company's Disclosure
Schedule, there exists no default under any such agreement by any party, which
default, individually or together with other defaults under the same agreement
or other agreements, could reasonably be expected to have a Material Adverse
Effect. The execution and delivery of the Transaction Documents and the
conclusion of any of the Transactions will not (and will not give any person a
right to) terminate or modify any rights of, or accelerate or increase any
obligation of, any of the Company and its Subsidiaries under any such
agreement.
Section 4.21 Transactions with Affiliates. Except as disclosed in Section
4.21 of the Company's Disclosure Schedule or in the Company SEC Documents
filed with the SEC prior to the date hereof, at no time since December 31,
1997 has any of the Company and its Subsidiaries entered into any transaction
(including,
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but not limited to, the purchase, sale or exchange of property or the
rendering of any service) with any Affiliate except as contemplated by the
Transaction Documents.
Section 4.22 SEC Documents. The Company has filed with the Securities and
Exchange Commission all reports, schedules, forms, statements and other
documents required by the Securities Act or the Exchange Act to be filed by
the Company since January 31, 1994 (collectively, and in each case including
all exhibits and schedules thereto and documents incorporated by reference
therein, the "Company SEC Documents"). As of their respective dates, except to
the extent revised or superseded by a subsequent filing with the Securities
and Exchange Commission on or before the date of this Agreement, the Company
SEC Documents filed by the Company complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and none of the Company SEC Documents (including any and all financial
statements included therein) filed by the Company as of such dates contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The consolidated financial statements of the Company and its
consolidated Subsidiaries included in the Company SEC Documents, including any
amendments thereto, comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Securities and Exchange Commission with respect thereto. The Company has filed
with the Securities and Exchange Commission as exhibits to the Company SEC
Documents all agreements, contracts and other documents or instruments
required to be so filed, and such exhibits are true and complete copies of
such agreements, contracts and other documents or instruments, as the case may
be. None of the Subsidiaries of the Company is required to file any reports,
schedules, statements or other documents with the Securities and Exchange
Commission.
Section 4.23 Proxy Statement/Prospectus; Registration Statement; Other
Information. None of the information with respect to any of the Company and
its Subsidiaries to be included in the Proxy Statement/Prospectus or the
Registration Statement will, in the case of the Proxy Statement/Prospectus or
any amendments thereof or supplements thereto, at the time of the mailing of
the Proxy Statement/Prospectus or any amendments thereof or supplements
thereto, and at the time of the Company Stockholders Meeting, or, in the case
of the Registration Statement, at the time it becomes effective, contain any
untrue statement of a material fact, omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that no representation is made by the representing party with respect to
information supplied in writing by Qwest, Qwest Subsidiary or any Affiliate
thereof specifically for inclusion in the Proxy Statement/Prospectus. The
letters to stockholders, notices of meeting, proxy statement and forms of
proxies to be distributed to stockholders in connection with this Agreement
and the Merger and any schedules required to be filed with the Securities and
Exchange Commission in connection therewith are collectively referred to as
the "Proxy Statement/Prospectus."
Section 4.24 Company Board Approval.
(a) The Board of Directors of the Company, by resolutions duly adopted at a
meeting duly called and held and not subsequently rescinded or modified in any
way (the "Company Board Approval"), but subject to clause (2) of the proviso
to Section 7.2(z), has duly (1) determined that this Agreement and the Merger
are in the best interests of the Company and its stockholders, (2) approved
this Agreement and the Merger and determined that this Agreement and the
Merger are advisable, (3) determined that the other Transaction Documents and
the other Transactions are in the best interests of the Company and its
stockholders and approved such other Transaction Documents and Transactions
and (4) recommended that the stockholders of the Company approve this
Agreement and the Merger.
(b) The Company Board Approval constitutes approval of this Agreement and
the Merger for purposes of Section 251 of the DGCL and of each of the
Transaction Documents and each of the Transactions (including, without
limitation, the Qwest/Principal Stockholder Transactions, the Qwest Credit
Transactions and the Qwest
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Private Line Services Agreement) for purposes of Section 203 of the DGCL if
the provisions thereof were to apply to any of the Transaction Documents or
any of the Transactions.
(c) The Company's Financial Advisor has delivered to the Board of Directors
of the Company its opinion, dated as of the date of this Agreement, to the
effect that the Merger Consideration to be received by the holders of Company
Common Stock (other than holders of Company Common Stock who are Affiliates of
the Company) in the Transactions is fair to such holders.
Section 4.25 Required Vote. The affirmative vote, at a duly convened meeting
of the holders of Company Common Stock at which the necessary quorum is
present, of a majority of the outstanding shares of Company Common Stock is
the only vote or consent of the holders of any class or series of the Equity
Securities of the Company necessary to approve this Agreement and the Merger.
The other Transaction Documents and the other Transactions are not required to
be approved by the holders of shares of any class or series of Equity
Securities of the Company.
Section 4.26 Business Combination Transactions. None of the Company and its
Subsidiaries has entered into any agreement with any person which has not been
terminated as of the date of this Agreement and under which there remains any
liability or obligation of any of the Company and its Subsidiaries with
respect to a Business Combination Transaction (other than the Transactions).
Section 4.27 Fees for Financial Advisors, Brokers and Finders. None of the
Company, its Subsidiaries and the Principal Stockholders has authorized any
person other than the Company's Financial Advisor to act as financial advisor,
broker, finder or other intermediary that might be entitled to any fee,
commission, expense reimbursement or other payment of any kind from any of the
Company and its Subsidiaries upon the conclusion of or in connection with any
of the Transactions. The Company has disclosed to Qwest and Qwest Subsidiary
the terms of the engagement of the Company's Financial Advisor by the Company.
Section 4.28 Ownership of Qwest Common Stock. None of the Company and its
Subsidiaries owns any shares of Qwest Common Stock or other Equity Securities
of Qwest (exclusive of any shares of Qwest Common Stock owned by any Company
Employee Plan).
Section 4.29 Continuing Representations and Warranties.
(a) Each of the representations and warranties made by the Company or a
Subsidiary in this Agreement or in any other Transaction Document as of any
date other than the Closing Date shall be true and correct in all material
respects on and as of the Closing Date, except as otherwise contemplated by
such Transaction Document.
(b) Not less than three Business Days prior to the Closing Date, the Company
shall prepare and deliver to Qwest and Qwest Subsidiary such updates or other
revisions of the written disclosures referred to in this Article IV as have
been delivered by the Company to Qwest and Qwest Subsidiary as shall be
necessary in order to make each of such written disclosures true and correct
in all material respects on and as of the Closing Date. The requirement to
prepare and deliver updates or other revisions of the written disclosures, and
the receipt by Qwest and Qwest Subsidiary of information pursuant to Section
6.1 or otherwise on or before the Closing Date, shall not limit the right of
Qwest and Qwest Subsidiary under Article III to require as a condition
precedent to the performance of its obligations under this Agreement on such
Closing Date the accuracy in all material respects of the representations and
warranties made by the representing party in any Transaction Document and the
performance in all material respects of the covenants of the Company made in
any Transaction Document (without regard to such updates or other revisions)
and to receive an unqualified certificate with respect to the same.
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ARTICLE V
Representations and Warranties of Qwest and Qwest Subsidiary
Each of Qwest and Qwest Subsidiary, jointly and severally, represents and
warrants to the Company as follows:
Section 5.1 Corporate Existence and Power. Each of Qwest and Qwest
Subsidiary (1) is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, (2) has
all necessary corporate power and authority and all material licenses,
authorizations, consents and approvals required to own, lease, license or use
its properties now owned, leased, licensed or used and proposed to be owned,
leased, licensed or used and to carry on its business as now conducted and
proposed to be conducted, (3) is duly qualified as a foreign corporation under
the laws of each jurisdiction in which qualification is required either to
own, lease, license or use its properties now owned, leased, licensed or used
or to carry on its business as now conducted, except where the failure to
effect or obtain such qualification, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect, and (4) has all
necessary corporate power and authority to execute and deliver each
Transaction Document to which it is or may become a party and to perform its
obligations thereunder.
Section 5.2 Authorization; Contravention. Subject to obtaining the Approvals
referred to in Section 5.3, the execution and delivery by each of Qwest and
Qwest Subsidiary of each Transaction Document to which it is or may become a
party and the performance by it of its obligations under each of those
Transaction Documents have been duly authorized by all necessary corporate
action and do not and will not (1) contravene, violate, result in a breach of
or constitute a default under, (A) its certificate of incorporation or bylaws,
(B) any Regulation of any Governmental Body or any decision, ruling, order or
award of any arbitrator by which it or any of its properties may be bound or
affected, including, but not limited to, the Hart-Scott-Rodino Act or (C) any
agreement, indenture or other instrument to which it is a party or by which it
or its properties may be bound or affected or (2) result in or require the
creation or imposition of any Lien on any property now owned or hereafter
acquired by it, except in each case referred to in the preceding clauses (1)
and (2) for contraventions, violations, breaches, defaults or Liens that,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
Section 5.3 Approvals. Except as disclosed in Section 5.3 of Qwest and Qwest
Subsidiary's Disclosure Schedule, no Approval of any Governmental Body or
other person is required or advisable on the part of Qwest or Qwest Subsidiary
for (1) the due execution and delivery by Qwest or Qwest Subsidiary, as the
case may be, of any Transaction Document, (2) the conclusion of the
Transactions, (3) the performance by Qwest or Qwest Subsidiary, as the case
may be, of its obligations under each Transaction Document to which it is or
may become a party and (4) the exercise by the Company of its rights under
each Transaction Document to which the Company is or may become a party,
except in each case referred to in the preceding clauses (1), (2), (3) and (4)
where the failure to obtain such Approval, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.
Section 5.4 Binding Effect. Each Transaction Document to which Qwest or
Qwest Subsidiary is or may become a party is, or when executed and delivered
in accordance with this Agreement will be, the legally valid and binding
obligation of Qwest or Qwest Subsidiary, as the case may be, enforceable
against it in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally and general principles of
equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of
specific performance or injunctive relief, regardless of whether considered in
a proceeding in equity or at law.
Section 5.5 Financial Information.
(a) The consolidated balance sheet of Qwest and its consolidated
Subsidiaries as of December 31, 1997 and the related consolidated statements
of income (loss) and stockholders' equity and cash flows for the fiscal
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year then ended, reported on by KPMG Peat Marwick LLP, true and complete
copies of which have been delivered to the Company, fairly present the
consolidated financial position of Qwest and its consolidated Subsidiaries as
of that date and their consolidated results of operations and cash flows for
the year then ended, in accordance with GAAP applied on a consistent basis
except as described in the footnotes to the financial statements or as
disclosed in Section 5.5 of Qwest and Qwest Subsidiary's Disclosure Schedule.
(b) The unaudited consolidated balance sheet of Qwest and its consolidated
Subsidiaries as of June 30, 1998 and the related consolidated statements of
income (loss) and stockholders' equity and cash flows for the six months then
ended, true and complete copies of which have been delivered to the Company,
fairly present, subject to normal year-end adjustments, the consolidated
financial position of Qwest and its consolidated Subsidiaries as of that date
and their consolidated results of operations and cash flows for the six months
then ended.
(c) At the respective dates of the balance sheets referred to in this
Section 5.5, none of Qwest and its Subsidiaries had any material Liability
that, in accordance with GAAP applied on a consistent basis, should have been
shown or reflected in the balance sheets but was not, except for the omission
of notes in unaudited balance sheets with respect to contingent liabilities
that in the aggregate did not materially exceed those so reported in the
latest audited balance sheets previously delivered and that were of
substantially the same type as so reported.
(d) Since January 1, 1997, there has been no material disagreement (within
the meaning of Item 304(a)(1)(iv) of Regulation S-K under the Securities Act)
between any of Qwest and its Subsidiaries, on the one part, and any of its
independent accountants, on the other part, with respect to any aspect of the
manner in which the Company or such Subsidiary, as the case may be, maintained
or maintains its books and records or the manner in which the Company or the
Subsidiary, as the case may be, has reported upon the financial condition and
results of operations of any of the Company and its Subsidiaries since such
date, that has not been resolved to the satisfaction of the relevant
independent accountants.
Section 5.6 Absence of Certain Changes or Events. Except as disclosed in
Section 5.6 of Qwest and Qwest Subsidiary's Disclosure Schedule or the Qwest
SEC Documents filed with the SEC prior to the date hereof, since December 31,
1997, no circumstance has existed and no event has occurred that has had, will
have or could reasonably be expected to have a Material Adverse Effect.
Section 5.7 Litigation.
(a) There is no Action pending against Qwest or Qwest Subsidiary or, to the
knowledge of the representing party, threatened against Qwest, Qwest
Subsidiary or any other person that restricts in any material respect or
prohibits (or, if successful, would restrict or prohibit) the conclusion of
any of the Transactions.
(b) There is no Action pending against any of Qwest and its Subsidiaries or,
to the knowledge of the representing party, threatened against any of Qwest
and its Subsidiaries or any other person that involves any of the Transactions
or any property owned, leased, licensed or used by any of Qwest and its
Subsidiaries, as the case may be, that, individually or in the aggregate, if
determined adversely to any of them, could reasonably be expected to have a
Material Adverse Effect on Qwest.
Section 5.8 Compliance with Regulations.
(a) None of Qwest and its Subsidiaries is in, and none of them has received
written notice of, a violation of or default with respect to, any Regulation
of any Governmental Body or any decision, ruling, order or award of any
arbitrator applicable to it or its business, properties or operations,
including individual products or services sold or provided by it, except for
violations or defaults that, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
(b) Each of Qwest and its Subsidiaries has filed or caused to be filed with
each applicable Governmental Body all reports, applications, documents,
instruments and information required to be filed by it pursuant to all
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applicable Regulations, other than those as to which the failure to file,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
Section 5.9 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of Qwest
consists of 600,000,000 shares of Qwest Common Stock and 25,000,000 shares of
preferred stock, par value $.01 per share, of Qwest (the "Qwest Preferred
Stock").
(b) As of August 31, 1998, there are approximately (1) 332,123,281 shares of
Qwest Common Stock issued and outstanding, (2) no shares of Qwest Common Stock
held in the treasury of Qwest, (3) no shares of Qwest Preferred Stock issued
and outstanding, (4) 35,855,624 shares of Qwest Common Stock reserved for
issuance upon exercise of outstanding stock options issued by Qwest to current
or former employees and directors of Qwest and its Subsidiaries, (5)
14,787,963 shares of Qwest Common Stock reserved for issuance upon exercise of
authorized but unissued stock options and (6) 8,600,000 shares of Qwest Common
Stock reserved for issuance upon exercise of a warrant issued to Anschutz
Family Investment Company LLC.
(c) All outstanding shares of Qwest Common Stock are duly authorized,
validly issued, fully paid and nonassessable, free from any Liens created by
Qwest with respect to the issuance and delivery thereof and not subject to
preemptive rights.
(d) Except with respect to the outstanding shares of Qwest Common Stock,
there are no outstanding bonds, debentures, notes or other indebtedness or
other securities of Qwest having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
stockholders of Qwest may vote.
(e) All outstanding Equity Securities of Qwest were issued in compliance
with all applicable Regulations, including, without limitation, the
registration provisions of applicable federal and state securities laws.
Equity Securities of Qwest that were issued and reacquired by Qwest were so
reacquired (and, if reissued, so reissued) in compliance with all applicable
Regulations, and Qwest has no liability with respect to the reacquisition or
reissuance of such Equity Securities.
Section 5.10 SEC Documents. Qwest has filed with the Securities and Exchange
Commission all reports, schedules, forms, statements and other documents
required by the Securities Act or the Exchange Act to be filed by Qwest since
April 18, 1997 (collectively, and in each case including all exhibits and
schedules thereto and documents incorporated by reference therein, the "Qwest
SEC Documents"). As of their respective dates, except to the extent revised or
superseded by a subsequent filing with the Securities and Exchange Commission
on or before the date of this Agreement, the Qwest SEC Documents filed by
Qwest complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and none of the Qwest
SEC Documents (including any and all financial statements included therein)
filed by Qwest as of such dates contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of Qwest and its consolidated Subsidiaries included in
the Qwest SEC Documents, including any amendments thereto, comply as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the Securities and Exchange Commission with
respect thereto. Qwest has filed with the Securities and Exchange Commission
as exhibits to the Qwest SEC Documents all agreements, contracts and other
documents or instruments required to be so filed, and such exhibits are true
and complete copies of such agreements, contracts and other documents or
instruments, as the case may be. None of the Subsidiaries of Qwest is required
to file any reports, schedules, statements or other documents with the
Securities and Exchange Commission.
Section 5.11 Proxy/Statement/Prospectus; Registration Statement; Other
Information. None of the information with respect to any of Qwest and its
Subsidiaries to be included in the Proxy Statement/Prospectus
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or the Registration Statement will in the case of the Proxy
Statement/Prospectus or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement/Prospectus or any amendments
thereof or supplements thereto, and at the time of the Company Stockholders
Meeting, or, in the case of the Registration Statement, at the time it becomes
effective, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representation is made by the
representing party with respect to information supplied in writing by the
Company or any Affiliate of the Company specifically for inclusion in the
Proxy Statement/Prospectus or the Registration Statement. The Registration
Statement will comply in all material respects with the provisions of the
Securities Act. The registration statement on Form S-4, in which the Proxy
Statement/Prospectus will be included, and all exhibits thereto, required to
be filed with the Securities and Exchange Commission in connection with this
Agreement and the Merger are collectively referred to as the "Registration
Statement".
Section 5.12 Ownership of Company Common Stock. None of Qwest and its
Subsidiaries owns any shares of Company Common Stock or other Equity
Securities of the Company (exclusive of any shares of Company Common Stock
owned by any Employee Plan of Qwest and its Subsidiaries).
Section 5.13 Continuing Representations and Warranties.
(a) Each of the representations and warranties made by Qwest or Qwest
Subsidiary in this Agreement or in any other Transaction Document as of any
date other than the Closing Date shall be true and correct in all material
respects on and as of the Closing Date, except as otherwise contemplated by
such Transaction Document.
(b) Not less than three Business Days prior to the Closing Date, Qwest and
Qwest Subsidiary shall prepare and deliver to the Company such updates or
other revisions of the written disclosures referred to in this Article V as
have been delivered by Qwest and Qwest Subsidiary to the Company as shall be
necessary in order to make each of such written disclosures correct and
complete in all material respects on and as of the Closing Date. The
requirement to prepare and deliver updates or other revisions of the written
disclosures, and the receipt by the Company of information pursuant to Section
6.1 or otherwise on or before the Closing Date, shall not limit the right of
the Company under Article III to require as a condition precedent to the
performance of its obligations under this Agreement on such Closing Date the
accuracy in all material respects of the representations and warranties made
by the representing party in any Transaction Document and the performance in
all material respects of the covenants of Qwest or Qwest Subsidiary, as the
case may be, made in any Transaction Document (without regard to such updates
or other revisions) and to receive an unqualified certificate with respect to
the same.
ARTICLE VI
Covenants of the Parties
Section 6.1 Covenants of the Parties. The Company covenants and agrees for
the benefit of Qwest and Qwest Subsidiary with respect to the Company, and
Qwest and Qwest Subsidiary, jointly and severally, covenant and agree for the
benefit of the Company, in each case that the party with respect to which the
covenant and agreement is made shall (and, with respect to the Company, that
the Company shall cause its Subsidiaries to) do the following until the
Effective Time and, with respect to Sections 6.1(e) and 6.1(f), indefinitely
after the date of this Agreement:
(a) Maintenance of Existence. Preserve and maintain its corporate existence
and good standing in the jurisdiction of its incorporation and qualify and
remain qualified as a foreign corporation in each jurisdiction in which
qualification is required either (1) to own, lease, license or use its
properties now owned, leased, licensed or used and proposed to be owned,
leased, licensed or used or (2) to carry on its business as now conducted or
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proposed to be conducted, except where the failure to effect or obtain such
qualification, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
(b) Compliance With Regulations. Comply in all respects with all Regulations
of each Governmental Body and all decisions, rulings, orders and awards of
each arbitrator applicable to it or its business, properties or operations in
connection with the Transactions if a failure to comply with any of the
foregoing, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect, including, without limitation, use its
reasonable best efforts to comply (and exchange information with other parties
to enable them to comply) with any applicable requirements under the Hart-
Scott- Rodino Act relating to filing and furnishing information to the
Department of Justice and the Federal Trade Commission, including, without
limitation, the following:
(1) assisting in the preparation and filing of each applicable "Antitrust
Improvements Act Notification and Report Form for Certain Mergers and
Acquisitions" and taking all other action required by 16 C.F.R. Parts 801-
803 (or any successor form or Regulation);
(2) complying with any additional request for documents or information
made by the Department of Justice or the Federal Trade Commission or by a
court; and
(3) causing all affiliated persons of the "ultimate parent entity" of the
party within the meaning of the Hart-Scott-Rodino Act to cooperate and
assist in such filing and compliance.
(c) Reasonable Best Efforts. Upon the terms and subject to the conditions
provided in this Agreement or the other Transaction Documents, use its
reasonable best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, and to assist and cooperate with the other parties to
this Agreement or any other Transaction Document in doing all things
necessary, proper or advisable to cause the satisfaction of the conditions to
the conclusion of the Transactions contemplated hereby or thereby as soon as
reasonably practicable, including, without limitation, using its reasonable
best efforts to obtain all Approvals that are required or advisable on the
part of any party with respect to the Transactions. Nothing in this Section
6.1(c) or any other provision of any Transaction Document shall (1) require
any of Qwest and its Subsidiaries to sell or otherwise dispose of any
substantial amount of the assets of any of Qwest, the Company and their
respective Subsidiaries, whether as a condition to obtaining any Approval from
a Governmental Body or any other person or for any other reason, or (2)
prevent Qwest from engaging in any activities, discussions or negotiations
with respect to a Business Combination Transaction with respect to any of
Qwest and its Subsidiaries, entering into any agreements or other arrangements
with respect to the same or concluding any transactions contemplated by, or
believed by any of Qwest and its Subsidiaries to be in furtherance of, such
Business Combination Transaction, and no such actions by any of Qwest and its
Subsidiaries with respect to such a Business Combination Transaction shall
constitute a breach of any representation, warranty, covenant or agreement of
Qwest or Qwest Subsidiary in any Transaction Document.
(d) Notification. Give prompt notice to the other parties to this Agreement
or any other Transaction Document, as the case may be, of (1) the occurrence,
or failure to occur, of any event that would be likely to cause any
representation or warranty of the party contained herein or therein to be
untrue or inaccurate in any material respect at any time from the date of this
Agreement to the Closing Date, any failure of the party to perform or
otherwise comply with, in any material respect, any covenant, condition or
agreement to be performed or complied with by it hereunder or thereunder and
(2) the receipt by the party of written or oral notice from any Governmental
Body or other person stating, or causing such party to believe, that there is
a reasonable likelihood that an Approval required by this Agreement to be
obtained from such Governmental Body or other person will not be obtained
timely or at all; which covenant of notification shall not limit the right of
any other party hereunder or thereunder to require as a condition precedent to
the performance of its obligations hereunder or thereunder the continuing
accuracy and performance of the representations and warranties and covenants
of the notifying party made herein or therein and to receive an unqualified
certificate with respect to the same.
(e) Publicity and Reports; Communications with Employees. Except as may be
required by applicable laws, court process or by obligations pursuant to any
Regulation of the NASD, as the case may be, refrain from
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issuing any press release or make any public filings with respect to the
Transactions, without affording the other parties the opportunity to review
and comment upon such release or filing; and, until the Effective Time,
cooperate with the other parties in determining the method and content of
written and oral communications by the parties and their respective
Subsidiaries to employees of the Company and its Subsidiaries.
(f) Confidentiality. Keep confidential any information disclosed by any
other party or its representatives to the covenanting party or its
representatives, whether before or after the date of this Agreement, in
connection with the Transactions or the discussions and negotiations preceding
the execution of the Transaction Documents, and to not use such information
other than as contemplated by the Transaction Documents, in each case unless
such information (1) becomes generally available to the public other than as a
result of a disclosure by the receiving party or its representatives or (2)
was available or becomes available to the receiving party or any of its
representatives on a non-confidential basis, provided that the source of such
information was not then known by the receiving party or its representatives,
after reasonable investigation, to be bound by a confidentiality agreement
with or other obligation of confidentiality to the other party or any of its
affiliates with respect to such information, except in each case to the extent
the duty as to confidentiality is waived in writing by the other party; and if
this Agreement is terminated, use reasonable efforts to return upon written
request from any other party all documents (and reproductions of those
documents) received by it or its representatives from the other party (and, in
the case of reproductions, all reproductions made by the receiving party)
unless the recipients provide assurances reasonably satisfactory to the
requesting party that the documents have been destroyed.
(g) Tax-Free Reorganization. Use, and cause its Affiliates to use,
reasonable best efforts to cause the Merger to qualify as a tax-free
reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code
including, without limitation, complying with the recording and reporting
requirements under Section 1.368-3 of the United States Treasury Regulations;
and not take, and cause its Affiliates not to take, any action that could
cause the Merger not to qualify as a tax-free reorganization under those
Sections and take the position for all purposes that the Merger qualifies as a
tax-free reorganization under those Sections.
(h) Further Assurances. Promptly upon request by any other party, correct
any defect or error that may be discovered in any Transaction Document or in
the execution or acknowledgement of any Transaction Document and execute,
acknowledge, deliver, file, re-file, register and re-register, any and all
such further acts, certificates, assurances and other instruments as the
requesting party may reasonably require from time to time in order (1) to
carry out more effectively the purposes of each Transaction Document, (2) to
enable the requesting party to exercise and enforce its rights and remedies
and collect any payments and proceeds under each Transaction Document, (3) to
enable any party to prepare, execute and file all Tax Returns and other
documents with respect to any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, transfer, recording,
registration and other fees and similar taxes that become due in connection
with the Transactions and (4) to better transfer, preserve, protect and
confirm to the requesting party the rights granted or now or hereafter
intended to be granted to the requesting party under each Transaction Document
or under each other instrument executed in connection with any Transaction
Document.
Section 6.2 Proxy Statement/Prospectus; Registration Statement. As soon as
practicable following the execution of this Agreement, each of the Company and
Qwest shall prepare and file with the Securities and Exchange Commission the
Proxy Statement/Prospectus and each of the Company and Qwest shall use its
reasonable best efforts to have the Proxy Statement/Prospectus cleared by the
Securities and Exchange Commission as promptly as practicable. As soon as
practicable following such clearance, Qwest shall prepare and file with the
Securities and Exchange Commission the Registration Statement, of which the
Proxy Statement/Prospectus will form a part, and shall use its reasonable best
efforts to have the Registration Statement declared effective by the
Securities and Exchange Commission as promptly as practicable thereafter. The
Company and Qwest shall cooperate with each other in the preparation of the
Proxy Statement/Prospectus, and each shall provide to the other promptly
copies of all correspondence between it or any of its representatives and the
Securities and Exchange Commission. Each of the Company and Qwest shall
furnish to the other all information concerning it and its Affiliates required
to be included in the Proxy Statement/Prospectus and the
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Registration Statement. As promptly as practicable after the effectiveness of
the Registration Statement, the Company shall mail the Proxy
Statement/Prospectus to the stockholders of the Company and Qwest shall mail
the Proxy Statement/Prospectus to the stockholders of Qwest. No amendment or
supplement to the Proxy Statement/Prospectus or the Registration Statement
shall be made without the approval of each of the Company and Qwest, which
approval shall not be unreasonably withheld, conditioned or delayed. Each of
the Company and Qwest shall advise the other, promptly after it receives
notice thereof, of the time when the Registration Statement has become
effective or any amendment thereto or any supplement or amendment to the Proxy
Statement/Prospectus has been filed, or the issuance of any stop order, or the
suspension of the qualification of Qwest Common Stock to be issued in the
Merger for offering or sale in any jurisdiction, or of any request by the
Securities and Exchange Commission or the NASD for amendment of the
Registration Statement or the Proxy Statement/Prospectus. The parties shall
take any action required to be taken under state blue sky or securities
Regulations in connection with the Transactions.
Section 6.3 Letters of Accountants. Each of the Company and Qwest shall use
commercially reasonable efforts to cause to be delivered to the other
"comfort" letters of PricewaterhouseCoopers LLP, the Company's independent
public accountants, and of KPMG Peat Marwick LLP, Qwest's independent public
accountants, respectively, in each case, dated and delivered on the date on
which the Registration Statement shall become effective and as of the
Effective Time, and addressed to the Boards of Directors of the Company and
Qwest, in form and substance reasonably satisfactory to the other and
reasonably customary in scope and substance for letters delivered by
independent public accountants in connection with transactions such as those
contemplated by this Agreement.
ARTICLE VII
Additional Covenants Of The Company
Section 7.1 Affirmative Covenants of the Company. The Company agrees for the
benefit of Qwest and Qwest Subsidiary that, until the Effective Time (or, with
respect to the covenant set forth in Section 7.1(m), for the period set forth
therein), the Company shall, and shall cause each of its Subsidiaries to, do
the following:
(a) NASDAQ. Take all action required, if any, to cause the Company Common
Stock to continue to be listed for trading on the NASDAQ and give such
notice to the NASDAQ as shall be required, if any, with respect to the
Transaction Documents and the Transactions.
(b) Maintenance of Records. Keep adequate records and books of account
reflecting all its financial transactions, keep minute books containing
accurate records of all meetings and accurately reflecting all corporate
action of its stockholders and its Board of Directors (including
committees) and keep stock books and ledgers correctly recording all
transfers and issuances of all capital stock, in each case in the Ordinary
Course.
(c) Maintenance of Properties. Maintain, keep and preserve all the
Company Properties in the Ordinary Course.
(d) Conduct of Business. Except as otherwise contemplated by this
Agreement, continue to engage in the Ordinary Course in the same lines of
business as conducted by it on the date of this Agreement; use its
reasonable best efforts to keep available the services of its present
officers, employees and consultants who are integral to the operation of
its business as so conducted; and use its reasonable best efforts to
preserve the business of the Company and its Subsidiaries and to preserve
the goodwill of customers, suppliers and others having business relations
with any of the Company and its Subsidiaries.
(e) Maintenance of Insurance. Maintain insurance in the Ordinary Course.
(f) Payment of Taxes. (1) Timely file (or cause to be filed) all Tax
Returns that are required to be filed by it, except for the filing of such
Tax Returns as to which the failure to file, individually or in the
aggregate, could not reasonably be expected to have a Materially Adverse
Effect, and (2) pay (or cause to be paid) before they become delinquent all
Taxes required to be paid when due whether or not shown or
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such Tax Returns and any assessment received by it or otherwise required to
be paid, except Taxes being contested in good faith by appropriate
proceedings and for which adequate reserves or other provisions are
maintained in accordance with GAAP, or amounts of Taxes and assessments
which, individually or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect.
(g) Reporting Requirements. Furnish to Qwest and Qwest Subsidiary:
(1) Adverse events. Promptly after the occurrence, or failure to
occur, of any such event, information with respect to any event (A)
which could reasonably be expected to have a Material Adverse Effect,
(B) which, if known as of the date of this Agreement, would have been
required by any Transaction Document to be disclosed to Qwest or Qwest
Subsidiary, (C) which could reasonably be expected to cause any
representation or warranty contained in any Transaction Document with
respect to the Company or a Subsidiary to be untrue or inaccurate in
any material respect at any time from the date of this Agreement to the
Effective Time or (D) which constitutes an Option Trigger (as defined
in the Option Agreements) or which would enable Qwest to exercise an
Option;
(2) Monthly financial statements. As soon as available, and in any
event within 30 days after the end of each month, the consolidated
balance sheet of the Company and its consolidated Subsidiaries as of
the end of the month and the related consolidated statements of income
(loss) for the portion of the fiscal year of the Company ended with the
last day of the month, all in reasonable detail and stating in
comparative form the respective consolidated figures for the
corresponding date and period in the previous fiscal year (subject to
year-end adjustments);
(3) Notice of litigation. Promptly after the commencement of each
such matter, notice of all Actions affecting the Company or a
Subsidiary that, individually or in the aggregate, if determined
adversely to any of them, could reasonably be expected to have a
Material Adverse Effect;
(4) Access to information. Afford to Qwest and Qwest Subsidiary and
their respective officers, employees, financial advisors, attorneys,
accountants and other representatives, reasonable access and
duplicating rights (at the requesting party's expense) during normal
business hours and upon reasonable advance notice to all its
properties, books, contracts, commitments, personnel and records;
furnish as promptly as practicable to Qwest and Qwest Subsidiary and
their respective officers, employees, financial advisors, attorneys,
accountants and other representatives such information with respect to
the business, properties, operations, prospects or condition (financial
or otherwise) of the Company and its Subsidiaries as they may from time
to time reasonably request and instruct the officers, employees,
financial advisors, attorneys, accountants and other representatives of
each of the Company and its Subsidiaries to cooperate with Qwest and
Qwest Subsidiary and their respective officers, employees, financial
advisors, attorneys, accountants and other representatives in their
investigation of each of the Company and the Subsidiaries;
(5) Reports to creditors and other persons. Promptly after the
furnishing of each such document, copies of any statement or report
furnished to any other person pursuant to the terms of the Company
Credit Facilities or any other indenture, loan or credit or similar
agreement and not otherwise required by any other clause of this
Section 8.1 to be furnished to Qwest and Qwest Subsidiary; and
(6) General information. Such other information respecting the
condition or operations, financial or otherwise, of any of the Company
and its Subsidiaries as Qwest or Qwest Subsidiary may from time to time
reasonably request.
(h) Affiliate Agreements. Deliver to Qwest and Qwest Subsidiary a list
(reasonably satisfactory to counsel for Qwest and Qwest Subsidiary),
setting forth names and addresses who are, at the time of the Company
Stockholders Meeting, in the Company's reasonable judgment, "affiliates" of
the Company for purposes of Rule 145 under the Securities Act; furnish such
information and documents as Qwest and Qwest Subsidiary may reasonably
request for the purpose of reviewing such list; and obtain from each such
person the written agreement referred to in Section 3.1(l), without cost or
other liability to any of the Company, its Subsidiaries, Qwest and Qwest
Subsidiary.
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(i) Company Stock Options. Cancel all securities of any of the Company
and the Subsidiaries which, after the Effective Time, would be convertible
into or exchangeable or exercisable for any shares of capital stock of any
of the Surviving Corporation and its Subsidiaries, and use reasonable best
efforts to obtain the written acknowledgement of each holder of a Company
Stock Option that such Company Stock Option from and after the Effective
Time is exercisable for shares of Qwest Common Stock as provided in Section
1.1(l), in each case without cost or other liability to any of the Company,
its Subsidiaries, Qwest and Qwest Subsidiary.
(j) Stockholder Agreements. Obtain from the Principal Stockholders the
Stockholders Agreements, without cost or other liability to any of the
Company, its Subsidiaries, Qwest and Qwest Subsidiary.
(k) Company Stockholders Meeting; Proxy Statement/Prospectus.
(1) The Company (to the extent necessary, acting through its Board of
Directors) shall, in accordance with applicable Regulations and as soon
as practicable following the execution and delivery of this Agreement,
(A) duly call, give notice of, convene and hold a meeting of the
stockholders of the Company (the "Company Stockholders Meeting") for
the purpose of considering the approval of this Agreement and the
Merger, which date shall be not less than 20 days after the date the
Proxy Statement/Prospectus shall be first mailed to the stockholders of
the Company, (B) fix a record date for determining stockholders
entitled to vote at the Company Stockholders Meeting and (C) subject to
Section 7.2(z), include in the Proxy Statement/Prospectus the
recommendation by the Board of Directors of the Company that the
stockholders of the Company approve this Agreement and the Merger.
(2) Notwithstanding the provisions of Section 7.2(z) and this Section
7.1(k), the obligations of the Company under Section 7.1(k)(1) shall
not be affected by the withdrawal or modification by the Board of
Directors of the Company Board Approval with respect to any matter.
Without limiting the generality of the foregoing, the Company shall
submit this Agreement and the Merger to the stockholders of the Company
whether or not the Board of Directors of the Company determines that
this Agreement and the Merger are no longer advisable and recommends
that the stockholders of the Company reject this Agreement and the
Merger.
(l) Teleway Agreement. Use reasonable best efforts to amend and restate
the Agreement of General Partnership of Icon CMT Corp. and Teleway
Corporation Partners dated as of November 17, 1997, so as to reorganize the
partnership created thereunder as a limited liability partnership or
limited liability company organized under the laws of the State of
Delaware, on terms no less favorable to the Company than those in effect on
the date of this Agreement.
(m) Qwest Services. If a Business Combination Transaction (other than the
Transactions) with respect to any of the Company and its Subsidiaries shall
be consummated within 12 months following the termination of obligations of
the parties under this Agreement pursuant to Section 9.1(a) (other than
pursuant to Section 9.1(a)(4)), (1) the Company and its Subsidiaries shall
purchase from one or more of Qwest and its Subsidiaries products and
services (including tariff and non-tariff services and facilities) selected
by the Company in its sole discretion that are generally offered for sale
by Qwest or such Subsidiary, at the prices and on the terms and conditions
generally offered by Qwest or such Subsidiary from time to time during such
period to customers of similar products and services at similar volume and
commitment levels, for an aggregate purchase price equal to (A) $30,000,000
less (B) the aggregate purchase price for products and services purchased
by the Company and its Subsidiaries from any of Qwest and its Subsidiaries
from the Termination Date to the date of the consummation of such Business
Combination Transaction, provided that purchases pursuant to commitments or
agreements in existence on such date of consumation that were made by the
other parties to such Business Combination Transaction and their respective
Affiliates shall not be included in determining whether the Company shall
have satisfied its obligation under this Section 7.1(m), (2) the Company
shall purchase such products and services within a period of months
following such date of consummation that is equal to (A) 12 months less (B)
the quotient obtained by dividing 2 into the number of whole months
(determined as periods of 30 or 31 consecutive
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days, as appropriate) that shall have elapsed between the Termination Date
and such date of consummation and (3) on such date of consummation, and as
a condition to such consummation, the Company shall pay to Qwest a portion
of the amount determined pursuant to the preceding clause (1) that is equal
to (A) $2,500,000 times the number of whole months (determined as periods
of 30 or 31 consecutive days, as appropriate) that shall have elapsed
between the Termination Date and such date of consummation less (B) the
aggregate purchase price for products and services purchased from any of
Qwest and its Subsidiaries from the Termination Date to such date of
consummation.
Section 7.2 Negative Covenants of the Company. The Company agrees for the
benefit of Qwest and Qwest Subsidiary that, until the Effective Time (or, with
respect to the covenant set forth in Section 7.2(aa) for the period set forth
therein) and except as contemplated by the Transaction Documents or unless the
Company shall have obtained the prior written approval of Qwest and Qwest
Subsidiary (which approval may be granted, withheld, delayed or conditioned in
their sole discretion), the Company shall not, and shall not permit any of its
Subsidiaries to, do any of the following or enter into any agreement or other
arrangement (other than the Transaction Documents) with respect to any of the
following:
(a) Dissolution. Dissolve any of the Company and its Subsidiaries, or
take any action in contemplation thereof.
(b) Charter documents. Amend its articles of incorporation, certificate
of incorporation, bylaws, operating agreement or limited partnership
agreement, as applicable.
(c) Capitalization. Any of (1) issue any shares of capital stock or other
Equity Securities, except in connection with the exercise of any Company
Stock Options or Company Warrants, (2) enter into an agreement or other
arrangement having the effect of restricting the voting or transfer of any
Equity Securities of any of the Company and its Subsidiaries, (3) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock, or (4) amend the terms or
change the period of exercisability of, purchase, repurchase, redeem or
otherwise acquire, any of its securities including, without limitation,
shares of Company Common Stock or any option, warrant or right, directly or
indirectly, to acquire shares of Company Common Stock; provided that the
Company may amend the Company's 1995 Stock Option Plan in the manner
contemplated by the Proxy Statement dated August 24, 1998 of the Company.
(d) Debt. Create, incur, assume or suffer to exist any Debt, except:
(1) any Debt under the Company Credit Facilities on the terms and
conditions thereof in existence as of the date of this Agreement in an
aggregate amount not exceeding $10,000,000 at any time outstanding;
(2) any Debt as lessee under capitalized leases entered into in the
Ordinary Course in an aggregate amount not exceeding $2,000,000 in the
aggregate at any time outstanding;
(3) any other Debt existing on the date of this Agreement, and all
amendments, extensions, modifications, refunding, renewals,
refinancings and substitutions thereof, but only if the aggregate
principal amount thereof is not increased thereby, the term thereof is
not extended thereby and the other terms and conditions thereof, taken
as a whole, are not less advantageous to the Company and its
Subsidiaries than those in existence as of the date of this Agreement;
and
(4) any Debt under the Qwest Credit Facility.
(e) Liens. Create, incur, assume, or suffer to exist any Lien upon or
with respect to any of its properties, now owned or hereafter acquired,
except Permitted Liens.
(f) Liabilities. Either (1) incur any Liability, except Liabilities (a)
incurred in the Ordinary Course or (b) expressly contemplated by the
Transaction Documents or (2) pay, discharge or satisfy any Liabilities,
except Liabilities (a) reflected or reserved against in, or contemplated
by, the financial statements (or the notes thereto) of the Company and its
Subsidiaries referred to in Section 4.5, (B) incurred in the Ordinary
Course, (C) legally required to be paid, discharged or satisfied or (D)
expressly contemplated by the Transaction Documents.
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(g) Settle Litigation. Settle or compromise any litigation (whether or
not commenced prior to the date of this Agreement) or settle, pay or
compromise any claims not required to be paid (which are not payable or
reimbursable under policies of insurance maintained by or on behalf of any
of the Company and its Subsidiaries), individually in an amount in excess
of $50,000 and in the aggregate in an amount in excess of $100,000, other
than in consultation and cooperation with Qwest and Qwest Subsidiary, and,
with respect to any such settlement, with the prior written consent of
Qwest and Qwest Subsidiary.
(h) Restricted Payments. Declare or make any Restricted Payment to any
person other than any of the Company and its Wholly-Owned Subsidiaries.
(i) Capital Expenditures. Make (or commit to make) any Capital
Expenditures except in accordance with the Company's budget for 1998, as
delivered to Qwest, and, thereafter, in accordance with a budget approved
by Qwest and Qwest Subsidiary.
(j) Acquisitions. Acquire (1) by merger, consolidation, acquisition of
stock or assets, or otherwise, all or substantially all of the Equity
Securities of any corporation, partnership, limited liability company,
joint venture, association, trust, unincorporated association or other
entity or organization or (2) any assets, in each case, except for fair
value and in the Ordinary Course.
(k) Investments. Make or acquire any Investment in any person, other than
(1) Investments in Wholly-Owned Subsidiaries, (2) Investments existing on
the date of this Agreement in other Subsidiaries and (3) Investments
pursuant to the cash management policy approved by the Board of Directors
of the Company as of the date hereof, including, without limitation, any
extension of the maturity, renewal, refunding or modification of such
existing Investments in other Subsidiaries and all amendments, extensions,
modifications, refundings, renewals and substitutions of such existing
Investments, but only if the aggregate amount of such existing Investments
shall not increase except as a result of the accrual of interest, dividends
and other amounts payable in respect of such Investments.
(l) Mergers, Etc. Merge or consolidate with any person, sell, lease,
license or dispose of all or substantially all of its assets (whether now
owned or hereafter acquired) to any person or acquire all or substantially
all of the assets or the business of any person, or take any other action
to effect, any Business Combination Transaction (other than the
Transactions), in each case whether in one transaction or in a series of
transactions, except that a Subsidiary may merge into or transfer assets to
the Company or a Wholly-Owned Subsidiary.
(m) Leases. Create, incur, assume or suffer to exist, pursuant to a
Guarantee or otherwise, any obligation as lessee for the rental or hire of
any real or personal property, except the following:
(1) conditional sale contracts that are Permitted Liens and any
extensions or renewals of those contracts;
(2) capitalized leases that are permitted under Section 7.2(d) and
any extensions or renewals of those leases;
(3) leases existing on the date of this Agreement and any extensions
or renewals of those leases;
(4) leases (other than capitalized leases) entered into in the
Ordinary Course and any extensions or renewals of those leases; and
(5) leases for office space in Philadelphia.
(n) Sale and Leaseback. Transfer any real or personal property to any
person and thereafter directly or indirectly lease back the same or similar
property for an aggregate sales price in excess of $2,000,000 in any
calendar quarter.
(o) Sale or Lease of Assets. Transfer any of its assets now owned or
hereafter acquired (including, but not limited to, shares of capital stock
and indebtedness of Subsidiaries and leasehold interests), except the
following:
(1) assets that are no longer used or useful in the conduct of its
business; and
(2) assets that are transferred for fair value and in the Ordinary
Course.
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(p) Conduct of Business. Either (1) engage in any line of business that
is not conducted by it on the date of this Agreement or (2) except as
contemplated by the Transaction Documents or otherwise in furtherance of
the conclusion of the Transactions, enter into any agreement, arrangement,
commitment, contract or transaction, amend or terminate any of the same,
take any action or omit to take any action or otherwise conduct any of its
affairs, in any case not in the Ordinary Course.
(q) Confidential Information. Except as otherwise expressly permitted by
the proviso to Section 7.2(z) with respect to a Business Combination
Transaction or pursuant to confidentiality agreements with respect to the
business, properties and operations of the Company and its Subsidiaries in
effect as of the date of this Agreement or entered into thereafter in the
Ordinary Course, use or disclose to any person (other than Qwest, Qwest
Subsidiary and their Affiliates), except as required by law, any material
non-public information concerning the business, properties, operations,
prospects or condition (financial or otherwise) of any of the Company and
its Subsidiaries.
(r) Transactions with Affiliates. Enter into any transaction (including,
but not limited to, the purchase, sale or exchange of property or the
rendering of any service or the amendment, modification or termination of
any of, or waiver of any provision of, the Company Affiliate Agreements)
with any of its directors, officers or stockholders having beneficial
ownership of 5.0% or more of the shares of Company Common Stock then issued
and outstanding, or with any of its Affiliates or the directors, officers
or such stockholders thereof, except (1) transactions among the Company and
its Wholly-Owned Subsidiaries, (2) transactions pursuant to agreements,
arrangements or understandings that are set forth in Section 7.2(r) of the
Company's Disclosure Schedule, (3) transactions that are expressly
contemplated by the Transaction Documents, and (4) transactions that do not
require the payment or provision by or to any of the Company and its
Subsidiaries of money in an aggregate amount, or goods or services having
an aggregate value, in excess of $25,000.
(s) Compliance With ERISA. Permit there to occur an Employee Plan Event
that results in any material liability of any of the Company and its
Subsidiaries.
(t) Compensation. Permit (1) an increase in the amount of compensation of
any senior executive officer of any of the Company and its Subsidiaries
(including wages, salaries, bonuses, extra compensation, pension and
continuation, severance or termination pay of all types, whether paid or
accrued) that is not required by an existing agreement or, if not so
required, is not in the Ordinary Course, (2) except as contemplated by
Section 1.1(l), the adoption or amendment of, or acceleration of payment or
vesting of the amounts payable or to become payable under, any bonus,
profit sharing, compensation, severance, termination, stock option, stock
purchase, stock appreciation rights, phantom stock, restricted stock or
other stock-based plan, pension, retirement, employment or other employee
benefit agreement, trust, plan or other arrangement for the benefit or
welfare of any current or former officer, director, employee, consultant or
agent of any of the Company and its Subsidiaries, (3) issuance of any
additional Company Stock Options except for grants in the Ordinary Course
in connection with the employment of new hires (x) in an aggregate amount
not in excess of Company Stock Options exercisable for 50,000 shares of
Company Common Stock in any calendar month and (y) in an amount for each
such person not in excess of Company Stock Options exercisable for 15,000
shares of Company Common Stock, provided that this individual limit may be
exceeded with the prior approval of Qwest, which approval shall not be
unreasonably withheld, conditioned or delayed, (4) the payment of any
benefit not required by any existing agreement, except for payments not
material to the Company made in the Ordinary Course, (5) the adoption or
amendment of any existing, employment, consulting, continuation pay,
severance pay or termination pay agreement (including, without limitation,
any such agreement that provides for the acceleration or payment of any
benefit upon the occurrence of a change in control, however defined) with
any officer, director or employee of any of the Company and its
Subsidiaries or, except in accordance with the existing written policies of
the Company or the Subsidiary, as the case may be, in existence as of the
date of this Agreement, the grant of any continuation, severance or
termination pay to any officer, director or employee of any of the Company
and its Subsidiaries, except for severance or termination payments in each
case not in excess of one month's salary or (6) the placement of any assets
in any trust for the benefit of officers, directors or employees of
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any of the Company and its Subsidiaries; provided, however, that
notwithstanding the foregoing, (w) each of the Company and its Subsidiaries
may amend the provisions of any employee pension plan which is intended to
be qualified under Section 401(a) of the Code in order to maintain such
qualified status, (x) none of the Company and its Subsidiaries shall take
any action, or refrain from taking any action, as the result of which the
Company and its Subsidiaries shall be, or upon the occurrence of any change
of control (however defined) or other event become, obligated to pay any
benefits, except for the acceleration in the vesting of Company Stock
Options and the creation of the obligation to make certain parachute
payments under employment agreements with the Principal Shareholders, (y)
the Company may amend the Company's 1995 Stock Option Plan in the manner
contemplated by the Proxy Statement dated August 24, 1998 of the Company
and (z) each of the Company and the Subsidiaries may replace an existing
benefit plan with a substantially similar plan containing terms and
conditions on the whole not less favorable to the Company or the Subsidiary
than the benefit plan so replaced.
(u) New Executive Officers. Employ, directly or indirectly (including as
a consultant), any executive officers of any of the Company and its
Subsidiaries not employed by the Company or such Subsidiary, as the case
may be, in the same position or capacity on the date of this Agreement;
provided that the consent of Qwest and Qwest Subsidiary with respect
thereto shall not be unreasonably withheld, conditioned or delayed.
(v) Union Contracts. Enter into or amend any agreements with any labor
union or other collective bargaining group, other than in the Ordinary
Course.
(w) Stock of Subsidiary. Transfer any shares of capital stock of any
Subsidiary, except in connection with a transaction permitted by Section
7.2(z).
(x) Taxes. Make any material Tax election or waiver or settle or
compromise any material Tax liability.
(y) Accounting Changes. Except as disclosed in Section 7.2(y) of the
Company's Disclosure Schedule, make or permit any significant change in
accounting policies or reporting practices, except for any change required
by GAAP, in the opinion of the Company's independent accountants.
(z) Business Combination Transactions. Do, or permit any of its officers,
directors, employees, financial advisors and other representatives to do,
any of the following or to enter into an agreement or other arrangement
(other than the Transaction Documents) with respect to any of the
following:
(1) enter into any agreement or other arrangement with respect to, or
take any other action to effect, any Business Combination Transaction
(other than the Transactions) with respect to any of the Company and
its Subsidiaries or publicly announce any intention to do any of the
foregoing;
(2) solicit, initiate or encourage (including, without limitation, by
way of furnishing information), or take any other action to facilitate,
any inquiry or the making of any proposal to any of the Company, its
Subsidiaries and its stockholders from any person (other than Qwest,
Qwest Subsidiary or any Affiliate of, or any person acting in concert
with, Qwest or Qwest Subsidiary) which constitutes, or may reasonably
be expected to lead to, a proposal with respect to a Business
Combination Transaction (other than the Transactions) with respect to
any of the Company and its Subsidiaries, or endorse any Business
Combination Transaction (other than the Transactions) with respect to
any of the Company and its Subsidiaries;
(3) continue, enter into or participate in any activities,
discussions or negotiations regarding any of the foregoing, or furnish
to any other person any information with respect to the business,
properties, operations, prospects or condition (financial or otherwise)
of any of the Company and its Subsidiaries or any of the foregoing, or
otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other person to
do or seek any of the foregoing; or
(4) recommend that the stockholders of the Company accept or approve
any Business Combination Transaction (other than the Transactions) with
respect to any of the Company and its
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Subsidiaries, modify or amend the Company Board Approval in any respect
materially adverse to Qwest or Qwest Subsidiary or withdraw the Company
Board Approval, or publicly announce any intention to do any of the
foregoing;
provided, that this Section 7.2(z) shall not prohibit (1) the Company from
(a) furnishing to any person (other than a Principal Stockholder or an
Affiliate of, or other person acting in concert with, the Company or a
Principal Stockholder) that has made an unsolicited, bona fide written
proposal with respect to a Business Combination Transaction with respect to
any of the Company and its Subsidiaries information concerning the Company
and its Subsidiaries and the business, properties, operations, prospects or
condition (financial or otherwise) of the Company and its Subsidiaries or
(b) engaging in discussions or negotiations with such a person that has
made such written proposal with respect to a Business Combination
Transaction, (2) following receipt of such written proposal with respect to
a Business Combination Transaction, the Company from taking and disclosing
to its stockholders a position contemplated by Rule 14e-2(a) under the
Exchange Act, (3) following receipt of such written proposal with respect
to a Business Combination Transaction, the Board of Directors of the
Company from withdrawing or modifying the Company Board Approval or (4)
following the payment by the Company of all amounts then owed by the
Company to Qwest and Qwest Subsidiary pursuant to Section 9.2, the Board of
Directors from terminating the obligations of the parties pursuant to
Section 9.1(a)(9) in order to enter into an agreement with any person
(other than Qwest, Qwest Subsidiary or any Affiliate of, or any person,
acting in concert with, Qwest or Qwest Subsidiary) to effect a Superior
Proposal; provided, however, that the Company or the Board of Directors of
the Company, as the case may be,
(x) shall take any action referred to in the preceding clauses (3) and
(4) with respect to such written proposal if such written proposal
satisfies each of the following requirements (a "Superior Proposal"): (a)
such written proposal is for (i) the acquisition from the Company or any
holder thereof of Equity Securities of the Company as a result of which the
holders of shares of Company Common Stock immediately before such
transaction or series of transactions would beneficially own less than 40%
of the shares of Company Common Stock issued and outstanding immediately
after such transaction or series of transactions, (ii) the merger or
consolidation of the Company with or into any person other than a Wholly-
Owned Subsidiary or (iii) the transfer of all or substantially all the
assets of the Company and its Subsidiaries and (B) with respect to such
written proposal after the Board of Directors of the Company shall have
concluded in good faith that (i) based on the advice of a financial advisor
of nationally recognized reputation, taking into account the terms and
conditions of such proposed Business Combination Transaction and the Merger
Agreement respectively, all other legal, financial, regulatory and other
aspects of such proposed Business Combination Transaction and the Merger,
and respectively, the identity of the person making such written proposal,
(a) such proposed Business Combination Transaction is reasonably capable of
being completed and would, if completed, result in a transaction more
favorable to the Company and its stockholders, other than the Principal
Stockholders, from a financial point of view than would the Merger and (b)
financing for such proposed Business Combination Transaction, to the extent
required, is then committed by a financial institution or other source able
to provide such financing and (ii) based on the advice of independent
counsel for the Company, the failure to take such action would breach its
fiduciary duties to the stockholders of the Company, other than the
Principal Stockholders,
(y) shall furnish to the person making such written proposal any
information referred to in the preceding clause (1)(A) and engage in the
negotiations or discussions referred to in the preceding clause (1)(B) only
if the Board of Directors of the Company shall have determined in good
faith that such written proposal is or is reasonably likely to be a
Superior Proposal, and the Company shall then furnish such information to
Qwest and Qwest Subsidiary (or shall have previously furnished such
information to Qwest or Qwest Subsidiary) and such information shall be so
furnished to such person pursuant to a customary confidentiality agreement
and
(z) shall take any action referred to in the preceding clauses (1), (2)
and (3) only if the Board of Directors of the Company shall, by written
notice delivered to Qwest and Qwest Subsidiary not less than 24 hours prior
thereto, inform Qwest and Qwest Subsidiary of its intention to take such
action;
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provided further, that the Company or the Board of Directors of the Company
shall not take any action referred to in the preceding clauses (1), (3) and
(4) if the Company Stockholders Meeting shall have occurred. The Company
shall cease and cause to be terminated any existing activities, discussions
or negotiations with all persons (other than Qwest, Qwest Subsidiary or any
Affiliate of, or any person acting in concert with, Qwest or Qwest
Subsidiary) conducted on or before the date of this Agreement with respect
to any Business Combination Transaction. The Company shall inform each of
its officers, directors, employees, financial advisors and other
representatives of the obligations undertaken in this Section 7.2(z). If
the Company, or any member of the Board of Directors thereof, receives a
proposal or inquiry, in each case whether written or oral, with respect to
a Business Combination Transaction with respect to any of the Company and
its Subsidiaries, then the Company and its financial advisers and
independent counsel shall, by written notice delivered within 24 hours
after the receipt of such proposal or inquiry, inform Qwest and Qwest
Subsidiary of the terms and conditions of such proposal or inquiry and the
identity of the person making the proposal or inquiry with respect to such
Business Combination Transaction and shall keep Qwest and Qwest Subsidiary
generally informed with reasonable promptness of any steps it is taking
pursuant to the proviso to the first sentence of this Section 7.2(z) with
respect to such proposal or inquiry. Nothing in this Section 7.2(z) shall
permit the Company to terminate any obligations under this Agreement except
pursuant to Article IX.
(aa) Restrictions on Qwest. If any Series Q Warrants or Options are then
outstanding, take or recommend to its stockholders any action that would
impose limitations on the legal rights to be enjoyed by any of Qwest and
its permitted assigns, as the holder of Series Q Warrants or as a
stockholder of the Company, upon the acquisition of shares of Company
Common Stock or other securities pursuant to the exercise of then Series Q
Warrants or any Option, including, without limitation, any action which
would impose or increase restrictions on any of Qwest and its permitted
assigns, based upon the size of its security holdings, the business in
which it is engaged or other considerations applicable to it and not to
security holders generally, whether (a) by means of the issuance of or
proposal to issue any other class of securities having voting power
disproportionately greater than the equity investment in the Company
represented by the Series Q Warrants, such shares of Company Common Stock
or other securities, (b) by implementing or adopting a shareholder rights
plan (sometimes referred to as a "poison pill") or issuing a similar
security which has a "trigger" threshold of not less than the greatest
number of shares of Company Common Stock that may be acquired by Qwest or
its permitted assigns pursuant to the exercise of all Series Q Warrants and
Options, (c) by charter or by-law amendment or (d) by contract, arrangement
or other means.
ARTICLE VIII
Additional Covenants of Qwest
Section 8.1 NASDAQ Listing. Qwest agrees for the benefit of the Company that
Qwest shall take all action required, if any, to cause the Qwest Common Stock
that shall be issued in the Merger to be approved for inclusion in NASDAQ, if
necessary, subject only to official notice of issuance, and give such notice
to the NASD as shall be required, if any, with respect this Agreement and the
Merger.
Section 8.2 Directors' and Officers' Insurance; Indemnification. Qwest
agrees for the benefit of the Indemnified Persons as follows:
(a) For six years after the Effective Time, each of the Surviving
Corporation and its Subsidiaries shall indemnify each person who is now, or
has been at any time prior to the date of this Agreement, a director,
officer, employee or agent of any of the Company and its Subsidiaries, and
the successors and assigns of such person (individually, an "Indemnified
Person" and, collectively the "Indemnified Persons"), to the same extent
and in the same manner as is now provided in the respective certificates of
incorporation, articles of incorporation, by-laws, operating agreements or
limited partnership agreements, as applicable, of the Company and its
Subsidiaries in effect on the date of this Agreement, with respect to any
claim, liability, loss, damage, cost or expense, whenever asserted or
claimed (an "Indemnified Liability"), based in whole
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or in part on, or arising in whole or in part out of, any matter existing
or occurring at or prior to the Effective Time; provided that if any claim
for indemnification shall be asserted or made within such six-year period,
all rights to such indemnification in respect of such claim shall continue
until the disposition of such claim.
(b) For six years after the Effective Time, the Surviving Corporation
shall in effect policies of directors' and officers' liability insurance in
amounts and for coverage agreed by the Company and Qwest to be appropriate
in respect of the activities and operations of the Company and its
Subsidiaries.
(c) Promptly after receipt by an Indemnified Person of notice of the
assertion (an "Assertion") of any claim or the commencement of any action
against the person in respect of which indemnity or reimbursement may be
sought hereunder against any of the Surviving Corporation and its
Subsidiaries (collectively, "Indemnitors"), such Indemnified Person shall
notify any Indemnitor in writing of the Assertion, but the failure to so
notify any Indemnitor shall not relieve any Indemnitor of any liability it
may have to such Indemnified Person hereunder except where such failure
shall have materially prejudiced Indemnitor in defending against such
Assertion. The Indemnitors shall be entitled to participate in and, to the
extent the Indemnitors elect by written notice to such Indemnified Person
within 30 days after receipt by any Indemnitor of notice of such Assertion,
to assume the defense of such Assertion, at their own expense, with counsel
chosen by the Indemnitors and reasonably satisfactory to an Indemnified
Person. Notwithstanding that the Indemnitors shall have elected by such
written notice to assume the defense of any Assertion, such Indemnified
Person shall have the right to participate in the investigation and defense
thereof, with separate counsel chosen by such Indemnified Person, but in
such event the fees and expenses of such counsel shall be paid by such
Indemnified Person. No Indemnified Person shall settle any Assertion
without the prior written consent of Qwest nor shall Qwest settle any
assertion without either (1) the written consent of all Indemnified Persons
against whom such Assertion was a made or (2) obtaining a general release
from the party making the Assertion for all Indemnified Persons as a
condition of such settlement.
(d) If any Indemnified Person becomes involved in any capacity in any
action, proceeding or investigation based in whole or in part on, or
arising in whole or in part out of, any matter, including the Transactions,
existing or occurring at or prior to the Effective Time, then to the extent
permitted by law the Surviving Corporation shall periodically advance to
such Indemnified Person its legal and other expenses (including the cost of
any investigation and preparation incurred in connection herewith), subject
to the provision by such Indemnified Person of an undertaking to reimburse
the amounts so advanced in the event of a final determination by a court of
competent jurisdiction that such Indemnified Person is not entitled
thereto.
Section 8.3 Employee Benefits Matters.
(a) Except as otherwise set forth in Section 1.1(l), in the case of any
Company Employee Plans under which the employees' interests are based upon the
Company Common Stock or the market price thereof (but which interests do not
constitute stock options), Company and Qwest agree that such interests shall,
from and after the Effective Time, be based on Qwest Common Stock determined
in accordance with the Exchange Ratio.
(b) Except as otherwise expressly set forth in any Transaction Document,
none of the Transaction Documents and none of the Transactions shall (1)
before or after the Effective Time, require the continued employment of any
person by any of the Company, Qwest, the Surviving Corporation and their
respective Subsidiaries or (2) after the Effective Time, prevent any of the
Company, the Surviving Corporation and their respective Subsidiaries from
taking any action or refraining from taking any action with respect to any
person that may then be permitted by law.
Section 8.4 Access to Information. Qwest shall afford to the Company and its
officers, employees, financial advisers, attorneys, accountants and other
representatives, reasonable access during normal business hours and upon
reasonable advance notice to senior management of Qwest to discuss publicly
available information with respect to the business, properties, operations,
prospects or condition (financial or otherwise) of Qwest and its Subsidiaries.
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ARTICLE IX
Termination
Section 9.1 Termination.
(a) The obligations of the parties under Articles I (other than Section 1.2)
and VI (other than Section 6.1(f)) may be terminated on any date (the
"Termination Date") prior to the Effective Time, whether before or after this
Agreement and the Merger shall have been approved by the stockholders of the
Company, in each case by:
(1) the agreement of the parties;
(2) the Company, on or after the date that is six months after the date
of this Agreement, if (a) the Closing shall then not have occurred for any
reason other than the breach or violation by the Company, in any material
respect, of any of its representations, warranties, covenants and
agreements set forth in this Agreement (a "Company Breach"), (b) a Company
Breach shall not then have occurred and be continuing and (c) the Company
shall have paid in full to Qwest and Qwest Subsidiary all amounts then owed
to Qwest and Qwest Subsidiary pursuant to Section 9.2;
(3) Qwest or Qwest Subsidiary, on or after the date that is six months
after the date of this Agreement, if (a) the Closing shall then not have
occurred for any reason other than the breach or violation by Qwest or
Qwest Subsidiary, in any material respect, of any of their respective
representations, warranties, covenants and agreements set forth in this
Agreement (a "Qwest Breach") and (b) a Qwest Breach shall then not have
occurred and be continuing;
(4) the Company, on or after the date that is four months after the date
of this Agreement, if (a) a Qwest Breach shall then have occurred and be
continuing and (b) a Company Breach shall then not have occurred and be
continuing;
(5) Qwest or Qwest Subsidiary, on or after the date that is four months
after the date of this Agreement, if (a) a Company Breach shall have
occurred and be continuing and (b) a Qwest Breach shall then not have
occurred and be continuing;
(6) the Company, on or after the date of the Company Stockholders
Meeting, and all adjournments thereof, if the stockholders of the Company
shall not have approved this Agreement and the Merger and the Company shall
have paid in full to Qwest and Qwest Subsidiary all amounts then owed to
Qwest and Qwest Subsidiary pursuant to Section 9.2;
(7) Qwest or Qwest Subsidiary, on or after the date of the Company
Stockholders Meeting, and all adjournments thereof, if the stockholders of
the Company shall not have approved this Agreement and the Merger;
(8) Qwest or Qwest Subsidiary, if the Company or the Board of Directors
of the Company shall have (a) authorized, recommended or proposed (or
publicly announced its intention to authorize, recommend or propose) an
agreement with respect to a Business Combination Transaction with respect
to any of the Company and its Subsidiaries (other than the Transactions),
(b) recommended (or publicly announced its intention to recommend) that the
stockholders of the Company accept or approve any such Business Combination
Transaction or (c) modified or amended (or publicly announced its intention
to modify or amend) the Company Board Approval in any respect materially
adverse to Qwest or Qwest Subsidiary or withdrawn (or publicly announced
its intention to withdraw) the Company Board Approval; provided that (x) a
communication of the Company to Qwest and Qwest Subsidiary that advises
that the Company has received a written proposal with respect to a Business
Combination Transaction and that takes no position with respect to such
proposal or that advises that the Company is engaging in an activity
permitted by clause (1) or (2) of the proviso to the first sentence of
Section 7.2(z) with respect to a Superior Proposal, shall not be deemed to
be a modification, amendment or withdrawal of the Company Board Approval
and (y) a "stop-look-and-listen" communication of the nature contemplated
in Rule 14d-9(e) under the Exchange Act with respect to an unsolicited
tender offer or exchange offer that, if concluded in accordance with the
terms thereof, would constitute or result in a Business Combination
Transaction with respect to any of the
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Company and its Subsidiaries (other than the Transactions), without more,
shall not be deemed to be a modification, amendment or withdrawal of the
Company Board Approval if, within the time period contemplated by Rule 14e-
2 under the Exchange Act, the Board of Directors of the Company shall
publicly confirm the Company Board Approval and recommend against the
acceptance of such tender offer or exchange offer by the stockholders of
the Company;
(9) the Company, prior to the date of the Company Stockholders Meeting,
if (a) the Board of Directors of the Company shall have determined that an
unsolicited, bona fide written proposal made by any person (other than a
Principal Stockholder or an Affiliate of, or other person acting in concert
with, the Company or a Principal Stockholder) with respect to a Business
Combination Transaction with respect to any of the Company and its
Subsidiaries is a Superior Proposal, (b) the Board of Directors of the
Company shall have complied in all material respects with Section 7.2(z)
with respect to actions taken or proposed to be taken by the Company or the
Board of Directors of the Company with respect to such Superior Proposal,
(c) the Company shall have notified Qwest and Qwest Subsidiary in writing,
in each case not less than three full Business Days in advance of taking
such action, of its election to terminate the obligations of the parties
pursuant to this Section 9.1(a)(9) for the purpose of entering into an
agreement to effect such Superior Proposal concurrently with such
termination, (d) the Company and its advisors and representatives shall
have discussed with Qwest and Qwest Subsidiary the modifications to the
terms of this Agreement that would permit the Company to conclude the
Merger in lieu of concluding such Superior Proposal, (e) at the end of such
three Business Day period the Board of Directors of the Company shall have
determined that such Superior Proposal continues to constitute a Superior
Proposal, and (f) the Company shall have paid in full to Qwest and Qwest
Subsidiary all amounts then owed to Qwest and Qwest Subsidiary pursuant to
Section 9.2; or
(10) Qwest or Qwest Subsidiary, if there shall have occurred a Business
Combination Transaction (other than the Transactions) with respect to any
of the Company and its Subsidiaries.
(b) Any termination of the obligations of the parties pursuant to this
Section 9.1 shall be made by written agreement or by written notice from the
terminating party to the other parties.
(c) The termination of the obligations of the parties pursuant to this
Section 9.1 shall not relieve any party of any liability for a breach of any
warranty, covenant or agreement, or for any misrepresentation, under this
Agreement, or be deemed to constitute a waiver of any available remedy
(including specific performance, if available) for any breach or
misrepresentation.
Section 9.2 Costs, Expenses and Fees.
(a) Termination Fee. The Company shall pay to Qwest in immediately available
funds the sum of $7,000,000 (the "Termination Fee") as follows (1) in
connection with the termination of the obligations of the parties or of this
Agreement pursuant to any of clauses (6), (7), (8), (9) and (10) of Section
9.1(a), or, (2) if (A) the Company or Qwest shall terminate the obligations of
the parties or this Agreement pursuant to any of clauses (2) and (3) of
Section 9.1(a), (B) at any time after the date of this Agreement and at or
before the time of such termination there shall exist a proposal for a
Business Combination Transaction with respect to any of the Company and its
Subsidiaries (or the public announcement of a third party to commence or of
its intention to pursue or engage in such a transaction) and (C) within 12
months of such termination, the Company enters into a definitive agreement
with any third party with respect to a Business Combination Transaction with
respect to any of the Company and its Subsidiaries or such a transaction is
consummated.
(b) Collection Expenses; Interests. In addition to the other provisions of
this Section 9.2, the Company shall promptly, but in no event later than three
Business Days following receipt of written demand therefor, together with
related bills or receipts, reimburse Qwest and Qwest Subsidiary for all
reasonable out-of-pocket costs, fees and expenses (including, without
limitation, the reasonable fees and disbursements of counsel and the expenses
of litigation) incurred in connection with collecting fees, expenses and other
amounts due under this
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Section 9.2. Interest shall be paid on the amount of any unpaid fee at the
publicly announced prime rate of Citibank, N.A. from the date such fee was
required to be paid.
(c) Other Expenses. Except as otherwise provided in this Section 9.2,
whether or not the Merger is concluded, all costs and expenses incurred or
paid by a party (including, without limitation, attorney's fees and expenses
related to the Transactions and the preparation of the Transaction Documents,
the Registration Statement or the Proxy Statement Prospectus) shall be paid by
the party incurring or paying such expenses. Notwithstanding the foregoing,
each of the Company and Qwest shall pay 50% of the costs and expenses of
complying with the Securities Act, the Exchange Act and the Hart-Scott-Rodino
Act (other than the attorney's fees and expenses related thereto or as stated
in the preceding sentence).
(d) Company's Fees for Financial Advisors, Brokers and Finders. The Company
shall pay or cause to be paid to the Company's Financial Advisor the entire
amount of the fee, commission, expense reimbursement or other payment to which
the Company's Financial Advisor shall become so entitled in connection with
the Transactions, all without cost, expense or any other liability whatsoever
to any of Qwest, Qwest Subsidiary and any other person.
(e) Qwest's Fees for Financial Advisors, Brokers and Finders. Qwest and
Qwest Subsidiary shall pay or cause to be paid to any financial advisor
retained by or on behalf of Qwest, the entire amount of the fee, commission,
expense reimbursement or other payment to which such financial advisor shall
become so entitled in connection with the Transactions, all without cost,
expense or any other liability whatsoever to any of the Company, its
Subsidiaries and any other person.
ARTICLE X
Miscellaneous
Section 10.1 Notices. All notices, requests and other communications to any
party or under any Transaction Document shall be in writing. Communications
may be made by telecopy or similar writing. Each communication shall be given
to a party at its address stated on the signature pages of this Agreement or
any other Transaction Document or at any other address as the party may
specify for this purpose by notice to the other parties. Each communication
shall be effective (1) if given by telecopy, when the telecopy is transmitted
to the proper address and the receipt of the transmission is confirmed, (2) if
given by mail, 72 hours after the communication is deposited in the mails
properly addressed with first class postage prepaid or (3) if given by any
other means, when delivered to the proper address and a written
acknowledgement of delivery is received.
Section 10.2 No Waivers; Remedies; Specific Performance.
(a) No failure or delay by any party to or express beneficiary of any
Transaction Document in exercising any right, power or privilege under such
Transaction Document shall operate as a waiver of the right, power or
privilege. A single or partial exercise of any right, power or privilege shall
not preclude any other or further exercise of the right, power or privilege or
the exercise of any other right, power or privilege. The rights and remedies
provided in the Transaction Documents shall be cumulative and not exclusive of
any rights or remedies provided by law.
(b) In view of the uniqueness of the Transactions and the business,
properties, operations, prospects and condition (financial and otherwise) of
the Company and its Subsidiaries, a party to or express beneficiary of any
Transaction Document would not have an adequate remedy at law for money
damages in the event that such Transaction Document were not performed in
accordance with its terms, and therefore each of the parties agrees that the
other parties to and express beneficiaries of such Transaction Document shall
be entitled to specific enforcement of the terms of such Transaction Document
in addition to any other remedy to which it may be entitled, at law or in
equity.
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Section 10.3 Amendments, Etc. No amendment, modification, termination, or
waiver of any provision of any Transaction Document, and no consent to any
departure by a party to any Transaction Document from any provision of the
Transaction Document, shall be effective unless it shall be in writing and
signed and delivered by the other parties to the Transaction Document, and
then it shall be effective only in the specific instance and for the specific
purpose for which it is given.
Section 10.4 Successors and Assigns; Third Party Beneficiaries.
(a) No party may assign its rights or delegate its obligations under this
Agreement. Any assignment or delegation in contravention of this Section 10.4
shall be void ab initio and shall not relieve the assigning or delegating
party of any obligation under this Agreement.
(b) The provisions of each Transaction Document shall be binding upon and
inure solely to the benefit of the parties to such Transaction Document, and,
except and to the extent that persons are expressly identified therein as
beneficiaries of one or more of the provisions thereof, nothing in any
Transaction Document is intended to or shall confer upon any other person any
right, benefit or remedy whatsoever under or by reason of any Transaction
Document (including, without limitation, by means of subrogation). Without
limiting the generality of the foregoing, (1) the provisions of Section
7.2(aa) are intended to be for the express benefit of Qwest and its permitted
assigns under each Option Agreement, (2) the provisions of Section 8.2 are
intended to be for the express benefit of Indemnified Persons and their
respective heirs, executors, legal representatives, successors and permitted
assigns, and no other person and (3) the provisions of Section 8.3 are not
intended for the benefit of, and may not be relied upon or enforced by, any
employee of any of the Company, Qwest, the Surviving Corporation or their
respective Subsidiaries and their respective heirs, executors, legal
representatives, successors and permitted assigns.
Section 10.5 Accounting Terms and Determinations. Unless otherwise
specified, all accounting terms shall be interpreted, all accounting
determinations shall be made, all records and books of account shall be kept
and all financial statements required to be prepared or delivered shall be
prepared in accordance with GAAP, applied on a basis consistent (except for
changes approved by the Company's independent public accountants) with the
latest audited financial statements referred to in Section 4.5.
Section 10.6 Governing Law. Each Transaction Document shall be governed by
and construed in accordance with the internal laws of the State of New York,
without regard to conflicts of laws principles, except that the Certificate of
Merger shall be governed by and construed in accordance with the laws of the
State of Delaware.
Section 10.7 Counterparts; Effectiveness. Each Transaction Document may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if all signatures were on the same instrument.
Section 10.8 Severability of Provisions.
(a) Any provision of any Transaction Document that is prohibited or
unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of the prohibition or unenforceability without
invalidating the remaining provisions of the Transaction Document or affecting
the validity or enforceability of the provision in any other jurisdiction.
(b) The parties agree that the amount of the fees provided in Section 9.2(b)
is fair and reasonable. If a court of competent jurisdiction shall
nonetheless, by a final, non-appealable judgment, determine that the amount of
any such fee exceeds the maximum amount permitted by law, then the amount of
such fee shall be reduced to the maximum amount permitted by law in the
circumstances, as determined by a court of competent jurisdiction.
Section 10.9 Headings and References. Article and section headings in any
Transaction Document are included in the Transaction Document for the
convenience of reference only and do not constitute a part of the
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Transaction Document for any other purpose. References to parties, express
beneficiaries, articles and sections in any Transaction Document are
references to the parties to or the express beneficiaries, articles and
sections of the Transaction Document, as the case may be, unless the context
shall require otherwise.
Section 10.10 Entire Agreement. The Transaction Documents embody the entire
agreement and understanding of the respective parties, and supersede all prior
agreements or understandings, with respect to the subject matters of the
Transaction Documents.
Section 10.11 Survival. Except as otherwise specifically provided in any
Transaction Document, each representation and warranty of each party to the
Transaction Document contained in or made pursuant to the Transaction Document
shall remain in full force and effect notwithstanding any investigation or
notice to the contrary or any waiver by any other party of a related condition
precedent to the performance by such other party of an obligation under the
Transaction Document.
Section 10.12 Exclusive Jurisdiction. Each party, and each express
beneficiary as a condition to its right to enforce or defend its rights under
or in connection with any Transaction Document, (1) agrees that any Action
with respect to any Transaction Document or any Transaction shall be brought
exclusively in the courts of the State of New York or of the United States of
America for the Southern District of New York, in each case sitting in the
Borough of Manhattan, State of New York, (2) accepts for itself and in respect
of its property, generally and unconditionally, the jurisdiction of those
courts and (3) irrevocably waives any objection, including, without
limitation, any objection to the laying of venue or based on the grounds of
forum non conveniens, which it may now or hereafter have to the bringing of
any Action in those jurisdictions; provided, however, that any party may
assert in an Action in any other jurisdiction or venue each mandatory defense,
third-party claim or similar claim that, if not so asserted in such Action,
may thereafter not be asserted by such party in an original Action in the
courts referred to in clause (1) above.
Section 10.13 Waiver of Jury Trial. Each party, and each express beneficiary
as a condition to its right to enforce or defend its rights under or in
connection with any Transaction Document, waives any right to a trial by jury
in any Action to enforce or defend any right under any Transaction Document
and agrees that any Action shall be tried before a court and not before a
jury.
Section 10.14 Affiliate. Nothing contained in any Transaction Document shall
constitute Qwest or Qwest Affiliate an "affiliate" of any of the Company and
its Subsidiaries within the meaning of the Securities Act and the Exchange
Act, including, without limitation, Rule 501 under the Securities Act and Rule
13e-3 under the Exchange Act.
Section 10.15 Non-recourse. No recourse under any Transaction Document shall
be had against any "controlling person" (within the meaning of Section 20 of
the Exchange Act) of any party or the stockholders, directors, officers,
employees, agents and Affiliates of the party or such controlling persons,
whether by the enforcement of any assessment or by any legal or equitable
proceeding, or by virtue of any Regulation, it being expressly agreed and
acknowledged that no personal liability whatsoever shall attach to, be imposed
on or otherwise be incurred by such controlling person, stockholder, director,
officer, employee, agent or Affiliate, as such, for any obligations of the
party under this Agreement or any other Transaction Document or for any claim
based on, in respect of or by reason of such obligations or their creation.
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In Witness Whereof, the parties have executed and delivered this Agreement
as of the date first written above in New York, New York.
Icon CMT Corp.
/s/ Scott A. Baxter
By: _________________________________
SCOTT A. BAXTER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Address: 1200 Harbor Boulevard
Weehawken, NJ 07087
Attention: Scott A. Baxter
Fax: 201-601-1917
With a copy to:
Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Michael Weinsier
Fax: 212-704-6288
Qwest Communications International
Inc.
/s/ Joseph P. Nacchio
By: _________________________________
JOSEPH P. NACCHIO
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Address:1000 Qwest Tower
555 Seventeenth Street
Denver, Colorado 80202
Attention: Marc B. Weisberg
Fax: 303-992-1723
With a copy to:
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022
Attention: Drake S. Tempest
Fax: 212-326-2061
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<PAGE>
Qwest 1998-I Acquisition Corp.
/s/ Marc B. Weisberg
By: _________________________________
MARC B. WEISBERG
VICE PRESIDENT
Address: 1000 Qwest Tower
555 Seventeenth Street
Denver, Colorado 80202
Attention: Marc B. Weisberg
Fax: 303-992-1723
With a copy to:
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022
Attention: Drake S. Tempest
Fax: 212-326-2061
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<PAGE>
ANNEX 1
DEFINITION ANNEX
"Access Agreement" means the Security Agreement dated as of August , 1996,
between the Company and Access Graphics, Inc., as of the date of this
Agreement.
"Action" against a person means an action, suit, investigation, complaint or
other proceeding threatened or pending against or affecting the person or its
property, whether civil or criminal, in law or in equity or before any
arbitrator or Governmental Body.
"Affiliate" of a person means (1) any other person that directly or
indirectly controls, is controlled by or is under common control with, such
person or any of its Subsidiaries and (2) if such person is an individual, any
other individual that is a relative (by blood or marriage) of such person. The
term "Control" means the possession, directly or in directly, of the power to
direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract or otherwise.
"Approval" means an authorization, consent, approval or waiver of, clearance
by, notice to or registration or filing with, or any other similar action by
or with respect to a Governmental Body or any other person and the expiration
or termination of all prescribed waiting, review or appeal periods with
respect to any of the foregoing.
"Average Market Price" has the meaning stated in Section 1.1(a)(2) of this
Agreement.
"Beneficially Own" or "Beneficial Ownership" with respect to any securities
means having "beneficial ownership" of such securities (as determined pursuant
to Regulation 13D-G under the Exchange Act), except as provided below,
including pursuant to any agreement, arrangement or understanding, whether or
not in writing. Without duplicative counting of the same securities by the
same holder, securities beneficially owned by a person shall include
securities beneficially owned by all Affiliates of such person and all other
persons with whom such person would constitute a Group.
"Business Combination Transaction" with respect to any person and its
Subsidiaries means, whether concluded or intended to be concluded in one
transaction or a series of related transactions, each of the following:
(1) the acquisition from any of such person and its Subsidiaries, or from
any holder thereof, of any Equity Securities of any of such person and its
Subsidiaries as a result of which the holders of Equity Securities of any
of such person and its Subsidiaries immediately before such transaction or
series of transactions would beneficially own less than 80% of the Equity
Securities of such person or such Subsidiary, as the case may be, issued
and outstanding immediately after such transaction or series of
transactions;
(2) the merger or consolidation of any of such person and its
Subsidiaries with or into any person other than such person or its Wholly-
Owned Subsidiary;
(3) the transfer of a substantial portion of the assets of any of such
person and its Subsidiaries to any person or Group other than such person
or its Wholly-Owned Subsidiary; or
(4) any transaction (whether or not any of such person and its
Subsidiaries shall be a party thereto) as a result of which a majority of
the members of the board of directors, or similar officials, of such person
or such Subsidiary would not be persons who on the day after the closing
date of such transaction were members of the board of directors, or similar
officials, or who were nominated for election or elected with the approval
of a majority of the directors, or similar officials, who were directors,
or similar officials, on that date or whose nomination or election was
previously so approved.
"Business Day" means any day excluding Saturday, Sunday and any day which is
a legal holiday in the State of New York or is a day on which banking
institutions located in such state are authorized or required by law or other
governmental action to close.
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"Capital Expenditure" of a person means payments that are made by the person
for the rental, lease, purchase, construction or use of any property the value
or cost of which should be capitalized and appear on the balance sheet of the
person in the category of property, plant or equipment, without regard to the
manner in which the payments or the instrument pursuant to which they are made
are characterized by the person including, without but not limited to,
payments for the installment purchase of property under conditional sale
contracts and payments under capitalized leases.
"Certificate of Merger" has the meaning stated in Section 1.1(a) of this
Agreement.
"Certificates" has the meaning stated in Section 1.1(b) of this Agreement.
"Closing" has the meaning stated in Section 2.1 of this Agreement.
"Closing date" has the meaning stated in Section 2.1 of this Agreement.
"Code" has the meaning stated in Recital C to this Agreement.
"Company" has the meaning stated in the heading to this Agreement.
"Company Affiliate Agreements" means, collectively, the agreements between
any of the Company and its Subsidiaries, on the one part, and any director or
officer of any of the Company and its Subsidiaries, any stockholder having
beneficial ownership of 5.0% or more of the shares of Company Common Stock
then issued and outstanding or any Affiliate of any of the foregoing, and all
stockholders' agreements and voting trusts with respect to the Company.
"Company Balance Sheet" has the meaning stated in Section 4.5(a).
"Company Board Approval" has the meaning stated in Section 4.24(a) of this
Agreement.
"Company Breach" has the meaning stated in Section 9.1(a)(2) of this
Agreement.
"Company Common Stock" has the meaning stated in Section 1.1(a)(2) of this
Agreement.
"Company Credit Facilities" means the Financing Agreement dated August 13,
1996, between The CIT Group/Business Credit, Inc., as lender, and the Company,
as borrower, as amended and modified as of the date hereof and the Security
Agreement dated October 9, 1996, between Frontier Media Group, Inc., a
Pennsylvania corporation, and Meridian Bank.
"Company Employee Plan" means any Employee Plan of any of the Company and
its Subsidiaries.
"Company ERISA Plan" means any ERISA Plan of any of the Company and its
Subsidiaries.
"Company Licenses" has the meaning stated in Section 4.11 of this Agreement.
"Company Material Contracts" has the meaning stated in Section 4.20(a) of
this Agreement.
"Company Preferred Stock" has the meaning stated in Section 4.13(a) of this
Agreement.
"Company Properties" has the meaning stated in Section 4.15(a) of this
Agreement.
"Company Proprietary Rights" has the meaning stated in Section 4.16(a) of
this Agreement.
"Company Qualified Plan" means any Qualified Plan of any of the Company and
its Subsidiaries.
"Company SEC Documents" has the meaning stated in Section 4.22 of this
Agreement.
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"Company Stock Option" has the meaning stated in Section 1.1(l)(1) of this
Agreement.
"Company Stock Option Plan" means the Company's 1995 Stock Option Plan, as
amended as of the date of this Agreement and as further amended in accordance
with the terms of this Agreement.
"Company Stockholders Meeting" has the meaning stated in Section 7.1(k) of
this Agreement.
"Company Warrants" has the meaning stated in Section 1.1(l)(2) of this
Agreement.
"Company's Disclosure Schedule" means the schedule with respect to certain
matters referred to in Article IV of this Agreement that has been delivered by
the Company to Qwest or Qwest Subsidiary, as such schedule may be modified in
accordance with this Agreement.
"Company's Financial Advisor" means Donaldson, Lufkin & Jenrette Securities
Corporation.
"Consolidated" means, as applied to any financial or accounting term, the
term determined on a consolidated basis for a person and its Subsidiaries,
excluding intercompany items and minority interests.
"Debt" of a person at any date means, without duplication, the sum of the
following:
(1) all obligations of the person (a) for borrowed money, (b) evidenced
by bonds, debentures, notes or other similar instruments, (c) to pay the
deferred purchase price of property or services, except current trade
accounts payable arising in the ordinary course of business, (d) as
purchaser under conditional sales contracts, (e) as lessee under
capitalized leases, (f) under letters of credit issued for the account of
the person and (g) arising under acceptance facilities; plus
(2) all Debt of others Guaranteed by the person; plus
(3) all Debt of others secured by a Lien on any asset of the person and
whether or not such Debt is assumed by the person; plus
(4) any balance sheet liability with respect to an ERISA Plan recognized
pursuant to Financial Accounting Standards Board Statement 87 or 88, or
with respect to post-retirement benefits other than pension benefits
recognized pursuant to Financial Accounting Standards Board Statement 106;
plus
(5) any withdrawal liability under Section 4201 of ERISA with respect to
a withdrawal from a Multiemployer Plan, as such liability shall have been
set forth in a notice of withdrawal liability under Section 4219 of ERISA,
and as adjusted from time to time subsequent to the date of such notice.
"Debt Securities" of a person means the bonds, debentures, notes and other
similar instruments of the person and all other securities convertible into or
exchangeable or exercisable for any such debt securities, all rights or
warrants to subscribe for or to purchase, all options for the purchase of, and
all calls, commitments or claims of any character relating to, such debt
securities and any securities convertible into or exchangeable or exercisable
for any of the foregoing.
"Department of Justice" means the Department of Justice of the United States
of America.
"DGCL" means the General Corporation Law of the State of Delaware, Title 8
Del. Code (S)(S)101 et seq., as amended.
"Dollars" and "$" refer to United States dollars and other lawful currency
of the United States of America from time to time in effect.
"Effective Time" has the meaning stated in Section 1.1(a) of this Agreement.
"Employee Plan" of a person means any plan, contract, commitment, program,
policy, arrangement or practice maintained or contributed to by the person and
providing benefits to any current or former employee,
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director or agent of the person, or any spouse or dependent of such
beneficiary, including, without limitation, (1) any ERISA Plan, (2) any
Multiemployer Plan, (3) any other "Employee Benefit Plan" (within the meaning
of Section 3(3) of ERISA), (4) any profit-sharing, deferred compensation,
bonus, stock option, stock purchase, stock appreciation rights, phantom stock,
restricted stock, other stock-based pension, retainer, consulting, retirement,
severance, welfare or incentive plan, contract, commitment, program, policy,
arrangement or practice and (5) any plan, contract, commitment, program,
policy, arrangement or practice providing for "fringe benefits" or
perquisites, including, without limitation, benefits relating to automobiles,
clubs, vacation, child care, parenting, sabbatical or sick leave and medical,
dental, hospitalization, life insurance and other types of insurance.
"Employee Plan Event" means any of the following:
(1) "Reportable Event" (within the meaning of Section 4043 of ERISA) with
respect to any ERISA Plan for which the requirement of notice to the PBGC
has not been waived by regulation;
(2) the failure to meet the minimum funding standard of Section 412 of
the Code with respect to any ERISA Plan (whether or not waived in
accordance with Section 412(d) of the Code) or the failure to make by its
due date a required installment under Section 412(m) of the Code with
respect to any ERISA Plan or the failure to make any required contribution
to a Multiemployer Plan;
(3) the provision by the administrator of any ERISA Plan pursuant to
Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in
a distress termination described in Section 4041(c) of ERISA;
(4) the withdrawal from any ERISA Plan during a plan year by a
"substantial employer" as defined in Section 4001(a)(2) of ERISA resulting
in liability pursuant to Section 4062(e) or Section 4063 of ERISA;
(5) the institution by the PBGC of proceedings to terminate any ERISA
Plan, or the occurrence of any event or condition which might constitute
grounds under ERISA for the termination of, or the appointment of a trustee
to administer, any ERISA Plan;
(6) the imposition of liability pursuant to Sections 4064 or 4069 of
ERISA or by reason of the application of Section 4212(c) of ERISA;
(7) the withdrawal in a complete or partial withdrawal (within the
meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if
there is any potential liability therefor, or the receipt of notice from
any Multiemployer Plan that it is in reorganization or insolvency pursuant
to Sections 4241 or 4245 of ERISA, or that it intends to terminate or has
terminated under Sections 4041A or 4042 of ERISA;
(8) the occurrence of an act or omission which could give rise to the
imposition of fines, penalties, taxes or related charges under Chapter 43
of the Code or under Sections 409, 502(c), 502(i), 502(l) or 4071 of ERISA
in respect of any such Employee Plan;
(9) the assertion of a material claim (other than routine claims for
benefits) against any Employee Plan other than a Multiemployer Plan or the
assets of any Employee Plan, or against the person maintaining or
contributing to such plan in connection with any such plan;
(10) receipt from the IRS of notice of the failure of any Qualified Plan
to qualify under Section 401(a) of the Code, or the failure of any trust
forming part of any Qualified Plan to fail to qualify for exemption from
taxation under Section 501(a) of the Code; or
(11) the imposition of a lien pursuant to Sections 401(a)(29) or 412(n)
of the Code or pursuant to ERISA with respect to any ERISA Plan.
"Environmental Laws" means any and all presently existing federal, state,
local and foreign Regulations, and any orders or decrees, in each case as now
or hereafter in effect, relating to the regulation or protection of human
health, safety or the environment or to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals or toxic or
hazardous substances or wastes into the indoor or outdoor environment,
including, without limitation, ambient air, soil, surface water, ground water,
wetlands, land or subsurface strata, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals or toxic or hazardous
substances or wastes.
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"Equity Securities" of a person means the capital stock of the person and
all other securities convertible into or exchangeable or exercisable for any
shares of its capital stock, all rights or warrants to subscribe for or to
purchase, all options for the purchase of, and all calls, commitments or
claims of any character relating to, any shares of its capital stock and any
securities convertible into or exchangeable or exercisable for any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974 and the
related Regulations, in each case as amended as of the date hereof and as the
same may be amended or modified from time to time. References to titles,
subtitles, sections, paragraphs or other provisions of ERISA and the related
Regulations also refer to successor provisions.
"ERISA Affiliate", as applied to any person, means (1) any corporation which
is a member of a controlled group of corporations within the meaning of
Section 414(b) of the Code of which such person is a member, (2) any trade or
business (whether or not incorporated) which is a member of a group of trades
or businesses under common control within the meaning of Section 414(c) of the
Code of which such person is a member, and (3) any member of an affiliated
service group within the meaning of Section 414(m) or (o) of the Code of which
such person, any corporation described in clause (1) above or any trade or
business described in clause (2) above is a member. Any former ERISA Affiliate
of Company or its Subsidiaries shall continue to be considered an ERISA
Affiliate within the meaning of this definition with respect to the period
such entity was an ERISA Affiliate of Company or its Subsidiaries and with
respect to liability arising after such period for which Company or its
Subsidiaries could be liable under the Code or ERISA.
"ERISA Plan" of a person means an "employee pension benefit plan" (within
the meaning of Section 3(2) of ERISA), other than a Multiemployer Plan, that
is covered by Title IV of ERISA or subject to the minimum funding standards of
Section 412 of the Code or Section 302 of ERISA that is maintained by the
person, to which the person contributes or has an obligation to contribute or
with respect to which the person is an "employer" (within the meaning of
Section 3(5) of ERISA).
"Excess Shares" has the meaning stated in Section 1.1(f)(2) of this
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the related rules and regulations thereunder.
"Exchange Agent" has the meaning stated in Section 1.1(c) of this Agreement.
"Exchange Fund" has the meaning stated in Section 1.1(c) of this Agreement.
"Exchange Ratio" has the meaning stated in Section 1.1(a)(2) of this
Agreement.
"Federal Trade Commission" means the Federal Trade Commission of the United
States of America.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America from time to time.
"Governmental Body" means any agency, bureau, commission, court, department,
official, political subdivision, tribunal or other instrumentality of any
government, whether federal, state, county or local, domestic or foreign.
"Group" has the meaning given such term in Section 13(d)(3) of the Exchange
Act.
"Guarantee" by any person means any obligation, contingent or otherwise, of
the person directly or indirectly guaranteeing the payment or other
performance of any Liability of any other person or in any manner providing
for the payment or other performance of any Liability of any other person or
the investment of funds in any other person or otherwise protecting the holder
of such Liability against loss (whether by agreement to
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indemnify, to lease assets as lessor or lessee, to purchase assets, goods,
securities or services, or to take-or-pay or otherwise), but the term
"Guarantee" does not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
correlative meaning.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the related rules, regulations and published
interpretations thereunder.
"Hazardous Substance" means, collectively, (1) any petroleum or petroleum
products, geothermal products, natural gas, flammable explosives, radioactive
materials, asbestos, urea formaldehyde foam insulation, and transformers or
other equipment that contain dielectric fluid containing polychlorinated
biphenyls (PCB's), (2) any chemicals or other materials or substances which
are now or hereafter become defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials", "extremely
hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic
pollutants", "contaminants", "pollutants" or words of similar import under any
Environmental Law and (3) any other chemical or other material or substance,
exposure to which is now or hereafter prohibited, limited or regulated under
any Environmental Law and which is present in concentrations or at locations
that present a threat to human health or the environment.
"Indemnified Persons" has the meaning stated in Section 8.2(a) of this
Agreement.
"Investment" of a person means any investment in any other person (other
than a Subsidiary), whether by means of loan, capital contribution, purchase
of capital stock, obligations or other securities, or any commitment or option
to make an investment or otherwise.
"IRS" means the United States Internal Revenue Service or any Governmental
Body succeeding to any or all of its functions.
"Knowledge" of (1) an individual means the actual knowledge of such
individual with respect to a representation or warranty of such person
contained in any Transaction Document or (2) if a person that is not an
individual, means, after reasonable inquiry by such person of each of the
following persons, the actual knowledge of any of the officers or other
employees of such person and its Subsidiaries having managerial responsibility
for the portion of the operations, assets or liabilities of such person and
its Subsidiaries with respect to which such knowledge of such person is being
represented.
"Liabilities" means all debts, claims, Actions, demands, rights, costs,
expenses, liabilities, losses, damages, commitments and obligations (in each
case whether fixed, contingent or absolute, matured, unmatured, or inchoate,
liquidated or unliquidated, accrued or not accrued, known or unknown, whenever
or however arising and whether or not the same would be required by generally
accepted accounting principles to be reflected in financial statements of any
person or disclosed in the notes thereto).
"License" means any license, permit, franchise, certificate of authority, or
order, or any extension, modification or waiver of the foregoing, required to
be issued by a Governmental Body.
"Lien" means any mortgage, deed of trust, lien (statutory or otherwise),
pledge, hypothecation, charge, deposit arrangement, preference, priority,
security interest, restriction on transfer or encumbrance of any kind
(including, without limitation, any conditional sale contract, any capitalized
lease or any financing lease having substantially the same economic effect as
the foregoing and the filing of or agreement to give any financing statement
under the Uniform Commercial Code or comparable law of any jurisdiction to
evidence any of the foregoing).
"Loss" means, with respect to any person, any cost, damage, disbursement,
expense, liability, judgment, loss, deficiency, obligation, Tax, penalty or
settlement of any kind or nature, whether foreseeable or unforeseeable
(including, without limitation, interest or other carrying costs, penalties,
legal, accounting, expert witness, consultant and other professional fees and
expenses incurred by such person in the investigation,
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collection, prosecution and defense of Actions (including, without limitation,
claims in connection with the enforcement of any rights under any of the
Transaction Documents) and amounts paid in settlement), that may be imposed on
or otherwise incurred or suffered by such person.
"Material Adverse Effect" means, with respect to a circumstance or event
that is a condition to the obligation of a person in any Transaction Document
or is the subject of a representation, warranty, covenant or other agreement
of a person in any Transaction Document that includes a reference therein to
the possible occurrence of a Material Adverse Effect, whether considered
individually or together in the aggregate with all other circumstances or
events that are included in the same condition or are the subject either of
the same representation, warranty, covenant or other agreement or of other
representations, warranties, covenants or other agreements by such person in
the Transaction Documents, any one or more of the following:
(1) a material adverse effect on the business, properties, operations,
prospects or condition (financial or otherwise) of such person and its
Subsidiaries, taken as a whole;
(2) a material adverse effect on the ability of such person to perform
its obligations under any Transaction Document to which it is or may become
a party; or
(3) the term or condition of an Approval, a Regulation, a decision,
ruling, order or award of any arbitrator applicable to such person or its
business, properties or operations or an Action, pending or threatened, in
each case that restricts in any material respect or prohibits (or, if
successful, would restrict or prohibit) the conclusion of any of the
Transactions.
"Merger" has the meaning stated in Recital A to this Agreement.
"Merger Consideration" has the meaning stated in Section 1.1(a)(2) of this
Agreement.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
3(37) of ERISA.
"NASD" means the National Association of Securities Dealers, Inc. and each
person succeeding to the authority thereof with respect to matters
contemplated by or arising from the Transaction Documents and the
Transactions.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation/National Market.
"Option" has the meaning stated in Section 1.2(a) of this Agreement.
"Option Agreement" has the meaning stated in Section 1.2(a) of this
Agreement.
"Option Documents" means, collectively, the Option Agreements and all other
agreements, instruments and other documents executed and delivered by any
Principal Stockholder pursuant to any Option Agreement.
"Option Shares" has the meaning stated in Section 1.2(a) of this Agreement.
"Ordinary Course" means, with respect to any person and as of any date of
determination, the conduct or operation of a line of business of such person
in the ordinary course of such business, as then conducted and proposed to be
conducted, in a manner consistent with the past business practices of such
person and in accordance with the reasonable requirements of such business, in
each case as determined with respect to such business as of such date of
determination.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means, collectively, with respect to any of the Company
and its Subsidiaries, (1) Liens for Taxes or governmental assessments, charges
or claims the payment of which is not yet due, or for Taxes the validity of
which are being contested in good faith by appropriate proceedings, (2)
statutory Liens of landlords
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and Liens of carriers, warehousemen, mechanics, materialmen and other similar
persons and other Liens imposed by applicable Regulations of any Governmental
Body incurred in the ordinary course of business for sums not yet delinquent
or being contested in good faith, (3) Liens relating to deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security, (4) Liens on real
property which do not in the aggregate materially interfere with or impair the
operation of any parcel of such real property for the purposes for which it is
or may reasonably be expected to be used, (5) Liens securing the executory
obligations of any person under any lease that constitutes an "operating
lease" under GAAP, (6) Liens securing Debt permitted to be created, incurred,
assumed or suffered to exist by any of the Company and its Subsidiaries
pursuant to Section 7.2(d) of this Agreement, (7) Liens securing indebtedness
created, incurred, assumed or suffered under the Access Agreement, and (8)
other Liens approved by Qwest and Qwest Subsidiary in writing; provided,
however, that, with respect to each of clauses (1)-(6) above, to the extent
that any such Lien relates to, or secures the payment of, a Liability that is
required to be accrued under GAAP, such Lien shall not be a Permitted Lien
unless adequate accruals for such Liability have been established therefor by
the Company or such Subsidiary on the financial statements referred to in
Section 4.5 in conformity with GAAP. Notwithstanding the foregoing, no Lien
arising under the Code or ERISA with respect to the operation, termination,
restoration or funding of any employee benefit plan or arrangement sponsored
by, maintained by or contributed to by the Company or any of its ERISA
Affiliates or arising in connection with any excise tax or penalty tax with
respect to such plan or arrangement shall be a Permitted Lien.
"Person" means an individual, a corporation, a partnership, a limited
liability company, a joint venture, an association, a trust, an unincorporated
association or any other entity or organization, including a Governmental
Body.
"Principal Stockholders" means, collectively, Scott A. Baxter, Richard M.
Brown and Scott Harmolin.
"Property" means any right or interest in or to property of any kind
whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Proprietary Rights" means all copyrights, uncopyrighted works, trademarks,
trademark rights, service marks, trade names, trade name rights, patents,
patent rights, unpatented inventions, licenses, permits, trade secrets, know-
how, inventions, computer software, seismic data and intellectual property
rights and other proprietary rights together with applications and licenses
for, and the goodwill of the business relating to, any of the foregoing.
"Proxy Statement/Prospectus" has the meaning stated in Section 4.28 of this
Agreement.
"Qualified Plan" of a person means any ERISA Plan of the person and any
other pension, profit sharing or stock bonus plan within the meaning of
Section 401(a) of the Code maintained by the person or to which the person
contributes or has an obligation to contribute.
"Qwest" has the meaning stated in the heading to this Agreement.
"Qwest Breach" has the meaning stated in Section 9.1(a)(3) of this
Agreement.
"Qwest Common Stock" has the meaning stated in Section 1.1(a)(2) of this
Agreement.
"Qwest Credit Facility" has the meaning stated in Section 1.3(c) of this
Agreement.
"Qwest Credit Transactions" means, collectively, the transactions undertaken
pursuant to, or otherwise contemplated by, the Qwest Credit Facility.
"Qwest Preferred Stock" has the meaning stated in Section 5.13(a) of this
Agreement.
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"Qwest Private Line Services Agreement" means, collectively, the Private
Line Services Agreement and the Master Collocation License Agreement, each
dated as of September 13, 1998 and between Qwest Communications Corporation
and the Company.
"Qwest SEC Documents" has the meaning stated in Section 5.20 of this
Agreement.
"Qwest Subsidiary" has the meaning stated in the heading to this Agreement.
"Qwest/Principal Stockholders Documents" means, collectively, the Option
Documents, the Voting Documents and the Stockholder Documents.
"Qwest/Principal Stockholders Transactions" means, collectively, the
transactions undertaken pursuant to, or otherwise contemplated by, the
Qwest/Principal Stockholders Documents.
"Qwest's Disclosure Schedule" means the schedule with respect to certain
matters referred to in Article V of this Agreement that has been delivered by
Qwest and Qwest Subsidiary to the Company, as such schedule may be modified in
accordance with this Agreement.
"Reasonable Best Efforts" means the use of all reasonable efforts,
including, without limitation, the expenditure of amounts reasonably related
to the objective sought to be achieved, with respect to matters and actions
over which the person has or could reasonably be expected to exert any control
or influence.
"Registration Rights Agreement" has the meaning stated in Section 1.3(b) of
this Agreement.
"Registration Statement" has the meaning stated in Section 5.21 of this
Agreement.
"Regulation" means (1) any applicable law, rule, regulation, ordinance,
judgment, decree, ruling, order, award, injunction, recommendation or other
official action of any Governmental Body, and (2) any official change in the
interpretation or administration of any of the foregoing by the Governmental
Body or by any other Governmental Body or other person responsible for the
interpretation or administration of any of the foregoing.
"Restricted Payment" with respect to a person means the following:
(1) any dividend or other distribution of any kind on any shares of the
person's capital stock, except dividends payable solely in shares of its
capital stock, other than an Equity Security of the person which by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable or exercisable), or upon the happening of any
event or with the passage of time, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the
option of the holder thereof, in whole or in part, or which is convertible
into or exchangeable or exercisable for debt securities of the person or
any of its Subsidiaries, and
(2) any payments in cash or otherwise, on account of the purchase,
redemption, retirement or acquisition of any Equity Securities of the
person.
"Securities Act" means the Securities Act of 1933, as amended, and the
related rules and regulations thereunder.
"Series Q Warrants" has the meaning stated in Section 1.3(b) of this
Agreement.
"Stockholder Agreement" has the meaning stated in Section 1.2(d) of this
Agreement.
"Stockholder Documents" means, collectively, the Stockholder Agreements and
all other agreements, instruments and other documents executed by any
Principal Stockholder pursuant to any Stockholder Agreement.
"Subsidiary" of a person means (1) any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect
a majority of the board of directors or other persons performing
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similar functions are at the time directly or indirectly owned by the person
or (2) a partnership or limited liability company in which the person or a
Subsidiary of the person is, at the date of determination, a general partner,
limited partner or member, as the case may be, but only if the person or its
Subsidiary is entitled at any time to receive more than 50% of the amounts
distributed or distributable by such partnership or limited liability company
to the partners or members thereof whether upon dissolution or otherwise.
Unless the context requires otherwise, references to one or more Subsidiaries
shall be references to Subsidiaries of the Company.
"Superior proposal" has the meaning stated in the proviso to the first
sentence of Section 7.2(z) of this Agreement.
"Tax Return" means a report, return or other information required to be
filed by a person with or submitted to a Governmental Body with respect to
Taxes, including, where permitted or required, combined or consolidated
returns for any group of entities that includes the person.
"Taxes" means all taxes, charges, fees, levies, duties, tariffs, imposts,
withholdings, and governmental impositions or charges of any kind in the
nature of (or similar to) taxes, payable to any Governmental Body, including
(without limitation) income, franchise, profits, gross receipts, ad valorem,
net worth, value added, sales, use, service, real or personal property,
special assessments, capital stock, license, payroll, withholding, employment,
social security, workers' compensation, unemployment compensation, utility,
severance, production, excise, stamp, occupation, premiums, windfall profits,
transfer and gains taxes, and interest, penalties (civil and criminal), and
additions to tax imposed with respect thereto.
"Termination Date" has the meaning stated in Section 9.1(a) of this
Agreement.
"Trading Day" means, as applied to any class of stock, any day on which the
NASDAQ or, if shares of such stock are not listed or admitted to trading on
the NASDAQ, the principal national securities exchange on which the shares of
such stock are listed or admitted for trading or, if the shares of such stock
are not listed or admitted for trading on any national securities exchange,
the NASDAQ or, if the shares of such stock are not included therein, any
similar interdealer system then in general use in which the shares of such
stock are included, is open for the trading of securities generally and with
respect to which information regarding the sale of securities included
therein, or with respect to which sales information is reported, is generally
available.
"Transaction Documents" means, collectively, this Agreement, the
Qwest/Principal Stockholders Documents, the Qwest Credit Facility, the Qwest
Private Line Services Agreement and all other instruments and documents
executed and delivered by any person in connection with the conclusion of one
or more of the transactions contemplated hereby and thereby.
"Transactions" means, collectively, the transactions undertaken pursuant to,
or otherwise contemplated by, the Transaction Documents.
"Transfer" means a sale, an assignment, a lease, a license, a pledge, a
grant, a transfer or other disposition of, or the creating of a Lien on, an
asset or any interest of any nature in an asset, including, without
limitation, the beneficial ownership of such asset. The term "TRANSFER" used
as a verb has a correlative meaning.
"Voting Agreement" has the meaning stated in Section 1.2(a) of this
Agreement.
"Voting Documents" means, collectively, the Voting Agreements and all other
agreements, instruments and other documents executed by any Principal
Stockholder pursuant to any Voting Agreement.
"Wholly-Owned Subsidiary" of a person means any Subsidiary all of the shares
of capital stock or other ownership interests of which, except directors'
qualifying shares, are at the time directly or indirectly owned by the person.
Unless the context requires otherwise, references to one or more Wholly-Owned
Subsidiaries shall be references to Wholly-Owned Subsidiaries of the Company.
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EXHIBIT A
FORM OF
OPTION AGREEMENT
The Option granted by this Option Agreement has not, and the shares of
Company Common Stock transferable upon the exercise thereof have not, been
registered under the Securities Act of 1933, as amended, and may not be
offered, sold, transferred or otherwise disposed of except in compliance with
said Act.
Option Agreement dated as of September 13, 1998 between ("Optionor")
and Qwest Communications International Inc., a Delaware corporation (together
with its successors and assigns, "Optionee").
RECITALS
(a) Optionor beneficially owns shares of common stock, par value $.001
per share (the "Company Common Stock"), of Icon CMT Corp., a Delaware
corporation (the "Company") [, including shares of Company Common Stock
issuable upon the exercise of Company Stock Options vested as of the date of
this Agreement]. All such shares, together with all other shares of Company
Common Stock with respect to which Optionor has beneficial ownership as of the
date of this Agreement or acquires beneficial ownership on or before the
Option Termination Date, are collectively referred to as the "Option Shares".
(b) Concurrently with the execution and delivery of this Agreement, the
Company, Optionee and Qwest Subsidiary, a Delaware corporation ("Qwest
Subsidiary"), are entering into the Agreement and Plan of Merger dated as of
September 13, 1998 (as amended or modified from time to time, the "Merger
Agreement"). Terms not otherwise defined in this Agreement have the meanings
stated in the Merger Agreement.
(c) Concurrently with the execution and delivery of this Agreement, Optionor
and Optionee are entering into the Voting Agreement and Proxy dated as of
September 13, 1998 (the "Voting Agreement") to provide for, among other
things, (1) the obligation of Optionor to vote the Option Shares to approve
the Merger Agreement and the merger contemplated thereby (the "Merger") and
against any Business Combination (other than the Transactions), (2) the grant
by Optionor to each of Optionee and Qwest Subsidiary of an irrevocable proxy
in connection therewith, (3) certain other restrictions on the voting and the
sale or other transfer of the Option Shares by Optionor, (4) certain
restrictions on Optionor with respect to Business Combination Transactions
(other than the Transactions) with respect to any of the Company and its
Subsidiaries and (5) the obligation of Optionor to execute and deliver the
Stockholder Agreement at or before the Closing of the Merger.
(d) As contemplated by Section 1.2(b) of the Merger Agreement, Optionor and
Optionee desire to enter into this Agreement to provide for, among other
things, (1) the grant by Optionor to Qwest of an option to acquire the Option
Shares, and (2) certain restrictions on the voting and the sale or other
transfer of the Option Shares. This Agreement and each Assignment of Rights
Agreement (as defined below) and all other agreements, instruments and other
documents executed and delivered by Optionor in connection with any of the
foregoing, are collectively referred to as the "Option Documents".
(e) Optionor acknowledges that Qwest and Qwest Subsidiary are entering into
the Merger Agreement in reliance on the representations, warranties, covenants
and other agreements of Optionor set forth in this Agreement and would not
enter into the Merger if Optionor did not enter into this Agreement.
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AGREEMENT
The parties agree as follows:
Section 1. Term of Option; Exercise of Option; Adjustment of Option.
(a) Term of Option. Subject to the conditions and on the terms of this
Agreement, Optionor hereby grants Optionee the right (the "Option"), during
the period commencing at the consummation of an Alternative Transaction (other
than the Transactions) with respect to any of the Company and its Subsidiaries
occurring after an Option Trigger and terminating at the Option Termination,
to purchase from Optionor any or all of the Option Shares, in each case upon
exercise of the Option and the payment therefor of an amount in cash equal to
the product of the number of such Option Shares so purchased multiplied by
$12.00 (the "Option Consideration"). The Option shall be void, have no value
and be of no further effect with respect to any Exercise Notice delivered to
Optionor after the Option Termination. The term "Option Trigger" means the
first to occur of (1) the termination or purported termination of the Merger
Agreement or the obligations of the parties thereunder, in any case without
the prior written approval of Optionee, (2) the time of the occurrence or
existence of any event or circumstance that would entitle any party to the
Merger Agreement to exercise its right to terminate certain obligations of the
parties thereunder pursuant to Section 9.1 of the Merger Agreement, (3) the
public announcement (or written communication that is or becomes the subject
of public disclosure) of a bona fide proposal by any person (other than
Optionee or any Affiliate of, or any person acting in concert with, Optionee)
with respect to a Business Combination Transaction (other than the
Transactions) with respect to any of the Company and its Subsidiaries, and (4)
the occurrence of a breach by any Principal Stockholder of any obligation
under an Option Agreement or a Voting Agreement. The term "Option Termination"
means 5:00 p.m., New York City time, on the date that is the first anniversary
of the Option commencement. The term "Alternative Transaction" means, whether
concluded or intended to be concluded in one transaction or a series of
transactions (other than the Transactions), (i) the acquisition from the
Company or any holder thereof of Equity Securities of the Company as a result
of which the holders of shares of Company Common Stock immediately before such
transaction or series of transactions would beneficially own less than 40% of
the shares of Company Common Stock issued and outstanding immediately after
such transaction or series of transactions, (ii) the acquisition of shares of
Common Stock from Optionor and transferees of shares of Company Common Stock
pursuant to clauses (b), (c) and (d) of the proviso to Section 3 as a result
of which Optionor and such transferees would beneficially own in the aggregate
less than 50% of the shares of Company Common Stock beneficially owned by
Optionor and such transferees in the aggregate immediately before such
transaction or series of transactions, (iii) the merger or consolidation of
the Company with or into any person other than a Wholly-Owned Subsidiary or
(iv) the transfer of all or substantially all the assets of the Company and
its Subsidiaries.
(b) Exercise of Option. The Option may be exercised in whole or in part, at
any time, by delivery by Optionee to Optionor (no earlier than in connection
with the consummation of an Alternative Transaction following the occurrence
of an Option Trigger and no later than the Option Termination) of written
notice (the "Exercise Notice") stating that Optionee is exercising the Option
in respect of the number of Option Shares specified therein.
(c) Option Payment Election. In connection with the delivery of an Exercise
Notice, Optionee may elect, in its sole discretion, to require Optionor to
repurchase the Option, or portion thereof, with respect to the Option Shares
specified in the Exercise Notice for cash in an amount equal to the excess of
the consideration per Option Share that would be received by the Optionor in
the Alternative Transaction pursuant to which the Option may be exercised
(such consideration, the "Alternative Transaction Consideration") over $12.00.
The value of any Alternative Transaction Consideration other than cash shall
be determined by a nationally recognized investment banking firm selected by
Optionee and reasonably acceptable to Optionor. The fees and expenses of such
investment bank or financial advisor shall be shared equally by Optionor and
Optionee.
(d) Adjustment of Option. The number of Option Shares and the Option
Exercise Price shall be adjusted in the event of any change in Company Common
Stock by reason of the issuance of any Equity Securities of the
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Company, stock or other non-cash dividends, extraordinary cash dividends,
split-ups, mergers, recapitalizations, combinations, subdivisions,
conversions, exchanges of shares or the like on or after the date hereof and
on or before the Option Termination Date, such that, in each case, the
Optionee shall receive upon the payment of the Option Exercise Price the
number and class of shares of Company Common Stock or other securities or
property that would have been received in respect of an Option Share if the
date on which the Option Share is acquired upon exercise of the Option had
occurred immediately prior to such event, or the record date therefor, as
applicable.
(e) Option Closing.
(1) The closing of the exercise of the Option or the repurchase referenced
in Section 1(c) shall take place (the "Option Closing") on the second Business
Day after the conditions set forth in Section 1(d)(2) with respect thereto
shall have been satisfied or waived, as the case may be, or on such other date
as approved by Optionor and Optionee in writing (the "Option Closing Date").
The Option Closing shall take place at the offices of O'Melveny & Myers LLP,
153 East 53rd Street, New York, New York 10022, or at such other location as
approved by Optionor and Optionee in writing. At the Option Closing, (1)
Optionee shall pay to Optionor the Option Consideration or the Alternative
Transaction Consideration then required to be paid by delivery of a certified
or official bank check payable to Optionor or by wire transfer of immediately
available funds in accordance with written wire instructions to be provided by
Optionor and (2) Optionor shall deliver to Optionee one or more certificates
representing any Option Shares then purchased by Optionee, duly endorsed in
blank for transfer or accompanied by a stock power duly executed in blank,
which certificates may bear any legends required by any agreement with the
Company to appear thereon.
(2) The obligations of each party under this Agreement with respect to the
sale or purchase of the Option Shares at any Option Closing are subject to the
satisfaction of the following conditions, unless waived by such party at or
before the Option Closing:
(a) Optionee shall have obtained the Approval required under the
Hart-Scott-Rodino Act, and all waiting, review or appeal periods under
the Hart-Scott-Rodino Act or otherwise prescribed with respect to each
Approval shall have terminated or expired, as the case may be; and
(b) the sale or purchase, as the case may be, of such Option Shares
shall not violate, result in a breach of or constitute a default under
any Regulation of any Governmental Body or any decision, ruling, order
or award of any arbitrator by which any of such party and its
Subsidiaries or any of their properties may be bound or affected,
except for violations, breaches or defaults that, individually or in
the aggregate, could not reasonably be expected to have a Material
Adverse Effect on such party.
Section 2. Covenants of Optionor.
(a) Voting. Until the later of the day following the Termination Date and
payment in full by the Company of all amounts then owed to Optionee and Qwest
Subsidiary pursuant to Section 9.2 of the Merger Agreement, subject to the
receipt of proper notice and the absence of a preliminary or permanent
injunction or other final order by any United States federal court or state
court barring such action, Optionor shall do the following:
(1) be present, in person or represented by proxy, at each meeting
(whether annual or special, and whether or not an adjourned or postponed
meeting) of the stockholders of the Company, however called, or in
connection with any written consent of the stockholders of the Company, so
that all Option Shares then entitled to vote may be counted for the
purposes of determining the presence of a quorum at such meetings; and
(2) at each such meeting and with respect to each such written consent,
except as otherwise approved in writing in advance by Optionee (which
approval may be granted, withheld, conditioned or delayed in its sole
discretion), vote (or cause to be voted) all such Option Shares (A) against
any action or agreement that would result in any breach of any
representation, warranty, covenant or agreement of Optionor contained in
any Option Document, that would or could reasonably be expected to impede,
interfere with, prevent or
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materially delay the conclusion of any of the transactions contemplated by
this Agreement or that would or could reasonably be expected to materially
reduce the benefits to Optionee of such transactions and (B) against any
amendment to the articles of incorporation or the certificate of
incorporation, as the case may be, or bylaws of the Company.
(b) Compliance With Regulations. Optionor shall comply in all respects with
all Regulations of each Governmental Body and all decisions, rulings, orders
and awards of each arbitrator applicable to it or its business, properties or
operations, in connection with the exercise of the Option, including, without
limitation, use its reasonable best efforts to comply (and exchange
information with other persons to enable them to comply) with any applicable
requirements under the Hart-Scott-Rodino Act relating to filing and furnishing
information to the Department of Justice and the Federal Trade Commission,
including, without limitation, the following:
(1) assisting in the preparation and filing of the "Antitrust
Improvements Act Notification and Report Form for Certain Mergers and
Acquisitions" and taking all other action required by 16 C.F.R. Parts 801-
803 (or any successor form or Regulation);
(2) complying with any additional request for documents or information
made by the Department of Justice or the Federal Trade Commission or by a
court; and
(3) causing all affiliated persons of the "ultimate parent entity" of the
party within the meaning of the Hart-Scott-Rodino Act to cooperate and
assist in the filing and compliance.
(c) Further Assurances. Promptly upon request by Optionee, Optionor shall
correct any defect or error that may be discovered in any Option Document or
in the exercise of the Option in whole or in part and execute, acknowledge,
deliver, file, re-file, register and re-register, any and all such further
acts, certificates, assurances and other instruments as Optionee may require
from time to time in order (1) to carry out more effectively the purposes of
each Option Document, (2) to enable Optionee to exercise and enforce its
rights and remedies under each Option Document and (3) to better transfer,
preserve, protect and confirm to Optionee the rights granted or now or
hereafter intended to be granted to Optionee under each Option Document or
under each other instrument executed in connection with or pursuant to each
Option Document.
(d) Option Commencement Notice. Optionor shall notify Optionee promptly in
writing of the occurrence of the Option commencement and of the consummation
of any Business Combination Transaction (other than the Transactions) prior to
such consummation, it being understood that the giving of such notice by
Optionor shall not be a condition to the right of Optionee to exercise the
Option.
Section 3. Transfer of Option Shares. Until the day following the Option
Termination Date, Optionor shall not sell or otherwise transfer (or offer to
sell or otherwise transfer) any Option Shares, or any interest therein, to any
person other than Optionee; provided that Optionor may (a) transfer Option
Shares to Qwest Subsidiary or any Affiliate thereof in connection with the
conclusion of the Transactions (b) transfer Option Shares to one or more
members of Optionor's immediate family or trusts with respect to which one or
more of Optionor and such members are the exclusive beneficiaries, (c) pledge
or create a security interest in or other Lien on not more than Option
Shares in the aggregate to secure bona fide indebtedness, of Option or owned
to one or more financial institutions, (d) transfer Option Shares to any other
person approved in advance in writing by Optionee, which approval may be
granted, withheld, conditioned or delayed in the sole discretion of Optionee
[and (e) sell the minimum number of Option Shares required to be sold to
satisfy the express obligations of Optionor under Section 7.1 of the Property
Settlement and Support Agreement dated as of August 10, 1998 between Optionor
and his wife (in the form delivered by Optionor to Optionee, the "Property
Settlement and Support Agreement")]; provided further that it shall be a
condition to (x) each such transfer referred to in the preceding clauses (b)
and (d) that such transferee shall (1) execute and deliver to Optionee the
Transferee Agreement in the form of Annex 1 attached hereto and (2) execute
and deliver to Optionee a replacement option identical in all respects to this
Agreement except for the change in the name of Optionor and (y) each such
transfer referred to in the preceding clause (c) that such transferee shall
agree that Optionor shall have the right to exercise all voting rights with
respect to the Option Shares so transferred and that no such
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transfer shall prevent, limit or interfere with Optionor's compliance with, or
performance of its obligations under, this Agreement, absent a default under
the terms of the related pledge or security agreement. The term "Transfer"
means a sale, an assignment, a pledge, a grant, a transfer or other
disposition of, or the creation of a Lien on, any Option Shares or any
interest of any nature in any Option Shares, including, without limitation,
the beneficial ownership of such Option Shares. The terms "Beneficially Own"
or "Beneficial Ownership" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to
Regulation 13D-G under the Exchange Act).
Section 4. Transfer of option. Optionee may transfer its rights and delegate
its obligations under this Agreement (including, without limitation, the
rights of Optionee under Sections 5 and 6) with respect to any Option Shares
to any person at any time; provided that the proposed assignee shall execute
and deliver to Optionor the Assignee Agreement in the form of Annex 2 attached
hereto.
Section 5. Power of Attorney.
(a) Appointment. Optionor hereby irrevocably appoints the Optionee (acting
in its capacity as attorney-in-fact pursuant hereto, the "Attorney-In-Fact")
as the true and lawful attorney-in-fact and agent of Optionor, with power of
substitution and resubstitution, to act in the name, place and stead of
Optionor solely with respect to the following:
(1) to take all actions necessary or appropriate to transfer or cause the
transfer to the Optionee of any Option Shares purchased by the Optionee in
accordance with the terms of this Agreement; and
(2) to instruct the Company, on behalf of Optionor, to issue and deliver
to the Optionee the Option Shares acquired upon exercise of the Option
pursuant to this Agreement.
(b) Confirmation. Optionor hereby acknowledges and confirms that the Power
of Attorney granted pursuant to this Section 5 is coupled with an interest
and, therefore, shall be irrevocable and shall not be terminated by any act of
Optionor or by operation of law, whether by the death, disability, liquidation
or dissolution of Optionor or by the occurrence of any other event or events,
and if, after the execution hereof, Optionor dies or is disabled, liquidated
or dissolved, or if any other such event or events shall occur before the
completion of the transactions contemplated by this Agreement, the Attorney-
in-Fact shall nevertheless be authorized and directed to complete all such
transactions as if such death, disability, liquidation or dissolution or other
event or events had not occurred and regardless of notice thereof.
(c) Termination. The Power of Attorney granted under this Section 5 shall
terminate at 5:00 p.m., New York City time, on the Option Termination Date.
Section 6. Legend. Optionor shall cause the following legend to be printed,
typed, stamped or otherwise impressed on each certificate for the Option
Shares and any certificates issued in exchange therefor or upon transfer
thereof (other than to Optionee), other than certificates for Option Shares
referred to in clause (c) of the proviso to Section 3:
"The shares represented by this certificate are subject to an option to
purchase and certain voting and transfer restrictions contained in the
Option Agreement dated as of September 13, 1998 from the registered holder
to Qwest Communications International Inc."
Section 7. Representations and Warranties of Optionor. Optionor represents
and warrants to Optionee as follows:
(a) Existence and Power. If Optionor is not a natural person, Optionor
(1) is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or is a
limited liability company, general partnership or limited partnership
formed and validly existing under the laws of the jurisdiction of its
formation and (2) has all necessary power and authority (as a corporation,
limited liability company, general partnership or limited partnership, as
the case may be) to execute and deliver each Option Document to which it is
or may become a party.
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(b) Authorization; Contravention. Subject to obtaining the Approval
referred to in Section 7(c), the execution and delivery by Optionor of each
Option Document to which it is or may become a party and the performance by
it of its obligations under each of those Option Documents have been duly
authorized by all necessary action (as a corporation, limited liability
company, general partnership or limited partnership, as the case may be),
if Optionor is not a natural person, and do not and will not (1)
contravene, violate, result in a breach of or constitute a default under,
(a) its articles of incorporation, certificate of incorporation, operating
agreement, partnership agreement, bylaws or articles or deed of trust, as
applicable, (b) any Regulation of any Governmental Body or any decision,
ruling, order or award of any arbitrator by which Optionor, the Option
Shares or any of its other properties may be bound or affected or (c) any
agreement, indenture or other instrument to which Optionor is a party or by
which Optionor, the Option Shares or any of its other properties may be
bound or affected or (2) result in or require the creation or imposition of
any Lien on the Option Shares or any of the other properties now owned or
hereafter acquired by it.
(c) Approvals. Except with respect to the Approval required under the
Hart-Scott-Rodino Act, no Approval of any Governmental Body or other person
is required or advisable on the part of Optionor for (1) the due execution
and delivery by Optionor of any Option Document to which it is or may
become a party, (2) the conclusion of the transactions contemplated by this
Agreement and the other Option Documents, (3) the performance by Optionor
of its obligations under each Option Document to which it is or may become
a party and (4) the exercise by Optionee of its rights and remedies under
each Option Document to which Optionor is or may become a party. Each such
Approval shall have been obtained, all actions by each person required to
be taken in connection with each such Approval shall have been taken and
all prescribed waiting, review or appeal periods with respect to each such
Approval shall have terminated or expired, as the case may be, in each case
on or before the Option Closing Date.
(d) Binding Effect. Each Option Document is, or when executed and
delivered by Optionor will be, the legally valid and binding obligation of
Optionor, enforceable against Optionor in accordance its terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally and
general principles of equity, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing and the possible
unavailability of specific performance or injunctive relief, regardless of
whether considered in a proceeding in equity or at law.
(e) Ownership. Optionor is the sole beneficial owner of all the Option
Shares, free and clear of all Liens except the Liens created by this
Agreement and the Voting Agreement and Liens permitted by clause (c) of the
proviso to Section 3. As of the date of this Agreement, Optionor does not
beneficially own any Equity Securities of the Company other than the Option
Shares. At the Option Closing, Optionor will be the sole beneficial owner
of the Option Shares to be sold, assigned and transferred by it under this
Agreement on such date, and no other person will have any beneficial
ownership interest in or to such Option Shares. Optionor has, and, at the
Option Closing, will have, good right, full power and lawful authority to
sell, assign and transfer to Optionee all its right, title and interest in
and to such Option Shares, free and clear of all Liens. Immediately after
the sale, assignment and transfer of such Option Shares pursuant to this
Agreement, upon the registration of such Option Shares in the name of
Optionee in the stock records of the Company and assuming that Optionee is
a purchaser for value and without notice of any adverse claim, Optionee
will have all the rights, title and interest of Optionor in and to such
Option Shares, free and clear of all Liens.
(f) Litigation. There is no Action pending against Optionor or, to the
knowledge of Optionor, threatened against Optionor or any other person that
restricts in any material respect or prohibits (or, if successful, would
restrict or prohibit) the exercise by any party or beneficiary of its
rights under any Option Document or the performance by any party of its
obligations under any Option Document.
(g) Voting and Transfer Restrictions. To the knowledge of Optionor,
except with respect to the Option Documents and the Voting Documents, there
is no agreement or arrangement restricting the voting of any Option Shares
or, except with respect to the Option Documents, the Voting Documents and
the
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pledge or security agreements creating the Liens permitted by clause (c) to
the proviso to Section 3, there is no agreement or arrangement restricting
the transfer of any Option Shares, or any interest therein.
(h) Fees for Financial Advisers, Brokers and Finders. Optionor has not
authorized any person to act as financial adviser, broker, finder or other
intermediary that might be entitled to any fee, commission, expense
reimbursement or other payment of any kind from any person upon the
conclusion of or in connection with any of the transactions contemplated by
this Agreement.
(i) Continuing Representations and Warranties. Each of the
representations and warranties made by Optionor in any Option Document as
of any date other than the date on which Optionor first executes this
Agreement shall be true and correct in all material respects on and as of
each Option Closing Date.
Section 8. Miscellaneous Provisions.
(a) Notices. All notices, requests and other communications to any party
under any Option Document shall be in writing. Communications may be made by
telecopy or similar writing. Each communication shall be given the party at
its address stated on the signature pages of this Agreement or at any other
address as the party may specify for this purpose by notice to the other
party. Each communication shall be effective (1) if given by telecopy, when
the telecopy is transmitted to the proper address and the receipt of the
transmission is confirmed, (2) if given by mail, 72 hours after the
communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the
proper address and a written acknowledgement of delivery is received.
(b) No Waivers; Remedies; Specific Performance.
(1) No failure or delay by Optionee in exercising any right, power or
privilege under any Option Document shall operate as a waiver of the right,
power or privilege. A single or partial exercise of any right, power or
privilege shall not preclude any other or further exercise of the right,
power or privilege or the exercise of any other right, power or privilege.
The rights and remedies provided in the Option Documents shall be
cumulative and not exclusive of any rights or remedies provided by law.
(2) In view of the uniqueness of the agreements contained in the Option
Documents and the transactions contemplated hereby and thereby and the fact
that Optionee would not have an adequate remedy at law for money damages in
the event that any obligation under any Option Document is not performed in
accordance with its terms, Optionor therefore agrees that Optionee shall be
entitled to specific enforcement of the terms of each Option Document in
addition to any other remedy to which Optionee may be entitled, at law or
in equity.
(c) Amendments, Etc. No amendment, modification, termination, or waiver of
any provision of any Option Document, and no consent to any departure by
Optionor or Optionee from any provision of any Option Document, shall be
effective unless it shall be in writing and signed and delivered by Optionor
and Optionee, and then it shall be effective only in the specific instance and
for the specific purpose for which it is given.
(d) Successors and Assigns; Third Party Beneficiaries.
(1) Optionee may assign its rights and delegate its obligations under
each Option Document only pursuant to Section 4. Optionor may assign its
rights and delegate its obligations under any Option Document only pursuant
to Section 3. Any assignment or delegation in contravention of this Section
8(d) shall be void ab initio and shall not relieve the assigning or
delegating party of any obligation under any Option Document.
(2) The provisions of each Option Document shall be binding upon and
inure to the benefit of the parties, the express beneficiaries thereof (to
the extent provided therein) and their respective permitted heirs,
executors, legal representatives, successors and assigns, and no other
person.
(e) Governing Law. Each Option Document shall be governed by and construed
in accordance with the internal laws of the State of New York.
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(f) Counterparts; Effectiveness. Each Option Document may be signed in any
number of counterparts, each of which shall be an original, with the same
effect as if all signatures were on the same instrument.
(g) Severability of Provisions. Any provision of any Option Document that is
prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of the Option
Document or affecting the validity or enforceability of the provision in any
other jurisdiction.
(h) Headings and References. Article and section headings in any Option
Document are included for the convenience of reference only and do not
constitute a part of the Option Document for any other purpose. References to
parties, express beneficiaries, articles and sections in any Option Document
are references to parties to or the express beneficiaries and sections of the
Option Document, as the case may be, unless the context shall require
otherwise.
(i) Entire Agreement. The Option Documents embody the entire agreement and
understanding of Optionor and Optionee, and supersedes all prior agreements or
understandings, with respect to the subject matters of the Option Documents.
(j) Survival. Except as otherwise specifically provided in any Option
Document, each representation, warranty or covenant of a party contained in
the Option Document shall remain in full force and effect, notwithstanding any
investigation or notice to the contrary or any waiver by any other party or
beneficiary of a related condition precedent to the performance by the other
party or beneficiary of an obligation under the Option Document.
(k) Exclusive Jurisdiction. Each party, and each express beneficiary of an
Option Document as a condition of its right to enforce or defend any right
under or in connection with such Option Document, (1) agrees that any Action
with respect to any Option Document or any transaction contemplated by any
Option Document shall be brought exclusively in the courts of the State of New
York or of the United States of America for the Southern District of New York,
in each case sitting in the Borough of Manhattan, State of New York, (2)
accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of those courts and (3) irrevocably waives
any objection, including, without limitation, any objection to the laying of
venue or based on the grounds of forum non conveniens, which it may now or
hereafter have to the bringing of any legal action in those jurisdictions;
provided, however, that any party may assert in an Action in any other
jurisdiction or venue each mandatory defense, third-party claim or similar
claim that, if not so asserted in such Action, may thereafter not be asserted
by such party in an original Action in the courts referred to in clause (1)
above.
(l) Waiver of Jury Trial. Each party, and each express beneficiary of an
Option Document as a condition of its right to enforce or defend any right
under or in connection with such Option Document, waives any right to a trial
by jury in any Action to enforce or defend any right under any Option Document
and agrees that any Action shall be tried before a court and not before a
jury.
(m) Affiliate. Nothing contained in any Option Document shall constitute
Optionee an "affiliate" of any of the Company and its Subsidiaries within the
meaning of the Securities Act and the Exchange Act, including, without
limitation, Rule 501 under the Securities Act and Rule 13e-3 under the
Exchange Act.
(n) Non-Recourse. No recourse under any Option Document shall be had against
any "controlling person" (within the meaning of Section 20 of the Exchange
Act) of any party or the stockholders, directors, officers, employees, agents
and Affiliates of the party or such controlling persons, whether by the
enforcement of any assessment or by any legal or equitable proceeding, or by
virtue of any Regulation, it being expressly agreed and acknowledged that no
personal liability whatsoever shall attach to, be imposed on or otherwise be
incurred by such controlling person, stockholder, director, officer, employee,
agent or Affiliate, as such, for any obligations of the party under any Option
Document or for any claim based on, in respect of or by reason of such
obligations or their creation.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above in New York, New York.
OPTIONOR:
_____________________________________
Name:
Address: 1200 Harbor Boulevard
Weehawken, New Jersey 07087
Fax: 201-601-1917
With a copy to:
Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Michael Weinsier
Fax: 212-704-6288
Qwest Communications International
Inc.
By: _________________________________
Joseph P. Nacchio
President and Chief Executive
Officer
Address: 1000 Qwest Tower
555 Seventeenth Street
Denver, Colorado 80202
Attention: Marc B. Weisberg
Fax: 303-992-1723
With a copy to:
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022
Attention: Drake S. Tempest
Fax: 212-326-2061
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<PAGE>
ANNEX 1
FORM OF
TRANSFEREE AGREEMENT
[Date]
Qwest Communications International Inc.
1000 Qwest Tower
555 Seventeenth Street
Denver, CO 80202
Re: Option Agreement dated as of September 13, 1998
between [Optionor] and Qwest Communications
International Inc.
Ladies and Gentlemen:
("Transferor") proposes to transfer to the undersigned shares of
common stock, par value $.001 per share, of Icon CMT Corp. (the "Transferred
Shares") that are subject to the Option Agreement dated as of September 13,
1998 (the "Option Agreement") between [Optionor] and Qwest Communications
International Inc. ("Qwest"). Terms not otherwise defined in this letter
agreement have the meanings stated in the Option Agreement.
This letter agreement is delivered to you pursuant to Section 3 of the
Option Agreement. The undersigned has reviewed the Option Agreement and, to
the extent necessary to understand the meaning of terms used in the Option
Agreement that are defined in the Merger Agreement, the Merger Agreement. The
undersigned acknowledges that the Option Agreement provides that the execution
and delivery of this letter agreement by the undersigned is a condition
precedent to the validity and effectiveness of the proposed transfer.
The undersigned agrees that, if and for so long as it holds any Transferred
Shares, the undersigned:
(1) shall be deemed to be the "Optionor" with respect to such Transferred
Shares under the Option Agreement;
(2) shall be bound by all of the terms and provisions of the Option
Agreement with respect to such Transferred Shares, including, without
limitation, Section 5 (Power of Attorney) of the Option Agreement;
(3) shall assume all obligations of Transferor under the Option Agreement
with respect to such Transferred Shares, including, without limitation,
Section 5 (Power of Attorney) of the Option Agreement; and
(4) until the day after the Option Termination Date, shall not transfer
any Transferred Shares, or any interest therein, except in accordance with
the provisions of the Option Agreement.
The undersigned understands that, if the undersigned were not to agree with
the foregoing, Transferor would be forbidden by the Option Agreement from
transferring the Option Shares to the undersigned and that any such purported
transfer would be void.
Very truly yours,
[Transferee]
By: _________________________________
Name:
Title:
Address:
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<PAGE>
ANNEX 2
FORM OF
ASSIGNEE AGREEMENT
[Date]
[Optionor]
Re: Option Agreement dated as of September 13, 1998
between [Optionor] and Qwest Communications
International Inc.
Ladies and Gentlemen:
("Assignor") proposes to transfer to the undersigned the rights of
Assignor under the Option Agreement (the "Option Agreement") dated as of
September 13, 1998 and between [Optionor] and Qwest Communications
International Inc. ("Qwest") with respect to shares of common stock, par
value $.001 per share, of Icon CMT Corp. (the "Shares") [, except that
Assignor does not propose to transfer to the undersigned the rights of
Assignor under Sections 2(a), and of the Option Agreement with respect
to the Shares]. This letter agreement is delivered to you pursuant to Section
4 of the Option Agreement.
The undersigned has reviewed the Option Agreement and, to the extent
necessary to understand the meaning of terms used in the Option Agreement that
are defined in the Merger Agreement, the Merger Agreement. The undersigned
acknowledges that the Option Agreement states that the execution and delivery
of this letter agreement by the undersigned is a condition precedent to the
validity and effectiveness of the proposed assignment.
The undersigned agrees that, if and for so long as it holds any rights under
the Option Documents, the undersigned:
(1) shall be deemed to be the "Optionee" under the Option Agreement with
respect to the Shares;
(2) shall be bound by all of the terms and provisions of the Option
Agreement with respect to the Shares, including, without limitation,
Section 5 (Power of Attorney) of the Option Agreement;
(3) shall assume all obligations of Assignor under the Option Agreement
with respect to the Shares; and
(4) [shall have no rights under Sections 2(a), and of the Option
Agreement with respect to the Shares.]
The undersigned understands that, if the undersigned were not to agree with
the foregoing, the Assignor would be forbidden by the Option Agreement from
assigning to the undersigned any of its rights under the Option Agreement and
that any such purported assignment would be void.
Very truly yours,
[Assignee]
By: _________________________________
Name:
Title:
Address:
Telecopy:
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<PAGE>
EXHIBIT B
FORM OF
VOTING AGREEMENT AND PROXY
VOTING AGREEMENT AND PROXY dated as of September 13, 1998 between
("Stockholder") and Qwest Communications International Inc., a Delaware
corporation (together with its successors and assigns, "Qwest").
RECITALS
A. Stockholder beneficially owns shares of common stock, par value
$.001 per share (the "Company Common Stock"), of Icon CMT Corp., a Delaware
corporation (the "Company") [, including shares of Company Common Stock
issuable upon the exercise of Company Stock Options vested as of the date of
this Agreement]. All such shares, together with all other shares of capital
stock of the Company with respect to which Stockholder has beneficial
ownership as of the date of this Agreement or acquires beneficial ownership on
or before the Termination Date, are collectively referred to as the
"Restricted Company Shares".
B. Concurrently with the execution and delivery of this Agreement, the
Company, Qwest and Qwest Subsidiary, a Delaware corporation ("Qwest
Subsidiary"), are entering into the Agreement and Plan of Merger dated as of
September 13, 1998 (as amended or modified from time to time, the "Merger
Agreement"), providing for, among other things, the merger of Qwest Subsidiary
with and into the Company (the "Merger"). Terms not otherwise defined in this
Agreement have the meanings stated in the Merger Agreement.
C. Concurrently with the execution and delivery of this Option Agreement,
Stockholder and Qwest are entering into the Option Agreement dated as of
September 13, 1998 (the "Option Agreement") to provide for, among other
things, (1) the grant by Stockholder to Qwest of an option to acquire the
Restricted Company Shares and (2) certain restrictions on the voting and the
sale or other transfer of the Restricted Company Shares.
D. As contemplated by Section 1.2(c) of the Merger Agreement, Stockholder
and Qwest desire to enter into this Agreement to provide for, among other
things, (1) the obligation of Stockholder to vote the Restricted Company
Shares to approve the Merger Agreement and the merger contemplated thereby
(the "Merger") and against any Business Combination (other than the
Transactions), (2) the grant by Stockholder to each of Qwest and Qwest
Subsidiary of an irrevocable proxy in connection therewith, (3) certain
restrictions on the voting and the sale or other transfer of the Restricted
Company Shares by Stockholder, (4) certain restrictions on Stockholder with
respect to Business Combination Transactions (other than the Transactions)
with respect to any of the Company and its Subsidiaries and (5) the obligation
of Stockholder to execute and deliver the Stockholder Agreement at or before
the Closing of the Merger. This Agreement and all other agreements,
instruments and other documents executed and delivered by Stockholder in
connection with this Agreement are collectively referred to as the "Voting
Documents".
E. Stockholder acknowledges that Qwest and Qwest Subsidiary are entering
into the Merger Agreement in reliance on the representations, warranties,
covenants and other agreements of Stockholder set forth in this Agreement and
would not enter into the Merger Agreement if Stockholder did not enter into
this Agreement.
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<PAGE>
AGREEMENT
The parties agree as follows:
Section 1. Covenants of Stockholder.
(a) Voting. Until the later of the day following the Termination Date and
payment in full by the Company of all amounts then owed to Qwest and Qwest
Subsidiary pursuant to Section 9.2 of the Merger Agreement, subject to the
receipt of proper notice and the absence of a preliminary or permanent
injunction or other final order by any United States federal court or state
court barring such action, Stockholder shall do the following:
(1) be present, in person or represented by proxy, at each meeting
(whether annual or special, and whether or not an adjourned or postponed
meeting) of the stockholders of the Company, however called, or in
connection with any written consent of the stockholders of the Company, so
that all Restricted Company Shares then entitled to vote may be counted for
the purposes of determining the presence of a quorum at such meetings; and
(2) at each such meeting held before the Effective Time and with respect
to each such written consent, vote (or cause to be voted) the Restricted
Company Shares (A) to approve each of the Merger Agreement and the Merger,
and any action required in furtherance thereof, (B) except as otherwise
approved in writing in advance by Qwest (which approval may be granted,
withheld, conditioned or delayed in its sole discretion), against any
action or agreement that would result in any breach of any representation,
warranty, covenant or agreement of Stockholder or the Company contained in
any Transaction Document, that would or could reasonably be expected to
impede, interfere with, prevent or materially delay the conclusion of any
of the Transactions or that would or could reasonably be expected to
materially reduce the benefits to Qwest or Qwest Subsidiary of the
Transactions, (C) except as otherwise approved in writing in advance by
Qwest (which approval may be granted, withheld, conditioned or delayed in
its sole discretion), against any Business Combination Transaction (other
than the Transactions) and (D) except as otherwise approved in writing in
advance by Qwest (which approval may be granted, withheld, conditioned or
delayed in its sole discretion), against any amendment to the articles of
incorporation or the certificate of incorporation, as the case may be, or
bylaws of the Company.
(b) Business Combination Transactions. Until the day following the
Termination Date, Stockholder shall not do any of the following or enter into
any agreement or other arrangement (other than the Voting Documents and the
Option Documents) with respect to any of the following:
(1) enter into any agreement with respect to or take any other action to
effect any Business Combination Transaction (other than the Transactions)
with respect to any of the Company and its Subsidiaries;
(2) solicit, initiate or encourage (including, without limitation, by way
of furnishing information) any inquiry or the making of any proposal to any
of the Company, its Subsidiaries and its stockholders from any person
(other than Qwest, Qwest Subsidiary or any Affiliate of, or any person
acting in concert with, Qwest or Qwest Subsidiary) which constitutes, or
may reasonably be expected to lead to, a proposal with respect to a
Business Combination Transaction (other than the Transactions) with respect
to any of the Company and its Subsidiaries, or endorse any Business
Combination Transaction (other than the Transactions) with respect to any
of the Company and its Subsidiaries; or
(3) continue, enter into or participate in any discussions or
negotiations regarding any of the foregoing, or furnish to any other person
any information with respect to the business, properties, operations,
prospects or condition (financial or otherwise) of the Company and its
Subsidiaries or any of the foregoing, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any effort or
attempt by any other person to do or seek any of the foregoing;
provided that the restrictions set forth in this Section 1(b) shall not
prevent Stockholder from serving as a director of any of the Company and its
Subsidiaries and in that capacity complying with his fiduciary obligations. If
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<PAGE>
Stockholder receives a proposal with respect to a Business Combination
Transaction with respect to any of the Company and its Subsidiaries, then
Stockholder shall, by written notice delivered within 24 hours after receipt
of such proposal, inform Qwest and Qwest Subsidiary of the terms and
conditions of such proposal and the identity of the person making the a
proposal with respect to such Business Combination Transaction. Stockholder
agrees that the restrictions in this Section 1(b) are reasonable and properly
required to accomplish the purposes of this Agreement.
(c) Stockholder Agreement. At or before the Closing, Stockholder shall
execute and deliver to Qwest a Stockholder Agreement substantially in the form
of Exhibit B to the Merger Agreement (the "Stockholder Agreement").
Section 2. Irrevocable Proxy. Stockholder hereby revokes any previous
proxies and appoints each of Qwest and Qwest Subsidiary, with full power of
substitution, as attorney and proxy of the undersigned, (1) to attend any and
all meetings of stockholders of the Company, (2) to vote in accordance with
the provisions of Section 1 the Restricted Company Shares that the undersigned
is then entitled to vote, (3) to grant or withhold in accordance with the
provisions of Section 1 all written consents with respect to the Restricted
Company Shares that the undersigned is then entitled to vote, and (4) to
represent and otherwise to act for the undersigned in the same manner and with
the same effect as if the undersigned were personally present, with respect to
all matters subject to Section 1. This proxy shall be deemed to be a proxy
coupled with an interest, is irrevocable until the day following the
Termination Date and shall not be terminated by operation of law upon the
occurrence of any event. Stockholder authorizes such attorney and proxy to
substitute any other person to act hereunder, to revoke any substitution and
to file this proxy and any substitution or revocation with the Secretary of
the Company.
Section 3. Transfer of Restricted Company Shares. Until the day following
the Termination Date, Stockholder shall not transfer any Restricted Company
Shares to any person other than Qwest; provided that Stockholder may (a)
transfer Restricted Company Shares to Qwest Subsidiary or any Affiliate
thereof in connection with the conclusion of the Transactions, (b) transfer
Restricted Company Shares to one or more members of Stockholder's immediate
family or trusts with respect to which one or more of Stockholder and such
members are the exclusive beneficiaries, (c) pledge or create security
interest in or other Liens on not more than Restricted Company Shares in
the aggregate to secure bona fide indebtedness of Stockholder owed to one or
more financial institutions, (d) any other person approved in advance in
writing by Qwest, which approval may be granted, withheld, conditioned or
delayed in the sole discretion of Qwest [and (e) sell the minimum number of
Restricted Company Shares required to be sold to satisfy the express
obligations of Stockholder under Section 7.1 of the Property Settlement and
Support Agreement dated as of August 10, 1998 between Stockholder and his wife
(in the form delivered by Stockholder to Qwest)]; provided further that it
shall be a condition to (x) each such transfer referred to in the preceding
clauses (b) and (d) that such transferee shall (1) execute and deliver to
Stockholder the Transferee Agreement in the form of Annex 1 attached hereto
and (2) execute and deliver to Qwest an agreement identical in all respects to
this Agreement except for the change in the name of Stockholder and the number
of shares of Company Common Stock beneficially owned by Stockholder and (y)
each such transfer referred to in the preceding clause (c) that such
transferee shall agree that Stockholder (and Qwest with respect to the proxy
referred to in Section 2) shall have the right to exercise all voting rights
with respect to the Restricted Company Shares so transferred and that no such
transfer shall prevent, limit or interfere with Stockholder's compliance with,
or performance of its obligations under, this Agreement, absent a default
under the terms of the related pledge or security agreement. The term
"Transfer" means a sale, an assignment, a pledge, a grant, a transfer or other
disposition of, or the creation of a Lien on, any Restricted Company Shares or
any interest of any nature in any Restricted Company Shares, including,
without limitation, the beneficial ownership of such Restricted Company
Shares. The terms "Beneficially Own" or "Beneficial Ownership" with respect to
any securities means having "beneficial ownership" of such securities (as
determined pursuant to Regulation 13D-G under the Exchange Act).
Section 4. Representations and Warranties of Stockholder. Stockholder
represents and warrants to Qwest as follows:
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<PAGE>
(a) Existence and Power. If Stockholder is not a natural person,
Stockholder (1) is a corporation duly incorporated, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or is
a limited liability company, general partnership or limited partnership
formed and validly existing under the laws of the jurisdiction of its
formation and (2) has all necessary power and authority (as a corporation,
limited liability company, general partnership or limited partnership, as
the case may be) to execute and deliver each Voting Document to which it is
or may become a party.
(b) Authorization; Contravention. The execution and delivery by
Stockholder of each Voting Document and the performance by it of its
obligations under each Voting Document have been duly authorized by all
necessary action (as a corporation, limited liability company, general
partnership or limited partnership, as the case may be), if Stockholder is
not a natural person, and do not and will not (1) contravene, violate,
result in a breach of or constitute a default under, (A) its articles of
incorporation, certificate of incorporation, operating agreement,
partnership agreement, bylaws or articles or deed of trust, as applicable,
(B) any Regulation of any Governmental Body or any decision, ruling, order
or award of any arbitrator by which Stockholder, the Restricted Company
Shares or any of its other properties may be bound or affected or (C) any
agreement, indenture or other instrument to which Stockholder is a party or
by which Stockholder, the Restricted Company Shares or any of its other
properties may be bound or affected or (2) result in or require the
creation or imposition of any Lien on the Restricted Company Shares or any
of the other properties now owned or hereafter acquired by it.
(c) Approvals. No Approval of any Governmental Body or other person is
required or advisable on the part of Stockholder for (1) the due execution
and delivery by Stockholder of any Voting Document to which it is or may
become a party, (2) the conclusion of the transactions contemplated by this
Agreement and the other Voting Documents, (3) the performance by
Stockholder of its obligations under each Voting Document to which it is or
may become a party and (4) the exercise by Qwest of its rights and remedies
under each Voting Document to which Stockholder is or may become a party.
(d) Binding Effect. Each Voting Document is, or when executed and
delivered by Stockholder will be, the legally valid and binding obligation
of Stockholder, enforceable against Stockholder in accordance with its
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally and general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing and
the possible unavailability of specific performance or injunctive relief,
regardless of whether considered in a proceeding in equity or at law.
(e) Ownership. Stockholder is the sole beneficial owner of all the
Restricted Company Shares, free and clear of all Liens except the Liens
created by this Agreement and the Option Agreement and Liens permitted by
clause (c) of the proviso to Section 3. As of the date of this Agreement,
Stockholder does not beneficially own any Equity Securities of the Company
other than the Restricted Company Shares. As of the time of the Company
Stockholders Meeting, Stockholder will be the sole beneficial owner of all
the Restricted Company Shares, free and clear of all Liens except the Liens
created by this Agreement and the Option Agreement and Liens permitted by
clause (c) of the proviso to Section 3.
(f) Litigation. There is no Action pending against Stockholder or, to the
knowledge of Stockholder, threatened against Stockholder or any other
person that restricts in any material respect or prohibits (or, if
successful, would restrict or prohibit) the exercise by any party or
beneficiary of its rights under any Voting Document or the performance by
any party of its obligations under any Voting Document.
Section 5. Restrictions.
(a) Legend. The following legend shall be printed, typed, stamped or
otherwise impressed on each certificate for the Restricted Company Shares and
any certificates issued in exchange therefor or upon transfer thereof (other
than to Qwest or Qwest Subsidiary), other than certificates for Restricted
Company Shares referred to in clause (c) of the proviso to Section 3:
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<PAGE>
"The shares represented by this certificate are subject to certain voting
and transfer restrictions contained in the Voting Agreement dated as of
September 13, 1998 from the registered holder to Qwest Communications
International Inc."
(b) Stop Order. Qwest may direct the Company to impose stop orders to
prevent the transfer of the Restricted Company Shares on the books of the
Company in violation of this Agreement.
Section 6. Miscellaneous Provisions.
(a) Notices. All notices, requests and other communications to any party
under any Voting Document shall be in writing. Communications may be made by
telecopy or similar writing. Each communication shall be given the party at
its address stated on the signature pages of this Agreement or at any other
address as the party may specify for this purpose by notice to the other
party. Each communication shall be effective (1) if given by telecopy, when
the telecopy is transmitted to the proper address and the receipt of the
transmission is confirmed, (2) if given by mail, 72 hours after the
communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the
proper address and a written acknowledgement of delivery is received.
(b) No Waivers; Remedies; Specific Performance.
(1) No failure or delay by Qwest in exercising any right, power or
privilege under any Voting Document shall operate as a waiver of the right,
power or privilege. A single or partial exercise of any right, power or
privilege shall not preclude any other or further exercise of the right,
power or privilege or the exercise of any other right, power or privilege.
The rights and remedies provided in the Voting Documents shall be
cumulative and not exclusive of any rights or remedies provided by law.
(2) In view of the uniqueness of the agreements contained in the Voting
Documents and the transactions contemplated hereby and thereby and the fact
that Qwest would not have an adequate remedy at law for money damages in
the event that any obligation under any Voting Document is not performed in
accordance with its terms, Stockholder therefore agrees that Qwest shall be
entitled to specific enforcement of the terms of each Voting Document in
addition to any other remedy to which Qwest may be entitled, at law or in
equity.
(c) Amendments, Etc.
(1) No amendment, modification, termination, or waiver of any provision
of any Voting Document, and no consent to any departure by Stockholder or
Qwest from any provision of any Voting Document, shall be effective unless
it shall be in writing and signed and delivered by Stockholder and Qwest,
and then it shall be effective only in the specific instance and for the
specific purpose for which it is given.
(2) Qwest may by written notice delivered from time to time to
Stockholder terminate any or all of its rights under this Agreement and the
proxy granted pursuant to Section 2 of this Agreement.
(d) Successors and Assigns; Third Party Beneficiaries.
(1) Qwest may assign any of its rights or delegate any of its obligations
under any Voting Document. Stockholder may assign its rights and delegate
its obligations under any Option Document only pursuant to Section 3. Any
assignment or delegation in contravention of this Section 6(d) shall be
void ab initio and shall not relieve the assigning or delegating party of
any obligation under any Voting Document.
(2) The provisions of each Voting Document shall be binding upon and
inure to the benefit of the parties, the express beneficiaries thereof (to
the extent provided therein) and their respective permitted heirs,
executors, legal representatives, successors and assigns, and no other
person.
(e) Governing Law. Each Voting Document shall be governed by and construed
in accordance with the internal laws of the State of New York.
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(f) Severability of Provisions. Any provision of any Voting Document that is
prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of the Voting
Document or affecting the validity or enforceability of the provision in any
other jurisdiction.
(g) Headings and References. Article and section headings in any Voting
Document are included for the convenience of reference only and do not
constitute a part of the Voting Document for any other purpose. References to
parties, express beneficiaries, articles and sections in any Voting Document
are references to parties to or the express beneficiaries, articles and
sections of the Voting Document, as the case may be, unless the context shall
require otherwise.
(h) Entire Agreement. The Voting Documents embody the entire agreement and
understanding of Stockholder and Qwest, and supersedes all prior agreements or
understandings, with respect to the subject matters of the Voting Documents.
(i) Survival. Except as otherwise specifically provided in any Voting
Document, each representation, warranty or covenant of a party contained in
the Voting Document shall remain in full force and effect, notwithstanding any
investigation or notice to the contrary or any waiver by any other party or
beneficiary of a related condition precedent to the performance by the other
party or beneficiary of an obligation under the Voting Document.
(j) Exclusive Jurisdiction. Each party, and each express beneficiary of a
Voting Document as a condition of its right to enforce or defend any right
under or in connection with such Voting Document, (1) agrees that any Action
with respect to any Voting Document or any transaction contemplated by any
Voting Document shall be brought exclusively in the courts of the State of New
York or of the United States of America for the Southern District of New York,
in each case sitting in the Borough of Manhattan, State of New York, (2)
accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of those courts and (3) irrevocably waives
any objection, including, without limitation, any objection to the laying of
venue or based on the grounds of forum non conveniens, which it may now or
hereafter have to the bringing of any legal action in those jurisdictions;
provided, however, that any party may assert in an Action in any other
jurisdiction or venue each mandatory defense, third-party claim or similar
claim that, if not so asserted in such Action, may thereafter not be asserted
by such party in an original Action in the courts referred to in clause (1)
above.
(k) Waiver of Jury Trial. Each party, and each express beneficiary of a
Voting Document as a condition of its right to enforce or defend any right
under or in connection with such Voting Document, waives any right to a trial
by jury in any Action to enforce or defend any right under any Voting Document
and agrees that any Action shall be tried before a court and not before a
jury.
(l) Affiliate. Nothing contained in any Voting Document shall constitute
Qwest an "affiliate" of any of the Company and its Subsidiaries within the
meaning of the Securities Act and the Exchange Act, including, without
limitation, Rule 501 under the Securities Act and Rule 13e-3 under the
Exchange Act.
(m) Non-Recourse. No recourse under any Voting Document shall be had against
any "controlling person" (within the meaning of Section 20 of the Exchange
Act) of any party or the stockholders, directors, officers, employees, agents
and Affiliates of the party or such controlling persons, whether by the
enforcement of any assessment or by any legal or equitable proceeding, or by
virtue of any Regulation, it being expressly agreed and acknowledged that no
personal liability whatsoever shall attach to, be imposed on or otherwise be
incurred by such controlling person, stockholder, director, officer, employee,
agent or Affiliate, as such, for any obligations of the party under any Voting
Document or for any claim based on, in respect of or by reason of such
obligations or their creation.
[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above in New York, New York.
Stockholder:
_____________________________________
Name:
Address: 1200 Harbor Boulevard
Weehawken, New Jersey 07087
Telecopy: 201-601-1917
With a copy to:
Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Michael Weinsier
Telecopy: 212-704-6288
Qwest Communications International
Inc.
By: _________________________________
Joseph P. Nacchio
President and Chief Executive
Officer
Address: 1000 Qwest Tower
555 Seventeenth Street
Denver, Colorado 80202
Attention: Marc B. Weisberg
Fax: 303-992-1723
With a copy to:
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022
Attention: Drake S. Tempest
Fax: 212-326-2061
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<PAGE>
ANNEX 1
FORM OF
TRANSFEREE AGREEMENT
[Date]
Qwest Communications International Inc.
1000 Qwest Tower
555 Seventeenth Street
Denver, CO 80202
Re: Voting Agreement and Proxy dated as of September 13, 1998
between Stockholder and Qwest Communications International
Inc.
Ladies and Gentlemen:
("Transferor") proposes to transfer to the undersigned shares of
common stock, par value $.001 per share, of Icon CMT Corp. (the "Transferred
Shares") that are subject to the Voting Agreement and Proxy dated as of
September 13, 1998 (the "Option Agreement") between Stockholder and Qwest
Communications International Inc. ("Qwest"). Terms not otherwise defined in
this letter agreement have the meanings stated in the Option Agreement.
This letter agreement is delivered to you pursuant to Section 3 of the
Voting Agreement and Proxy. The undersigned has reviewed the Voting Agreement
and Proxy and, to the extent necessary to understand the meaning of terms used
in the Voting Agreement and Proxy that are defined in the Merger Agreement,
the Merger Agreement. The undersigned acknowledges that the Voting Agreement
and Proxy provides that the execution and delivery of this letter agreement by
the undersigned is a condition precedent to the validity and effectiveness of
the proposed transfer.
The undersigned agrees that, if and for so long as it holds any Transferred
Shares, the undersigned:
(1) shall be deemed to be the "Stockholder" with respect to such
Transferred Shares under the Voting Agreement and Proxy;
(2) shall be bound by all of the terms and provisions of the Voting
Agreement and Proxy with respect to such Transferred Shares, including,
without limitation, Section 2 (Irrevocable Proxy) of the Voting Agreement
and Proxy;
(3) shall assume all obligations of Transferor under the Voting Agreement
and Proxy with respect to such Transferred Shares, including, without
limitation, Section 2 (Irrevocable Proxy) of the Voting Agreement and
Proxy; and
(4) until the day following the Termination Date, shall not transfer any
Transferred Shares, or any interest therein, except in accordance with the
provisions of the Voting Agreement and Proxy.
The undersigned understands that, if the undersigned were not to agree with
the foregoing, Transferor would be forbidden by the Voting Agreement and Proxy
from transferring the Restricted Company Shares to the undersigned and that
any such purported transfer would be void.
Very truly yours,
[TRANSFEREE]
By: _________________________________
Name:
Title:
Address:
Telecopy:
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EXHIBIT C
FORM OF
STOCKHOLDER AGREEMENT
Stockholder Agreement dated as of , 199 between ("Stockholder")
and Qwest Communications International Inc., a Delaware corporation (together
with its successors and assigns, "Qwest").
RECITALS
A. Stockholder will acquire, subject to adjustment for fractional shares,
shares of common stock, par value $.01 per share, of Qwest ("Qwest Common
Stock") pursuant to the Agreement and Plan of Merger dated as of September 13,
1998 (the "Merger Agreement") among Icon CMT Corp., a Delaware corporation,
Qwest and Qwest Subsidiary, a Delaware corporation ("Qwest Subsidiary"). Terms
not otherwise defined in this Agreement have the meanings stated in the Merger
Agreement.
B. As contemplated by Sections 1.2(d) and 3.1(i) of the Merger Agreement and
Section 1(c) of the Voting Agreement and Proxy dated as of September 13, 1998
between Stockholder and Qwest, Stockholder and Qwest desire to enter into this
Agreement to provide for certain restrictions on the sale or other transfer by
Stockholder of the shares of Qwest Common Stock received by Stockholder in the
Merger (as such shares may be adjusted in the event of any change in the
capital stock of Qwest by reason of stock dividends, split-ups, reverse split-
ups, mergers, recapitalizations, subdivisions, conversions, exchanges of
shares or the like, collectively, the "Restricted Qwest Shares"). This
Agreement and all other agreements, instruments and other documents executed
and delivered by Stockholder in connection with this Agreement are
collectively referred to as the "Stockholder Documents".
C. Stockholder acknowledges that Qwest and Qwest Subsidiary entered into the
Merger Agreement in reliance on the representations, warranties, covenants and
other agreements of Stockholder set forth in this Agreement and would not have
entered into the Merger Agreement if Stockholder had not agreed to enter into
this Agreement.
AGREEMENT
The parties agree as follows:
Section 1. Transfers. Stockholder shall not sell or otherwise transfer (or
offer to sell or otherwise transfer) any of the Restricted Qwest Shares, or
any interest therein, if, after giving effect to such sale or other transfer,
Stockholder would be the sole beneficial owner of less than 60% of the
Restricted Qwest Shares on [the first anniversary of the Closing Date],
40% of the Restricted Qwest Shares on [the second anniversary of the
Closing Date] or 20% of the Restricted Qwest Shares on [the third
anniversary of the Closing Date], in each case free and clear of all Liens
(except the Lien created by this Agreement); provided that Stockholder may (a)
transfer Restricted Qwest Shares to one or more members of Stockholder's
immediate family or trusts with respect to which Stockholder and one or more
of such members are the exclusive beneficiaries, (b) sell or otherwise
transfer any or all of the Restricted Qwest Shares pursuant to a Business
Combination Transaction with respect to Qwest approved by the Board of
Directors of Qwest [and (c) on or after , 1998, sell the minimum number
of Restricted Qwest Shares required to be sold to satisfy the express
obligations of Stockholder under Section 7.1 of the Property Settlement and
Support Agreement dated as of August 10, 1998 between Optionor and his wife
(in the form delivered by Stockholder to Qwest)]. Each Restricted Qwest Share
sold or otherwise transferred by Stockholder pursuant to this Section 1 shall,
at the effective time of such sale or other transfer, cease to be subject to
this Agreement. The term
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<PAGE>
"Transfer" means a sale, an assignment, a pledge, a grant, a transfer or other
disposition of, or the creation of a Lien on, any Restricted Qwest Shares or
any interest of any nature in any Restricted Qwest Shares, including, without
limitation, the beneficial ownership of such Restricted Qwest Shares. The
terms "Beneficially Own" or "Beneficial Ownership" with respect to any
securities means having "beneficial ownership" of such securities (as
determined pursuant to Regulation 13D-G under the Exchange Act).
Section 2. Representations and Warranties of Stockholder. Stockholder
represents and warrants to Qwest as follows:
(a) Existence and Power. If Stockholder is not a natural person, Stockholder
(1) is a corporation duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or is a limited
liability company, general partnership or limited partnership formed and
validly existing under the laws of the jurisdiction of its formation and (2)
has all necessary power and authority (as a corporation, limited liability
company, general partnership or limited partnership, as the case may be) to
execute and deliver each Stockholder Document to which it is or may become a
party.
(b) Authorization; Contravention. The execution and delivery by Stockholder
of each Stockholder Document to which it is or may become a party and the
performance by it of its obligations under each of those Stockholder Documents
have been duly authorized by all necessary action (as a corporation, limited
liability company, general partnership or limited partnership, as the case may
be), if Stockholder is not a natural person, and do not and will not (1)
contravene, violate, result in a breach of or constitute a default under, (A)
its articles of incorporation, certificate of incorporation, operating
agreement, partnership agreement, bylaws or articles or deed of trust, as
applicable, (B) any Regulation of any Governmental Body or any decision,
ruling, order or award of any arbitrator by which Stockholder, the Restricted
Qwest Shares or any of its other properties may be bound or affected or (C)
any agreement, indenture or other instrument to which Stockholder is a party
or by which Stockholder, the Restricted Qwest Shares or any of its other
properties may be bound or affected or (2) result in or require the creation
or imposition of any Lien on the Restricted Qwest Shares or any of the other
properties now owned or hereafter acquired by it.
(c) Approvals. No Approval of any Governmental Body or other person is
required or advisable on the part of Stockholder for (1) the due execution and
delivery by Stockholder of any Stockholder Document to which it is or may
become a party, (2) the conclusion of the transactions contemplated by this
Agreement and the other Stockholder Documents, (3) the performance by
Stockholder of its obligations under each Stockholder Document to which it is
or may become a party and (4) the exercise by Qwest of its rights and remedies
under each Stockholder Document to which Stockholder is or may become a party.
(d) Binding Effect. Each Stockholder Document is, or when executed and
delivered by Stockholder will be, the legally valid and binding obligation of
Stockholder, enforceable against Optionor in accordance its terms, except as
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally and general
principles of equity, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing and the possible unavailability of
specific performance or injunctive relief, regardless of whether considered in
a proceeding in equity or at law.
(e) Ownership. Stockholder will acquire pursuant to the Merger Agreement the
number of Restricted Qwest Shares specified in Recital A above.
(f) Litigation. There is no action, suit, investigation, complaint or other
proceeding pending against Stockholder or, to the knowledge of Stockholder,
threatened against Stockholder or any other person that restricts in any
material respect or prohibits (or, if successful, would restrict or prohibit)
the exercise by any party or beneficiary of its rights under this Agreement or
the performance by any party of its obligations under any Stockholder
Document.
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Section 3. Legend. The following legend shall be printed, typed, stamped or
otherwise impressed on each certificate for the Restricted Qwest Shares and
any certificates issued in exchange therefor or upon transfer thereof (other
than a permitted transfer pursuant to Section 1):
"The shares represented by this certificate are subject to certain
transfer restrictions contained in the Stockholder Agreement dated as of
, 199 between registered holder and Qwest Communications
International Inc."
Section 4. Miscellaneous Provisions.
(a) Notices. All notices, requests and other communications to any party
under any Stockholder Document shall be in writing. Communications may be made
by telecopy or similar writing. Each communication shall be given the party at
its address stated on the signature pages of this Agreement or at any other
address as the party may specify for this purpose by notice to the other
party. Each communication shall be effective (1) if given by telecopy, when
the telecopy is transmitted to the proper address and the receipt of the
transmission is confirmed, (2) if given by mail, 72 hours after the
communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the
proper address and a written acknowledgement of delivery is received.
(b) No Waivers; Remedies; Specific Performance.
(1) No failure or delay by Qwest in exercising any right, power or
privilege under any Stockholder Document shall operate as a waiver of the
right, power or privilege. A single or partial exercise of any right, power
or privilege shall not preclude any other or further exercise of the right,
power or privilege or the exercise of any other right, power or privilege.
The rights and remedies provided in the Stockholder Documents shall be
cumulative and not exclusive of any rights or remedies provided by law.
(2) In view of the uniqueness of the agreements contained in the
Stockholder Documents and the transactions contemplated hereby and thereby
and the fact that Qwest would not have an adequate remedy at law for money
damages in the event that any obligation under any Stockholder Document is
not performed in accordance with its terms, Stockholder therefore agrees
that Qwest shall be entitled to specific enforcement of the terms of each
Stockholder Document in addition to any other remedy to which Qwest may be
entitled, at law or in equity.
(c) Amendments, Etc. No amendment, modification, termination, or waiver of
any provision of any Stockholder Document, and no consent to any departure by
Stockholder or Qwest from any provision of any Stockholder Document, shall be
effective unless it shall be in writing and signed and delivered by
Stockholder and Qwest, and then it shall be effective only in the specific
instance and for the specific purpose for which it is given.
(d) Successors and Assigns; Third Party Beneficiaries.
(1) Qwest may assign its rights and delegate its obligations under each
Stockholder Document. Stockholder may assign its rights and delegate its
obligations under any Stockholder Document only pursuant to Section 1. Any
assignment or delegation in contravention of this Section 4(d) shall be
void ab initio and shall not relieve the assigning or delegating party of
any obligation under any Stockholder Document.
(2) The provisions of each Stockholder Document shall be binding upon and
inure to the benefit of the parties, the express beneficiaries thereof (to
the extent provided therein) and their respective permitted heirs,
executors, legal representatives, successors and assigns, and no other
person.
(e) Governing Law. Each Stockholder Document shall be governed by and
construed in accordance with the internal laws of the State of New York.
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<PAGE>
(f) Counterparts; Effectiveness. Each Stockholder Document may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if all signatures were on the same instrument.
(g) Severability of Provisions. Any provision of any Stockholder Document
that is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of the
Stockholder Document or affecting the validity or enforceability of the
provision in any other jurisdiction.
(h) Headings and References. Article and section headings in any Stockholder
Document are included for the convenience of reference only and do not
constitute a part of the Stockholder Document for any other purpose.
References to parties, express beneficiaries, articles and sections in any
Stockholder Document are references to parties to or the express
beneficiaries, articles and sections of the Stockholder Document, as the case
may be, unless the context shall require otherwise.
(i) Entire Agreement. The Stockholder Documents embody the entire agreement
and understanding of Stockholder and Qwest, and supersedes all prior
agreements or understandings, with respect to the subject matters of the
Stockholder Documents.
(j) Survival. Except as otherwise specifically provided in any Stockholder
Document, each representation, warranty or covenant of a party contained in
the Stockholder Document shall remain in full force and effect,
notwithstanding any investigation or notice to the contrary or any waiver by
any other party or beneficiary of a related condition precedent to the
performance by the other party or beneficiary of an obligation under the
Stockholder Document.
(k) Exclusive Jurisdiction. Each party, and each express beneficiary of an
Stockholder Document as a condition of its right to enforce or defend any
right under or in connection with such Stockholder Document, (1) agrees that
any Action with respect to any Stockholder Document or any transaction
contemplated by any Stockholder Document shall be brought exclusively in the
courts of the State of New York or of the United States of America for the
Southern District of New York, in each case sitting in the Borough of
Manhattan, State of New York, (2) accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of those courts and
(3) irrevocably waives any objection, including, without limitation, any
objection to the laying of venue or based on the grounds of forum non
conveniens, which it may now or hereafter have to the bringing of any legal
action in those jurisdictions; provided, however, that any party may assert in
an Action in any other jurisdiction or venue each mandatory defense, third-
party claim or similar claim that, if not so asserted in such Action, may
thereafter not be asserted by such party in an original Action in the courts
referred to in clause (1) above.
(l) Waiver of Jury Trial. Each party, and each express beneficiary of an
Stockholder Document as a condition of its right to enforce or defend any
right under or in connection with such Stockholder Document, waives any right
to a trial by jury in any Action to enforce or defend any right under any
Stockholder Document and agrees that any Action shall be tried before a court
and not before a jury.
(m) Affiliate. Nothing contained in this Agreement shall constitute
Stockholder an "affiliate" of any of Qwest and its Subsidiaries within the
meaning of the Securities Act and the Exchange Act, including, without
limitation, Rule 501 under the Securities Act and Rule 13e-3 under the
Exchange Act.
(n) Non-Recourse. No recourse under this Agreement shall be had against any
"controlling person" (within the meaning of Section 20 of the Exchange Act) of
any party or the stockholders, directors, officers, employees, agents and
Affiliates of the party or such controlling persons, whether by the
enforcement of any assessment or by any legal or equitable proceeding, or by
virtue of any Regulation, it being expressly agreed and acknowledged that no
personal liability whatsoever shall attach to, be imposed on or otherwise be
incurred by such controlling person, stockholder, director, officer, employee,
agent or Affiliate, as such, for any obligations
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<PAGE>
of the party under this Agreement or for any claim based on, in respect of or
by reason of such obligations or their creation.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above in New York, New York.
Stockholder:
_____________________________________
Name:
Address: 1200 Harbor Boulevard
Weehawken, New Jersey 07087
Telecopy: 201-601-1917
With a copy to:
Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Michael Weinsier
Telecopy: 212-704-6288
Qwest Communications International
Inc.
By: _________________________________
Joseph P. Nacchio
President and Chief Executive
Officer
Address: 1000 Qwest Tower
555 Seventeenth Street
Denver, Colorado 80202
Attention: Marc B. Weisberg
Fax: 303-992-1723
With a copy to:
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022
Attention: Drake S. Tempest
Fax: 212-326-2061
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<PAGE>
ANNEX 1
FORM OF
TRANSFEREE AGREEMENT
[Date]
Qwest Communications International Inc.
1000 Qwest Tower
555 Seventeenth Street
Denver, CO 80202
Re: Stockholder Agreement dated as of , 199 between
[Stockholder] and Qwest Communications International Inc.
Ladies and Gentlemen:
(the "Transferor") proposes to transfer to the undersigned shares
of common stock, par value $.01 per share, of Qwest Communications
International Inc. (the "Transferred Restricted Qwest Shares") that are
subject to the Stockholder Agreement dated as of , 199 (the "Stockholder
Agreement") between [Stockholder] and Qwest Communications International Inc.
Terms not otherwise defined in this letter agreement have the meanings stated
in the Stockholder Agreement.
This letter agreement is delivered to you pursuant to Section 1(b) of the
Stockholder Agreement. The undersigned has reviewed the Stockholder Agreement
and, to the extent necessary to understand the meaning of terms used in the
Stockholder Agreement that are defined in the Merger Agreement, the Merger
Agreement. The undersigned acknowledges that the Stockholder Agreement
provides that the execution and delivery of this letter agreement by the
undersigned is a condition precedent to the validity and effectiveness of the
proposed transfer.
The undersigned agrees that, if and for so long as it holds any Transferred
Restricted Qwest Shares, the undersigned:
(1) shall be deemed to be the "Stockholder" with respect to such
Transferred Restricted Qwest Shares under the Stockholder Agreement;
(2) shall be bound by all of the terms and provisions of the Stockholder
Agreement with respect to such Transferred Restricted Qwest Shares;
(3) shall assume all obligations of the Transferor under the Stockholder
Agreement with respect to such Transferred Restricted Qwest Shares;
(4) until the Termination Date, shall not sell or otherwise transfer (or
offer to sell or otherwise transfer) any Transferred Restricted Qwest
Shares, or any interest therein, except in accordance with the provisions
of the Stockholder Agreement.
The undersigned understands that, if the undersigned were not to agree with
the foregoing, the Transferor would be forbidden by the Stockholder Agreement
from transferring the Transferred Restricted Qwest Shares to the undersigned
and that any such purported transfer would be void.
Very truly yours,
[Transferee]
By: _________________________________
Name:
Title:
Address:
Telecopy:
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EXHIBIT D
TERMS AND CONDITIONS
QWEST CREDIT FACILITY
The following is a summary of the basic terms and conditions for the
proposed financing. It does not include descriptions of all of the terms,
conditions and other provisions that are to be contained in the definitive
documentation relating to the Qwest Credit Facility and is not intended to
limit the scope of discussion and negotiation of any matters not inconsistent
with the specific matters set forth herein. Terms not otherwise defined in
this summary have the meanings stated in the Merger Agreement.
<TABLE>
<C> <S>
Borrower: Icon CMT Corp. (the "Company").
Lender: Qwest Communications International Inc. ("Qwest") and
its successors and assigns.
Amount and Availability: Up to $15,000,000 (the "Facility Amount"), of which
(i) up to an amount equal to the principal amount of
the indebtedness outstanding under the Company Credit
Facilities, but no more than $10,000,000, may be
borrowed on the Initial Funding Date and (ii) up to
$2,000,000 may be borrowed upon five day's notice in
one advance during each calendar month thereafter.
Advances shall be made in a minimum amount of
$500,000 and integral multiplies thereof. The last
advance must be made on or before January 15, 2000.
Initial Funding Date: January 31, 1999.
Maturity Date: January 31, 2000.
Use of Proceeds: To (i) repay indebtedness outstanding under the
Company Credit Facilities, (ii) pay indebtedness owed
under the Access Agreement, (iii) acquire equipment
and (iv) pay general corporate expenses.
Guarantors: All Subsidiaries of the Company.
Collateral: First perfected security interest in all existing and
after-acquired real and personal property of the
Company and its Subsidiaries, including a pledge of
100% of the stock of all Subsidiaries.
Negative pledge of all assets of Company and its
Subsidiaries.
Interest: Before occurrence of a Material Adverse Condition at
a floating rate equal to the rate published in The
Wall Street Journal from time to time as the Prime
Rate ("Prime"), plus 1.00%. After occurrence of
Material Adverse Condition at a floating rate, Prime
plus 8.00%. The term "Material Adverse Condition"
means a material adverse effect on the business,
properties, operations, prospects or condition
(financial or otherwise) of the Company and its
Subsidiaries, taken as a whole.
After the occurrence and during the continuance of an
event of default, interest shall accrue at a rate 2%
per annum in excess of the amount otherwise then
payable and shall be payable upon demand.
Interest will be paid monthly in arrears and upon the
maturity or termination of the Qwest Credit Facility
and computed on the basis of a 365-/366-day year.
</TABLE>
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<TABLE>
<C> <S>
Warrants; Registration Rights: 750,000 warrants issued at execution of Merger
Agreement and exercisable at $12.00 per share
for 10 years with registration rights. The
forms of warrant and registration rights
agreement are attached as Exhibits E and F to
the Merger Agreement, respectively.
Prepayments: Optional prepayments of the loans will be
permitted in whole or in part at the option of
the Company without premium or penalty.
Mandatory prepayments will be required as
follows:
Asset Sale Proceeds: the net after-tax cash
proceeds of the sale or other disposition of
any property or assets of the Company or any
of the Subsidiaries, other than net cash
proceeds of sales or other dispositions of
inventory in the ordinary course of business
in each case payable no later than the first
business day following the date of receipt.
Insurance/Condemnation Proceeds: the net cash
proceeds received under any casualty insurance
maintained by the Company or any of the
Subsidiaries or as a result of the taking of
any assets of the Company or any of the
Subsidiaries pursuant to the power of eminent
domain or condemnation, in each case payable
no later than the first business day following
the date of receipt.
Proceeds of Equity Offerings: the net cash
proceeds received from the issuance of equity
securities of the Company any of its
Subsidiaries, in each case payable no later
than the first business day following the date
of receipt.
Proceeds of Debt Issuances: the net cash
proceeds received from certain issuances of
debt securities by the Company or any of the
Subsidiaries, in each case payable no later
than the first business day following the date
of receipt.
Prepayments shall be applied first to
outstanding loans, and thereafter the
commitment to make additional advances shall
be reduced by an equivalent amount to the
remaining proceeds.
Documentation: The Qwest Credit Facility will be subject to
the negotiation, execution and delivery of
definitive loan and security documentation
prepared by counsel to Qwest and in form and
substance satisfactory to Qwest.
Representations and Warranties: Customary and appropriate for transactions of
this type, including, without limitation, due
organization and authorization,
enforceability, financial condition, no
material adverse changes, title to properties,
liens, litigation, payment of taxes, no
material adverse agreements, compliance with
laws, employee benefit liabilities,
environmental liabilities, perfection and
priority of liens securing the Qwest Credit
Facility, full disclosure, and incorporating
by reference all representations and
warranties in the Merger Agreement, whether or
not the Merger Agreement remains in full force
and effect.
</TABLE>
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<TABLE>
<C> <S>
Covenants: Customary and appropriate affirmative and negative
covenants, including, without limitation, to
limitations on other indebtedness, liens, investments,
guarantees, restricted junior payments (dividends,
redemptions and payments on subordinated debt),
mergers and acquisitions, sales of assets, capital
expenditures, leases, transactions with affiliates,
conduct of business and other provisions customary and
appropriate for financings of this type, including
exceptions and baskets to be mutually agreed upon and
incorporating by reference appropriate covenants in
the Merger Agreement, whether or not the Merger
Agreement remains in full force and effect.
Events of Default: Customary and appropriate (subject to customary and
appropriate grace periods), including without
limitation failure to make payments when due, defaults
under other agreements or instruments of indebtedness,
noncompliance with covenants, breaches of
representations and warranties, bankruptcy, judgments
in excess of specified amounts, invalidity of
guaranties, impairment of security interests in
collateral, the occurrence of any volitional default
under the Merger Agreement, the termination of the
Merger Agreement pursuant to Section 9.1(a)(5) of the
Merger Agreement, the consummation of a Business
Combination Transaction (other than the Transactions)
with respect to the Company and its Subsidiaries.
Conditions Precedent to Customary and appropriate for a transaction of this
Initial and Subsequent type, including, without limitation, customary closing
Advances: documentation including opinions of borrower's
counsel, a certificate of the chief financial officer
of Company as to the solvency of Company in form and
substance satisfactory to Qwest, the absence of a
volitional default under the Merger Agreement and the
absence of consummation of a Business Combination
Transaction (other than the Transactions) with respect
to the Company and the Subsidiaries. The absence of
the occurrence of a Material Adverse Change is not a
condition to the initial advance or any subsequent
advance.
Governing law: New York. The Company will submit to the non-exclusive
jurisdiction of the federal and state courts of the
State of New York and will waive any right to trial by
jury.
Expenses and Indemnity: The Company will pay the expenses of Qwest, including
the fees and expenses of Qwest's counsel, whether or
not the closing of the facility occurs and shall
indemnify and hold harmless Qwest and its directors,
officers, employees, agents, attorneys and affiliates
from and against any losses, claims, damages,
liabilities or other expenses relating to the Qwest
Credit Facility and pay legal and other expenses in
connection with any investigation, litigation or other
proceeding relating thereto.
</TABLE>
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EXHIBIT E
FORM OF
ICON CMT CORP.
SERIES Q WARRANTS
TO PURCHASE COMMON STOCK
AT $.001 PER SHARE
(SUBJECT TO ADJUSTMENT)
The Warrant represented by this certificate and the shares of Common Stock
issuable upon the exercise hereof have not been registered under the
Securities Act of 1933, as amended, and may not be offered, sold, transferred
or otherwise disposed of except in compliance with said Act. This Warrant and
such shares are also subject to the restrictions stated in a Registration
Rights Agreement dated as of September 13, 1998, a copy of which is on file at
the office of the Secretary of the Company.
Certificate Number Certificate for
This certificate is transferable Warrants
in ,
ICON CMT CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT, for value received, QWEST COMMUNICATIONS INTERNATIONAL
INC., a Delaware corporation, or registered assigns, is entitled to purchase
from ICON CMT CORP., a Delaware corporation (the "Company"), at any time and
from time to time after the date of this Warrant and prior to 5:00 p.m., New
York time, on the Expiration Date, at the purchase price of $12.00 per share
(as such price may be adjusted pursuant to Section 7, the "Warrant Price") the
total number of shares of common stock, par value $.001 per share (the "Common
Stock"), of the Company, which is equal to the number of Warrants set forth
above (as such number of shares may be adjusted pursuant to Section 7, the
"Warrant Shares"). Terms not otherwise defined herein have the meanings stated
in Section 20.
Section 1. Transferability of Warrants.
1.1 Warrant Register and Registration. The Secretary of the Company shall
keep or cause to be kept at the office of the Company books for the
registration and transfer (the "Warrant Register") of this Warrant certificate
and any other Warrant certificate issued hereunder (collectively including the
initial Warrant, the "Warrants"). The Warrants shall be numbered and shall be
registered in the Warrant Register as they are issued. The Company and the
Secretary of the Company shall be entitled to treat a person as the owner in
fact for all purposes of each Warrant registered in such person's name (each
registered owner is herein referred to as a "Holder" of such Warrant) and
shall not be bound to recognize any equitable or other claim to or interest in
such Warrant on the part of any other person, and shall not be liable for any
registration of transfer of Warrants that are registered or to be registered
in the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust
in requesting such registration of transfer, or with such knowledge of such
facts that its participation therein amounts to bad faith.
1.2 Transfer. The Warrants shall be transferable only on the Warrant
Register upon delivery thereof duly endorsed by the holder or by his duly
authorized attorney or representative, which endorsement shall be guaranteed
by a bank or trust company located in the United States of America or by a
broker or dealer that is a member of a registered national securities
exchange, or accompanied by proper evidence of succession,
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assignment or authority to transfer. In all cases of transfer by an attorney,
the original power of attorney, duly approved, or an official copy thereof,
duly certified, shall be deposited and remain with the Secretary of the
Company. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Secretary of
the Company in its discretion. Upon any registration of transfer, the Company
shall deliver a new Warrant or Warrants to the persons entitled thereto.
1.3 Form of Warrant. The Warrants shall be executed on behalf of the Company
by its Chairman of the Board, President or one of its Vice Presidents and
attested to by the Secretary of the Company or an Assistant Secretary. The
signature of any of such officers on the Warrants may be manual or facsimile.
Section 2. Exchange of Warrants. Each Warrant may be exchanged at the option
of the holder thereof for another Warrant or Warrants entitling the holder
thereof to purchase a like aggregate number of Warrant Shares as the Warrant
or Warrants surrendered then entitle such holder to purchase. Any holder
desiring to exchange a Warrant or Warrants shall make such request in writing
delivered to the Secretary of the Company, and shall surrender, properly
endorsed, which endorsement shall be guaranteed as provided in Section 1.2
hereof if the new Warrant or Warrants are to be issued other than in the name
of the holder, the Warrant or Warrants to be so exchanged at the office of the
Secretary of the Company. Thereupon, a new Warrant or Warrants, as the case
may be, as so requested, shall be delivered to the person entitled thereto.
Section 3. Term of Warrants; Exercise of Warrants; Distributions.
3.1 Term of Warrants. Each holder shall have the right, at any time before
5:00 p.m., New York time, on September 13, 2008, or, if such date is not a
Business Day, the next Business Day (the "Expiration Date") to purchase from
the Company the number of fully paid and nonassessable Warrant Shares that the
holder may at the time be entitled to purchase on exercise of such Warrants at
the Warrant Price in effect on such date. After the Expiration Date, any
previously unexercised Warrants shall be void, have no value and be of no
further effect.
3.2 Exercise of Warrants.
(a) A Warrant may be exercised upon surrender to the Company, in care of the
Secretary of the Company, of the Warrant to be exercised, together with the
duly completed and signed form of Election to Purchase attached hereto, and
upon payment to the Company of the Warrant Price for the number of Warrant
Shares in respect of which such Warrant is then exercised. Payment of the
aggregate Warrant Price shall be made by wire transfer of immediately
available funds in accordance with written wire transfer instructions to be
provided by the Company.
(b) Subject to Section 5, upon such surrender of the Warrant and payment of
the Warrant Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
holder and in such name or names as the holder may designate, a certificate or
certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants, together with a check or cash in respect of any
fraction of a share of Common Stock otherwise deliverable upon such exercise,
as provided in Section 5. Such certificate or certificates shall be deemed to
have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the Warrant Price; provided
that if, at the date of surrender of such Warrant and payment of such Warrant
Price, the transfer books for the Warrant Shares or other class of stock
purchasable upon the exercise of such Warrant shall be closed, the
certificates for the Warrant Shares in respect of which such Warrant is then
exercised shall be issuable as of the date on which such books shall next be
opened (whether before or after the Expiration Date) and until such date the
Company shall be under no duty to deliver any certificate for such Warrant
Shares; provided, further that the transfer books, unless otherwise required
by law, shall not be closed at any one time for a period longer than 20 days.
(c) The rights of purchase represented by the Warrant shall be exercisable,
at the election of the holders thereof, either in full or from time to time in
part. If a Warrant is exercised in respect of less than all of the
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Warrant Shares purchasable on such exercise at any time prior to the
Expiration Date, a new Warrant evidencing the remaining Warrant Shares will be
issued, and the Company shall deliver the new Warrant pursuant to the
provisions of this Section 3.2.
(d) Notwithstanding any other provision hereof, if an exercise of any
portion of this Warrant is to be made in connection with a public offering of
Common Stock or a Business Combination, such exercise may at the election of
the holder be conditioned upon the conclusion of such transaction, in which
case such exercise shall not be deemed to be effective until the conclusion of
such transaction.
3.3 Distributions. If the Company shall at any time (1) issue rights or
warrants to all holders of shares of Common Stock, entitling them (for a
period not exceeding forty-five (45) days after the date of issuance) to
subscribe for or purchase shares of Common Stock at a price per share less
than the Average Market Price per share of Common Stock or to subscribe for or
purchase Derivative Securities providing for the purchase of shares of Common
Stock upon the conversion, exchange or exercise thereof at a price per share
of Common Stock less than the Average Market Price per share of Common Stock,
in each case on the record date fixed for the determination of shareholders
entitled to receive such right or warrant, or (2) declare or pay any dividend
or other distribution on the Common Stock (including, without limitation, any
distribution of other or additional stock or other securities or property or
rights or warrants to subscribe for or purchase securities of any of the
Company and its Subsidiaries by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement), other than a dividend
payable in shares of Common Stock or Derivative Securities, then the Company
may, at the same time or times, pay a distribution on or in respect of each
Warrant which is equivalent to such dividend or other distribution declared or
paid on each share of Common Stock, multiplied by the number of shares of
Common Stock into which each Warrant may be exercised on the record date for
such action.
Section 4. Adjustment of Warrant Price And Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of each Warrant
and the Warrant Price shall be subject to adjustment from time to time upon
the occurrence of certain events, as hereinafter described.
4.1 Mechanical Adjustments. The number of Warrant Shares purchasable upon
the exercise of each Warrant and the Warrant Price payable in connection
therewith shall be subject to adjustment from time to time as follows:
(a) If the Company shall at any time pay a dividend on the Common Stock
(including, if applicable, shares of Common Stock held by the Company in
treasury or by a Subsidiary) in shares of the Common Stock, subdivide its
outstanding shares of Common Stock into a larger number of shares or
combine its outstanding shares of Common Stock into a smaller number of
shares or otherwise effect a reclassification or recapitalization of the
Common Stock, then, in each such case, the number of Warrant Shares
thereafter issuable upon exercise of this Warrant shall be adjusted so that
this Warrant shall thereafter be exercisable for the number of Warrant
Shares equal to the number of shares of Common Stock which the holder would
have held after the occurrence of any of the events described above had
this Warrant been exercised in full immediately prior to the occurrence of
such event. An adjustment made pursuant to this paragraph (a) shall become
effective retroactively to the related record date in the case of a
dividend and shall become effective on the related effective date in the
case of a subdivision, combination, reclassification or recapitalization.
(b) Except with respect to Permitted Issuances, if the Company or a
Subsidiary shall at any time issue or sell shares of Common Stock at a
purchase price per share of Common Stock (the value of any consideration,
if other than cash, to be determined as provided in Section 4.1(h)) less
than the Average Market Price per share of Common Stock on the date of
issuance or sale (for the purpose of this paragraph (b), the "Adjustment
Date"), then, in each such case, the number of Warrant Shares thereafter
issuable upon exercise of this Warrant after such Adjustment Date shall be
determined by multiplying the number of Warrant Shares issuable upon
exercise of this Warrant on the date immediately preceding such Adjustment
Date by a fraction, the numerator of which shall be the sum of the number
of shares of Common
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Stock outstanding on such date of issuance or sale and the number of
additional shares of Common Stock so issued or sold, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
on such date of issuance or sale and the number of shares of Common Stock
which the aggregate offering price of the total number of shares so offered
would purchase at such Average Market Price. For the purposes of this
paragraph (b), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Company or by a
Subsidiary.
(c) Except with respect to Permitted Issuances, if the Company or a
Subsidiary shall at any time issue or sell Derivative Securities (as
defined below) providing for the purchase of shares of Common Stock upon
the conversion, exchange or exercise thereof at a price per share of Common
Stock (taking into account any consideration received by the Company upon
the issuance or sale of such Derivative Securities and any additional
consideration to be received upon the conversion, exchange or exercise
thereof, the value of such consideration, if other than cash, to be
determined as provided in Section 4.1(h)) less than the Average Market
Price per share of Common Stock on the date of issuance or sale (for the
purpose of this paragraph (c), the "Adjustment Date"), then, in each such
case, the number of Warrant Shares thereafter issuable upon exercise of
this Warrant after such Adjustment Date shall be determined by multiplying
the number of Warrant Shares issuable upon exercise of this Warrant on the
date immediately preceding such Adjustment Date by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding on such Adjustment Date and the number of additional shares of
Common Stock so offered for subscription or purchase upon the conversion,
exchange or exercise of such Derivative Securities, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
on such Adjustment Date and the number of shares of Common Stock which the
aggregate offering price of the total number of shares so offered would
purchase at such Average Market Price. Such adjustment shall be made
whenever any such Derivative Securities are issued, and shall become
effective on the date of issuance retroactive to the Adjustment Date. If
all the shares of Common Stock so offered for subscription or purchase are
not delivered upon the final conversion, exchange or exercise of such
Derivative Securities, then, upon the final conversion, exchange or
exercise of such Derivative Securities, or the expiration, cancellation or
other termination thereof, the number of Warrant Shares issuable upon
exercise of this Warrant shall thereafter be readjusted to the number of
Warrant Shares which would have been in effect had the numerator and the
denominator of the foregoing fraction and the resulting adjustment been
made based upon the number of shares of Common Stock actually delivered
upon the conversion, exchange or exercise of such Derivative Securities, or
the expiration, cancellation or other termination thereof rather than upon
the number of shares of Common Stock so offered for subscription or
purchase. If the purchase price provided for in any Derivative Securities,
the additional consideration, if any, payable upon the conversion, exchange
or exercise of any Derivative Securities or the rate at which any
Derivative Securities are convertible into or exchangeable or exercisable
for Common Stock shall change at any time (including, without limitation,
at the time of or after such conversion, exchange or exercise but excluding
any change as a result of any event that would cause the number of Warrant
Shares to have been adjusted pursuant to Section 4.1), the number of
Warrant Shares issuable upon exercise of this Warrant in effect at the time
of such change shall be readjusted to the number of Warrant Shares issuable
upon exercise of this Warrant which would have been in effect at such time
had such Derivative Securities still outstanding provided for such changed
purchase price, additional consideration or changed conversion rate, as the
case may be, on the related Adjustment Date, and such readjustment shall
become effective on the date of such change retroactive to the Adjustment
Date; provided, that no such readjustment shall have the effect of
decreasing the number of Warrant Shares issuable upon the exercise of this
Warrant by an amount in excess of the amount of the adjustment initially
made with respect to the issuance or sale of the Derivative Securities. For
the purposes of this paragraph (c), the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Company or by a Subsidiary.
(d) Except with respect to Permitted Issuances, if the Company or a
Subsidiary shall at any time distribute to all the holders of Common Stock
(1) Derivative Securities providing for the purchase of shares of Common
Stock upon the conversion, exchange or exercise thereof (other than those
referred to in Section 4.1(c)) or any evidence of indebtedness or other
securities of the Company (other than Common Stock) or
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(2) assets (other than cash) having a fair market value (as determined in a
resolution adopted by the Board of Directors of the Company, which shall be
conclusive evidence of such fair market value) in an amount during any 12-
month period equal to more than 10% of the Market Capitalization of the
Company on the day immediately preceding the date of declaration or
authorization of such distribution by the Board of Directors of the Company
(for the purpose of this paragraph (d), the "Adjustment Date"), then, in
each such case, the number of Warrant Shares issuable upon exercise of this
Warrant after the record date with respect to such distribution shall be
determined by multiplying the number of Warrant Shares issuable upon
exercise of one Warrant on the date immediately preceding such Adjustment
Date by a fraction, the numerator of which shall be the Average Market
Price per share of Common Stock on such date of declaration or
authorization and the denominator of which shall be such Average Market
Price less the then fair market value (as determined by the Board of
Directors of the Company as provided above) of the portion of the assets,
rights, warrants, evidences of indebtedness or other securities so
distributed applicable to one (1) share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become
effective on the date of such distribution retroactive to the Adjustment
Date.
(e) Except with respect to the payment by the Company of a distribution
on or in respect of the Warrants pursuant to Section 3.3, if the Company
shall at any time declare or pay a dividend or other distribution on the
Common Stock other than a stock dividend payable solely in shares of Common
Stock or a cash dividend paid out of current earnings (the value of any
such dividend or other distribution, if other than cash, to be determined
as provided in Section 4.1(h)), then, in each such case, the number of
Warrant Shares thereafter issuable upon exercise of this Warrant after the
record date therefor (for the purpose of this paragraph (d), the
"Adjustment Date") shall be determined by multiplying the number of Warrant
Shares issuable upon exercise of this Warrant on the date immediately
preceding such Adjustment Date by a fraction, the numerator of which shall
be the sum of the number of shares of Common Stock outstanding on such
Adjustment Date and the number of additional shares of Common Stock which
the aggregate value of such dividend or distribution would purchase at the
Average Market Price per share of Common Stock on the date immediately
preceding such Adjustment Date and the denominator of which shall be the
number of shares of Common Stock outstanding on such Adjustment Date. For
the purposes of this paragraph (e), the number of shares of Common Stock at
any time outstanding shall not include shares held in the treasury of the
Company or by a Subsidiary.
(f) If the Company or a Subsidiary shall at any time purchase shares of
Common Stock at a price per share of Common Stock (the value of any
consideration, if other than cash, to be determined as provided in Section
4.1(h)) less than the Average Market Price per share of the Common Stock on
the date of such purchase (for the purpose of this paragraph (f), the
"Adjustment Date"), then, in each such case, the number of Warrant Shares
thereafter issuable upon exercise of this Warrant after such Adjustment
Date shall be determined by multiplying the number of Warrant Shares
issuable upon exercise of this Warrant on the date immediately preceding
such Adjustment Date by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on such Adjustment Date
and the number of additional shares of Common Stock which the aggregate
purchase price of the total number of shares so purchased would purchase at
such Average Market Price and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such Adjustment Date
and the number of shares of Common Stock so purchased. For the purposes of
this paragraph (f), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company or
by a Subsidiary.
(g) In case of any capital reorganization or any reclassification (other
than a change in par value) of the capital stock of the Company, or of any
exchange or conversion of the Common Stock for or into securities of
another corporation, or in case of the consolidation or merger of the
Company with or into any other person (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock) or in case of any sale or conveyance of
all or substantially all of the assets of the Company, the person formed by
such consolidation or resulting from such capital reorganization,
reclassification or merger or which acquires such assets, as the case may
be, shall make provision such that this Warrant shall thereafter be
exercisable for the kind and amount of shares of stock, other securities,
cash and other property receivable upon such capital reorganization,
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reclassification of capital stock, consolidation, merger, sale or
conveyance, as the case may be, by a holder of the shares of Common Stock
equal to the number of Warrant Shares issuable upon exercise of this
Warrant immediately prior to the effective date of such capital
reorganization, reclassification of capital stock, merger, consolidation,
sale or conveyance, assuming (1) such holder of Common Stock of the Company
is not a person with which the Company consolidated or into which the
Company merged or which merged into the Company or to which such sale or
transfer was made as the case may be ("Constituent Entity"), or an
affiliate of a constituent entity, and (2) such person failed to exercise
his rights of election, if any, as to the kind or amount of securities,
cash and other property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale or
conveyance and, in any case appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions
herein set forth with respect to rights and interests thereafter of the
holder, to the end that the provisions set forth herein (including the
specified changes in and other adjustments of the number of Warrant Shares
issuable upon exercise of this Warrant) shall thereafter be applicable, as
near as reasonably may be, in relation to any shares of stock or other
securities or other property thereafter deliverable upon exercise of this
Warrant. The provisions of this paragraph (g) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(h) If any shares of Common Stock or Derivative Securities are issued or
sold or deemed to have been issued or sold for cash, the consideration
received therefor shall be deemed to be the net amount received by the
Company therefor. In case any shares of Common Stock or Derivative
Securities are issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall
be the fair value of such consideration, except where such consideration
consists of marketable securities, in which case the amount of
consideration received by the Company shall be the market price thereof as
of the date of receipt. In case any shares of Common Stock or Derivative
Securities are issued to the owners of the non-surviving or selling entity
in connection with any merger or consolidation or sale, lease or conveyance
of all or substantially all the assets of such entity, or other business
combination in which the Company is the surviving or purchasing entity, the
amount of consideration therefor shall be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as
is attributable to such shares of Common Stock or Derivative Securities, as
the case may be. The fair value of any consideration received by the
Company or dividends or distributions paid by the Company, in each case,
other than cash or marketable securities, shall be determined jointly by
the Company and the holders of at least a majority of the total number of
Warrants then outstanding (the "Required Holders"). If such persons are
unable to reach agreement within a reasonable period of time, such fair
value shall be determined by an appraiser jointly selected by the Company
and the Required Holders, whose determination shall be final and binding on
the Company and all holders of the Warrants. The fees and expenses of such
appraiser shall be paid by the Company.
(i) If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (1) to receive a dividend or other distribution
on the Common Stock or (2) to subscribe for or purchase shares of Common
Stock or Derivative Securities, then such record date shall be deemed to be
the date of the payment or distribution of such dividend or other
distribution or the date of issuance and sale of any shares of Common Stock
deemed to have been issued or sold in connection therewith. If shares of
Common Stock are not so issued or sold, then the number of Warrant Shares
issuable upon exercise of this Warrant shall thereafter be readjusted to
the number of Warrant Shares which would have been in effect that such
shares of Common Stock not been deemed to have been issued.
(j) All calculations under this Section 4 shall be made to the nearest
one-thousandth of a share of Common Stock.
(k) Whenever the number of Warrant Shares issuable upon the exercise of
this Warrant is adjusted or readjusted pursuant to paragraphs (a) through
(i), inclusive, above, the Warrant Price payable upon exercise of this
Warrant shall be adjusted or readjusted by multiplying such Warrant Price
immediately prior to the related Adjustment Date by a fraction, the
numerator of which shall be the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately preceding such Adjustment Date,
and the
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denominator of which shall be the number of Warrant Shares so purchasable
immediately thereafter; provided that no such readjustment pursuant to
paragraph (c) above with respect to the conversion, exchange or exercise,
or expiration, cancellation or other termination, of any Derivative
Securities shall have the effect of increasing the Warrant Price by an
amount in excess of the amount of the adjustment initially made in respect
of the issuance or sale of such Derivative Securities.
(l) If any event occurs of the type contemplated by the provisions of
this Section 4 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
number of Warrant Shares issuable upon exercise of this Warrant and the
Warrant Price so as to protect the rights of this Warrant.
(m) For all purposes of this Warrant, the term "Shares of Common Stock"
shall mean (1) the class of stock designated as the Common Stock of the
Company at the date of this Warrant or (2) any other class of stock
resulting from successive changes or reclassification of such shares
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraphs (a) through (l),
inclusive, above, the holder shall become entitled to receive any shares of
the Company other than shares of Common Stock, thereafter the number of
such other shares so receivable upon exercise of this Warrant and the
Warrant Price shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in paragraphs (a) through (l),
inclusive, above, and the provisions of Sections 4.2, 4.3, 4.4 and 4.5,
inclusive, with respect to the Warrant Shares, shall apply on like terms to
any such other shares.
4.2 Time of Adjustments. Each adjustment required by Section 4.1 shall be
effective as and when the event requiring such adjustment occurs.
4.3 Notice of Adjustment. Whenever the number of Warrant Shares purchasable
upon the exercise of each Warrant or the Warrant Price is adjusted as herein
provided, the Company shall promptly mail by first class mail, postage
prepaid, to each holder a certificate of the chief financial officer of the
Company (who may be the regular accountants employed by the Company) setting
forth the number of Warrant Shares purchasable upon the exercise of each
Warrant and the Warrant Price after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made. Such certificate shall be
conclusive evidence of the correctness of such adjustment.
4.4 No Adjustment for Dividends. Except as provided in Section 4.1, no
adjustment shall be made during the term of this Warrant or upon the exercise
of this Warrant in respect of any dividends declared or paid on the Common
Stock.
4.5 Statement on Warrants. Irrespective of any adjustments in the Warrant
Price or the number or kind of shares purchasable upon the exercise of
Warrants, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the initial
Warrant.
Section 5. Fractional Interests. No fractional Warrant Shares shall be
issued upon the exercise of Warrants, but in lieu thereof the Company shall
pay therefor in cash an amount equal to the product obtained by multiplying
the Closing Price per Warrant Share on the Trading Day immediately preceding
the date of exercise of the Warrant times such fraction. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares that shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented.
Section 6. Taxes. The Company shall pay any and all issue and other taxes
that may be payable in respect of any issue or delivery of Warrant Shares upon
the exercise of this Warrant; provided, however, that the Company shall not be
required to pay any tax or taxes that may be payable in respect of any
transfer involved in
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the issue or delivery of any Warrant or certificates for Warrant Shares in a
name other than that of the registered holder of such Warrant, and no such
issue or delivery shall be made unless and until the person requesting the
issuance thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has
been paid.
Section 7. Reservation Of Warrant Shares; Valid Issuance; Purchase Of
Warrants; Cancellation Of Warrants.
7.1 Reservation of Warrant Shares. There have been reserved, and the Company
shall at all times reserve and keep available, free from preemptive rights,
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the exercise of the Warrants, the number of shares of Common Stock
that shall from time to time be sufficient to provide for the exercise of the
rights of purchase represented by the outstanding Warrants. All Warrants
surrendered in the exercise of the rights thereby evidenced shall thereupon be
cancelled by the Company and retired. Promptly after the Expiration Date, the
Secretary of the Company shall certify to the Company the aggregate number of
Warrants then outstanding, and thereafter no shares of Common Stock shall be
subject to reservation in respect of such Warrants. The Company shall from
time to time take all necessary actions, in accordance with the laws of the
State of Delaware, to increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued shall not be
sufficient to permit the exercise of all the then outstanding Warrants.
7.2 Valid Issuance. All shares of Common Stock or other securities issued
upon exercise of the Warrants will, upon issuance in accordance with the terms
hereof, be validly issued, fully paid and nonassessable, free from all liens,
charges, security interests and encumbrances created by the Company with
respect to the issuance and delivery thereof and not subject to preemptive
rights.
7.3 Purchase of Warrants by the Company. Any of the Company and its
Subsidiaries shall have the right, except as limited by law, other agreements
or herein, to purchase or otherwise acquire Warrants at such times, in such
manner and for such consideration as it may deem appropriate.
7.4 Cancellation of Warrants. If any of the Company and its Subsidiaries
shall purchase or otherwise acquire Warrants, the same shall thereupon be
cancelled by the Company and retired. The Company shall cancel any Warrant
surrendered for exchange, substitution, transfer or exercise in whole or in
part.
Section 8. Mutilated Or Missing Warrants. If any Warrant shall be mutilated,
lost, stolen or destroyed and the Company shall receive evidence thereof and
indemnity reasonably satisfactory to it, the Company shall issue and deliver
in exchange and substitution for and upon cancellation of the mutilated
Warrant, or in lieu of and substitution for the Warrant lost, stolen or
destroyed, a new Warrant of like tenor and representing an equivalent right or
interest. An applicant for such a substitute Warrant shall comply with such
other reasonable requirements and pay such reasonable charges as the Company
may prescribe.
Section 9. No Rights as Stockholder. Nothing contained in this Warrant or in
any of the Warrants shall be construed as conferring upon the holders or their
transferees the right to vote or to receive dividends or to consent or to
receive notice as stockholders in respect of any meeting of stockholders for
the election of directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
Section 10. Notice to Holders. At any time prior to the expiration of the
Warrants and prior to their exercise, if any of the following events shall
occur:
(1) the Company shall declare any dividend (or any other distribution) on
Common Stock other than a cash dividend or shall declare or authorize
repurchase of in excess of 10% of the then outstanding shares of Common
Stock; or
(2) the Company shall authorize the granting to all holders of Common
Stock of rights or warrants to subscribe for or purchase any shares of
Common Stock or any Derivative Securities; or
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(3) the Company shall propose any capital reorganization,
recapitalization, subdivision or reclassification of Common Stock (other
than a subdivision or combination of the outstanding Common Stock, or a
change in par value, or from par value to no par value or from no par value
to par value), or any consolidation or merger to which the Company is a
party for which approval of any stockholders of the Company shall be
required, or the sale, transfer or lease of all or substantially all of the
assets of the Company; or
(4) the voluntary or involuntary dissolution, liquidation or winding up
of the Company (other than in connection with a consolidation, merger, or
sale of all or substantially all of its property, assets and business as an
entirety) shall be proposed;
then the Company shall give notice in writing of such event to the holders at
least 15 days prior to the date fixed as a record date or the date of closing
the transfer books for the determination of the stockholders entitled to such
dividend, distribution, or subscription rights, or for the determination of
stockholders entitled to vote on such proposed consolidation, merger, sale,
transfer or lease of assets, dissolution, liquidation or winding up. No
failure to give such notice or any defect therein or in the mailing thereof
shall affect the validity of the corporate action required to be specified in
such notice.
Section 11. Notices. All notices, requests and other communications with
respect to the Warrants shall be in writing. Communications may be made by
telecopy or similar writing. Each communication shall be given to the holder
at the address in the Warrant Register and the Company at its offices in 1200
Harbor Boulevard, Weehawken, New Jersey 07087, fax: 201-601-1917 (with a copy
to Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York,
NY 10036, attention: Michael Weinsier, fax: 212-704-6288), or at any other
address as the holder or the Company, as the case may be, may specify for this
purpose by notice to the other party. Each communication shall be effective
(1) if given by telecopy, when the telecopy is transmitted to the proper
address and the receipt of the transmission is confirmed, (2) if given by
mail, 72 hours after the communication is deposited in the mails properly
addressed with first class postage prepaid or (3) if given by any other means,
when delivered to the proper address and a written acknowledgement of delivery
is received.
Section 12. No Waivers; Remedies; Specific Performance.
(a) Prior to the Expiration Date, no failure or delay by any holder in
exercising any right, power or privilege with respect to the Warrants shall
operate as a waiver of the right, power or privilege. A single or partial
exercise of any right, power or privilege shall not preclude any other or
further exercise of the right, power or privilege or the exercise of any other
right, power or privilege. The rights and remedies provided in the Warrants
shall be cumulative and not exclusive of any rights or remedies provided by
law.
(b) In view of the uniqueness of the Warrants, a holder would not have an
adequate remedy at law for money damages in the event that any of the
obligations arising under the Warrants is not performed in accordance with its
terms, and the Company therefore agrees that the holder shall be entitled to
specific enforcement of the terms of the Warrants in addition to any other
remedy to which they may be entitled, at law or in equity.
Section 13. Amendments, Etc. No amendment, modification, termination, or
waiver of any provision of a Warrant, and no consent to any departure from any
provision of the Warrant, shall be effective unless it shall be in writing and
signed and delivered by the Company and the holder, and then it shall be
effective only in the specific instance and for the specific purpose for which
it is given. The rights of the holder and the terms and provisions of this
Warrant including, without limitation, the performance of the obligations of
the Company hereunder, shall not be affected in any manner whatsoever by the
terms and provisions of any other agreement, whether entered into prior to or
after the date of this Warrant.
Section 14. Governing Law. The Warrants shall be governed by and construed
in accordance with the internal laws of the State of New York.
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Section 15. Severability of Provisions. Any provision of the Warrants that
is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of the Warrants
or affecting the validity or enforceability of the provision in any other
jurisdiction.
Section 16. Headings and References. Headings in the Warrants are included
for the convenience of reference only and do not constitute a part of the
Warrants for any other purpose. References to parties and sections in the
Warrant are references to the parties or the sections of the Warrant, as the
case may be, unless the context shall require otherwise.
Section 17. Exclusive Jurisdiction. Each of the Company and the holder, by
acceptance hereof, (1) agrees that any legal action with respect to the
Warrant shall be brought exclusively in the courts of the State of New York or
of the United States of America for the Southern District of New York, in each
case sitting in the Borough of Manhattan, State of New York, (2) accepts for
itself and in respect of its property, generally and unconditionally, the
jurisdiction of those courts and (3) irrevocably waives any objection,
including, without limitation, any objection to the laying of venue or based
on the grounds of forum non conveniens, which it may now or hereafter have to
the bringing of any legal action in those jurisdictions; provided, however,
that any party may assert in a legal action in any other jurisdiction or venue
each mandatory defense, third-party claim or similar claim that, if not so
asserted in such legal action, may thereafter not be asserted by such party in
an original legal action in the courts referred to in clause (1) above.
Section 18. Waiver of Jury Trial. Each of the Company and the holder waives,
by acceptance hereof, any right to a trial by jury in any legal action to
enforce or defend any right under the Warrants or any amendment, instrument,
document or agreement delivered, or which in the future may be delivered, in
connection with the Warrants and agrees that any legal action shall be tried
before a court and not before a jury.
Section 19. Merger or Consolidation of the Company. The Company will not
merge or consolidate with or into any other corporation unless the corporation
resulting from such merger or consolidation (if not the Company) shall
expressly assume, by supplemental agreement, the due and punctual performance
and observance of each and every covenant and condition of this Warrant to be
performed and observed by the Company.
Section 20. Definitions. For purposes of this Warrant, the following terms
have the following meanings:
(a) "Average Market Price" per share of Common Stock on any date means
the average of the daily Closing Prices for the fifteen (15) consecutive
Trading Days commencing twenty (20) Trading Days before such date.
(b) "Business Day" means any day excluding Saturday, Sunday and any day
which is a legal holiday under the laws of the State of New York or is a
day on which Banking institutions located in such state are authorized or
required by law or other governmental action to close.
(c) "Business Combination" means, whether concluded or intended to be
concluded in one transaction or series of transactions, each of the
following:
(1) the merger or consolidation of any of the Company and its
Subsidiaries with or into any person other than the Company or a
wholly-owned Subsidiary of the Company;
(2) the transfer of a substantial portion of the assets of any of the
Company and its Subsidiaries to any person or group other than the
Company or a wholly-owned Subsidiary of the Company;
(3) an acquisition from any of the Company, it Subsidiaries and its
stockholders of any shares of Common Stock or other securities of the
Company; or
(4) any tender offer (including a self-tender offer) or exchange
offer, recapitalization, liquidation, dissolution or similar
transaction involving any of the Company and its Subsidiaries;
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(d) "Closing Price" means, as applied to any class of stock on any date,
the last reported sales price, regular way, per share of such stock on such
day, or if no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, in each case, as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or,
if shares of such stock are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which the shares of such stock are listed
or admitted to trading, or, if the shares of such stock are not listed or
admitted to trading on any national securities exchange, the last quoted
sale price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations Systems
("NASDAQ") or, if not so reported, as reported by any similar interdealer
system then in general use, or, if on any such date the shares of stock are
not quoted or reported by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the shares of stock selected by the Board of Directors of the
Company, if such stock is the Common Stock, or by holders of at least a
majority of the total number of Warrants, if such stock is not the Common
Stock. If the Common Stock is not publicly held or so listed or publicly
traded, "Closing Price" means the fair market value per share as determined
in good faith by the Board of Directors of the Company.
(e) "Derivative Securities" means securities convertible into or
exchangeable or exercisable for shares of Common Stock, rights or warrants
to subscribe for or purchase shares of Common Stock, options for the
purchase of, or calls, commitments or other claims of any character
relating to, shares of Common Stock or any securities convertible into or
exchangeable for any of the foregoing.
(f) "Market Capitalization" as of any date means the product obtained by
multiplying (A) the number of shares of Common Stock outstanding on such
date by (B) the Average Market Price per share of the Common Stock on such
date.
(g) "Permitted Issuances" means each of the following:
(1) the issuance of shares of Common Stock upon the exercise of stock
options outstanding as of September 13, 1998 and issued by the Company
to current and former employees of the Company and its Subsidiaries;
(2) the issuance of shares of Common Stock upon the exercise of
warrants outstanding as of September 13, 1998; and
(3) the issuance of shares of Common Stock upon the exercise of the
Warrants; and
(4) the issuance and distribution by the Company of any securities
with respect to which the Company shall pay a distribution on or in
respect of the Warrants pursuant to Section 3.2.
(h) "Subsidiary" means (A) any corporation or other entity of which
securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by the
Company or (B) a partnership or limited liability company in which the
Company or a Subsidiary of the Company is, at the date of determination, a
general or limited partner of such partnership or a member of such limited
liability company, but only if the Company or its Subsidiary is entitled to
receive more than fifty percent of the assets of such partnership or
limited liability company upon its dissolution.
(i) "Trading Day" means, as applied to any class of stock, any day on
which the New York Stock Exchange or, if shares of such stock are not
listed or admitted to trading on the New York Stock Exchange, the principal
national securities exchange on which the shares of such stock are listed
or admitted for trading or, if the shares of such stock are not listed or
admitted for trading on any national securities exchange, the NASDAQ or, if
the shares of such stock are not included therein, any similar interdealer
system then in general use in which the shares of such stock are included,
is open for the trading of securities generally and with respect to which
information regarding the sale of securities included therein, or with
respect to which sales information is reported, is generally available.
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THIS WARRANT is executed and delivered by the Company on the date set forth
below in New York, New York.
Dated: September 13, 1998 ICON CMT CORP.
Attest: _____________________________ By: _______________________________
Name: Scott A. Baxter
Title: President and Chief
Executive Officer
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ICON CMT CORP.
ELECTION TO PURCHASE
MAIL ADDRESS
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for and to purchase thereunder, shares of
the stock provided for herein, and requests that certificates for such shares
be issued in the name of
----------------------------------------------------------
----------------------------------------------------------
(Please Print Name, Address and Social Security No.)
----------------------------------------------------------
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant Certificate for the balance remaining of the
shares purchasable under the within Warrant Certificate be registered in the
name of the undersigned holder of this Warrant or his Assignee as below
indicated and delivered to the address stated below.
Date: , 19 .
Name of holder of this Warrant or Assignee: ___________________________________
(Please Print)
Address: _________________________________________
-------------------------------------------
Signature: _______________________________________
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular without alteration or
enlargement or any change whatever unless this Warrant has been assigned.
Signature Guaranteed: ____________________________
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<PAGE>
ASSIGNMENT
(TO BE SIGNED ONLY UPON ASSIGNMENT OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
[ ] _______________________________________
- -------------------------------------------------------------------------------
Attorney to transfer said Warrant on the books of the Company, with full power
of substitution in the premises.
DATED: , 19 .
Signature of Registered holder: __________________________
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular without alteration or
enlargement or any change whatever unless this Warrant has been assigned.
Signature Guaranteed: ____________________________________
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<PAGE>
EXHIBIT F
FORM OF
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement dated as of September 13, 1998 between Icon
CMT Corp., a Delaware corporation (the "Company"), and Qwest Communications
International Inc., a Delaware corporation ("Stockholder").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, the
Company, Stockholder and Qwest Subsidiary, a Delaware corporation ("Qwest
Subsidiary"), are entering into the Agreement and Plan of Merger dated as of
September 13, 1998 (as amended or modified from time to time, the "Merger
Agreement"). Terms not otherwise defined in this Agreement have the meanings
stated in the Merger Agreement.
B. As contemplated by Section 1.3(c) of the Merger Agreement, concurrently
with the execution and delivery of this Agreement the Company is issuing to
Stockholder Warrants dated September 13, 1998 (the "Warrants") for the
purchase of 750,000 shares of common stock, par value $.001 per share, of the
Company (the "Company Common Stock"). Shares of Company Common Stock issued
from time to time upon the exercise of the Warrants are collectively referred
to as the "Registrable Shares".
C. Each of the Company and Stockholder desire to enter into this Agreement
to provide for, among other things, the registration under the Securities Act
of the disposition of the Registrable Shares. The execution and delivery of
this Agreement is a condition precedent to the respective obligations of the
parties on the Option Closing Date.
AGREEMENT
The parties agree as follows:
Section 1. Demand Registration Rights.
(a) From and after September 13, 1998 (the "Commencement Date") and to and
including the date that is the tenth anniversary of the Commencement Date,
subject to extension pursuant to Section 4 (as so extended from time to time,
the "Termination Date"), on one or more occasions when the Company shall have
received the written request of Stockholder or holders of at least 100,000
Registrable Shares in the aggregate (as such number of shares may be adjusted
in the event of any change in the capital stock of the Company by reason of
stock dividends, split-ups, reverse split-ups, mergers, recapitalizations,
subdivisions, conversions, exchanges of shares or the like) that have been
acquired directly or indirectly from Stockholder and to which rights under
this Section 1 shall have been assigned pursuant to Section 13(a) (each such
person, when requesting registration under this Section 1 or under Section 2
and thereafter in connection with any such registration, being hereinafter
referred to as a "Registering Stockholder"), the Company shall give written
notice of the receipt of such request to each potential Registering
Stockholder, and each other person known by the Company to have rights with
respect to the registration under the Securities Act of the disposition of
securities of the Company. The Company shall use commercially reasonable
efforts as promptly as practicable to include in a Registration Statement the
Registrable Shares owned by the Registering Stockholders (collectively,
"Transaction Registrable Shares") that in each case shall have been duly
specified by such Registering Stockholders by written notice received by the
Company not later than 10 Business Days after the Company shall have given
written notice to the Registering Stockholders pursuant to this Section 1(a).
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(b) If the Registering Stockholders initiating a request for registration of
Registrable Shares pursuant to Section 1 (a) shall state in such written
notice that they intend to distribute the Transaction Registrable Shares
covered by their request by means of an underwritten offering, the Company
shall include such information in the written notice delivered by the Company
pursuant to Section 1(a). The Registering Stockholders holding a majority of
the Transaction Registrable Shares shall select the managing underwriter for
the offering and any additional investment bankers and managers to be used in
connection with the offering, with the consent of the Company, which consent
shall not be unreasonably withheld, conditioned or delayed.
(c) Notwithstanding anything herein to the contrary:
(1) The Company shall not be required to prepare and file pursuant to
this Section 1 a Registration Statement including less than 100,000
Transaction Registrable Shares in the aggregate (as such number of shares
may be adjusted in the event of any change in the capital stock of the
Company by reason of stock dividends, split-ups, reverse split-ups,
mergers, recapitalizations, subdivisions, conversions, exchanges of shares
or the like);
(2) subject to the following clause (3), the Company shall not be
required to prepare and file pursuant to this Section 1 more than two
Registration Statements in the aggregate; provided that a Registration
Statement shall be deemed not to have been prepared and filed if the same
does not become effective for any reason other than the withdrawal
therefrom of 50% or more of the Transaction Registrable Shares requested to
be included in such Registration Statement or the determination by
Registering Stockholders owning 50% or more of such Transaction Registrable
Shares not to proceed with the contemplated distribution of such
Transaction Registrable Shares; and
(3) if a requested registration pursuant to this Section 1 shall involve
an underwritten offering, and if the managing underwriter shall advise the
Company, and the Registering Stockholders in writing that, in its opinion,
the number of Transaction Registrable Shares proposed to be included in the
registration is so great as to adversely affect the offering, including the
price at which the Transaction Registrable Shares could be sold, the
Company shall include in the registration the maximum number of securities
which it is so advised can be sold without the adverse effect, allocated as
follows:
(A) first, all Transaction Registrable Shares duly requested to be
included in the registration, allocated pro rata among all Registering
Stockholders on the basis of the relative number of Transaction
Registrable Shares that each Registering Stockholder shall have duly
requested to be included in the registration; and
(B) second, any other securities proposed to be registered by the
Company other than for its own account, including, without limitation,
securities proposed to be registered by the Company pursuant to the
exercise by any person other than a Registering Stockholder of a
"piggy-back" right requesting the registration of shares of Common
Stock in circumstances similar to those contemplated by Section 2;
provided that if 50% or more of the Transaction Registrable Shares
requested to be included in a registration pursuant to this Section 1 are
so excluded from any registration and an investment banking firm of
recognized national standing shall advise the Company that the number of
the Transaction Registerable Shares requested to be registered, at the time
of the request and in light of the market conditions then prevailing, did
not exceed the number that would have an adverse effect on the offering of
such Transaction Registrable Shares, including the price of which such
Transaction Registrable Shares could be sold, there shall be provided one
additional registration under the preceding clause (2)(A) in respect of
each such exclusion.
Section 2. Piggy-Back Registration Rights.
(a) From and after the Commencement Date to and including the date that is
the tenth anniversary of the Commencement Date, if the Company shall determine
to register or qualify by a registration statement filed under the Securities
Act and under any applicable state securities laws, any offering of any Equity
Securities of
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the Company, other than an offering with respect to which a Registering
Stockholder shall have requested a registration pursuant to Section 1, the
Company shall give notice of such determination to each potential Registering
Stockholder and each other person known by the Company to have rights with
respect to the registration under the Securities Act of the disposition of
securities of the Company. The Company shall use commercially reasonable
efforts as promptly as practicable to include in a Registration Statement the
Registrable Shares owned by the Registering Stockholders (collectively,
"Transaction Registrable Shares") that in each case shall have been duly
specified by such Registering Stockholders by written notice received by the
Company not later than 20 Business Days after the Company shall have given
written notice to the Registering Stockholders pursuant to this Section 2(a).
(b) Notwithstanding anything herein to the contrary:
(1) The Company shall not be required by this Section 2 to include any
Registrable Shares in a registration statement on Form S-4 or S-8 (or any
successor form) or a registration statement filed in connection with an
exchange offer or other offering of securities solely to the then existing
stockholders of the Company; and
(2) if a registration pursuant to this Section 2 involves an underwritten
offering, the Company shall select the managing underwriter for the
offering and any additional investment bankers and managers to be used in
connection with the offering, and if the managing underwriter advises the
Company in writing that, in its opinion, the number of securities requested
to be included in the registration is so great as to adversely affect the
offering, including the price at which the securities could be sold, the
Company shall include in the registration the maximum number of securities
which it is so advised can be sold without the adverse effect, allocated as
follows:
(A) first, all securities proposed to be registered by the Company
for its own account;
(B) second, all securities proposed to be registered by the Company
pursuant to the exercise by any person other than a Registering
Stockholder of a "demand" right requesting the registration of shares
of Company Common Stock in circumstances similar to those contemplated
by Section 1; and
(C) fourth, any other securities proposed to be registered by the
Company other than for its own account, including, without limitation,
Transaction Registrable Shares duly requested to be included in the
registration and securities proposed to be registered by the Company
pursuant to the exercise by any person other than a Registering
Stockholder or an Other Registering Stockholder of a "piggy-back" right
requesting the registration of shares of Company Common Stock in
circumstances similar to those contemplated by this Section 2,
allocated pro rata among all Registering Stockholders and such other
persons on the basis of the relative number of Transaction Registrable
Shares or other securities that each Registering Stockholder or other
person has duly requested to be included in such registration.
Section 3. Registration Provisions. With respect to each registration
pursuant to this Agreement:
(a) Notwithstanding anything herein to the contrary, the Company shall
not be required to include in any registration any of the Registrable
Shares owned by a Registering Stockholder if (1) the Company shall deliver
to the Registering Stockholder an opinion, satisfactory in form, scope and
substance to the Registering Stockholder and addressed to the Registering
Stockholder by legal counsel satisfactory to the Registering Stockholder,
to the effect that the distribution of such Registrable Shares proposed by
the Registering Stockholder is exempt from registration under the
Securities Act and all applicable state securities laws, (2) such
Registering Stockholder or any underwriter of such Registrable Shares shall
fail to furnish to the Company the information in respect of the
distribution of such Registrable Shares that may be required under this
Agreement to be furnished by the Registering Stockholder or the underwriter
to the Company or (3) if such registration involves an underwritten
offering, such Registrable Shares are not included in such underwritten
offering on the same terms and conditions as shall be applicable to the
other securities being sold through underwriters in the registration or the
Registering Stockholder fails to enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwritten offering.
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(b) The Company shall make available for inspection by each Registering
Stockholder participating in the registration, each underwriter of
Transaction Registrable Shares owned by the Registering Stockholder and
their respective accountants, counsel and other representatives all
financial and other records, pertinent corporate documents and properties
of the Company as shall be reasonably necessary to enable them to exercise
their due diligence responsibility in connection with each registration of
Transaction Registrable Shares owned by the Registering Stockholder, and
shall cause the Company's officers, directors and employees to supply all
information reasonably requested by any such person in connection with such
registration; provided that records and documents which the Company
determines, in good faith, after consultation with counsel for the Company
and counsel for the Registering Stockholder or underwriter, as the case may
be, to be confidential and which it notifies such persons are confidential
shall not be disclosed to them, except in each case to the extent that (1)
the disclosure of such records or documents is necessary to avoid or
correct a misstatement or omission in the Registration Statement or (2) the
release of such records or documents is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction. Each Registering
Stockholder shall, upon learning that disclosure of any such records or
documents is sought in a court of competent jurisdiction, give notice to
the Company, and allow the Company, at the Company's expense, to undertake
appropriate action and to prevent disclosure of any such records or
documents deemed confidential.
(c) Each Registering Stockholder shall furnish, and shall cause each
underwriter of Transaction Registrable Shares owned by the Registering
Stockholder to be distributed pursuant to the registration to furnish, to
the Company in writing promptly upon the request of the Company the
information regarding the Registering Stockholder or the underwriter, the
contemplated distribution of the Transaction Registrable Shares and the
other information regarding the proposed distribution by the Registering
Stockholder and the underwriter that shall be required in connection with
the proposed distribution by the applicable securities laws of the United
States of America and the states thereof in which the Transaction
Registrable Shares are contemplated to be distributed. The information
furnished by any Registering Stockholder or any underwriter shall be
certified by the Registering Stockholder or the underwriter, as the case
may be, and shall be stated to be specifically for use in connection with
the registration.
(d) The Company shall use commercially reasonable efforts to prepare and
file with the Securities and Exchange Commission the Registration
Statement, including the Prospectus, and each amendment thereof or
supplement thereto, under the Securities Act and as required under any
applicable state securities laws, on the form that is then required or
available for use by the Company to permit each Registering Stockholder,
upon the effective date of the Registration Statement, to use the
Prospectus in connection with the contemplated distribution by the
Registering Stockholder of the Transaction Registrable Shares requested to
be so registered. A registration pursuant to Section 1 shall be effected
pursuant to Rule 415 (or any similar provision then in force) under the
Securities Act if the manner of distribution contemplated by the Register
Stockholder initiating the request for such registration shall include an
offering on a delayed or continuous basis. The Company shall furnish to
each Registering Stockholder drafts of the Registration Statement and the
Prospectus and each amendment thereof or supplement thereto for its timely
review prior to the filing thereof with the Securities and Exchange
Commission. If any Registration Statement refers to any Registering
Stockholder by name or otherwise as the holder of any securities of the
Company but such reference is not required by the Securities Act or any
similar federal statute then in force, then the Registering Stockholder
shall have the right to require, the deletion of such reference. The
Company shall deliver to each Registering Stockholder, without charge, one
executed copy of the Registration Statement and each amendment or post-
effective amendment thereof and one copy of each document incorporated
therein by reference. If the registration shall have been initiated solely
by the Company or shall not have been initiated by a Registering
Stockholder, the Company shall not be obligated to prosecute the
registration, and may withdraw the Registration Statement at any time prior
to the effectiveness thereof, if the Company shall determine in good faith
not to proceed with the offering of securities included in the Registration
Statement. In all other cases, the Company shall use commercially
reasonable efforts to cause the Registration Statement to become effective
and, as soon as practicable after the effectiveness thereof, shall deliver
to each Registering Stockholder evidence of the effectiveness and a
reasonable supply of copies
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of the Prospectus and each amendment thereof or supplement thereto. The
Company consents to the use by each Registering Stockholder of each
Prospectus and each amendment thereof and supplement thereto in connection
with the distribution, in accordance with this Agreement, of the
Transaction Registrable Shares owned by the Registering Stockholder. In
addition, if necessary for resale by the Registering Stockholders, the
Company shall qualify or register in such states as may be reasonably
requested by each Registering Stockholder the Transaction Registrable
Shares of the Registering Stockholder that shall have been included in the
Registration Statement; provided that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any state in which it is not subject to process or qualified
as of the date of the request. The Company shall advise Stockholder and
each Registering Stockholder in writing, promptly after the occurrence of
any of the following, of (1) the filing of the Registration Statement or
any Prospectus, or any amendment thereof or supplement thereto, with the
Securities and Exchange Commission, (2) the effectiveness of the
Registration Statement and any post- effective amendment thereto, (3) the
receipt by the Company of any communication from the Securities Exchange
Commission with respect to the Registration Statement or the Prospectus, or
any amendment thereof or supplement thereto, including, without limitation,
any stop order suspending the effectiveness thereof, any comments with
respect thereto and any requests for amendments or supplements and (4) the
receipt by the Company of any notification with respect to the suspension
of the qualification of Transaction Registrable Shares owned by the
Registering Stockholders for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose.
(e) The Company shall use commercially reasonable efforts to cause the
Registration Statement to remain effective under the Securities Act and the
Prospectus to remain current, including the filing of necessary amendments,
post-effective amendments and supplements, and shall furnish copies of such
amendments, post-effective amendments and supplements to the Registering
Stockholders, so as to permit the Registering Stockholders to distribute
the Transaction Registrable Shares owned by them in their respective manner
of distribution during their respective contemplated periods of
distribution, but in no event longer than nine consecutive months from the
effective date of the Registration Statement; provided that the period
shall be increased by the number of days that any Registering Stockholder
shall have been required by Section 4 to refrain from disposing under the
registration any of the Transaction Registrable Shares owned by the
Registering Stockholder. During such respective contemplated periods of
distribution, the Company shall comply with the provisions of the
Securities Act applicable to it with respect to the disposition of all
Transaction Registrable Shares owned by the Registering Stockholders that
shall have been included in the Registration Statement in accordance with
their respective contemplated manner of disposition by the Registering
Stockholders set forth in the Registration Statement, the Prospectus or the
supplement, as the case may be.
(f) The Company shall notify each Registering Stockholder, at any time
when a prospectus with respect to the Transaction Registrable Shares owned
by the Registering Stockholders is required to be delivered under the
Securities Act, when the Company becomes aware of the happening of any
event as a result of which the Prospectus (as then in effect) contains any
untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein (in the case of the Prospectus or
any preliminary prospectus, in light of the circumstances under which they
were made) not misleading; and, as promptly as practicable thereafter, but
subject to Sections 4 and 5, the Company shall use commercially reasonable
efforts to prepare and file with the Securities and Exchange Commission an
amendment or supplement to the Registration Statement or the Prospectus so
that, as thereafter delivered to the purchasers of such Transaction
Registrable Shares, such Prospectus will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The Company also shall notify each Registering
Stockholder, when the Company becomes aware of the occurrence thereof, of
the issuance by the Securities and Exchange Commission of an order
suspending the effectiveness of the Registration Statement; and, as
promptly as practicable thereafter, but subject to Sections 4 and 5, the
Company shall use commercially reasonable efforts to obtain the withdrawal
of such order at the earliest possible moment.
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(g) If requested by any Registering Stockholder or an underwriter of
Transaction Registrable Shares owned by the Registering Stockholder, the
Company shall as promptly as practicable prepare and file with the
Securities and Exchange Commission an amendment or supplement to the
Registration Statement or the Prospectus containing such information as the
Registering Stockholder or the underwriter requests to be included therein,
including, without limitation, information with respect to the Transaction
Registrable Shares being sold by the Registering Stockholder to the
underwriter, the purchase price being paid therefor by such underwriter and
other terms of the underwritten offering of the Transaction Registrable
Shares to be sold in such offering.
(h) Each Registering Stockholder shall (1) offer to sell or otherwise
distribute Registrable Shares in reliance upon a registration contemplated
pursuant to Section 1 or 2 only if such Registrable Securities are
Transaction Registrable Securities and after the related Registration
Statement shall have been filed with the Securities and Exchange
Commission, (2) sell or otherwise distribute Registrable Shares in reliance
upon such registration only if such Registrable Securities are Transaction
Registrable Securities and the related Registration Statement is then
effective under the Securities Act, (3) not sell or otherwise distribute
Transaction Registrable Securities during any period specified in a
Suspension Notice delivered to the Registering Stockholder pursuant to
Section 4 or after receiving a Termination Notice pursuant to Section 5
(until the Registering Stockholder shall have received written notice from
the Company pursuant to Section 3(d) that the registration of such
Transaction Registrable Shares is again effective) and (4) report to the
Company distributions made by the Registering Stockholder of Transaction
Registrable Shares pursuant to the Prospectus. Each Registering Stockholder
shall distribute Transaction Registrable Shares only in accordance with the
manner of distribution contemplated by the Prospectus with respect to the
Transaction Registrable Shares owned by the Registering Stockholder. Each
Registering Stockholder, by participating in a registration pursuant to
this Agreement, acknowledges that the remedies of the Company at law for
failure by the Registering Stockholder to comply with the undertaking
contained in this paragraph (i) would be inadequate and that the failure
would not be adequately compensable in damages and would cause irreparable
harm to the Company, and therefore agrees that undertakings made by the
Registering Stockholder in this paragraph (h) may be specifically enforced.
(i) If the registration involves an underwritten offering, the Company
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting and shall
deliver to each Registering Stockholder, its counsel and each underwriter
of Transaction Registrable Shares owned by the Registering Stockholders to
be distributed pursuant to such registration, the certificates, opinions of
counsel and comfort letters that are customarily delivered in connection
with underwritten offerings.
(j) Prior to sales of such Transaction Registrable Shares, the Company
shall cooperate with each Registering Stockholder and each underwriter of
Transaction Registrable Shares owned by the Registering Stockholder to
facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legends) representing the Transaction Registrable Shares to
be sold under the Registration Statement, and to enable such Transaction
Registrable Shares to be in such denominations and registered in such names
as the Registering Stockholder or the underwriter may request.
(k) The Company shall use commercially reasonable efforts to comply with
all applicable rules and regulations of the Securities and Exchange
Commission, and make available to its securityholders, as soon as
reasonably practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months, beginning with the
first calendar month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act.
(l) The Company shall use commercially reasonable efforts to cause the
Transaction Registrable Shares to be listed on each national securities
exchange on which Company Common Stock shall then be listed, if any, and to
be qualified for inclusion in the NASDAQ/National Market, as the case may
be, if Company Common Stock is then so qualified, and in each case if the
listing or inclusion of the Transaction Registrable Shares is then
permitted under the rules of such national securities exchange or the NASD,
as the case may be.
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(m) For the purposes of this Agreement, the following terms shall have
the following meanings:
(1) "Business Day" means any day excluding Saturday, Sunday and any
day which is a legal holiday under the laws of the State of New York or
is a day on which banking institutions located in such state are
authorized or required by law or other governmental action to close;
(2) "Prospectus" means (A) the prospectus relating to the Transaction
Registrable Shares owned by the Registering Stockholders included in a
Registration Statement, (B) if a prospectus relating to the Transaction
Registrable Shares shall be filed with the Securities and Exchange
Commission pursuant to Rule 424 (or any similar provision then in
force) under the Securities Act, such prospectus, and (C) in the event
of any amendment or supplement to the prospectus after the effective
date of the Registration Statement, then from and after the
effectiveness of the amendment or the filing with the Securities and
Exchange Commission of the supplement, the prospectus as so amended or
supplemented;
(3) "Registration Statement" means (A) a registration statement filed
by the Company in accordance with Section 3(d), including exhibits and
financial statements thereto, in the form in which it shall become
effective, the documents incorporated by reference therein pursuant to
Item 12 of Form S-3 (or any similar provision or forms then in force)
under the Securities Act and information deemed to be a part of such
registration statement pursuant to paragraph (b) of Rule 430A (or any
similar provision then in force) and (B) in the event of any amendment
thereto after the effective date of the registration statement, then
from and after the effectiveness of the amendment, the registration
statement as so amended; and
(4) information "Contained", "Included" or "Stated" in a Registration
Statement or a Prospectus (or other references of like import) includes
information incorporated by reference.
Section 4. Blackout Provisions.
(a) Notwithstanding anything in this Agreement to the contrary, by delivery
of written notice to any of the Registering Stockholders and the other holders
of Registrable Shares (a "Suspension Notice"), stating which one or more of
the following limitations shall apply to the addressee of such Suspension
Notice, the Company may (1) postpone effecting a registration under this
Agreement, (2) require such addressee to refrain from disposing of Transaction
Registrable Shares under the registration or (3) require such addressee to
refrain from otherwise disposing of any Registrable Shares or other Equity
Securities of the Company owned by such addressee (whether pursuant to Rule
144 or 144A under the Securities Act or otherwise), in each case for a
reasonable time specified in the notice but not exceeding 60 days (which
period may not be extended or renewed).
(b) The Company may postpone effecting a registration or apply to any person
specified in clauses (2) and (3) of paragraph (a) above any of the limitations
specified such clauses if (1) the Company is then taking, or proposes to take,
any of the actions referred to in Section 3(f), (2) an investment banking firm
of recognized national standing shall advise the Company in writing that
effecting the registration or the disposition by such person of Registrable
Shares or other Equity Securities of the Company, as the case may be, would
materially and adversely affect an offering of Equity Securities of the
Company the preparation of which had then been commenced or (3) the Company is
in possession of material non-public information the disclosure of which
during the period specified in such notice the Company reasonably believes
would materially and adversely affect the interests of the Company.
(c) If the Company shall take any action pursuant to paragraph (a) above,
the period during which the Registering Stockholders may exercise their
respective rights under Sections 1 and 2 shall be extended by one day beyond
the Termination Date for each day that, pursuant to this Section 4, the
Company postpones effecting a registration, requires any person to refrain
from disposing of Transaction Registrable Shares under a registration or
otherwise requires any person to refrain from disposing of Registrable Shares
or other Equity Securities of the Company.
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Section 5. Termination Provisions. Notwithstanding anything in this
Agreement to the contrary, if, in the opinion of counsel for the Company,
there shall have arisen any legal impediment to the offering of Transaction
Registrable Shares pursuant to this Agreement or if any legal action or
administrative proceeding shall have been instituted or threatened or any
other claim shall have been made relating to the registration or the offer
made by the related prospectus or against any of the parties involved in the
offering, the Company may at any time upon written notice (a "Termination
Notice") to each Registering Stockholder participating in the registration (1)
terminate the effectiveness of the related Registration Statement or (2)
withdraw from the Registration Statement the Transaction Registrable Shares
owned by the Registering Stockholder; provided that, promptly after those
matters shall be resolved to the satisfaction of counsel for the Company,
then, pursuant to Section 1 or 2, as the case may be, the Company shall cause
the registration of Transaction Registrable Shares formerly covered by the
Registration Statement that were removed from registration by the action of
the Company.
Section 6. Expenses.
(a) The Company shall bear all expenses of the following in connection with
the registration of Transaction Registrable Shares pursuant to this Agreement,
whether or not any related Registration Statement shall become effective:
(1) preparing, printing and filing each Registration Statement and
Prospectus and each qualification or notice required to be filed under
federal and state securities laws or the rules and regulations of the
National Association of Securities Dealers, Inc. (the "NASD") in connection
with a registration pursuant to Section 1;
(2) all fees and expenses of complying with federal and state securities
laws and the rules and regulations of the NASD;
(3) furnishing to each Registering Stockholder one executed copy of the
related Registration Statement and the number of copies of the related
Prospectus that may be required by Sections 3(d) and 3(e) to be so
furnished, together with a like number of copies of each amendment, post-
effective amendment or supplement;
(4) performing its obligations under Sections 3(d) and 3(j);
(5) printing and issuing share certificates, including the transfer
agent's fees, in connection with each distribution so registered; and
(6) preparing audited financial statements required by the Securities Act
and the rules and regulations thereunder to be included in the Registration
Statement and preparing audited financial statements for use in connection
with the registration other than audited financial statements required by
the Securities Act and the rules and regulations thereunder;
(7) internal expenses of the Company (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties);
(8) premiums or other expenses relating to liability insurance required
by the Company or underwriters of the Registering Stockholders;
(9) fees and disbursements of underwriters of the Registering
Stockholders customarily paid by issuers or sellers of securities;
(10) listing of the Registrable Shares on national securities exchanges
and inclusion of the Registrable Shares on the NASDAQ/National Market; and
(11) fees and expenses of any special experts retained by the Company in
connection with the registration.
(b) The Registering Stockholders shall bear all other expenses incident to
the distribution by the respective Registering Stockholders of the Transaction
Registrable Shares owned by them in connection with a registration pursuant to
this Agreement, including, without limitation (but excluding the expenses
referred to in paragraph
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(a)(8) above), the selling expenses of the Registering Stockholders,
commissions, underwriting discounts, insurance, fees of counsel for the
Registering Stockholders and their underwriters.
Section 7. Indemnification
(a) The Company shall indemnify and hold harmless each Registering
Stockholder participating in a registration pursuant to this Agreement, each
underwriter of Transaction Registrable Shares owned by the Registering
Stockholder to be distributed pursuant to the registration, each partner in
the Registering Stockholder, the officers and directors of the Registering
Stockholder and the underwriter and each person, if any, who controls the
Registering Stockholder, any partner in the Registering Stockholder or the
underwriter within the meaning of Section 15 (or any successor provision) of
the Securities Act, and their respective successors, against all claims,
losses, damages and liabilities to third parties (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in the Registration Statement or the
Prospectus or other document incident thereto or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall reimburse
each such Registering Stockholder and each other person indemnified pursuant
to this Section 7(a) for any legal and any other expenses reasonably incurred
in connection with investigating or defending any such claim, loss, damage,
liability or action; provided that the Company shall not be liable in any case
to the extent that any such claim, loss, damage or liability arises out of or
is based on any untrue statement or omission based upon written information
furnished to the Company by the Registering Stockholder or the underwriter of
such Transaction Registrable Shares specifically for use in the Registration
Statement or the Prospectus.
(b) Each Registering Stockholder, by participating in a registration
pursuant to this Agreement, thereby agrees to indemnify and to hold harmless
the Company and its officers and directors and each person, if any, who
controls any of them within the meaning of Section 15 (or any successor
provision) of the Securities Act, and their respective successors, against all
claims, losses, damages and liabilities to third parties (or actions in
respect thereof) arising out of or based upon any untrue statement (or alleged
untrue statement) of a material fact contained in the Registration Statement
or the Prospectus or other document incident thereto or any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse the Company and each other person indemnified pursuant to this
Section 7(b) for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action; provided that (x) this Section 7(b) shall apply only if
(and only to the extent that) the statement or omission was made in reliance
upon and in conformity with information furnished to the Company in writing by
the Registering Stockholder specifically for use in the Registration Statement
or the Prospectus and (y) in no event shall the liability of a Registering
Stockholder under this Section 7 exceed the amount of the gross proceeds paid
to the Registering Stockholder in consideration of the sale of Transaction
Registrable Shares pursuant to such registration.
(c) If any action or proceeding (including any governmental investigation or
inquiry) shall be brought, asserted or threatened against any person
indemnified under this Section 7, the indemnified person shall promptly notify
the indemnifying party in writing, and the indemnifying party shall assume the
defense of the action or proceeding, including the employment of counsel
satisfactory to the indemnified person and the payment of all expenses. The
indemnified person shall have the right to employ separate counsel in any
action or proceeding and to participate in the defense of the action or
proceeding, but the fees and expenses of that counsel shall be at the expense
of the indemnified person unless:
(1) the indemnifying party shall have agreed to pay those fees and
expenses; or
(2) the indemnifying party shall have failed to assume the defense of the
action or proceeding or shall have failed to employ counsel reasonably
satisfactory to the indemnified person in the action or proceeding; or
(3) the named parties to the action or proceeding (including any
impleaded parties) include both the indemnified person and the indemnifying
party, and the indemnified person shall have been advised by
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counsel that there may be one or more legal defenses available to the
indemnified person that are different from or additional to those available
to the indemnifying party (in which case, if the indemnified person
notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action or
proceeding on behalf of the indemnified person; it being understood,
however, that the indemnifying party shall not, in connection with any one
action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for the
indemnified person, which firm shall be designated in writing by the
indemnified person).
The indemnifying party shall not be liable for any settlement of any action
or proceeding effected without its written consent, but if settled with its
written consent, or if there be a final judgment for the plaintiff in any such
action or proceeding, the indemnifying party shall indemnify and hold harmless
the indemnified person from and against any loss or liability by reason of the
settlement or judgment.
(d) If the indemnification provided for in this Section 7 is unavailable to
an indemnified person (other than by reason of exceptions provided in this
Section 7) in respect of losses, claims, damages, liabilities or expenses
referred to in this Section 7, then each applicable indemnifying party, in
lieu of indemnifying the indemnified person, shall contribute to the amount
paid or payable by the indemnified person as a result of the losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of
the indemnified person on the other in connection with the statements or
omissions which resulted in the losses, claims, damages, liabilities or
expenses as well as any other relevant equitable considerations. The relative
fault of the indemnifying party on the one hand and of the indemnified person
on the other shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the indemnifying party or by the indemnified person and by these persons'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission. The parties agree that it would not be
just and equitable if contribution pursuant to this Section 7(d) were
determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to in the
immediately preceding sentence. The amount paid or payable by a person as a
result of the losses, claims, damages, liabilities and expenses shall be
deemed to include any legal or other fees or expenses reasonably incurred by
the person in connection with investigating or defending any action or claim.
Notwithstanding in the foregoing to the contrary, no Registering Stockholder
or underwriter of Transaction Registrable Shares owned by the Registering
Stockholder shall be required to contribute any amount in excess of the amount
by which (1) in the case of the Registering Stockholder, the gross proceeds
paid to the Registering Stockholder in consideration of the sale pursuant to
the registration of Transaction Registrable Shares owned by it or (2) in the
case of the underwriter, the total price at which such Transaction Registrable
Shares purchased by it and distributed to the public were offered to the
public exceeds, in any such case, the amount of any damages that the
Registering Stockholder or underwriter, as the case may be, has otherwise been
required to pay by reason of any untrue or alleged untrue statement or
omission. No person guilty of fraudulent representation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation.
(e) Each Registering Stockholder participating in a registration pursuant to
Section 1 shall cause each underwriter of any Transaction Registrable Shares
owned by the Registering Stockholder to be distributed pursuant to the
registration to agree in writing on terms reasonably satisfactory to the
Company to indemnify and to hold harmless the Company and its officers and
directors and each person, if any, who controls any of them within the meaning
of Section 15 (or any similar provision then in force) of the Securities Act,
and their respective successors, against all claims, losses, damages and
liabilities to third parties (or actions in respect thereof) arising out of or
based upon any untrue statement (or alleged untrue statement) of a material
fact contained in the Registration Statement or the Prospectus or other
document incident thereto or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements
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therein not misleading, and to reimburse the Company and each other person
indemnified pursuant to the agreement for any legal or any other expense
reasonably incurred in connection with investigating or defending any claim,
loss, damage, liability or action; provided that the agreement shall apply
only if (and only to the extent that) the statement or omission was made in
reliance upon and in conformity with information furnished to the Company in
writing by the underwriter specifically for use in the Registration Statement
or the Prospectus.
Section 8. Transfer Restrictions.
(a) Stockholder acknowledges that, the Company has issued the Warrants and,
upon the exercise thereof, will issue the Registrable Shares to Stockholder
pursuant to an exemption from registration under the Securities Act.
Stockholder represents that (1) it has acquired the Warrants and will acquire
Registrable Shares for investment and without any view toward distribution of
any of Registrable Securities to any other person, (2) it will not sell or
otherwise dispose of the Warrants or Registrable Shares except in compliance
with the registration requirements or exemption provisions under the
Securities Act and (3) before any sale or other disposition of any of the
Warrants or Registrable Shares other than in a sale registered under the
Securities Act or pursuant to Rule 144 or 144A (or any similar provisions then
in force) under the Securities Act (unless the Company shall have been advised
by counsel that the sale does not meet the requirements of Rule 144 or Rule
144A, as the case may be, for such sale), it will deliver to the Company an
opinion of counsel, in form and substance reasonably satisfactory to the
Company, to the effect that such registration is unnecessary.
(b) (1) Except as provided to the contrary in this Section 8, each
instrument or certificate evidencing or representing any Registrable Shares,
and any certificate issued in exchange therefor or upon conversion, exercise
or transfer thereof, shall bear legends substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH SAID. ACT
THE ARE ALSO SUBJECT TO THE RESTRICTIONS STATED IN A REGISTRATION RIGHTS
AGREEMENT DATED AS OF SEPTEMBER 13, 1998, A COPY OF WHICH IS ON FILE AT THE
OFFICE OF THE SECRETARY OF THE COMPANY."
(2) Except as provided to the contrary in this Section 8, each instrument or
certificate evidencing or representing any Warrant, and any certificate issued
in exchange therefor or upon conversion, exercise or transfer thereof, shall
bear legends substantially in the following form:
"THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH SAID ACT.
THIS WARRANT AND SUCH SHARES ARE ALSO SUBJECT TO THE RESTRICTIONS STATED IN
A REGISTRATION RIGHTS AGREEMENT DATED AS OF SEPTEMBER 13, 1998, A COPY OF
WHICH IS ON FILE AT THE OFFICE OF THE SECRETARY OF THE COMPANY."
(c) If the holder of any Warrant or any Registrable Shares shall request in
writing that the Company remove any or all of the legends stated in Section
8(b) from the instruments or certificates evidencing or representing such
Registrable Shares, then, as soon as practicable following the later of the
date of receipt of such request and the date of receipt of such instruments or
certificates bearing such legends, the Company shall issue and deliver to the
registered owner of such Registrable Shares or its registered transferee
instruments or certificates evidencing or representing such Warrant or such
Registrable Shares without such legends if either (1) such substitute
instruments or certificates are issued in connection with a sale that is
registered under the Securities Act or (2) (A) one year shall have elapsed
from the date of the consummation of the Merger and the provisions of Rule
145(d)(2) under the Securities Act are then available to the holder or (B)
Stockholder has received either an opinion of counsel, which opinion and
counsel shall be reasonably satisfactory to Stockholder, or a "no-
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action" letter obtained by the holder from the staff of the Securities and
Exchange Commission, to the effect that the restrictions imposed by Rule 144
and Rule 145 under the Securities Act no longer apply to such shares.
Section 9. Exempt Sales.
(a) The Company shall make all filings with the Securities and Exchange
Commission required by paragraph (c) of Rule 144 (or any similar provision
then in force) under the Securities Act to permit the sale of Registrable
Shares by any holder thereof (other than an Affiliate of the Company) to
satisfy the conditions of Rule 144 (or any similar provision then in force).
The Company shall, promptly upon the written request of the holder of
Registrable Shares, deliver to such holder a written statement as to whether
the Company has complied with all such filing requirements.
(b) Prior to sales of Registrable Shares proposed to be sold pursuant to an
exemption from the registration requirements of the Securities Act, the
Company shall, subject to Section 8(c), cooperate with Principal Stockholder
and each other holder of Purchaser Securities to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legends)
representing such Purchaser Securities.
Section 10. Merger, Consolidation, Exchange, Etc. In the event, directly or
indirectly, (1) the Company shall merge with and into, or consolidate with,
any other person or (2) any person shall merge with and into, or consolidate,
the Company and the Company shall be the surviving corporation of such merger
or consolidation and, in connection with such merger or consolidation, all or
part of the Registrable Shares shall be changed into or exchanged for stock or
other securities of any other person, then, in each such case, proper
provision shall be made so that such other person shall be bound by the
provisions of this Agreement and the term the "Company" shall thereafter be
deemed to refer to such other person.
Section 11. Notices. All notices, requests and other communications to any
party under this Agreement shall be in writing. Communications may be made by
telecopy or similar writing. Each communication shall be given to the party at
its address stated on the signature pages of this Agreement or at any other
address as the party may specify for this purpose by notice to the other
party. Each communication shall be effective (1) if given by telecopy, when
the telecopy is transmitted to the proper address and the receipt of the
transmission is confirmed, (2) if given by mail, 72 hours after the
communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the
proper address and a written acknowledgement of delivery is received.
Section 12. No Waivers; Remedies. No failure or delay by any party in
exercising any right, power or privilege under this Agreement shall operate as
a waiver of the right, power or privilege. A single or partial exercise of any
right, power or privilege shall not preclude any other or further exercise of
the right, power or privilege or the exercise of any other right, power or
privilege. The rights and remedies provided in this Agreement shall be
cumulative and not exclusive of any rights or remedies provided by law.
Section 13. Amendments, Etc. No amendment, modification, termination or
waiver of any provision of this Agreement, and no consent to any departure by
a party to this Agreement from any provision of this Agreement, shall be
effective unless it shall be in writing and signed and delivered by the other
party to this Agreement, and then it shall be effective only in the specific
instance and for the specific purpose for which it is given.
Section 14. Successors and Assigns.
(a) Each holder of Registrable Shares may assign to any transferee of
Registrable Shares its rights and delegate to the transferee its obligations
under this Agreement including, without limitation, the rights of assignment
pursuant to this Section 14; provided that such transferee assignee shall
accept such rights and assume such obligations for the benefit of the Company
by written instrument, in form and substance reasonably satisfactory to the
Company. Thereafter, without any further action by any person, all references
in this
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Agreement to the holder of such Registrable Shares, and all comparable
references, shall be deemed to be references to the transferee, and the
transferor shall be released from each obligation or liability under this
Agreement with respect to the Registrable Shares so transferred.
(b) The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties to this Agreement, the express beneficiaries thereof
and their respective permitted heirs, executors, legal representatives,
successors and assigns, and no other person.
Section 15. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
Section 16. Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same
effect as if all signatures were on the same instrument.
Section 17. Severability of Provisions. Any provision of this Agreement that
is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of this
Agreement or affecting the validity or enforceability of the provision in any
other jurisdiction.
Section 18. Headings and References. Section headings in this Agreement are
included for the convenience of reference only and do not constitute a part of
this Agreement for any other purpose. References to parties, express
beneficiaries and sections in this Agreement are references to the parties to
or the express beneficiaries and sections of this Agreement, as the case may
be, unless the context shall require otherwise.
Section 19. Entire Agreement. This Agreement embodies the entire agreement
and understanding of the parties and supersedes all prior agreements or
understandings with respect to the subject matters of this Agreement.
Section 20. Survival. Except as otherwise specifically provided in this
Agreement, each representation, warranty or covenant of each party contained
in to this Agreement shall remain in full force and effect, notwithstanding
any investigation or notice to the contrary or any waiver by the other party
of a related condition precedent to the performance by such other party of an
obligation under this Agreement.
Section 21. Exclusive Jurisdiction. Each party, and each express beneficiary
of this Agreement as a condition of its right to enforce or defend any right
under or in connection with this Agreement, (1) agrees that any Action with
respect to this Agreement or any transaction contemplated by this Agreement
shall be brought exclusively in the courts of the State of New York or of the
United States of America for the Southern District of New York, in each case
sitting in the Borough of Manhattan, State of New York, (2) accepts for itself
and in respect of its property, generally and unconditionally, the
jurisdiction of those courts and (3) irrevocably waives any objection,
including, without limitation, any objection to the laying of venue or based
on the grounds of forum non conveniens, which it may now or hereafter have to
the bringing of any legal action in those jurisdictions; provided, however,
that any party may assert in an Action in any other jurisdiction or venue each
mandatory defense, third-party claim or similar claim that, if not so asserted
in such Action, may thereafter not be asserted by such party in an original
Action in the courts referred to in clause (1) above.
Section 22. Waiver of Jury Trial. Each party waives any right to a trial by
jury in any Action to enforce or defend any right under this Agreement or any
amendment, instrument, document or agreement delivered, or which in the future
may be delivered, in connection with this Agreement and agrees that any Action
shall be tried before a court and not before a jury.
Section 23. Affiliate. Nothing contained in this Agreement shall constitute
Stockholder or any Registering Stockholder an "affiliate" of any of the
Company and its Subsidiaries within the meanings of the Securities Act or the
Exchange Act, respectively, including, without limitation, Rule 501 under the
Securities Act and Rule 13e-3 under the Exchange Act.
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Section 24. Non-Recourse. No recourse under this Agreement shall be had
against any "controlling person" (within the meaning of Section 20 of the
Exchange Act) of any party or the stockholders, directors, officers,
employees, agents and Affiliates of such party or such controlling persons,
whether by the enforcement of any assessment or by any legal or equitable
proceeding, or by virtue of any Regulation, it being expressly agreed and
acknowledged that no personal liability whatsoever shall attach to, be imposed
on or otherwise be incurred by such controlling person, stockholder, director,
officer, employee, agent or Affiliate, as such, for any obligations of such
party under this Agreement or for any claim based on, in respect of or by
reason of such obligations or their creation.
Section 25. No Inconsistent Agreements. The Company shall not enter into, or
amend or otherwise modify, any agreement to afford to any person other than
Stockholder and the holders of Registrable Shares rights with respect to the
registration under the Securities Act of shares of Company Common Stock or
other securities or the inclusion of any such shares or other securities in
any registration that are inconsistent with, or conflict with, the rights of
Stockholder and the holders of Registrable Shares under this Agreement,
including, without limitation, Sections 1 and 2.
-----------------------------
[INTENTIONALLY LEFT BLANK]
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In Witness Whereof, the parties have executed and delivered this Agreement
as of the date first written above in New York, New York.
Icon CMT Corp.
By___________________________________
SCOTT A. BAXTER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Address: 1200 Harbor Boulevard
Weehawken, NJ 07087
Attention: Scott A. Baxter
Fax: 201-601-1917
With a copy to:
Parker Chapin Flattau &
Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Michael Weinsier
Fax: 212-704-6288
Qwest Communications International
Inc.
By:
-----------------------------------
JOSEPH P. NACCHIO
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Address: 1000 Qwest Tower
555 Seventeenth Street
Denver, Colorado 80202
Attention: Marc B. Weisberg
Fax: 303-992-1723
With a copy to:
O'Melveny & Myers LLP
153 East 53rd Street
New York, NY 10022
Attention: Drake S. Tempest
Fax: 212-326-2061
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EXHIBIT 3.1(J)(1)
FORM OF QWEST TAX REPRESENTATION LETTER
[LETTERHEAD OF QWEST COMMUNICATIONS INTERNATIONAL INC.]
[Date]
[Counsel for the Company]
[Address]
Re: Representation Letter for Proposed Merger Opinion
Gentlemen:
This letter is being furnished in connection with the merger (the "Merger")
of Qwest 1998-I Acquisition Corp., a Delaware corporation ("Qwest Subsidiary")
and a wholly-owned subsidiary of Qwest Communications International Inc., a
Delaware corporation ("Qwest"), with and into Icon CMT Corp., a Delaware
corporation (the "Company"), in exchange for shares of voting common stock,
par value $.01 per share, of Qwest ("Qwest Common Stock") pursuant to the
Agreement and Plan of Merger dated as of September 13, 1998 (the "Merger
Agreement"), among Qwest, Qwest Subsidiary, and the Company. All capitalized
terms not otherwise defined herein have the meanings ascribed to them in the
Merger Agreement.
Qwest represents and warrants as follows:
1. The representations and warranties set forth in the Merger Agreement
will be true, correct and complete as if made at the Effective Time. The
facts relating to the Merger as described in the Merger Agreement insofar
as they relate to Qwest or Qwest Subsidiary are true, correct and complete
in all material respects.
2. The fair market value of Qwest Common Stock and other consideration
(including cash in lieu of fractional shares), if any, received by each
stockholder of the Company in the Merger will be approximately equal to the
fair market value of the Company stock surrendered by such stockholder in
the Merger.
3. Neither Qwest nor any person related to Qwest has any plan or
intention to redeem or acquire any shares of Qwest Common Stock issued
pursuant to the Merger. For purposes of this representation, persons are
considered to be "related" if such persons are related within the meaning
of Treasury Regulation (S)1.368-1(e).
4. None of the compensation received by any stockholder-employee of the
Company will be separate consideration for, or allocable to, any of his
shares of Company Common Stock. None of the shares of Qwest Common Stock
received by any stockholder-employee will be separate consideration for, or
allocable to, any employment agreement. The compensation paid to any
stockholder-employee will be for services actually rendered and will be
commensurate with amounts paid to unrelated third parties bargaining at
arm's length for similar services.
5. Immediately following the Merger, the Company will hold at least 90
percent of the fair market value of Qwest Subsidiary's net assets and at
least 70 percent of the fair market value of Qwest Subsidiary's gross
assets held immediately prior to the Merger. Following the Merger, Qwest
intends to, and absent a change in circumstances which occurs after, and is
not in connection with, the Merger, will, cause the Company to hold (a) at
least 90 percent of the fair market value of its net assets and at least 70
percent of the fair market value of its gross assets held immediately prior
to the Merger, and (b) at least 90 percent of the fair market value of
Qwest Subsidiary's net assets and at least 70 percent of the fair market
value of Qwest Subsidiary's gross assets held immediately prior to the
Merger. For purposes of this representation, amounts paid to Company
stockholders who receive cash or other property (including cash for
fractional shares), amounts used by the Company or Qwest Subsidiary to pay
reorganization expenses, and all
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redemptions and distributions (except for regular, normal dividends) made
by the Company will be included in the assets of the Company or Qwest
Subsidiary, as the case may be, immediately prior to the Merger.
6. Prior to the Merger, Qwest will be in control of Qwest Subsidiary
within the meaning of Section 368(c) of the Internal Revenue Code of 1986,
as amended (the"Code").
7. Qwest has no plan or intention to cause the Company, following the
Merger, to issue additional shares of its stock that would result in
Qwest's losing control of the Company within the meaning of Section 368(c)
of the Code. Immediately following the Merger, the Company will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock in the
Company that, if exercised or converted, would affect Qwest's acquisition
or retention of control of the Company, as defined in Section 368(c) of the
Code.
8. Qwest has no plan or intention (a) to liquidate the Company, (b) to
merge the Company with or into another corporation, (c) to sell or
otherwise dispose of the stock of the Company except for transfers of stock
to a member of Qwest's qualified group or to a qualified partnership, or
(d) to cause the Company to sell or otherwise dispose of any of its assets
or of any of the assets acquired from Qwest Subsidiary, except for
dispositions made in the ordinary course of business or transfers to a
member of Qwest's qualified group or to a qualified partnership. For
purposes of this representation, "Qwest's qualified group" is the qualified
group within the meaning of Treasury Regulation (S)1.36 8-1(d)(4)(ii) in
which Qwest is the issuing corporation, and a "qualified partnership" is a
partnership in which members of Qwest's qualified group, in the aggregate,
own at least 33 1/3 percent of the capital and profits interests in the
partnership.
9. Qwest Subsidiary will have no liabilities assumed by the Company, and
will not transfer to the Company any assets subject to liabilities, in the
Merger.
10. Qwest Subsidiary has been newly formed solely to consummate the
Merger and, prior to the Effective Time, Qwest Subsidiary has not conducted
and will not conduct any business activity or other operation of any kind
(except for the issuance of its stock to Qwest).
11. Following the Merger, Qwest intends to, and absent a change in
circumstances which occurs after, and is not in connection with, the
Merger, will, cause the Company to continue its historic business or use a
significant portion of its historic business assets in a business within
the meaning of Treasury Regulation (S)1.368-1(d).
12. Qwest, Qwest Subsidiary, the Company, and the stockholders of the
Company will pay their respective expenses, if any, incurred in connection
with the Merger. Neither Qwest nor Qwest Subsidiary will pay or assume any
expense of the Company in connection with the transactions described in the
Merger Agreement.
13. There is no intercorporate indebtedness existing between Qwest and
the Company or between Qwest Subsidiary and the Company that was issued,
acquired, or will be settled at a discount.
14. In the Merger, shares of Company stock representing control of the
Company, as defined in Section 368(c) of the Code, will be exchanged solely
for Qwest Common Stock. For purposes of this representation, shares of
Company stock exchanged for cash or other property originating with Qwest
will be treated as outstanding Company stock on the date of the Merger.
15. Qwest does not own, nor has it owned during the past five years, any
shares of the stock of the Company.
16. Neither Qwest nor Qwest Subsidiary is an investment company as
defined in Section 368(a)(2)(F) of the Code.
17. The payment of cash in lieu of fractional shares of Qwest Common
Stock is solely for the purpose of avoiding the expense and inconvenience
to Qwest of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid
in the Merger to the Company stockholders instead of issuing fractional
shares of Qwest Common Stock will be issued in the Merger to the Company
stockholders in exchange for their shares of Company stock. The fractional
share interests of each Company stockholder will be aggregated (except in
cases where the beneficial interests
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cannot be identified or it would be improper to aggregate), and no Company
stockholder will receive cash in an amount equal to or greater than the
value of one full share of Qwest Common Stock.
18. Qwest and Qwest Subsidiary and after the Merger, the Company, will
treat the Merger as a tax-free reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. Neither Qwest nor Qwest
Subsidiary, nor after the Merger, the Company, will take any position that
is inconsistent with the treatment of the Merger as a tax-free
reorganization within the meaning of Section 368(a) of the Code, unless
otherwise required by a determination within the meaning of Section
1313(a)(1) of the Code or by applicable state or local income or franchise
tax law.
19. Other than those described in the Merger Agreement, the Joint Proxy
Statement/Prospectus of Qwest and the Company or Qwest's Registration
Statement on Form S-4, there are no agreements, arrangements or
understandings (whether written or oral) between or among (a) any of Qwest,
its subsidiaries, affiliates or stockholders, on the one hand, and (b) any
of the Company, its subsidiaries, affiliates or stockholders on the other
hand, concerning the Merger.
Qwest represents and warrants that the foregoing representations are true,
correct and complete at the Effective Time as well as on the date hereof, and
Qwest will notify you in writing of any changes therein prior to the Effective
Time and prior to the Closing.
Qwest understands the foregoing representations and has had the opportunity
to discuss these representations, their meaning and factual support therefor
with its tax advisors before signing this letter. Qwest recognizes that you
will be relying on these representations in connection with your rendering an
opinion regarding the federal income tax treatment of the Merger to the
Company and its stockholders.
The undersigned has authority to sign this representation letter on behalf
of Qwest and is an executive officer of Qwest fully familiar with its
operations and ownership.
Very truly yours,
Qwest Communications International
Inc.
By: ____________________________
Name:
Title:
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<PAGE>
EXHIBIT 3.1(J)(2)
FORM OF COMPANY TAX REPRESENTATION LETTER
[LETTERHEAD OF ICON CMT CORP.]
[Date]
[Counsel for the Company]
[Address]
Re: Representation Letter for Proposed Merger Opinion
Gentlemen:
This letter is being furnished in connection with the merger (the "Merger")
of Qwest 1998-I Acquisition Corp., a Delaware corporation ("Qwest Subsidiary")
and a wholly-owned subsidiary of Qwest Communications International Inc., a
Delaware corporation ("Qwest"), with and into Icon CMT Corp., a Delaware
corporation (the "Company"), in exchange for shares of voting common stock,
par value $.01 per share, of Qwest ("Qwest Common Stock") pursuant to the
Agreement and Plan of Merger dated as of September 13, 1998 (the "Merger
Agreement"), among Qwest, Qwest Subsidiary, and the Company. All capitalized
terms not otherwise defined herein have the meanings ascribed to them in the
Merger Agreement.
The Company represents and warrants as follows:
1. The representations and warranties set forth in the Merger Agreement
will be true, correct and complete as if made at the Effective Time. The
facts relating to the Merger as described in the Merger Agreement insofar
as they relate to the Company are true, correct and complete in all
material respects.
2. The fair market value of Qwest Common Stock and other consideration
(including cash in lieu of fractional shares), if any, received by each
stockholder of the Company in the Merger will be approximately equal to the
fair market value of the Company stock surrendered by such stockholder in
the Merger.
3. At least 50 percent of the aggregate value of all Company stock
outstanding immediately prior to the Merger is preserved in the Merger
within the meaning of Treasury Regulation (S)1.368-1(e). For purposes of
this representation, the value of a share of Company stock is considered to
be preserved in the Merger if the share of Company stock is exchanged for
Qwest Common Stock in the Merger. However, the value of a share of Company
stock is not preserved in the Merger (and is treated as outstanding
immediately prior to the Merger) if and to the extent that (a) in
connection with the Merger, the share of Company stock is acquired by Qwest
or a person related to Qwest for consideration other than Qwest Common
Stock, (b) if, prior to the Merger, the share of Company stock was redeemed
by the Company or acquired by a person related to the Company, (c) if, in
connection with the Merger, Qwest Common Stock issued in the Merger is
redeemed or acquired by a person related to Qwest, or (d) to the extent
that prior to and in connection with the Merger, an extraordinary
distribution (as such term is used in Treasury Regulation (S)1.368-1T(e))
is made with respect to the share of Company stock.
Neither the Company nor any person related to the Company has redeemed or
acquired nor does the Company or any person related to the Company have any
plan or intention to redeem or acquire any shares of Company stock or make
an extraordinary distribution with respect to any shares of Company stock.
To the best of the Company's knowledge, neither Qwest nor any person
related to Qwest has any plan or intention to redeem or acquire any shares
of Qwest Common Stock issued pursuant to the Merger.
For purposes of this representation, persons are considered "related" if
such persons are related within the meaning of Treasury Regulation
(S)1.368-1(e).
4. None of the compensation received by any stockholder-employee of the
Company will be separate consideration for, or allocable to, any of his
shares of Company Common Stock. None of the shares of
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<PAGE>
Qwest Common Stock received by any stockholder-employee will be separate
consideration for, or allocable to, any employment agreement. The
compensation paid to any stockholder-employee will be for services actually
rendered and will be commensurate with amounts paid to unrelated third
parties bargaining at arm's length for similar services.
5. Following the Merger, the Company will hold (a) at least 90 percent of
the fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets held immediately prior to the Merger, and
(b) to the best of the Company's knowledge, at least 90 percent of the fair
market value of Qwest Subsidiary's net assets and at least 70 percent of
the fair market value of Qwest Subsidiary's gross assets held immediately
prior to the Merger. For purposes of this representation, amounts paid to
Company stockholders who receive cash or other property (including cash for
fractional shares), amounts used by the Company or Qwest Subsidiary to pay
reorganization expenses, all redemptions and distributions (except for
regular, normal dividends) made by the Company and all assets disposed of
by the Company in contemplation of the Merger (except in the ordinary
course of business) will be included in the assets of the Company or Qwest
Subsidiary as the case may be, immediately prior to the Merger.
6. To the best of the Company's knowledge, prior to the Merger, Qwest
will be in control of Qwest Subsidiary within the meaning of Section 368(c)
of the Internal Revenue Code of 1986, as amended (the "Code").
7. The Company has no plan or intention to issue additional shares of its
stock that would result in Qwest's losing control of the Company within the
meaning of Section 368(c) of the Code. At the Effective Time, the Company
will not have outstanding any warrants, options, convertible securities, or
any other type of right pursuant to which any person could acquire stock in
the Company that, if exercised or converted, would affect Qwest's
acquisition or retention of control of the Company, as defined in Section
368(c) of the Code.
8. To the best of the Company's knowledge, Qwest has no plan or intention
(a) to liquidate the Company, (b) to merge the Company with or into another
corporation, (c) to sell or otherwise dispose of the stock of the Company
except for transfers of stock to a member of Qwest's qualified group or to
a qualified partnership, or (d) to cause the Company to sell or otherwise
dispose of any of its assets or of any of the assets acquired from Qwest
Subsidiary, except for dispositions made in the ordinary course of business
or transfers to a member of Qwest's qualified group or to a qualified
partnership. For purposes of this representation, "Qwest's qualified group"
is the qualified group within the meaning of Treasury Regulation (S)1.368-
1(d)(4)(ii) in which Qwest is the issuing corporation, and a "qualified
partnership" is a partnership in which members of Qwest's qualified group,
in the aggregate, own at least 33 1/3 percent of the capital and profits
interests in the partnership.
9. Qwest Subsidiary will have no liabilities assumed by the Company, and
will not transfer to the Company any assets subject to liabilities, in the
Merger.
10. To the best of the Company's knowledge, Qwest Subsidiary has been
newly formed solely to consummate the Merger and, prior to the Effective
Time, Qwest Subsidiary has not conducted and will not conduct any business
activity or other operation of any kind (except for the issuance of its
stock to Qwest).
11. To the best of the Company's knowledge, following the Merger, the
Company will continue its historic business assets in a business or use a
significant portion of its historic business assets in a business within
the meaning of Treasury Regulation (S)1.368-1(d). No assets of the Company
have been disposed of in any manner prior to the Merger nor does the
Company have any plan or intention to dispose of any such assets, except in
the ordinary course of business.
12. Qwest, Qwest Subsidiary, the Company, and the stockholders of the
Company will pay their respective expenses, if any, incurred in connection
with the Merger. Neither Qwest nor Qwest Subsidiary will pay or assume any
expense of the Company in connection with the transactions described in the
Merger Agreement.
13. There is no intercorporate indebtedness existing between Qwest and
the Company or between Qwest Subsidiary and the Company that was issued,
acquired, or will be settled at a discount.
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14. In the Merger, shares of Company stock representing control of the
Company, as defined in Section 368(c) of the Code, will be exchanged solely
for Qwest Common Stock. For purposes of this representation, shares of
Company stock exchanged for cash or other property originating with Qwest
will be treated as outstanding Company stock on the date of the Merger.
15. Qwest does not own, nor has it owned during the past five years, any
shares of the stock of the Company.
16. The Company, and to the best of the Company's knowledge, Qwest and
Qwest Subsidiary are not investment companies as defined in Section
368(a)(2)(F) of the Code.
17. At the Effective Time, the fair market value of the assets of the
Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
18. The Company is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
19. The payment of cash in lieu of fractional shares of Qwest Common
Stock is solely for the purpose of avoiding the expense and inconvenience
to Qwest of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid
in the Merger to the Company stockholders instead of issuing fractional
shares of Qwest Common Stock will be issued in the Merger to the Company
stockholders in exchange for their shares of Company stock. The fractional
share interests of each Company stockholder will be aggregated (except in
cases where the beneficial interests cannot be identified or it would be
improper to aggregate), and no Company stockholder will receive cash in an
amount equal to or greater than the value of one full share of Qwest Common
Stock.
20. The Company will treat the Merger as a tax-free reorganization within
the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. The
Company will not take any position that is inconsistent with the treatment
of the Merger as a tax-free reorganization within the meaning of Section
368(a) of the Code, unless otherwise required by a determination within the
meaning of Section 1313(a)(1) of the Code or by applicable state or local
income or franchise tax law.
21. Other than those described in the Merger Agreement, the Joint Proxy
Statement/Prospectus of Qwest and the Company or Qwest's Registration
Statement on Form S-4, there are no agreements, arrangements or
understandings (whether written or oral) between or among (a) any of Qwest,
its subsidiaries, affiliates or stockholders, on the one hand, and (b) any
of the Company, its subsidiaries, affiliates or stockholders on the other
hand, concerning the Merger.
22. The Company represents and warrants that the foregoing
representations are true, correct and complete at the Effective Time as
well as on the date hereof, and the Company will notify you in writing of
any changes therein prior to the Effective Time and prior to the Closing.
The Company understands the foregoing representations and has had the
opportunity to discuss these representations, their meaning and factual
support therefor with its tax accountants before signing this letter. The
Company recognizes that you will be relying on these representations in
connection with your rendering an opinion regarding the federal income tax
treatment of the Merger to the Company and its stockholders.
The undersigned has authority to sign this representation letter on behalf
of the Company and is an executive officer of the Company fully familiar with
its operations and ownership.
Very truly yours,
Icon CMT Corp.
By: ____________________________
Name:
Title:
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EXHIBIT 3.1(J)(3)
FORM OF TAX OPINION
[Date]
Icon CMT Corp.
1200 Harbor Boulevard
Weehawken, New Jersey 07087
Re: Tax Consequences of Merger of Icon CMT Corporation
Gentlemen:
We have acted as counsel to Icon CMT Corp., a Delaware corporation (the
"Company"), in connection with the proposed merger (the "Merger") of Qwest
1998-I Acquisition Corp. ("Subsidiary"), a Delaware corporation and a wholly-
owned subsidiary of Qwest Communications International Inc., a Delaware
corporation ("Parent"), with and into the Company, pursuant to the terms of
the Agreement and Plan of Merger dated as of September 13, 1998 (the "Merger
Agreement"), among the Company, Parent and Subsidiary. This opinion is being
rendered pursuant to the Merger Agreement. All capitalized terms not otherwise
defined herein have the meaning assigned to them in the Merger Agreement.
In connection with this opinion, we have examined a copy of the Merger
Agreement and Qwest's Registration Statement on Form S-4 as filed with the
Securities Exchange Commission on , 1998 (the "Form S-4"). In our
examination, we have assumed the genuineness of all signatures, the legal
capacity and corporate authority of all parties, and the authenticity and
conformity to originals of all documents submitted to us. In rendering the
opinion set forth below, we have assumed that the parties will act in
accordance with the terms, representations and covenants contained in the
Merger Agreement. In addition, we have relied upon certain written
representations and covenants of Qwest and the Company, copies of which are
annexed hereto (the "Representation Letters"), and have assumed that the
parties will act in accordance with the representations and covenants set
forth therein.
Based upon and subject to the foregoing, we are of the opinion that the
Merger will, under current law, constitute a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and Qwest and the Company will each be a party to the reorganization within
the meaning of Section 368(b) of the Code.
As a tax-free reorganization, the Merger will have the following Federal
income tax consequences for the Company and its stockholders:
1. The Company will not recognize any gain or loss as a result of the
Merger.
2. No gain or loss will be recognized by holders of Company Common Stock
as a result of the exchange of such shares for shares of Qwest Common Stock
pursuant to the Merger, except to the extent of any cash received in lieu
of a fractional share of Qwest Common Stock. Each stockholder of the
Company receiving cash in lieu of a fractional share of Qwest Common Stock
will be treated as having received such fractional share and as having sold
it for the cash received, thereby recognizing gain or loss equal to the
difference between the amount of cash received and that stockholder's tax
basis in the fractional share. Such gain or loss will generally be capital
gain or loss, unless the deemed sale is essentially equivalent to a
dividend within the meaning of Section 302 of the Code.
3. The tax basis of the shares of Qwest Common Stock received by each
stockholder of the Company (including any fractional share deemed to have
been received by that stockholder) will be equal to the tax basis of such
stockholder's shares of Company Common Stock exchanged in the Merger.
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4. The holding period for the shares of Qwest Common Stock received by
each stockholder of the Company (including any fractional share deemed to
have been received by that stockholder) will include the holding period for
the shares of Company Common Stock of such stockholder exchanged in the
Merger.
The foregoing opinion relates only to the U.S. federal income tax
consequences of the Merger to a U.S. person who holds the Company Common Stock
as a capital asset within the meaning of Section 1221 of the Code. In
addition, it does not apply to certain types stockholders who are subject to
special treatment under the Code in light of their particular situations.
Our opinion is based upon our analysis of those provisions of the Code,
Treasury Regulations, administrative rulings and proceedings and case law as
of the date hereof which we deem relevant. It should be noted that such
authority is subject to change retroactively as well as prospectively, and
that we have no duty to advise you of any such changes or their effect upon
this opinion. It should also be recognized that the Internal Revenue Service
may disagree with our conclusions and that a court may uphold such contrary
positions. Finally, in expressing our opinions, we have relied on the facts,
representations and covenants as set forth in the Merger Agreement, the Form
S-4 and the Representation Letters. We have not made any independent analysis
of any of the items or information set forth therein or reviewed any other
documentation in connection therewith. If any of the facts are determined to
be different than those stated therein or any of the representations or
covenants are breached, our conclusions may no longer be applicable.
Except as set forth above, we express no opinion as to the tax consequences,
whether Federal, state, local or foreign, of the Merger to any party, or of
any transactions related to the Merger or contemplated by the Merger
Agreement. This opinion is being furnished only to you in connection with the
Merger and may be relied upon solely by your and your stockholders in
connection with the Merger. This opinion may not be used or relied upon by any
other person or for any other purpose and may not be circulated, quoted or
otherwise referred to for any other purpose without our express written
consent.
Very truly yours,
A-129
<PAGE>
EXHIBIT 3.1(K)(7)
FORM OF
U.S. REAL PROPERTY INTEREST CERTIFICATION
The undersigned is of Icon CMT Corp., a Delaware corporation (the
"Company"). This certificate is delivered to Qwest Communications
International Inc., a Delaware corporation ("Qwest"), and Qwest 1998-I
Acquisition Corp., a Delaware corporation ("Qwest Subsidiary"), pursuant to
Section 3.1(k)(7) of the Agreement and Plan of Merger dated as of September
13, 1998 among the Company, Qwest and Qwest Subsidiary, as the same may have
been amended as of the date hereof (the "Merger Agreement"). Terms not
otherwise defined herein have the meanings stated in the Merger Agreement.
To inform Qwest and Qwest Subsidiary that no withholding is required
pursuant to section 1445 of the Code with respect to Qwest's acquisition of
the Company, the undersigned hereby certifies the following on behalf of the
Company that the Company is not, and has not been at any time during the
period specified in section 897(c)(1)(A)(ii) of the Code, a "United States
real property holding corporation" as that term is defined in section
897(c)(2) of the Code.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete, and I further declare that I have authority to sign this
document on behalf of the Company.
Icon CMT Corp.
Date: _______________________ _____________________________
Name:
Title:
A-130
<PAGE>
EXHIBIT 3.1(L)
FORM OF
AFFILIATE LETTER FOR AFFILIATES OF THE COMPANY
[Date]
Qwest Communications International Inc.
1000 Qwest Tower
555 Seventeenth Street
Denver, CO 80202
Attention of Marc B. Weisberg
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Icon CMT Corp., a Delaware corporation (the "Company"), as
the term "affiliate" is defined for purposes of paragraphs (c) and (d) of Rule
145 of the Securities and Exchange Commission under the Securities Act of
1933, as amended (together with the rules and regulations thereunder, the
"Securities Act").
Pursuant to the terms of the Agreement and Plan of Merger dated as of
September 13, 1998 among the Company, Qwest Communications International Inc.,
a Delaware corporation ("Qwest"), and Qwest Subsidiary, a Delaware corporation
("Qwest Subsidiary"), as amended (the "Merger Agreement"), Qwest Subsidiary
will be merged with and into the Company, with the Company continuing as the
Surviving Corporation (the "Merger"). Capitalized terms used in this letter
without definition shall have the meanings assigned to them in the Merger
Agreement.
As a result of the Merger, I may receive shares of common stock, par value
$.01 per share, of Qwest (the "Qwest Common Stock") in exchange for shares (or
upon exercise of options for shares) of common stock, par value $.001 per
share, of the Company (the "Company Common Stock") owned by me.
1. I hereby represent, warrant and covenant to Qwest that, if I receive any
shares of Qwest Common Stock in the Merger:
(a) I shall not make any sale or other transfer of such shares (or any
interest therein) in violation of the Securities Act.
(b) I have carefully read this letter and the Merger Agreement and
discussed with my counsel or counsel for the Company the requirements of
such documents and other applicable limitations upon my ability to sell or
otherwise transfer such shares (or any interest therein), to the extent I
felt necessary.
(c) I have been advised that the issuance of such shares to me in the
Merger has been registered with the Securities and Exchange Commission
under the Securities Act on a Registration Statement on Form S-4. However,
I have also been advised that, because at the time the Merger is submitted
for a vote of the stockholders of the Company, (i) I may be deemed to be an
affiliate of the Company and (ii) the distribution by me of such shares has
not been registered under the Securities Act, I may not sell or otherwise
transfer such shares (or any interest therein) issued to me in the Merger
unless (x) such sale, transfer or other disposition is made in conformity
with the volume and other limitations of Rule 145 under the Securities Act,
(y) such sale or other transfer has been registered under the Securities
Act or (z) in the opinion of counsel reasonably acceptable to Qwest, such
sale or other transfer is otherwise exempt from registration under the
Securities Act.
(d) I understand that, except as provided for in the Merger Agreement,
Qwest is under no obligation to register the sale or other transfer of such
shares (or any interest therein) by me or on my behalf under the
A-131
<PAGE>
Securities Act, except as provided in paragraph 2(a) below, to take any
other action necessary in order to make compliance with an exemption from
such registration available.
(e) I also understand that there will be placed on the certificates for
such shares issued to me, or any substitutions therefor, a legend stating
in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED
SEPTEMBER 13, 1998 BETWEEN THE REGISTERED HOLDER HEREOF AND THE
COMPANY, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES
OF THE COMPANY."
(f) I also understand that unless a sale or transfer of such shares by me
is made in conformity with the provisions of Rule 145, or pursuant to a
registration statement, Qwest reserves the right to put the following
legend on the certificates issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE
HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
(g) Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first
paragraph of this letter, nor as a waiver of any rights I may have to
object to any claim that I am such an affiliate on or after the date of
this letter.
2. By Qwest's acceptance of this letter, Qwest agrees with me that, if I
receive any shares of Qwest Common Stock in the Merger:
(a) For so long as and to the extent necessary to permit me to sell such
shares pursuant to Rule 145 and, to the extent applicable, Rule 144 under
the Securities Act, Qwest shall (i) use its reasonable best efforts to (x)
file, on a timely basis, all reports and data required to be filed with the
Securities and Exchange Commission by it pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act"), and (y) furnish to me upon
request a written statement as to whether Qwest has complied with such
reporting requirements during the 12 months preceding any proposed sale of
the shares by me under Rule 145, and (ii) otherwise use its reasonable
efforts to permit such sales pursuant to Rule 145 and Rule 144. Qwest has
filed all reports required to be filed with the Securities and Exchange
Commission under Section 13 of the Exchange Act during the preceding 12
months.
A-132
<PAGE>
(b) It is understood and agreed that certificates for such shares having
the legends set forth in paragraphs (e) and (f) above will be substituted
by delivery of certificates without such legend if (i) one year shall have
elapsed from the date of the consummation of the Merger and the provisions
of Rule 145(d)(2) under the Securities Act are then available to me or (ii)
Qwest has received either an opinion of counsel, which opinion and counsel
shall be reasonably satisfactory to Qwest, or a "no-action" letter obtained
by the undersigned from the staff of the Securities and Exchange
Commission, to the effect that the restrictions imposed by Rule 144 and
Rule 145 under the Securities Act no longer apply to such shares.
Very truly yours,
_____________________________________
Name:
Accepted and Agreed:
Qwest Communications International
Inc.
By: _________________________________
Name:
Title:
Date:
A-133
<PAGE>
ANNEX B
[LETTERHEAD OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION]
December 10, 1998
Board of Directors
Icon CMT Corp.
1200 Harbor Boulevard
Weehawken, New Jersey 07087
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the holders of common stock of Icon CMT Corp. (the "Company") (other
than the holders of common stock of the Company who are Affiliates of the
Company) of the Merger Consideration (as defined below) to be received by such
holders of common stock pursuant to the terms of the Agreement and Plan of
Merger, dated as of September 13, 1998 (the "Agreement"), among the Company,
Qwest Communications International Inc. ("Qwest") and Qwest 1998-I Acquisition
Corp. ("Sub"), pursuant to which Sub will be merged (the "Merger") with and
into the Company. Any capitalized terms used herein but not otherwise defined
shall have the meaning set forth in the Agreement.
Pursuant to the Agreement, each share of common stock, par value $.001 per
share, of the Company (the "Company Common Stock") will be converted
(excluding shares held by the Company, Qwest, Sub or their respective Wholly-
Owned Subsidiaries) into the right to receive (i) if the average trading price
of the common stock on the NASDAQ, par value $.01 per share, of Qwest, ("Qwest
Common Stock") for the 15 consecutive trading days ending on the trading day
that is three Business Days before the date of the Company Stockholder Meeting
(the "Average Market Price") is not more than $37.50 nor less than $27.00, a
number of shares of Qwest Common Stock equal to $12.00 divided by the Average
Market Price, (ii) if the Average Market Price is more than $37.50, .3200 of a
share of Qwest Common Stock, and (iii) if the Average Market Price is less
than $27.00, .4444 of a share of Qwest Common Stock (the "Merger
Consideration").
In arriving at our opinion, we have reviewed the Agreement and the exhibits
thereto. We also have reviewed financial and other information that was
publicly available or furnished to us by the Company and Qwest, including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the Company's
management were certain financial projections of the Company for the period
beginning December 31, 1997 and ending December 31, 2002 prepared by the
management of the Company. In addition, we have compared certain financial and
securities data of the Company and Qwest with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the Company Common Stock and Qwest Common Stock,
reviewed prices and premiums paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion. We were not requested to, nor
did we, solicit the interest of any other party in acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company and Qwest or
their respective representatives, or that was otherwise reviewed by us. With
respect to the financial projections supplied to us, we have relied on the
representation of management of the Company that the financial projections
have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future operating and financial performance of the Company, assuming the
Company would be able to satisfy its anticipated funding needs on satisfactory
terms and timing. We have not assumed any responsibility for making an
independent evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by us. We have
relied as to certain legal matters on advice of counsel to the Company.
B-1
<PAGE>
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. We are expressing no opinion herein as to prices
at which Qwest Common Stock will trade at any time. Our opinion does not
address the relative merits of the Merger and the other business strategies
being considered by the Company's Board of Directors, nor does it address the
Board's decision to proceed with the Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on
the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. DLJ has
performed investment banking and other services for the Company in the past
and has been compensated for such services and is being compensated for
services rendered in connection with the Merger, including the delivery of
this opinion. DLJ also has performed in the past, and is currently performing,
investment banking and other services not related to the Merger for Qwest and
its principal stockholder, and has been, and will be, compensated for such
services. In particular, DLJ is performing investment banking services for
Qwest's principal stockholder in connection with an ongoing transaction
involving Qwest Common Stock which was publicly announced on November 28,
1998, and will receive a fee from Qwest's principal stockholder at the
conclusion of that transaction. The transaction will reduce the principal
stockholder's ownership interest in Qwest to approximately 48% of the
outstanding shares of Qwest Common Stock. Qwest will not receive any proceeds
from the transaction. The amount of DLJ's fee in such transaction is dependent
principally on the value of Qwest Common Stock at the conclusion of such
transaction, and may be greater than the fee payable to DLJ at the
consummation of the Merger.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Merger Consideration to be received by holders of
Company Common Stock (other than holders of Company Common Stock who are
Affiliates of the Company) pursuant to the Agreement is fair to such holders
from a financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
/s/ Louis P. Friedman
By: _________________________________
Louis P. Friedman
Managing Director
B-2
<PAGE>
ANNEX C
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
----------------
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NUMBER)
1000 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 992-1400
(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 335.6 million, as of
October 31, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
C-1
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<C> <S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997........... C-3
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997.................................. C-4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997.................... C-5
Notes to Condensed Consolidated Financial Statements......... C-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997........................... C-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ C-27
Item 2. Changes in Securities and Use of Proceeds.................... C-28
Item 6. Exhibits and Reports on Form 8-K............................. C-28
Signature Page........................................................ C-29
</TABLE>
C-2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Communications services............ $ 601.8 $ 32.5 $ 884.2 $ 77.1
Construction services.............. 205.0 156.5 493.4 413.2
--------- --------- --------- -------
Total revenue.................... 806.8 189.0 1,377.6 490.3
--------- --------- --------- -------
Operating expenses:
Access and network operations...... 371.6 25.0 556.1 61.8
Construction services.............. 128.2 107.5 333.8 292.0
Selling, general and
administrative.................... 189.4 31.4 341.5 123.2
Depreciation and amortization...... 79.9 5.1 120.0 13.1
Merger costs....................... -- -- 62.5 --
Provision for in-process research
and development................... -- -- 750.0 --
--------- --------- --------- -------
Total operating expenses......... 769.1 169.0 2,163.9 490.1
--------- --------- --------- -------
Earnings (loss) from operations.. 37.7 20.0 (786.3) 0.2
Other (income) expense:
Interest expense, net.............. 29.0 4.2 62.3 8.9
Other (income) expense, net........ 2.9 (4.0) (11.6) (13.2)
--------- --------- --------- -------
Earnings (loss) before income
taxes........................... 5.8 19.8 (837.0) 4.5
Income tax expense (benefit)......... 12.7 7.0 (14.4) 2.2
--------- --------- --------- -------
Net earnings (loss).................. $ (6.9) $ 12.8 $ (822.6) $ 2.3
========= ========= ========= =======
Net earnings (loss) per share--
basic............................... $ (0.02) $ 0.06 $ (3.17) $ 0.01
========= ========= ========= =======
Net earnings (loss) per share--
diluted............................. $ (0.02) $ 0.06 $ (3.17) $ 0.01
========= ========= ========= =======
Weighted average shares outstanding--
basic............................... 330.7 206.6 259.9 185.1
========= ========= ========= =======
Weighted average shares outstanding--
diluted............................. 330.7 211.6 259.9 189.0
========= ========= ========= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
C-3
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN MILLIONS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 225.4 $ 379.8
Trade accounts receivable, net........................... 293.9 58.3
Deferred income tax asset................................ 297.2 --
Prepaid expenses and other............................... 313.8 285.9
-------- --------
Total current assets................................... 1,130.3 724.0
Property and equipment, net................................ 2,043.9 614.6
Excess of cost over net assets acquired.................... 3,203.7 21.2
Other, net................................................. 456.1 38.3
-------- --------
TOTAL ASSETS........................................... $6,834.0 $1,398.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 160.4 $ 55.9
Facility costs accrued and payable....................... 276.4 8.3
Accrued expenses and other............................... 743.0 251.1
-------- --------
Total current liabilities.............................. 1,179.8 315.3
Long-term debt and capital lease obligations............... 1,387.1 630.5
Other long-term liabilities................................ 515.1 70.5
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 600.0 million
shares; 332.7 million shares and 206.6 million shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively......................... 3.3 2.1
Paid-in capital.......................................... 4,603.2 411.6
Accumulated deficit...................................... (854.5) (31.9)
-------- --------
Total stockholders' equity............................. 3,752.0 381.8
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $6,834.0 $1,398.1
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
C-4
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Net cash provided by (used in) operating activities........... $106.3 $ (60.0)
------ -------
Cash flows from investing activities:
Acquisitions and other...................................... (27.4) 9.0
Expenditures for property and equipment..................... (751.0) (205.3)
------ -------
Net cash used in investing activities..................... (778.4) (196.3)
------ -------
Cash flows from financing activities:
Proceeds from long-term debt................................ 300.0 328.0
Repayments of long-term debt................................ (25.8) (186.0)
Net short-term debt borrowings.............................. 151.9 --
Proceeds from issuance of common stock, net................. -- 319.5
Proceeds from employee stock transactions and issuance of
stock warrants............................................. 96.4 2.3
Other....................................................... (4.8) (27.7)
------ -------
Net cash provided by financing activities................. 517.7 436.1
------ -------
Net (decrease) increase in cash and cash equivalents...... (154.4) 179.8
Cash and cash equivalents, beginning of period................ 379.8 6.9
------ -------
Cash and cash equivalents, end of period...................... $225.4 $ 186.7
====== =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net................................. $ 21.8 $ 4.5
====== =======
Cash paid for taxes......................................... $ 7.9 $ 0.2
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
C-5
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BACKGROUND
Qwest Communications International Inc. and subsidiaries (the "Company" or
"Qwest") 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 September 30, 1998, the Majority Shareholder owned
approximately 52.0% of the outstanding common stock of the Company.
The Company is a facilities-based provider of a full range of multimedia
communications services to businesses, consumers and other communications
entities ("Communications Services"). In addition, the Company is constructing
and installing fiber optic systems for interexchange carriers and other
communications entities, as well as for its own use ("Construction Services").
(2) BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements as of September 30, 1998 and for the three and nine months ended
September 30, 1998 and 1997 include the accounts of the Company and all
majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. The unaudited interim condensed
consolidated financial statements reflect all adjustments, consisting of
normal recurring items, which are, in the opinion of management, necessary to
fairly present the results of the interim periods. 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. Certain prior year balances have been
reclassified to conform with 1998 presentation.
The Company has no elements of comprehensive income other than net income.
(3) ACQUISITIONS
(a) Icon Acquisition
On September 13, 1998, the Company signed a definitive merger agreement with
Icon CMT Corp. ("Icon"), a provider of integrated Internet solutions
associated with web hosting and Internet protocol integration. The terms of
the merger agreement call for the acquisition of all of Icon's outstanding
common shares and the assumption of all of Icon's stock options by the
Company. The purchase price of the all-stock transaction is anticipated to be
approximately $207.0 million, not including approximately $3.5 million of
direct acquisition costs. The merger is intended to qualify as a tax-free
reorganization and will be accounted for as a purchase. The merger is expected
to close by December 31, 1998.
The Company has also agreed to advance up to $15.0 million to Icon, with an
initial availability date of January 31, 1999, to fund working capital
requirements and for other corporate purposes. In consideration for this
commitment, Icon issued to the Company a warrant to purchase up to 750,000
shares of Icon stock at $12 per share.
Approval of the merger is subject to the affirmative vote of a majority of
the outstanding shares of Icon common stock. Icon's three founders also
entered into agreements with the Company to vote to approve the merger and to
grant the Company purchase options on their shares. The warrant and purchase
options give the Company beneficial ownership of approximately 44% of Icon's
common stock.
C-6
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) LCI Acquisition
On June 5, 1998, the Company acquired LCI International, Inc. and
subsidiaries ("LCI"), a communications services provider for approximately
$3.9 billion in Company common stock. At the close of the acquisition (the
"LCI Merger"), the Company issued approximately 129.9 million shares of the
Company's common stock (including outstanding LCI stock options assumed by the
Company), and incurred approximately $13.5 million in direct acquisition
costs. The LCI Merger was accounted for as a purchase.
In connection with the acquisition of LCI, the Company allocated $682.0
million of the purchase price to in-process research and development ("R&D")
projects, $318.0 million to developed technology, $65 million to other
intangible assets and $3,026.0 million 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. The developed technology, other
intangibles and goodwill are being amortized on a straight-line basis from 10
to 40 years.
The acquired R&D represents engineering and test activities associated with
the introduction of new services and information systems. Specifically, LCI
had been working on a variety of projects that are essential to delivering
data services, which are a significant departure in terms of technological
complexity from the Company's traditional voice products. These efforts are
related to redesigning and scaling the network infrastructure as well as
developing the requisite network management systems. These projects are time-
consuming and difficult to complete. If the R&D projects are not completed as
planned, they will neither satisfy the technical requirements of a changing
market nor be cost effective. Since these projects had not yet reached
technological feasibility and have no alternative future uses, there can be no
guarantee as to the achievability of the projects or the ascribed values.
Accordingly, these costs were expensed as of the acquisition date.
The Securities and Exchange Commission staff performed a limited review of
the Company's Form S-3 (File No. 333-58617) filed July 7, 1998, as amended on
September 30, 1998 and December 9, 1998. In connection with the limited
review, the Company has increased the allocation of purchase price to
developed technology and reduced the in-process R&D writeoff by $58 million.
In addition, the Company allocated $65 million of purchase price to other
intangible assets and recorded a corresponding reduction to goodwill. As a
result of the increases to developed technology and other intangible assets,
the Company recorded approximately $53.2 million of deferred tax liabilities
and a corresponding increase to goodwill.
The aggregate purchase price was allocated as follows (in millions):
<TABLE>
<S> <C>
Working capital, excluding deferred taxes...................... $ (352.1)
Deferred tax asset, net........................................ 144.4
Property and equipment......................................... 716.6
Goodwill....................................................... 3,026.0
R&D............................................................ 682.0
Developed technology........................................... 318.0
Other intangibles.............................................. 65.0
Long-term debt, excluding current portion...................... (462.4)
Other liabilities and assets, net.............................. (207.0)
---------
$ 3,930.5
---------
</TABLE>
LCI's results of operations have been included in the accompanying condensed
consolidated statements of operations of the Company from the date of
acquisition. The Company 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 purchase price
will not differ materially from the preliminary allocation.
C-7
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) EUnet Acquisition
On April 14, 1998, the Company acquired EUnet International Limited
("EUnet"), a European Internet service provider with subsidiaries in 14
countries, for approximately $158.2 million. Certain EUnet stockholders and
option holders received approximately 3.6 million shares of Company common
stock, having a value of approximately $135.3 million, and $4.2 million in
cash. Direct costs of the acquisition were approximately $3.5 million.
Approximately 0.6 million shares were placed in escrow for two years and may
be recovered by the Company to satisfy any indemnification claims. At the
expiration of the escrow period, these shares revert to the EUnet
stockholders. In addition, the Company committed to purchase certain
preference shares for $15.2 million. The Company will issue additional shares
of Company common stock or cash to fulfill this purchase commitment. The EUnet
acquisition was accounted for as a purchase.
The Company allocated $68.0 million of the purchase price to incomplete R&D
projects. These projects include the design and development of several new
value-added internet services as well as the development of the necessary
customer care and network management systems. Remaining development efforts
for these projects include various phases of design, development and testing
efforts that are expected to be completed in stages over the next 21 months.
Since these projects had not yet reached technological feasibility and have no
alternative future uses, there can be no guarantee as to the achievability of
the projects or the ascribed values. Accordingly, these costs were expensed as
of the acquisition date. The remaining intangibles from the purchase relate to
developed technology and goodwill and are being amortized on a straight-line
basis over five years and ten years, respectively.
The aggregate purchase price was allocated as follows (in millions):
<TABLE>
<S> <C>
Working capital.................................................. $ (5.1)
Property and equipment........................................... 10.7
Deferred tax liability........................................... (50.3)
R&D.............................................................. 68.0
Developed technology............................................. 7.0
Goodwill......................................................... 127.6
Other............................................................ 0.3
-------
$ 158.2
-------
</TABLE>
The results of operations of EUnet have been included in the accompanying
condensed consolidated statements of operations of the Company from the date
of acquisition. The accompanying condensed consolidated financial statements
reflect the preliminary allocation of purchase price which is subject to
adjustment.
(d) Phoenix Transaction
On March 30, 1998, the Company acquired Phoenix Network, Inc. ("Phoenix"), a
non-facilities-based reseller of long distance services. Approximately 0.8
million shares of the Company common stock having a value of approximately
$27.2 million were exchanged for the outstanding shares of Phoenix. The
results of operations of Phoenix have been included in the accompanying
condensed consolidated statements of operations of the Company from the date
of acquisition. The Phoenix acquisition was accounted for as a purchase.
C-8
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate purchase price was allocated as follows (in millions):
<TABLE>
<S> <C>
Working capital................................................. $ (16.5)
Property and equipment.......................................... 2.9
Goodwill........................................................ 53.8
Other liabilities............................................... (13.0)
-------
$ 27.2
=======
</TABLE>
(e) Pro Forma Results
The following pro forma operating results of the Company, LCI, Phoenix and
EUnet for the nine months ended September 30, 1998 and 1997 have been prepared
assuming these acquisitions occurred on January 1, 1998 and 1997,
respectively. On a pro forma basis for the nine months ended September 30,
1998 and 1997, revenue was $2,158.8 million and $1,790.8 million,
respectively, and net loss was $824.4 million, or ($2.52) per basic and
diluted share, and $806.3 million, or ($2.49) per basic and diluted share,
respectively. The pro forma results do not purport to represent what the
Company's results of operations would have actually been had the above
transactions occurred on the dates indicated and are not indicative of future
results.
(4) ACCOUNTS RECEIVABLE SECURITIZATION
As of September 30, 1998, the Company, through its wholly-owned subsidiary,
LCI, maintained an agreement to sell a percentage ownership interest in a
defined pool of trade accounts receivable (the "Securitization Program").
Under the Securitization Program, LCI SPC I, Inc. ("SPC"), a single purpose
subsidiary of the Company, sells accounts receivable. Receivables sold are not
included in the accompanying condensed consolidated balance sheet as of
September 30, 1998. SPC had approximately $150.0 million of accounts
receivable available for sale and had sold a total of approximately $125.0
million as of September 30, 1998. The Company retains substantially the same
risk of credit loss as if the receivables had not been sold, and has
established reserves for such estimated credit losses.
In October 1998, the Company funded the reacquisition of the ownership
interest in the $125.0 million pool of trade accounts receivable that were
sold under the Securitization Program through short-term debt borrowings and
available cash balances.
(5) CONSTRUCTION SERVICES
Costs and billings on uncompleted contracts included in the accompanying
condensed consolidated financial statements were as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Costs incurred on uncompleted contracts........ $ 791.9 $ 473.8
Estimated earnings............................. 411.4 238.2
-------- -------
1,203.3 712.0
Less: billings to date......................... 941.2 476.8
-------- -------
Costs and estimated earnings in excess of
billings, net................................. $ 262.1 $ 235.2
======== =======
Revenue the Company expects to realize for work
to be performed on the above uncompleted
contracts..................................... $ 268.9 $ 506.8
======== =======
</TABLE>
C-9
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has entered into various agreements to provide indefeasible
rights of use of multiple fibers along the Qwest Network, an approximately
18,450 route-mile, coast-to-coast, technologically advanced fiber optic
communications network. Such agreements include contracts with three major
customers for an aggregate purchase price of approximately $1.0 billion.
Construction Services revenue relating to the contracts with these major
customers was approximately $75.1 million and $136.2 million for the three
months ended September 30, 1998 and 1997, respectively, and $286.8 million and
$374.0 million for the nine months ended September 30, 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.
(6) LONG-TERM DEBT
LONG-TERM DEBT CONSISTED OF THE FOLLOWING (IN MILLIONS):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
8.29% Notes..................................... $ 316.9 $ --
9.47% Notes..................................... 382.6 356.9
10 7/8% Notes................................... 250.0 250.0
7.25% Notes..................................... 351.7 --
Credit facility and lines of credit............. 232.5 --
Equipment credit facility....................... 57.3 22.6
Capital lease and other obligations............. 32.0 13.0
-------- -------
Total debt...................................... 1,623.0 642.5
Less current portion............................ (235.9) (12.0)
-------- -------
Long-term debt.................................. $1,387.1 $ 630.5
======== =======
</TABLE>
Current portion of long-term debt is included in accrued expenses and other
in the accompanying condensed consolidated balance sheets.
In January 1998, the Company issued $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. Interest on the 8.29% Notes is 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 July 1998, the Company completed an exchange of the 8.29% Series B Senior
Discount Notes (the "8.29% Exchange Notes"), registered under the Securities
Act of 1933, as amended ("the Act"), for all of the $450.5 million in
principal amount at maturity of the 8.29% Notes. The 8.29% Exchange Notes are
identical in all material respects to the originally issued 8.29% Notes.
C-10
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the LCI Merger, the Company assumed LCI's existing debt
instruments, including $350.0 million of 7.25% Senior Notes, due 2007 (the
"7.25% Notes"); a $250.0 million revolving credit facility ("Credit Facility")
from a syndicate of banks; and three separate discretionary line of credit
agreements (the "Lines of Credit") with commercial banks for up to a total of
$75.0 million.
The Credit Facility bears interest at a rate consisting of two components:
the base rate component is dependent upon a market indicator; the second
component varies from 0.30% to 0.75%, based on the more favorable of the
relationship of borrowing levels to operating cash flow (the "leverage ratio")
or the senior unsecured debt rating. As of September 30, 1998, the Company had
$215.0 million outstanding under the Credit Facility at an annual interest
rate of 6.0%. The Credit Facility contains various financial covenants, the
most restrictive being the leverage ratio requirement and the restriction on
the ability of the Company and its subsidiaries to pay dividends. As of
September 30, 1998, the Company was in compliance with all Credit Facility
covenants. The Credit Facility expires December 31, 1998 and is therefore
included in current liabilities in the accompanying condensed consolidated
balance sheet as of September 30, 1998. In November 1998, the outstanding
balance under the Credit Facility was repaid.
As of September 30, 1998, $17.5 million was outstanding on the Lines of
Credit at an interest rate of 6.3%. The Lines of Credit are short-term in
nature and are therefore included in current liabilities in the accompanying
condensed consolidated balance sheet as of September 30, 1998. In November
1998, the outstanding balance under the Lines of Credit was repaid.
In October 1998, the Company entered into a $67.0 million short-term demand
note with a bank to partially fund the reacquisition of the ownership interest
in the $125.0 million pool of trade accounts receivable that were sold under
the Securitization Program (see Note 4). The annual interest rate of the
demand note was 6.1% as of October 31, 1998. In November 1998, the outstanding
balance under the demand note was repaid.
In November 1998, the Company issued and sold $750.0 million in principal
amount of 7.50 % Senior Notes, due 2008 (the "7.50% Notes"), generating net
proceeds of approximately $741.0 million, after deducting offering costs.
Interest on the 7.50% Notes is payable semiannually in arrears on May 1 and
November 1 of each year, commencing May 1, 1999. The 7.50% Notes are subject
to redemption at the option of the Company, in whole or in part, at any time
at specified redemption prices.
In connection with the sale of the 7.50% Notes, the Company agreed to make
an offer to exchange new notes, registered under the Securities Act of 1933,
as amended (the "Securities Act"), and with terms identical in all material
respects to the 7.50% Notes, for the 7.50% Notes or, alternatively, to file a
shelf registration statement under the Securities Act with respect to the
7.50% Notes. If the registration statement for the exchange offer or the shelf
registration statement, as applicable, is not declared effective within
specified time periods or, after being declared effective, ceases to be
effective or usable for resale of the 7.50% Notes during specified time
periods (each a "Registration Default"), additional cash interest will accrue
at a rate per annum equal to 0.50% of the principal amount of the 7.50% 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 of the 7.50% 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.
On November 5, 1998, the Company executed a commitment letter with its three
lead banks to syndicate an unsecured, $500.0 million to $750.0 million credit
facility. Each of the lead banks has agreed to commit up to $100.0 million,
with a minimum aggregate commitment of $250.0 million. The new credit facility
would be structured to include a $250.0 million 364-day revolving credit
facility, with the balance as a five-year revolving credit facility. The 364-
day facility would be extendable for an additional 364 days on the lenders'
approval or convertible at the Company's option to a term loan terminating at
the same time as the five-year facility.
C-11
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowings under the new credit facility would bear interest at a variable
rate based on LIBOR plus an applicable margin. Consummation of the new credit
facility is conditioned, among other things, on the execution of a mutually
satisfactory credit agreement. The Company and the three lead banks are
working toward a December 1998 closing, but there can be no assurance that the
new credit facility will be in place before the Credit Facility expires.
(7) INCOME TAXES
Effective with the LCI Merger, Qwest is no longer included in the
consolidated federal income tax return of its Majority Shareholder. As a
result, the tax sharing agreement with the Majority Shareholder is no longer
effective for activity after June 5, 1998. The Company is still subject to the
provisions of the tax sharing agreement for activity through June 5, 1998.
The Company's effective tax rate for the three and nine months ended
September 30, 1998 and 1997, differed from the statutory income tax rate as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Federal tax at statutory rate...... 35.0% 35.0% (35.0)% 35.0%
State taxes (net of federal
effect)........................... 5.0% -- (5.0)% 2.4%
In-process R&D..................... -- -- 35.8 % --
Goodwill and other non-deductible
expenses.......................... 179.0% -- 2.0 % 1.0%
Growth share plan.................. -- -- -- 8.7%
Other, net......................... -- 0.6% 0.5 % 1.8%
--------- -------- --------- --------
Effective tax rate................. 219.0% 35.6% (1.79%) 48.9%
========= ======== ========= ========
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
(a) Network Construction Project and Capital Requirements
In 1996, the Company commenced construction of the Qwest Network. The
Company estimates the total cost to construct and activate the Qwest Network
(which now includes the LCI network) and complete construction of the dark
fiber sold to customers will be approximately $2.3 billion. The Company
projects its total remaining cost as of September 30, 1998 for completing the
construction of the Qwest Network will be approximately $800.0 million.
(b) Network and Telecommunications Capacity Exchanges
From time to time, the Company enters into agreements to acquire long-term
telecommunications capacity rights from unrelated third parties in exchange
for long-term telecommunications capacity rights along segments of the Qwest
Network under construction. In general, the exchange agreements provide 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. The exchange agreements provide for liquidated
damages to be levied against the Company in the event the Company fails to
deliver the telecommunications capacity, in accordance with the agreed-upon
timetables.
(c) Long-term Capacity Agreements
From time to time, the Company enters into long-term agreements to sell
capacity on the Qwest Network to third parties. These agreements generally
call for the Company to provide the third party the use of a circuit
C-12
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on the Qwest Network at varying capacity levels for a period of time ranging
up to 25 years. The agreements may or may not include maintenance fees paid to
the Company.
(d) Vendor Agreements
The Company has agreements with certain telecommunications interexchange
carriers and third party vendors that require the Company to maintain minimum
monthly and/or annual billings based on usage. The Company has historically
met all minimum billing requirements and believes the minimum usage
commitments will continue to be met.
(e) Legal Matters
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has adequate accrued loss contingencies and, that although the
ultimate outcome of these claims cannot be ascertained at this time, current
pending or threatened litigation matters are not expected to have a material
adverse impact on the Company's results of operations or financial position.
(9) NET EARNINGS (LOSS) PER SHARE
The following are computations of the basic and diluted earnings per share
(in millions, except per share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net earnings (loss).................. $ (6.9) $ 12.8 $(822.6) $ 2.3
========= ========= ========= ========
Shares:
Weighted average number of shares
outstanding during
the period for computing basic earn-
ings per share...................... 330.7 206.6 259.9 185.1
Incremental common shares attribut-
able to dilutive securities:
Common shares issuable for war-
rants............................. -- 2.0 -- 0.7
Common shares issuable under stock
option plan....................... -- 2.4 -- 0.8
Common shares issuable for out-
standing growth shares............ -- 0.6 -- 2.4
Number of shares as adjusted for pur-
poses of computing diluted earnings
per share........................... 330.7 211.6 259.9 189.0
========= ========= ========= ========
Net earnings (loss) per share-ba-
sic............................... $(0.02) $0.06 $(3.17) $0.01
========= ========= ========= ========
Net earnings (loss) per share-di-
luted............................. $(0.02) $0.06 $(3.17) $0.01
========= ========= ========= ========
</TABLE>
C-13
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
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 or refers to forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended, that include, among others, (1) statements by Qwest
concerning the benefits expected to result from certain business activities
and transactions, 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 Company after the closing of such
transactions, (2) the Company'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 Company of
expectations, beliefs, future plans and strategies, anticipated developments
and other matters that are not historical facts. The Company 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, in documents filed with the Securities and Exchange
Commission (the "Commission"). The most important factors that could prevent
the Company from achieving its stated goals include, but are not limited to:
(a) failure by the Company to construct the Qwest Network on schedule and on
budget, (b) operating and financial risks related to managing rapid growth,
integrating acquired businesses and maintaining sufficient cash flow to meet
its debt service requirements, make capital expenditures and fund operations,
(c) intense competition in the Company's Communcations Services market, (d)
the Company'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 Company. These cautionary
statements should be considered in connection with any subsequent written or
oral forward-looking statements that may be issued by the Company or persons
acting on its behalf. The Company 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.
OVERVIEW
The Company is a facilities-based provider of a full range of multimedia
communications services to businesses, consumers and other communications
entities ("Communications Services"). In addition, the Company is constructing
and installing fiber optic systems for interexchange carriers and other
communications entities, as well as for its own use ("Construction Services").
The Company expects to complete its domestic voice and data network 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 to Mexico and Europe.
Completion of the Mexico network is scheduled for early 1999. The network
expansion into Europe includes capacity on three undersea submarine systems.
The transatlantic capacity includes eight STM-1s (the European equivalent to
SONET OC-3) from New York City to London and other European destinations.
In August 1998, the Company announced its participation in a consortium of
communications companies that is building a submarine cable system connecting
the United States to Japan. Scheduled for completion by the second quarter of
2000, the 13,125-mile four-fiber pair cable will ultimately possess the
capability to transmit information at the rate of 640 gigabits per second.
C-14
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
In September 1998, the Company announced that in November 1998 it planned to
make available for use the nation's first OC-48 native IP network along the
Qwest Network. Along this OC-48 network, the Company will offer high-speed
dedicated Internet access, web hosting, IP-based virtual private network
services and expanded availability of voice over IP long distance services.
Additionally, the Company's European subsidiary, EUnet International Limited
("EUnet), will provide the first pan-European Internet broadcasting network.
The new services will allow customers in Europe to broadcast video, data and
voice globally.
Communications Services. Communications Services consists of retail and
wholesale services. The Company's retail services include voice, data and
video services to business and residential customers. 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. The Company's wholesale services provides
high-volume and conventional private line services over the Company's owned
capacity and switched services over owned and leased capacity to other
communications providers. In addition to traditional communications carriers,
the Company is marketing to Internet service providers, electric utility
companies and other data service companies.
Construction Services. Construction Services constructs and installs fiber
optic systems for other communications 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. The Company has entered into major construction contracts for
the sale of dark fiber to Frontier, MCI WorldCom and GTE whereby the Company
has agreed to install and provide dark fiber to each along portions of the
Qwest Network. In addition to these contracts, the Company has signed
agreements with other communications providers for the sale of dark fiber
along the Qwest Network. Revenue from Construction Services generally is
recognized under the percentage of completion method as performance milestones
relating to the contract are satisfactorily completed. After completion of the
Qwest Network in 1999, the Company expects that revenue from Construction
Services will be less significant to the Company's operations.
Icon Acquisition. On September 13, 1998, the Company signed a definitive
merger agreement with Icon CMT Corp. ("Icon"), a provider of integrated
Internet solutions associated with web hosting and IP integration. The terms
of the merger agreement call for the acquisition of all of Icon's outstanding
common shares and the assumption of all of Icon's stock options by the
Company. The purchase price of the all-stock transaction is anticipated to be
approximately $207.0 million, not including approximately $3.5 million of
direct acquisition costs. The merger is intended to qualify as a tax-free
reorganization and will be accounted for as a purchase. The merger is expected
to close by December 31, 1998.
The Company has also agreed to advance up to $15.0 million to Icon, with an
initial availability date of January 31, 1999, to fund working capital
requirements and for other corporate purposes. In consideration for this
commitment, Icon issued to the Company a warrant to purchase up to 750,000
shares of Icon stock at $12 per share.
Approval of the merger is subject to the affirmative vote of a majority of
the outstanding shares of Icon common stock. Icon's three founders also
entered into agreements with the Company to vote to approve the merger and to
grant the Company purchase options on their shares. The warrant and purchase
options give the Company beneficial ownership of approximately 44% of Icon's
common stock.
LCI Acquisition. On June 5, 1998, the Company acquired LCI International,
Inc. and subsidiaries ("LCI"), a communications services provider, for
approximately $3.9 billion in Company common stock. At the close of the
acquisition (the "LCI Merger"), the Company issued approximately 129.9 million
shares of the Company's common stock (including outstanding LCI stock options
assumed by the Company), and incurred approximately $13.5 million in direct
acquisition costs. The LCI Merger was accounted for as a purchase.
C-15
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
In connection with the acquisition of LCI, the Company allocated $682.0
million of the purchase price to in-process research and development ("R&D")
projects, $318.0 million to developed technology, $65 million to other
intangible assets and $3,026.0 million 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. The developed technology, other
intangibles and goodwill are being amortized on a straight-line basis from 10
to 40 years (See further discussion of the LCI Merger in RESULTS OF
OPERATIONS).
LCI's results of operations have been included in the accompanying condensed
consolidated statements of operations of the Company from the date of
acquisition. The Company 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 purchase price
will not differ materially from the preliminary allocation.
EUnet Acquisition. On April 14, 1998, the Company acquired EUnet, a European
internet service provider with subsidiaries in 14 countries, for approximately
$158.2 million. Certain EUnet stockholders and option holders received
approximately 3.6 million shares of Company common stock, having a value of
approximately $135.3 million, and $4.2 million in cash. Direct costs of
acquisition were approximately $3.5 million. Approximately 0.6 million shares
were placed in escrow for two years and may be recovered by the Company to
satisfy any indemnification claims. At the expiration of the escrow period,
these shares revert to the EUnet stockholders. In addition, the Company
committed to purchase certain preference shares for $15.2 million. The Company
will issue additional shares of Company common stock or cash to fulfill this
purchase commitment. The EUnet acquisition was accounted for as a purchase.
The Company allocated $68.0 million of the purchase price to incomplete R&D
projects. These projects include the design and development of several new
value-added internet services as well as the development of the necessary
customer care and network management systems. Remaining development efforts
for these projects include various phases of design, development and testing
efforts that are expected to be completed in stages over the next 21 months.
Since these projects had not yet reached technological feasibility and have no
alternative future uses, there can be no guarantee as to the achievability of
the projects or the ascribed values. Accordingly, these costs were expensed as
of the acquisition date. The remaining intangibles from the purchase relate to
developed technology and goodwill and are being amortized on a straight-line
basis over five years and ten years, respectively.
The results of operations of EUnet have been included in the accompanying
condensed consolidated statements of operations of the Company from the date
of acquisition. The accompanying condensed consolidated financial statements
reflect the preliminary allocation of purchase price which is subject to
adjustment.
Phoenix Transaction. On March 30, 1998, the Company acquired Phoenix
Network, Inc. ("Phoenix"), a non-facilities-based reseller of long distance
services. Approximately 0.8 million shares of the Company common stock having
a value of approximately $27.2 million were exchanged for the outstanding
shares of Phoenix. The results of operations of Phoenix have been included in
the accompanying condensed consolidated statements of operations of the
Company from the date of acquisition. The Phoenix acquisition was accounted
for as a purchase.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
The Company reported a net loss of $6.9 million for the three months ended
September 30, 1998, compared to net earnings of $12.8 million for the same
period of the prior year. For the nine months ended September 30,
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
1998, the Company reported a net loss of $822.6 million compared to net earnings
of $2.3 million for the nine months ended September 30, 1997. The increase in
the net loss for the three-and nine-month periods as compared to the same
periods in the prior year was primarily due to the factors discussed below. For
the comparative periods presented, the Company's results of operations include
the acquisitions of: SuperNet, Inc. from October 1997; Phoenix from March 1998;
EUnet from April 1998; and LCI from June 1998. Excluding the effect of the
merger related costs and the write-off of in-process R&D costs related to the
LCI and EUnet acquisitions, the Company's reported net loss would have been
$30.9 million for the nine months ended September 30, 1998 compared to net
earnings of $2.3 million for the same period of the prior year.
The following pro forma operating results of the Company, LCI, Phoenix and
EUnet for the nine months ended September 30, 1998 and 1997 have been prepared
assuming these acquisitions occurred on January 1, 1998 and 1997,
respectively. On a pro forma basis for the nine months ended September 30,
1998 and 1997, revenue was $2,158.8 million and $1,790.8 million,
respectively, and net loss was $824.4 million, or ($2.52) per basic and
diluted share, and $806.3 million, or ($2.49) per basic and diluted share,
respectively.
Revenue. Selected components of revenue for the three and nine months ended
September 30, 1998 and 1997, were as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1998 1997 INCREASE 1998 1997 INCREASE
------ ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Communications services......... $601.8 $ 32.5 $569.3 $ 884.2 $ 77.1 $807.1
Construction services........... 205.0 156.5 48.5 493.4 413.2 80.2
------ ------ ------ -------- ------ ------
Total revenue................. $806.8 $189.0 $617.8 $1,377.6 $490.3 $887.3
====== ====== ====== ======== ====== ======
</TABLE>
During the three and nine months ended September 30, 1998, as compared to
the same periods in the prior year, Communications Services revenue increased
due to the addition of revenue from the acquisitions discussed above. If the
anticipated acquisition of Icon is consummated, the Company expects
Communications Services revenue to grow. Additionally, excluding acquisitions,
revenue increased due to growth in retail and data services.
During the three and nine months ended September 30, 1998, as compared to
the same periods in the prior year, Construction Services revenue increased
primarily due to additional dark fiber sales to other carriers.
Operating Expenses. Selected components of operating expenses for the three
and nine months ended September 30, 1998 and 1997, were as follows (in
millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
1998 1997 INCREASE 1998 1997 INCREASE
------ ------ -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Access and network
operations................... $371.6 $ 25.0 $346.6 $ 556.1 $ 61.8 $ 494.3
Construction services......... 128.2 107.5 20.7 333.8 292.0 41.8
Selling, general and
administrative............... 189.4 31.4 158.0 341.5 123.2 218.3
Depreciation and
amortization................. 79.9 5.1 74.8 120.0 13.1 106.9
Merger related costs.......... -- -- -- 812.5 -- 812.5
------ ------ ------ -------- ------ --------
Total operating expenses.... $769.1 $169.0 $600.1 $2,163.9 $490.1 $1,673.8
====== ====== ====== ======== ====== ========
</TABLE>
Expenses for access and network operations primarily consist of the cost of
operation of the Qwest Network, Local Exchange Carrier ("LEC") access charges
and the cost of leased capacity. The increase in access and network operations
for both the three and nine months ended September 30, 1998 was primarily
attributable to growth in revenue from acquisitions, as well as internally
generated growth in Communications Services revenue. As the Qwest Network is
completed and activated, the Company is able to serve more customer needs over
its own network.
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
Expenses for 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 construction services
increased for the three and nine months ended September 30, 1998 as compared
to the same periods in the prior year due to additional contracts that were
signed during 1998.
Selling, general and administrative ("SG&A") expense includes the cost of
salaries, benefits, occupancy costs, commissions, sales and marketing expenses
and administrative expenses. The increase in SG&A for the three and nine
months ended September 30, 1998 was primarily due to the addition of SG&A
expenses related to acquired entities, increased sales and marketing efforts,
new service offerings, administrative and information services supporting the
Company's growth, increased payroll from the recruiting and hiring of
additional personnel, increased commissions expense related to the growth in
Communications Services revenue, and increased property taxes and maintenance
costs related to the increase of fixed assets along the Qwest Network. During
the three and nine months ended September 30, 1998, as compared to the same
periods in the prior year, the Company experienced increases in the number of
employees from acquisitions and the expansion of the sales and customer
support infrastructure from approximately 1,290 employees at September 30,
1997 to approximately 6,900 employees at September 30, 1998. The increases in
SG&A were partially offset by a decrease in Growth Share Plan expense. 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 for the three and nine months ended
September 30, 1998 was $2.3 million and $7.1 million, respectively, compared
to $4.1 million and $69.3 million for the three and nine months ended
September 30, 1997, respectively. Growth Share Plan expense is not expected to
be material to the operations of the Company in the future. SG&A is expected
to increase in the short term as the Company continues to grow, as segments of
the Qwest Network become operational and as the Company continues the
expansion of its Communications Services business.
The Company's depreciation and amortization expense increased primarily due
to activating segments of the Qwest Network during the three and nine months
ended September 30, 1998, purchases of fixed assets to accommodate the
Company's growth and depreciation and amortization of fixed assets and
goodwill related to the Company's acquisitions. 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.
During the nine months ended September 30, 1998, the Company recorded $62.5
million in merger-related costs due to the merger with LCI, including $31.0
million of duplicate facilities, $25.0 million of channel consolidation and
duplicate commitments and $6.5 million of other miscellaneous merger costs.
In connection with the acquisition of LCI, the Company allocated $682.0
million of the purchase price to in-process R&D projects, $318.0 million to
developed technology, $65 million to other intangible assets and $3,026.0
million to goodwill. The developed technology, other intangibles and goodwill
are being amortized on a straight-line basis from 10 to 40 years. 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, the Company 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 Internet Protocol technologies; and
(3) new operational systems and tools. Taken together, these projects, if
successful, will enable the Company to
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
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:
. 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, the Company
believes that 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.
. 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, the Company believes the overall project was
approximately 60% to 70% complete as of the LCI transaction date.
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.
. 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, the Company 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 the Company expects to begin generating the economic benefits from
the technologies. At the time of valuation, the costs incurred and the
expected costs to complete all such projects were approximately $50 million
and $60 million, respectively.
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.
The Company estimates total revenues from the specific acquired in-process
technology peak in 2003 and steadily decline from 2004 through 2009 as other
new product and service technologies are expected to be introduced by the
company. 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 the LCI's overall weighted average cost of
capital. Intangible assets are
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
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.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the merger. The Company 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.
The Company expects to continue their support of these efforts and believes
the Company has a reasonable chance of successfully completing the R&D
programs. However, risk is associated with the completion of the projects and
the Company 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 the Company may be adversely affected in future periods. The
failure of any particular individual project in-process would not materially
impact the Company'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 the Company's control,
such as trends in technology, government regulations, market size and growth,
and product introduction or other actions by competitors.
The Securities and Exchange Commission staff performed a limited review of
the Company's Form S-3 (File No. 331-58617), filed July 7, 1998, as amended on
September 30, 1998 and December 9, 1998. In connection with the limited
review, the Company has increased the allocation of purchase price to
developed technology and reduced the in-process R&D writeoff by $68 million.
In addition, the Company allocated $65 million of purchase price to other
intangible assets and recorded a corresponding reduction to goodwill. As a
result of the increases to developed technology and other intangible assets,
the Company recorded approximately $53.2 million of deferred tax liabilities
and a corresponding increase to goodwill.
Other (Income) Expense. Selected components of other (income) expense for
the three and nine months ended September 30, 1998 and 1997, were as follows
(in millions):
<TABLE>
<CAPTION>
THREE
MONTHS NINE MONTHS
1998 1997 INCREASE 1998 1997 INCREASE
----- ---- -------- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Interest expense, net............. $29.0 $4.2 $24.8 $62.3 $ 8.9 $53.4
Other (income) expense, net....... 2.9 (4.0) 6.9 (11.6) (13.2) 1.6
----- ---- ----- ----- ------ -----
Total other (income) expense...... $31.9 $0.2 $31.7 $50.7 $ (4.3) $55.0
===== ==== ===== ===== ====== =====
</TABLE>
The increase in interest expense, net during the three and nine months ended
September 30, 1998, as compared to the same period in the prior year, resulted
from an increase in long-term indebtedness, (see "Liquidity and Capital
Resources" below), partially offset by an increase in capitalized interest
resulting from
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
construction of the Qwest Network. As the Qwest Network is completed, interest
expense will increase as the amount of capitalized interest decreases. Other
(income) expense, net, increased due primarily to decreases in interest income
due to lower average cash balances and a loss recorded for the write-off of
certain assets during the three and nine months ended September 30, 1998.
Additionally, in the first half of 1997, the Company recorded a $9.3 million
gain on sale of contract rights.
Income Taxes. Effective with the LCI Merger, Qwest is no longer included in
the consolidated federal income tax return of its Majority Shareholder. As a
result, the tax sharing agreement with the Majority Shareholder is no longer
effective for activity after June 5, 1998. The Company is still subject to the
provisions of the tax sharing agreement for activity through June 5, 1998.
The Company's effective tax rate for the three and nine months ended
September 30, 1998, differed from the statutory income tax rate primarily as a
result of the nondeductibility of R&D write-offs and acquisition-related
goodwill. The effective tax rate for the nine months ended September 30, 1997,
differred from the statutory rate primarily as a result of the
nondeductibility of a portion of growth share expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $106.3 million during the nine months ended
September 30, 1998. Cash used in investing activities was $778.4 million
during the nine months ended September 30, 1998, including $751.0 million to
fund capital expenditures. Cash provided by financing activities was $517.7
million during the nine months ended September 30, 1998, including total debt
borrowings of $451.9 million.
The Company estimates the total cost to construct and activate the Qwest
Network and complete construction of dark fiber sold to third parties will be
approximately $2.3 billion. Of this amount, the Company had already expended
approximately $1.5 billion as of September 30, 1998.
The Company has obtained the following sources of funds which are available
to complete the build-out: (i) approximately $1.4 billion under the Frontier,
WorldCom and GTE contracts and additional smaller construction contracts for
sales of dark fiber, of which approximately $900.0 million had already been
received and $500.0 million remained to be received at September 30, 1998;
(ii) $90.0 million of vendor financing, with approximately $57.3 million
outstanding as of September 30, 1998; and (iii) approximately $1.1 billion
from various debt and equity financings, with approximately $949.5 million of
such debt outstanding as of September 30, 1998. The Company believes that its
available cash and cash equivalent balances at September 30, 1998, cash flow
from operations, proceeds from the November 1998, 7.50% senior notes offering
(described below) and its proposed bank financings (described below) will
satisfy its currently anticipated cash requirements at least for the next 12
months.
In connection with the LCI Merger, the Company assumed LCI's existing debt
instruments, including $350.0 million of 7.25% Senior Notes, due 2007 (the
"7.25% Notes"); a $250.0 million revolving credit facility ("Credit Facility")
from a syndicate of banks; and three separate discretionary line of credit
agreements (the "Lines of Credit") with commercial banks for up to a total of
$75.0 million.
The Credit Facility bears interest at a rate consisting of two components:
the base rate component is dependent upon a market indicator; the second
component varies from 0.30% to 0.75%, based on the more favorable of the
relationship of borrowings levels to operating cash flow (the "leverage
ratio") or senior unsecured debt rating. As of September 30, 1998, the Company
had $215.0 million outstanding under the Credit Facility. The Credit Facility
contains various financial covenants, the most restrictive being the leverage
ratio requirement and the restriction on the ability of the Company and its
subsidiaries to pay dividends. As of September 30, 1998, the Company was in
compliance with all Credit Facility covenants. The Credit Facility
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
expires December 31, 1998 and is therefore included in current liabilities in
the accompanying condensed consolidated balance sheet as of September 30,
1998. In November 1998, the outstanding balance under the Credit Facility was
repaid.
As of September 30, 1998, $17.5 million was outstanding on the Lines of
Credit. The Lines of Credit are short-term in nature and are therefore
included in current liabilities in the accompanying condensed consolidated
balance sheet as of September 30, 1998. In November 1998, the outstanding
balance under the Lines of Credit was repaid.
As of September 30, 1998, the Company, through its wholly-owned subsidiary,
LCI, maintained an agreement to sell a percentage ownership interest in a
defined pool of trade accounts receivable (the "Securitization Program"). The
Company can transfer an undivided interest in the trade accounts receivable on
an ongoing basis to maintain the participation interest up to $150.0 million.
As of September 30, 1998, the Company had approximately $150.0 million of
accounts receivable available for sale and had sold a total of approximately
$125.0 million. The Company retains substantially the same risk of credit loss
as if the receivables had not been sold, and has established reserves for such
estimated credit losses.
In October 1998, the Company funded the reacquisition of the ownership
interest in the $125.0 million pool of trade accounts receivable that were
sold under the Securitization Program through short-term debt borrowings and
available cash balances.
In November 1998, the Company issued and sold $750.0 million in principal
amount of 7.50 % Senior Notes, due 2008 (the "7.50% Notes"), generating net
proceeds of approximately $741.0 million, after deducting offering costs.
Interest on the 7.50% Notes is payable semiannually in arrears on May 1 and
November 1 of each year, commencing May 1, 1999. The 7.50% Notes are subject
to redemption at the option of the Company, in whole or in part, at any time
at specified redemption prices.
In connection with the sale of the 7.50% Notes, the Company agreed to make
an offer to exchange new notes, registered under the Securities Act and with
terms identical in all material respects to the 7.50% Notes, for the 7.50%
Notes or, alternatively, to file a shelf registration statement under the
Securities Act with respect to the 7.50% Notes. If the registration statement
for the exchange offer or the shelf registration statement, as applicable, is
not declared effective within specified time periods or, after being declared
effective, ceases to be effective or usable for resale of the 7.50% Notes
during specified time periods (each a "Registration Default"), additional cash
interest will accrue at a rate per annum equal to 0.50% of the principal
amount of the 7.50% 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 of the 7.50% 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.
On November 5, 1998, the Company executed a commitment letter with its three
lead banks to syndicate an unsecured, $500.0 million to $750.0 million credit
facility. Each of the lead banks has agreed to commit up to $100.0 million,
with a minimum aggregate commitment of $250.0 million. The new credit facility
would be structured to include a $250.0 million 364-day revolving credit
facility, with the balance as a five-year revolving credit facility. The 364-
day facility would be extendable for an additional 364 days on the lenders'
approval or convertible at the Company's option to a term loan terminating at
the same time as the five-year facility. Borrowings under the new credit
facility would bear interest at a variable rate based on LIBOR plus an
applicable margin. Consummation of the new credit facility is conditioned,
among other things, on the execution of a mutually satisfactory credit
agreement. The Company and the three lead banks are working toward a December
1998 closing, but there can be no assurance that the new credit facility will
be in place before the Credit Facility expires.
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
YEAR 2000
Many existing computer systems, including hardware and software, use only
the last two digits to identify a year. Consequently, as the year 2000
approaches, such systems will not recognize the difference in a year that
begins with "20" rather than "19". As a result of the date change in the year
2000, if any of the Company's computer systems use only two digits to define
the year, these defective systems may cause disruptions in its network
operations through which the Company provides communications services to its
customers and in its internal operations. Additionally, the Company is
dependent upon outside sources to provide communications services to its
customers and to bill its customers for such services. The greatest risk to
the Company's ability to provide communications services is the failure of
third-party service providers to be year 2000 compliant, especially those
third-party service providers that provide local access and certain of the
billing systems upon which the provision of long distance telecommunications
service relies.
The Company has established a year 2000 compliance group. The objective of
the year 2000 compliance group is to eliminate disruptions as a result of the
date change in the year 2000. The compliance group has developed a five-step
plan to identify and repair year 2000 affected systems: (i) identify
potentially date-sensitive systems, including third-party products; (ii)
assess such systems for year 2000 compliance; (iii) modify, upgrade or replace
non-compliant systems; (iv) test the corrected systems; and (v) deploy the
corrected systems.
The year 2000 compliance group has focused mainly on the Company's domestic
operations and, to a lesser extent, on its international operations.
In addition to reviewing its own systems, the year 2000 compliance group is
submitting requests to third-party service providers to obtain information as
to their compliance efforts.
The Company currently anticipates that remediation of the systems supporting
the domestic operations will be completed by December 31, 1998. Testing and
deployment of corrected systems is scheduled for completion by June 30, 1999.
The Company's ability to meet these target dates depends on third parties for
operational testing, as well as the Company's overall efforts to integrate the
operations of recently acquired businesses, including LCI. Thus, various
factors, including the compliance efforts of third parties, over which the
Company has no control, may affect these target dates.
The Company is developing contingency plans in the event that the Company or
any of its third-party service providers fail to be year 2000 compliant. The
contingency plans are expected to be completed by June 1999.
The Company estimates the SG&A expenses of implementing its year 2000 plan
will be approximately $5.0 million to $7.0 million for the year ending
December 31, 1998. During the nine months ended September 30, 1998, the Company
incurred approximately $3.0 million for the year 2000 compliance costs, included
in SG&A expense. The Company expects to incur an additional approximately $10.0
million to 15.0 million in SG&A expense during the remainder of 1998 and in 1999
to implement its year 2000 plan.
INDUSTRY ENVIRONMENT
Historically, the Company has operated in the $80 billion long-distance
telecommunications industry. Recent legislative and regulatory activity is
designed to create one telecommunications industry to encompass both long-
distance and local telecommunications services. The Company intends to compete
in what is estimated to be a $150 billion combined market.
The current industry environment subjects the Company to varying degrees of
regulatory oversight on both the national and state levels. There are numerous
judicial and regulatory actions that are ongoing which can
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
impact the nature and degree of competition in the telecommunications
industry. The Company is unable to predict the timing for resolution of these
actions, or the ultimate impact of these matters on the industry and
competition. The regulatory and legislative actions discussed below could
impact the Company's pricing and cost structure by changing access or by
generally increasing competition. The Company is unable to predict what impact
these changes will have on its pricing, revenue growth or operating margin.
LEGISLATIVE MATTERS
Telecommunications Act of 1996. In February 1996, the Telecommunications Act
of 1996 ("the Telecommunications Act") was enacted to increase competition in
the long-distance and local telecommunications industries. The legislation is
intended to open competition in the local services market and, at the same
time, contains provisions intended to protect consumers and businesses from
unfair competition by incumbent LECs, including the Regional Bell Operating
Companies ("RBOCs"). The Telecommunications Act allows RBOCs to provide long-
distance service between LATAs to consumers inside their local service
territories only after meeting certain criteria, including a list of 14
specific "competitive checklist" requirements for opening the local market to
competition. The Telecommunications Act also provides a framework for the
Company and other long-distance carriers to compete with LECs by reselling
local telephone service, leasing unbundled elements of the incumbent LEC
networks or building new local service facilities. The Company has signed
local service resale agreements with Ameritech Corporation, BellSouth
Corporation and Bell Atlantic Corporation ("Bell Atlantic"). The Company has
also signed an interconnection agreement with Ameritech Corporation.
In July 1997, SBC Communications Inc. ("SBC"), followed by U S West and Bell
Atlantic, filed a lawsuit in the United States District Court for the Northern
District of Texas ("the District Court") challenging, on constitutional
grounds, the restrictions contained in the Telecommunications Act applicable
only to RBOCs. In December 1997, the District Court ruled that the RBOC-
specific provisions of the Telecommunications Act were an unconstitutional
bill of attainder. The FCC, AT&T, MCI WorldCom and Sprint appealed this ruling
to the United States Court of Appeals for the Fifth Circuit (the "Fifth
Circuit"), which stayed the ruling pending appeal. In September 1998, the
Fifth Circuit overturned the District Court ruling and upheld the
Telecommunications Act's provisions. On October 20, 1998, SBC and U.S. West
petitioned the United States Supreme Court for review. If the District Court
ruling is ultimately upheld, the RBOCs may be able to provide long-distance
services within their local service territories much sooner than expected and
without the detailed review and approval process by state regulators and the
FCC that is currently required under the Telecommunications Act. If this
decision were upheld, the Company expects an increase in competition for long-
distance services which could result in the loss of market share and/or a
decrease in operating margins. However, the Company believes that the RBOCs'
and other companies' participation in the market will provide opportunities
for the Company to sell fiber or lease long distance high volume capacity. The
Company is unable to predict the outcome of the pending petition for review.
REGULATORY MATTERS
In order to implement the Telecommunications Act, the FCC is required to
undertake a variety of regulatory actions that impact competition in the
telecommunications industry. Many of the actions taken by the FCC to implement
the Telecommunications Act, in addition to the Telecommunications Act itself,
face court challenges. Certain of these regulatory actions are described
below.
Access Charge Reform. In May 1997, the FCC issued an order designed to
reform the system of interstate access charge expenses levied by LECs on long-
distance service carriers. In that order, the FCC used rate reductions and
presumably increased competition in interstate access in an attempt to bring
interstate access
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
charges closer to actual economic cost. Various parties filed petitions for
reconsideration of the order with the FCC. Some parties, including the
Company, appealed the order to the Eighth Circuit, which, in August 1998,
upheld the FCC's determinations. The FCC has stated that it will issue a
further order designed to permit incumbent LECs to lower interstate access
charges in response to competition, and has recently announced it will delay
certain adjustments until July 1, 1999. The manners in which the FCC
implements its approach to lowering access charge levels will have a material
effect on the prices the Company and its long-distance competitors pay for
originating and terminating interstate traffic. Although the ultimate outcome
of the FCC actions is uncertain, the Company did expect lower access charges
in 1998. This decrease, however, has been offset by increases in customer line
charges and charges for the universal service fund.
Under traditional federal regulatory policy, providers of long distance
services over the Internet and companies that use IP technology to provide
long distance services have been exempt from access charges. Two RBOCs
recently informed carriers that provide long distance voice services over the
Internet or use IP technology that they also must pay access charges on IP
telephony services. This is the first effort by incumbent local exchange
carriers to levy access charges on IP telephony services. Furthermore, there
has been no definitive FCC determination as to treating IP telephony as a
service subject to access charges. If local exchange carriers are allowed to
levy access charges on IP telephony long distance service offerings, this
development would increase the Company's costs to provide such services and
might cause the Company to reevaluate the pricing of such services.
Universal Service. The FCC released a companion order on universal service
reform in May 1997. In accordance with the Telecommunications Act, the FCC
adopted plans to implement the recommendations of a Federal-State Joint Board
to preserve universal service, including a definition of services to be
supported, and defining carriers eligible for contributing to and receiving
from universal service subsidies. The FCC ruled, among other things, that:
contributions to universal service funding would be based on all interexchange
carriers' gross retail revenues from both interstate and international
telecommunications services; only common carriers providing a full complement
of defined local services were eligible for support; and up to $2.25 billion
in new annual subsidies for discounted telecommunications services used by
schools, libraries, and rural health care providers would be funded by an
assessment on total interstate and intrastate revenues of all interexchange
carriers. The FCC stated that it intends to study the mechanism for continued
support of universal service in high cost areas in a subsequent proceeding.
Several parties have filed petitions for reconsideration or judicial appeals
or both of this order, many of which are still pending. Further to its study
of the mechanism for support of universal service, on April 10, 1998, the FCC
released a report to Congress suggesting that the FCC might, in a later
proceeding, classify some kinds of "phone-to-phone" voice services using the
Internet protocol as telecommunications services. Such an outcome would extend
new regulatory obligations and associated costs, including the obligation to
support universal service, to providers of those services. The Company is
unable to predict the outcome of the further FCC proceedings or the pending
judicial appeals or petitions for FCC reconsideration on its operations. The
Company is required to contribute in 1998 a percentage of its gross retail
revenue to the universal services fund and includes charges for these
contributions in its 1998 billings.
Deployment of Advanced Telecommunications Services. Recently, the FCC
initiated two proceedings on the deployment of advanced telecommunications
services (e.g., high-speed Internet access, video telephony) and the petitions
filed by several entities pursuant to the Telecommunications Act of 1996. A
Notice of Inquiry examines if advanced telecommunications services are being
made available to consumers on a reasonable and timely basis. A Notice of
Proposed Rulemaking proposes to offer incumbent local telephone companies the
option to provide advanced telecommunications services through a separate
affiliate on a largely deregulated basis. The Company has filed comments in
both proceedings, but is unable to predict what impact these proceedings will
have on the nature of competition or how advanced telecommunications services
offered by LECs will be regulated.
State Regulation. The Company's intrastate long distance telecommunications
operations are subject to various state laws and regulations including, in
many jurisdictions, certification and tariff filing requirements.
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
Generally, the Company must obtain and maintain certificates of authority
from regulatory bodies in most states in which it offers intrastate services.
In most of these jurisdictions the Company must also file and obtain prior
regulatory approval of tariffs for its intrastate services. Certificates of
authority can generally be conditioned, modified, canceled, terminated, or
revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory
authorities. Fines and other penalties also may be imposed for such
violations. The Company is currently authorized to provide intrastate services
throughout the United States. The Company intends to have authority in all
states where competition is allowed.
Those states that permit the offering of intrastate/intraLATA service by
interexchange carriers generally require that end users desiring to use such
services dial special access codes. Historically, this has put the Company at
a competitive disadvantage compared with LECs whose customers can make
intrastate/intraLATA calls simply by dialing 1 plus the desired number. If a
long distance carrier's customer attempts to make an intraLATA call by simply
dialing 1 plus the desired number, the call will be routed to and completed by
the LEC. Regulatory agencies in a number of states have issued decisions that
would permit the Company and other interexchange carriers to provide intraLATA
calling on a 1 + basis. Further, the Telecommunications Act requires in most
cases that the RBOCs provide such dialing parity coincident to their providing
in-region interLATA services. The Company expects to benefit from the ability
to offer 1 + intraLATA services in states that allow this type of dialing
parity.
Local Regulation. The Company is occasionally required to obtain street use
and construction permits and licenses and/or franchises to install and expand
its fiber optic network using municipal rights-of-way. Termination of the
existing franchise or license agreements prior to their expiration dates or a
failure to renew the franchise or license agreements and a requirement that
the Company remove its facilities or abandon its network in place could have a
material adverse effect on the Company. In some municipalities where the
Company has installed or anticipates constructing networks, it will be
required to pay license or franchise fees based on a percentage of gross
revenue or on a per linear foot basis. There can be no assurance that,
following the expiration of existing franchises, fees will remain at their
current levels. In addition, the Company could be at a competitive
disadvantage if its competitors do not pay the same level of fees as the
Company. However, the Telecommunications Act requires municipalities to manage
public rights-of-way in a competitively neutral and non-discriminatory manner.
Other. The Company monitors compliance with federal, state and local
regulations governing the discharge and disposal of hazardous and
environmentally sensitive materials, including the emission of electromagnetic
radiation. The Company believes that it is in compliance with such
regulations, although there can be no assurance that any such discharge,
disposal or emission might not expose the Company to claims or actions that
could have a material adverse effect on the Company.
INDUSTRY STRUCTURE
The long-distance telecommunications market is highly competitive. The
principal competitive factors affecting the Company's market share are
pricing, regulatory and judicial developments (as described above), customer
service and diversity of services and features. The Telecommunications Act is
expected to change the nature of the industry by allowing carriers other than
incumbent LECs to provide local service, while permitting RBOCs to provide
interLATA long-distance services. As RBOCs are allowed into the long-distance
market, the Company expects competition within the industry to increase in
both the long-distance and local markets.
Several of the Company's competitors are larger and have greater financial,
technical and marketing resources. In addition to the largest
telecommunications companies, AT&T, MCI WorldCom and Sprint, the Company also
competes with hundreds of other long-distance carriers, as well as LECs, in
various types of telecommunications services. The Company's principal pricing
strategy is to offer a simple, flat-rate pricing
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
structure with rates competitive with those of AT&T, MCI WorldCom and Sprint.
Although the Company is prepared to respond to competitive offerings from
other carriers, the Company continues to believe that its marketing and
service pricing approach is competitive in retaining existing customers, as
well as in obtaining new customers. The Company believes that the nature of
competition will continue to change with consolidation in the industry. The
telecommunications industry has experienced significant merger activity in the
last year. Of the many mergers that have occurred or have been announced in
the last year, the most significant include: SBC/Pacific Telesis Group,
MCI/WorldCom, Inc., SBC/Southern New England Telephone Company, AT&T/Teleport
Communications Group, SBC/Ameritech, AT&T/TCI and GTE/Bell Atlantic. At this
time the Company is unable to predict the impact of these mergers, if any, on
the Company or competition within the industry as a whole. The Company's
ability to compete effectively will depend on maintaining exceptional customer
service and high quality, market-responsive services at prices generally equal
to or below those charged by its major competitors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March, 1998 four putative class action complaints ("Complaints") against
LCI, its directors and in two of these cases, Qwest, were filed in the Court
of Chancery of the State of Delaware in and for New Castle County (the
"Court"). The Complaints each made substantially the same allegations. The
plaintiffs alleged that the consummation of the LCI Merger subjected LCI
stockholders to the control of the Majority Shareholder. The plaintiffs
further alleged that the LCI Merger constitutes a change in control of LCI and
imposes heightened fiduciary duties on the members of the LCI Board to
maximize stockholder value. The plaintiffs also alleged that the members of
the LCI Board violated their fiduciary duties by failing to auction LCI or to
undertake an active "market check" for other potential bidders. The plaintiffs
had sought, among other things, to have the Court declare the suit a proper
class action, enjoin the LCI Merger and require the members of' the LCI Board
to auction LCI and/or conduct a "market check," and award monetary damages,
together with costs and disbursements.
On May 5, 1998, Qwest and LCI entered into a proposed settlement with the
plaintiffs in the Complaints. Pursuant to the Memorandum of Understanding
entered into by counsel for Qwest, LCI and the plaintiffs, Qwest and LCI
agreed, among other things, to (i) include in the Joint Proxy
Statement/Prospectus for the LCI Merger financial information with respect to
the quarter ended March 31, 1998, (ii) request Lehman Brothers to issue
an updated opinion with respect to the fairness of the LCI Merger; (iii)
include in the Joint Proxy Statement/Prospectus additional disclosure
regarding actions by LCI and its representatives regarding alternative
business combination transactions and (iv) not oppose an application for legal
fees and expenses by the plaintiffs' attorneys in the amount of not more than
$410,000. Pursuant to the proposed settlement, the actions will be dismissed
with prejudice and the defendants will be released from claims that were or
could have been asserted in the actions. Because the Complaints are putative
class actions, the proposed settlement is subject to reasonable confirmatory
discovery, certification of the plaintiff class of LCI Stockholders as of
March 9, 1998 through the consummation of the LCI Merger, notice to the class
and Court approval. The proposed settlement does not affect the Phillips
action discussed below. On June 3, 1998, the four putative class action
lawsuits were consolidated by an Order of the Court and the complaint in Miri
Shapiro v. William F. McConnell [sic], Julius W. Erving, Douglas M. Karp,
George M. Perrin, H. Brian Thompson, John L. Vogelstein, Thomas J. Wayne
[sic], LCI International, Inc. and Qwest Communications International Inc.,
was designated as the operative complaint in the consolidated action.
Confirmatory discovery was completed in June 1998. The parties have prepared
for execution a Stipulation and Agreement of Compromise, Settlement and
Release. The parties also have prepared for submission to the Court a
scheduling order for approval of the settlement. On November 2, 1998, the
Court approved the settlement.
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QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
On April 3, 1998, in an action captioned Lionel Phillips v. LCI
International Inc. and H. Brian Thompson, the plaintiff filed a putative class
action complaint in the United States District Court for the Eastern District
of Virginia against LCI and H. Brian Thompson, the Chairman and Chief
Executive Officer of LCI. The plaintiff brought the action purportedly on
behalf of stockholders of LCI who sold LCI Common Stock between February 17,
1998 and March 9, 1998. The plaintiff alleged, among other things, that the
defendants violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder by making materially false and misleading statements
that LCI was not for sale at a time when negotiations between Qwest and LCI
regarding a potential merger were allegedly ongoing. The plaintiff sought,
among other things, to have the Court declare the suit a proper class action
and award damages, together with costs and disbursements. On June 25, 1998,
defendants moved to dismiss the complaint on the grounds that it failed to
state a claim against defendants. By Order dated July 20, 1998, the Court
granted defendants' motion to dismiss the complaint but granted the plaintiff
leave to amend the complaint within fifteen days. On August 4, 1998, the
plaintiff filed an amended complaint and the Company again moved to dismiss
the lawsuit. On September 30, 1998, the Court granted the defendant's motion
to dismiss the complaint. On October 20, 1998, the plaintiff filed notice to
appeal the Court's decision.
The Company also has been named as a defendant in various other litigation
matters. Management intends to vigorously defend these outstanding claims. The
Company believes it has adequate accrued loss contingencies and, that although
the ultimate outcome of these claims cannot be ascertained at this time,
current pending or threatened litigation matters are not expected to have a
material adverse impact on the Company's results of operations or financial
position.
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
communications network with the remaining net proceeds temporarily invested in
certain short-term investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of September 13, 1998 among
Qwest Communications International Inc., and Icon CMT Corp.
(incorporated by reference to Annex A of the Joint Proxy
Statement/Prospectus included as part of the Registration Statement on
Form S-4 filed by Qwest on September 30, 1998 (File No. 333-65095).
27 Financial Data Schedule filed herewith
</TABLE>
(b)Reports on Form 8-K:
During the quarter ended September 30, 1998, the Company filed the following
Current Reports on Form 8-K:
<TABLE>
<C> <S>
(i) On July 8, 1998, the Company filed a Current Report on Form 8-K
announcing that it would host a major investment community meeting to
discuss strategic direction, operational plans and status of
integration activities related to the merger of LCI International, Inc.
and the Company.
(ii) On July 10, 1998, the Company filed a Current Report on Form 8-K/A to
amend a portion of Exhibit 99.1 to Form 8-K filed on July 8, 1998.
(iii) On September 16, 1998, the Company filed a Current Report on Form 8-K
announcing the signing of a definitive merger agreement with Icon CMT
Corp.
</TABLE>
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<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
/s/ Robert S. Woodruff
By: ____________________________
ROBERT S. WOODRUFF
EXECUTIVE VICE PRESIDENT--FINANCE
AND
CHIEF FINANCIAL OFFICER AND
TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
November 13, 1998
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<PAGE>
ANNEX D
QWEST AND ITS SUBSIDIARIES
The following contains certain important information related to Qwest and
its subsidiaries. Except as stated in the next sentence, the information is
excerpted from Amendment No. 1 to the Registration Statement on Form S-4 (File
No. 49915) of Qwest filed May 13, 1998, and speaks only as of such date (or
such other date as stated herein). The financial statements of SuperNet, Inc.,
included herein are exerpted from the Registration Statement on Form S-4 (File
No. 333-46145) of Qwest filed February 12, 1998, and speak as of the date of
such financial statements. None of the information contained in this Annex D
speaks as of the date of the Proxy Statement/Prospectus. If there are any
inconsistencies between the text of information provided elsewhere in the
Proxy Statement/Prospectus and the information contained in this Annex D, you
should give precedence to such other information provided elsewhere in the
Proxy Statement/Prospectus.
D-1
<PAGE>
BUSINESS OF LCI
LCI is a facilities-based, telecommunications carrier that provides a broad
range of voice and data transmission services to residential and business
customers and other telecommunications carriers throughout the United States
and to more than 230 international locations. LCI provides service to its
customers through owned and leased digital fiber-optic facilities and more
than 15 switches strategically located throughout the U.S. (the "LCI
Network"), connecting LCI to metropolitan areas that account for 95% of U.S.
call volume.
LCI, a Delaware corporation, was incorporated in 1988 and is a holding
company. LCI's operations are conducted through LCI's direct and indirect
wholly owned subsidiaries, principally LCI International Management Services,
Inc., LCI International Telecom Corp., and USLD Communications Corp.
LCI's principal executive offices are located at 8180 Greensboro Drive,
Suite 800, McLean, Virginia 22102, and its telephone number is 800-555-2124.
TELECOMMUNICATIONS SERVICES
LCI provides a broad array of long distance and local telecommunications
services to its customers, which include residential/small business, medium-
sized and large businesses, national accounts, other interexchange carriers,
government agencies and academic institutions. LCI's switched services include
basic long distance or measured toll service, accessible via "1 plus" dialing
or dialing a five digit access code.
LCI has developed a marketing strategy that focuses on differentiating it
through "simple, fair and inexpensive" domestic and international
telecommunications service offerings in all market segments. LCI provides low,
easy to understand rates that vary primarily based on the time a call is
placed and not by the distance of an interstate call. Since 1991, LCI has
offered flat rates to business customers. In 1992, LCI was the first to bill
residential customers in six-second increments, instead of rounding up to the
full minute like every major competitor. In 1997, LCI was the first to
introduce Exact BillingSM to both residential and business customers, billing
in single second increments, after an initial one minute call increment. In
addition, LCI offers discounted evening rates beginning at 6 p.m. and does not
require waiting until later hours for discounts. LCI does not attach complex
conditions to the simple, fair and inexpensive service, such as minimum
monthly usage or term requirements, or requiring customers to sign up other
customers to earn full discounts. For commercial customers, LCI also focuses
on offering a full complement of high quality, competitively priced services
to small, medium-sized and large customers, including calling card services,
prepaid calling cards, toll-free services, audioconferencing, frame relay data
service, broadcast fax, Internet access, and specialized high-volume data
transmission services. Although LCI provides long distance services to a wide
range of market segments, it does not seek to compete with every service
offered by competitors. LCI's strategy for competitive flexibility includes a
balance across all market segments with selective service offerings.
LCI's strategic direction is supported by growth through geographic
expansion of sales presence and the LCI Network operating facilities, as well
as expansion in sales channels, targeted service offerings to each market
segment, and selective acquisitions. This approach is dependent on maintaining
efficient, low cost operations in order to preserve pricing flexibility and
operating margins. LCI has historically managed its selling, general and
administrative expenses ("SG&A") at a percentage of revenue which is lower
than AT&T, MCI and Sprint, LCI's three largest competitors.
TARGETED SERVICE OFFERINGS
Residential/small business customers and medium-sized businesses primarily
purchase switched services, while carriers and large commercial customers
typically purchase both switched and dedicated services. Switched services,
charged on a usage-sensitive basis, are telecommunications services provided
to each customer through switching and transmission facilities. Private line
services, a type of dedicated service, are charged on a fixed price basis for
which transmission capacity is reserved for a specific customer's traffic.
D-2
<PAGE>
Business Services. In the quarter ended March 31, 1998 and in each of 1997,
1996 and 1995, business long distance customers, including wholesale
customers, accounted for more than 70% of LCI's annual revenues. LCI has
expanded its marketing to include a full range of large and small businesses
throughout the United States. In 1997, LCI introduced Simply Guaranteed PlusSM
for general business customers which offers an all-in-one package with
guaranteed domestic rates for business customers spending between $100 and
$10,000 a month. It offers a complete line of voice and data services with
Exact BillingSM at rates that are, on average, 30% lower than those offered by
AT&T, MCI and Sprint. In response to the fast-growing market of small and
home-based businesses, LCI delivered services specially tailored to the needs
of these customers through its product offering Simply BusinessSM. Unlike
other plans for businesses, LCI offers plans that do not require term
commitments, contracts, subscription fees or penalties. These popular
commercial services have continued to be successful and have been extended to
the small and medium-sized business customer. LCI's simple, fair and
inexpensive philosophy also extends to pricing for international calls, with
rates varying based on the originating and terminating countries.
Another important source of revenue for LCI is the sale of transmission
capacity and services to other long distance wholesalers and to resellers of
long distance service. Although gross margin on some switched services sales
can be lower than LCI's overall average, the service expenses associated with
this segment are lower, and should result in an operating margin in line with
LCI's overall average.
LCI also offers private line telecommunications services to its business and
wholesale customers, as well as increased offerings to small to medium-sized
companies. Private line services are dedicated exclusively for a single
customer's use and typically connect to three or four customer locations with
dedicated access facilities. LCI has experienced success with its frame-relay
service, FramePlusSM, and offers strict performance guarantees and new network
management technologies.
Residential Services. Within the past three years, LCI has implemented
marketing and service development efforts intended to expand its share of the
U.S. residential long distance market. LCI offers residential customers Exact
BillingSM after the first minute for all state-to-state, international
outbound, in-state, toll, residential 800 and calling card calls.
Residential/small business revenue grew 30%, 125%, and 170% in 1997, 1996, and
1995, respectively, and represented approximately 30% of revenue in 1997 and
1996 and 20% of revenue in 1995. In the quarter ended March 31, 1998, such
revenue grew more than 22%, as compared to the comparable period a year ago,
and represented approximately 25% of revenue. The decline in residential/small
business revenue growth reflects competitive pricing as well as a larger base
of customers and revenue.
In addition to its internal sales force, LCI uses a combination of other
channels, such as advertising and third-party sales representatives, to market
its services. For certain third-party sales representatives, compensation is
paid through a combination of upfront payments and an ongoing commission based
upon collected long distance revenue attributable to customers identified by
the representatives. LCI retains responsibility for the customer relationship,
including billing and customer service. American Communications Network, Inc.
("ACN"), a nationwide network of third-party sales representatives, continued
to be the largest of LCI's sales representatives for residential/small
business customers. LCI has diversified and expanded other sales channels and,
as a result, channels other than ACN currently are generating more than 70% of
new residential/small business sales. ACN is authorized to sell certain
defined services that currently exist; new services may or may not be
authorized in the future.
LCI has experienced an increase in SG&A, such as billing, commissions and
bad debt expenses, as a result of the growth in the residential/small business
service line. Although, the residential/small business segment incurs higher
proportional SG&A, it also provides a higher gross margin than most other
segments.
Local Services. LCI is seeking state regulatory approval to resell local
services in various states, which would enable LCI to provide combined local
and long distance services to existing and prospective customers. LCI is
currently reselling local telecommunications service in more than 40 markets.
D-3
<PAGE>
LCI has extended its simple, fair and inexpensive marketing strategy to its
local service offerings. Through LCI's Simply DirectSM service offering, LCI's
local service customers will receive simplified rates, direct dialing for
local and long distance service, 24-hour customer service, combined billing
for local and long distance service and six-second incremental billing.
ACQUISITIONS
On December 22, 1997, LCI acquired USLD in a stock-for-stock merger that was
accounted for as a pooling of interests. USLD provides long distance
telecommunications services, principally to business customers in the
Southwest, Southeast, Pacific Northwest and Western regions of the United
States. In addition, USLD offers operator services for the hospitality and
payphone industries, as well as local telephone service in selected markets.
LCI exchanged approximately 12 million shares of LCI Common Stock for all of
the outstanding shares of USLD common stock. LCI's consolidated financial
statements have been restated to include the results for USLD, as though the
companies had always been a combined entity.
FACILITIES EXPANSION
The LCI Network utilizes transmission equipment consisting of digital fiber
optic transmission circuits to complete long-distance calls. In 1997, LCI
entered into several agreements to extend its owned fiber-optic network
throughout several geographic areas of the United States. LCI purchased 3,100
route miles from Chicago to Los Angeles, via Dallas. The route miles from
Chicago to Dallas were paid for and delivered in the third quarter of 1997
with the remaining miles from Dallas to Los Angeles expected for delivery in
the first half of 1998. LCI also purchased a position in 729 route miles from
Cleveland to New York and 1,925 route miles between Washington D.C. and
Dallas. Delivery of the route miles is expected in the first half of 1998. In
addition, LCI has entered into an agreement to swap fiber along routes with
excess capacity in exchange for fiber from New York to Baltimore, which
completes a strategic fiber ring for the LCI Network. Adding to the 1,400
route miles within the central Midwest region of the United States, LCI will
have more than 8,500 route miles of owned network capacity. LCI provides
nationwide long-distance telecommunications services primarily through the
entire LCI Network, which includes both owned and leased digital fiber optic
transmission facilities spanning the continental United States. LCI expects
increased costs during the transition to the new owned facilities during 1998,
but expects a lower cost of services after the transition and as a result of
the LCI Network synergies. LCI will continue to evaluate the best options to
expand its network capacity through leased or owned facilities.
In 1997, LCI opened sales offices in Denver, Boston, Los Angeles, Tampa, and
Fort Lauderdale. The offices added with the acquisition of USLD expanded LCI's
coverage into the Southwest, West, and Pacific Northwest. As of the end of
1997, LCI has more than 60 direct sales offices.
LEGISLATIVE MATTERS
Telecommunications Act of 1996. In February 1996, the Telecommunications Act
of 1996 (the "Act") was enacted to increase competition in the long-distance
and local telecommunications industries. The legislation is intended to open
competition in the local services market and, at the same time, contains
provisions intended to protect consumers and businesses from unfair
competition by incumbent LECs, including the RBOCs. The Act allows RBOCs to
provide inter-LATA long-distance voice and data services to consumers inside
their local service territories only after meeting certain competitive
criteria, including a list of 14 specific "competitive checklist" requirements
for opening the local market to competition.
The Act provides a framework for LCI and other long-distance carriers to
compete with LECs by reselling local telephone service, leasing unbundled
elements of the incumbent LEC networks or building new local service
facilities. LCI has signed local service resale agreements with Ameritech
Corporation ("Ameritech"), BellSouth Corporation ("BellSouth") and Bell
Atlantic Corporation ("Bell Atlantic"). LCI has also signed an
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interconnection agreement with Ameritech and is currently in formal
interconnection negotiations with several other LECs for interconnection
agreements. LCI intends to vigorously compete in the local service market and
is currently providing local service to customers on a bundled resale basis.
LCI is also evaluating providing local service through the recombination of
unbundled network elements; however, a recent court ruling does not require
the LECs to recombine the various network elements on behalf of local service
competitors. LCI could also decide in the future to build, or otherwise
acquire, local service facilities or use a competitive LEC other than
incumbent LECs (such as the RBOCs or GTE) to provide local service. LCI's
decision on the timing and method of providing local service is dependent on
the economic viability and profitability of the available options, the
resolution of various operational issues, and the outcome of several pending
regulatory and judicial proceedings. See "--Regulatory Matters--Local
Competition Order".
In July 1997, SBC Communications Inc. ("SBC"), followed by US WEST
Communications ("US West") and Bell Atlantic filed a lawsuit in the United
States District Court for the Northern District of Texas (the "District
Court") challenging, on constitutional grounds, the restrictions contained in
the Act applicable only to RBOCs. The plaintiffs sought both a declaratory
judgment and an injunction against the enforcement of the challenged
provisions. On December 31, 1997, the District Court ruled that the RBOC-
specific provisions of the Act were an unconstitutional bill of attainder. The
FCC, AT&T, MCI and Sprint have appealed this ruling to the United States Court
of Appeals for the Fifth Circuit and requested a stay of this ruling pending
the outcome of the appeal. On February 11, 1998, the District Court granted a
stay, pending appeals. If the ruling is ultimately upheld, the RBOCs will
likely be able to provide long-distance services within their local service
territories much sooner than expected and without first undergoing the kind of
detailed review by state regulators and the FCC that is currently required
under the Act. If this decision were upheld, LCI expects to see a significant
increase in competition in long-distance services which could result in the
loss of market share and/or a decrease in operating margins. LCI is unable to
predict the outcome of the pending appeal.
In addition, Congress is considering several amendments to the Act. Congress
is considering reducing or eliminating the statutory requirements that RBOCs
must meet prior to entering the in-region, inter-LATA market. In addition,
Congress is considering legislation that would impose increased verification
requirements when a customer switches to a new long-distance carrier and would
increase the penalties for violations of the verification requirements. LCI
cannot predict whether these amendments will be passed.
REGULATORY MATTERS
In order to implement the Act, the FCC is required to undertake a variety of
regulatory actions that impact competition in the telecommunications industry.
Many of the actions taken by the FCC to implement the Act--as well as the Act
itself--face court challenges. Certain of these regulatory actions are
described below.
Local Competition Order. In August 1996, the FCC adopted a local competition
order (the "Local Competition Order") which established a minimum national
framework related to the manner in which companies wanting to provide local
service could interconnect with the LECs. The Local Competition Order covered
several important interconnection issues, including the purchase of unbundled
local network elements, resale discounts and arbitration procedures between
incumbent LECs and competitive local exchange carriers.
Several states, companies, associations and other entities appealed the
Local Competition Order. On July 18, 1997, the United States Court of Appeals
for the Eighth Circuit (the "Eighth Circuit") overturned on jurisdictional
grounds many of the rules established in the Local Competition Order,
including the pricing of interconnection, resale and unbundled network
elements. In addition, the Eighth Circuit overturned the "pick-and-choose"
rule, which would have allowed potential competitors to receive the benefit of
the most favorable provisions contained in a LEC's interconnection agreements
with other carriers. On October 14, 1997, the Eighth Circuit further
overturned the FCC's rules pertaining to the unbundled network elements
platform. The Eighth Circuit concluded that the FCC's rules prohibiting a LEC
from separating network elements that are currently combined in the incumbent
LEC's network are contrary to the Act. The FCC and others filed a petition for
a writ of certiorari asking the United States Supreme Court to accept the case
and consider the merits of various
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appeals. In addition, several incumbent LECs filed cross petitions with the
Supreme Court requesting review of the Eighth Circuit's decision to uphold
certain of the FCC's rules regarding resale and unbundled network elements. On
January 26, 1998, the Supreme Court announced that it will hear the appeals
from the Eighth Circuit.
The Eighth Circuit's decisions substantially limit the FCC's jurisdiction
and expand the jurisdiction of state regulators to establish and enforce rules
governing the development of local competition. If the Eighth Circuit's
decisions are upheld, it is likely that over time the rules governing local
competition will vary substantially from state to state. If a patchwork of
state regulations were to develop, it could make competitive entry in some
markets difficult and expensive and could increase the costs of regulatory
compliance associated with local entry. If the Supreme Court were to uphold
the Eighth Circuit ruling, it could negatively affect LCI's ability to offer
competitive local service and increase the costs associated with local
service. LCI cannot predict the outcome of the current appeals to the Supreme
Court.
RBOC Applications to Provide In-Region Inter-LATA Long-Distance. Throughout
1997, various RBOCs applied to the FCC for authority to provide in-region
inter-LATA service. The FCC denied these in-region applications for various
reasons, including that the RBOCs have not demonstrated compliance with the
competitive checklist or the other safeguards of the Act. BellSouth and SBC
have appealed the denial of their applications, by the FCC to provide long
distance service within the states of Louisiana and South Carolina and
Oklahoma, respectively. On March 20, 1998, the United States Court of Appeals
for the D.C. Circuit (the "D.C. Circuit") upheld the FCC's rejection of SBC's
application. Several appeals by RBOC's and in region inter-LATA applications
are still pending. LCI is unable to predict when one or more RBOCs may be
actively competing in the long distance market, but expects that when able to
compete, RBOCs will gain a significant market share.
On April 6, 1998, the Chairman of the New York Public Service Commission
outlined a series of tests and conditions that Bell Atlantic has agreed to
meet prior to seeking approval from the FCC to provide long distance service
within New York. The conditions agreed upon by Bell Atlantic include among
others; access to unbundled network elements, including the network elements
platform, for a period of four to six years; however, after that period
competitive local exchange carriers ("CLECs") will still have access to the
network elements platform by recombining the network elements themselves;
third party testing of operational support systems ("OSS") supervised by the
FCC and the Department of Justice; and terms and conditions under which CLECs
will be able to connect their facilities with Bell Atlantic. Once Bell
Atlantic has met the conditions set forth in their pre-filing document, they
still must seek approval from the New York Public Service Commission and the
FCC for authority to provide in-region long distance service in New York. LCI
is unable to predict when Bell Atlantic will be able to comply with the
conditions set forth in its pre-filing document or the impact on the market if
Bell Atlantic's application is approved.
Access Charge Reform. In May 1997, the FCC issued an order designed to
reform the system of interstate access charge expenses levied by LECs on long-
distance service carriers. In the May order, the FCC decided to rely on a
combination of prescriptive rate reductions and increased competition in
interstate access to bring interstate access charges closer to actual economic
cost. The FCC has stated that it will issue a further order designed to permit
incumbent LECs to lower interstate access charges in response to competition.
The manner in which the FCC implements its approach to lowering access charge
levels will have a material effect on the prices LCI and its long-distance
competitors pay for originating and terminating interstate traffic. Various
parties have filed petitions for reconsideration of the May order with the
FCC. Some parties, including LCI, have appealed the May order to the Eighth
Circuit, which heard oral arguments on January 15, 1998. LCI cannot predict
when the Eighth Circuit will issue a ruling on LCI's appeal. Although the
ultimate outcome of the May order and resulting court actions is uncertain,
LCI does expect lower access charges in 1998. This decrease, however, is
expected to be offset by increases in customer line charges and charges for
the universal service fund. It is possible that either federal statutory or
regulatory changes will mandate that the increase in universal service
payments made by long-distance carriers are completely offset by reductions in
interstate access charges.
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Payphone Compensation. In September 1996, the FCC adopted rules to implement
the Act's requirement to fairly compensate payphone service providers. This
order included a specific fee to be paid to each payphone service provider by
long-distance carriers and intra-LATA toll providers (including LECs) on all
"dial-around" calls, including debit card and calling card calls. In orders
released in July and September 1997, the D.C. Circuit vacated and remanded
some of the FCC rules. In October, 1997, the FCC established a default per-
call rate of $0.284 for a two-year period to respond to the D.C. Circuit. The
FCC's action will increase LCI's costs to carry certain calls that originate
from payphones. This decision has been appealed by several parties. In the
quarter ended March 31, 1998, LCI implemented billing procedures to charge its
customers for the expected cost of these calls. In light of this appeal and
any court action in these proceedings, LCI is unable to predict the ultimate
impact this decision will have on LCI.
Petition for Expedited Rulemaking. In May 1997, LCI and the Competitive
Telecommunications Association ("CompTel") jointly filed a petition for
expedited rulemaking requesting that the FCC establish performance standards
for incumbent LECs to meet the OSS requirements of the Act and applicable FCC
regulations. The OSS requirements are critical in ensuring that access to the
incumbent LECs' internal systems is provided at a level of quality consistent
with services incumbent LECs provide to themselves. In its petition, LCI
proposed that an industry group consisting of local and long-distance
carriers, trade associations and regulators be given approximately nine weeks
to establish measurement categories, measurement formulas and default
performance intervals for several OSS categories. In June 1997, the FCC issued
a public notice requesting comments on LCI's petition. Numerous parties,
including the California Public Service Commission, the Wisconsin Public
Service Commission and the National Association of Regulatory Utilities
Commissioners, have filed comments in support of LCI's petition. On April 17,
1998, the FCC issued a notice of proposal rulemaking regarding OSS
requirements based on LCI's petition. At this time, LCI is unable to determine
the action of this proceeding.
Universal Service. In May 1997, the FCC released an order establishing a
significantly expanded federal telecommunications subsidy regime. Providers of
interstate telecommunications services, such as LCI, as well as certain other
entities, must pay to subsidize services for schools, libraries and rural
health care providers as well as services for low-income consumers and
consumers living in high-cost areas. LCI's share of the federal subsidy will
be based on its market share of defined telecommunications services and
certain defined telecommunications end user revenues. The order has resulted
in an increase of LCI's total obligation, but LCI anticipates that such
increase will be billed to the customer. Several parties have appealed the May
1997 order, and those appeals have been transferred and consolidated in the
United States Court of Appeals for the Fifth Circuit.
Detariffing. In October 1996, the FCC issued an order that non-dominant
interexchange carriers will no longer be permitted to file tariffs for
interstate domestic long-distance services. Under the terms of the FCC order,
detariffing would be mandatory after a nine-month transition period.
Interexchange carriers would still be required to retain and make available
information as to the rates and terms of the services they offer. The FCC's
order was appealed by several parties and, in February 1997, the D.C. Circuit
issued a stay preventing the rules from taking effect pending judicial review.
LCI is currently unable to predict what impact the FCC's order will have on
LCI or the telecommunications industry if the mandatory detariffing rules take
effect.
Operator Services. On January 29, 1998, the FCC released an order requiring
operator service providers ("OSPs") to put in place a process for customers to
determine the cost of making 0+ calls from payphones and other public phones
prior to making such calls. The new disclosure rules, which are scheduled to
take effect on July 1, 1998, may increase the amount of operator staff time
needed to provide cost information to customers, which consequently may
increase the cost of LCI's OSP activities.
Local Service. LCI is seeking state approval to resell local services in
various states, which would enable LCI to provide combined local and long-
distance services to existing and prospective customers. Presently, LCI has
received approval to resell local service in 37 states and the District of
Columbia, and has applications pending to resell local service in another
seven states. LCI is currently reselling local telecommunications service in
more than 40 markets.
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To date, LCI's efforts to provide local resale service have not been
profitable. LCI continues to identify and evaluate alternatives to reselling
incumbent LEC service, such as purchasing service from competitive access
providers and investments in local facilities-based providers. On January 22,
1998, LCI filed a petition with the FCC that identified three critical
barriers to local competition, including the absence of a nondiscriminatory
OSS, no practical and efficient unbundled network elements, and pricing that
discriminates in favor of the RBOC's own retail operations. To mitigate
discrimination, the petition recommends that the RBOCs be given the option to
separate into wholesale and retail units. The wholesale units would be
required to provide comparable service to new local service providers, such as
LCI, and the RBOC's retail operations. In return, the RBOC would benefit from
a rebuttable presumption in favor of granting in-region inter-LATA authority.
On January 26, 1998, the FCC issued a public notice seeking comments on LCI's
Petition. In February 1998, the Illinois Commerce Commission initiated a
notice of inquiry into LCI's proposal, and the Oklahoma Corporation Commission
opened a notice of inquiry into the status of local telephone exchange
competition and asked for input on the issue of structural separation. On
April 17, 1998, the FCC issued a notice of proposed rulemaking regarding OSS
requirements based on LCI's petition. At this time, LCI is unable to determine
the outcome of this proceeding.
Impact of Regulatory Issues. The regulatory actions discussed above could
impact LCI's pricing and cost structure by changing access, per-line and pay
phone charges or other costs, or by generally increasing competition. LCI is
unable to predict what impact these changes will have on its pricing, revenue
growth or operating margin.
EMPLOYEES
At December 31, 1997, LCI had more than 3,900 full-time employees, none of
whom were subject to any collective bargaining agreement.
PROPERTIES
Currently, LCI's corporate headquarters are located in McLean, Virginia,
where it leases space for general and administrative functions as well as a
sales office under a lease expiring in March 2004. During 1996, LCI entered
into an operating lease agreement for the rental of a new corporate
headquarter being developed in Arlington, Virginia. This agreement has a
three-year lease term with two options to renew for one year each. The
property is owned by an unrelated entity that is leasing the facility to LCI.
LCI plans to occupy the building in June 1998. In addition, LCI leases office
space in Dublin, Ohio, a suburb of Columbus, for certain LCI Network
operations as well as administrative and marketing offices. Office space is
leased in three buildings: two under capitalized leases expiring in 2005 and
2012, respectively; and an operating lease, which expires in 2001. LCI leases
more than 80 properties for its offices, switching and other facilities.
Properties leased by LCI for general office space are generally available at
fair market rentals in all of the locations in which LCI operates. LCI's
growth and ability to operate have not been constrained by a lack of suitable
office space.
LEGAL PROCEEDINGS
LCI has been named as a defendant in various litigation matters incident to
the character of its business. LCI's management intends to vigorously defend
these outstanding claims. LCI believes it has adequate accrued loss
contingencies and that current or threatened litigation matters will not have
a material adverse impact on LCI's results of operations or financial
condition. See also "PLAN OF MERGER--Litigation."
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF LCI
The selected data presented below under the captions "Income Statement
Information" and "Balance Sheet Information" as of the end of and for each of
the years in the five-year period ended December 31, 1997 and as of March 31,
1998 and 1997, and for the three months ended March 31, 1998 and 1997, have
been taken or derived from the historical Consolidated Financial Statements of
LCI. Consolidated Financial Statements of LCI as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997 are
included elsewhere in this Joint Proxy Statement/Prospectus. The information
set forth below should be read in conjunction with the discussion under "LCI'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "BUSINESS OF LCI" and the Historical Consolidated Financial
Statements of LCI and the notes thereto, appearing elsewhere in this Joint
Proxy Statement/Prospectus.
SELECTED HISTORICAL FINANCIAL DATA OF LCI
(IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -------------
1993(1) 1994(1) 1995 1996(1) 1997(1) 1997 1998
------- ------- ------ -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
INFORMATION:
Revenues.............. $431.2 $589.5 $824.3 $1,303.9 $1,641.7 $367.8 $447.7
Income (loss) from
continuing
operations........... $ (4.4) $ 5.4 $ 48.5 $ 63.0 $ 31.3 $ 21.9 $ 29.2
Income (loss) per
common share from
continuing
operations(2)........ $(0.27) $(0.01) $ 0.53 $ 0.64 $ 0.32 $ 0.22 $ 0.29
Shares used in
calculating per share
data................. 55.3 76.2 92.2 99.2 99.1 98.5 101.8
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
---------------------------------------- -----------------
1993(1) 1994(1) 1995 1996 1997 1997 1998
------- ------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
INFORMATION:
Book value per common
share(3)............. $ 2.94 $ 3.13 $ 4.77 $ 5.51 $ 5.75 $ 5.58 $ 6.15
Total assets.......... $443.2 $574.3 $896.6 $1,053.4 $1,353.5 $1,081.5 $1,398.7
Long-term debt........ $102.5 $162.6 $291.3 $ 252.3 $ 412.7 $ 260.2 $ 394.9
Stockholders' equity.. $234.4 $254.1 $416.0 $ 490.2 $ 551.8 $ 518.4 $ 598.8
</TABLE>
- --------
(1) Includes write-off of assets, loss of contingency expenses and
restructuring charges of $54.1 in 1997, $15.8 in 1996, $62.5 in 1994 and
$13.8 in 1993.
(2) Income (loss) from continuing operations per common share are presented on
a diluted basis.
(3) Assumes that the conversion of LCI preferred stock into 12.1 million
shares of LCI Common Stock occurred in 1993.
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<PAGE>
LCI'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with LCI's audited
Consolidated Financial Statements and unaudited interim financial statements
and the notes thereto, appearing elsewhere in this Joint Proxy
Statement/Prospectus.
LCI is a facilities-based telecommunications carrier that provides a broad
range of domestic and international telecommunications services, including
long-distance, data and local services. LCI targets all markets--retail and
wholesale businesses, residential and local--and sells through a variety of
channels, including an internal sales force and external channels. LCI serves
its customers primarily through owned and leased digital fiber-optic
facilities, including switches strategically located throughout the United
States. Collectively, these facilities constitute the LCI Network.
INDUSTRY ENVIRONMENT
Historically, LCI has operated in the $80 billion long-distance
telecommunications industry. Recent legislative and regulatory activity is
designed to create one telecommunications industry to encompass both long-
distance and local telecommunications services. LCI intends to provide
combined local and long-distance services to compete in what is estimated to
be a $150 billion combined market.
The current industry environment subjects LCI to varying degrees of
regulatory oversight on both the national and state levels. There are numerous
judicial and regulatory actions that are ongoing which can impact the nature
and degree of competition in the telecommunications industry. LCI is unable to
predict the timing for resolution of these actions, or the ultimate impact of
these matters on the industry and competition. In addition, these regulatory
and legislative actions could impact LCI's pricing and cost structure by
changing access, per-line and payphone charges, or by generally increasing
competition. LCI is unable to predict what impact these changes will have on
its pricing, revenue growth or operating margin. See "BUSINESS OF LCI--
Legislative Matters" and "--Regulatory Matters."
INDUSTRY STRUCTURE
The long-distance telecommunications market is highly competitive. The
principal competitive factors affecting LCI's market share are pricing,
regulatory and judicial developments (as described above), customer service
and diversity of services and features. The Act is expected to change the
nature of the industry by allowing carriers other than incumbent LECs to
provide local service, while permitting RBOCs to provide inter-LATA long-
distance services. As RBOCs are allowed into the long-distance market, LCI
expects competition within the industry to increase in both the long-distance
and local markets.
Several of LCI's competitors are larger and have greater financial,
technical and marketing resources. In addition to the largest
telecommunications companies, AT&T, MCI and Sprint, or the "Big Three," LCI
also competes with hundreds of other long-distance carriers, as well as LECs,
in various types of telecommunications services. LCI's principal pricing
strategy is to offer a simple, flat-rate pricing structure with rates
competitive with those of the Big Three. Although LCI is prepared to respond
to competitive offerings from other carriers, LCI continues to believe that
its Simple, Fair and Inexpensive SM marketing and service pricing approach is
competitive in retaining existing customers, as well as in obtaining new
customers. In 1997, LCI introduced Exact Billing SM, a differentiator that
neither the Big Three nor any other nationwide long-distance carrier offers,
giving LCI a competitive advantage in some markets. LCI believes that the
nature of competition will continue to change with consolidation in the
industry. LCI's ability to compete effectively will depend on maintaining
exceptional customer service and high quality, market-responsive services at
prices generally equal to or below those charged by its major competitors.
Industry Mergers. The telecommunications industry has experienced
significant merger activity in the last year. Of the many mergers that have
occurred or have been announced in the last year, the most significant
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include: LCI with Qwest, Bell Atlantic with NYNEX CableComms Group Inc.
("NYNEX"); SBC with Pacific Telesis Group ("PacTel"); MCI with WorldCom; SBC
with Southern New England Telephone Company; AT&T with Teleport; and, more
recently, SBC with Ameritech. To date, only the Bell Atlantic/NYNEX and
SBC/PacTel mergers have received federal and state regulatory approvals. At
this time LCI is unable to predict the impact of these mergers, if any, on LCI
or competition within the industry as a whole.
GENERAL--RESULTS OF OPERATIONS
LCI's revenues primarily consist of switched and private line revenues.
Switched revenues are a function of switched minutes of use ("MOUs") and rate
structure (rates charged per MOU), which are based on LCI's customer and
service mix. Private line revenues are a function of fixed rates that do not
vary with usage. LCI's cost of services consists primarily of expenses
incurred for origination, termination and transmission of calls through LECs
and over the LCI Network.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues for the three months ended March 31, 1998 increased 22%
to $448 million on 3.5 billion MOUs as compared to $368 million on 2.9 billion
MOUs for the three months ended March 31, 1997. The following table provides
further information regarding LCI's revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1998 1997 CHANGE
----- ----- ------
<S> <C> <C> <C>
Total Revenues (in millions)........................... $ 448 $ 368 22%
MOUs (in billions)..................................... 3.5 2.9 21%
Switched Revenue per MOU(1)............................ $.120 $.118 2%
</TABLE>
--------
(1) Switched revenue divided by MOUs
Revenues from business customers increased in excess of 21% for the three
months ended March 31, 1998 over the comparable period in 1997, and
represented approximately three-fourths of LCI's total revenues.
Residential/small business revenues represented approximately one-fourth of
total revenues and increased in excess of 22% for the three months ended March
31, 1998 compared to the same period in 1997. Growth in international service
revenues across all revenue service lines was approximately 68% for the three
months ended March 31, 1998, compared to the same period in 1997.
LCI experienced an increase in average revenue per MOU for the three months
ended March 31, 1998, as compared to the same period in 1997. Revenue per MOU
reflects changing cost of services, changes in the mix of services by market
segments and competitive pricing. LCI's growth in various segments, which have
different rate structures and generate different gross margins, has changed
its revenue mix and consequently impacted the average revenue per MOU. The
increase in revenue per MOU also reflects the impact of certain changes in
access charges in 1998 that have been reflected in billings to its customers.
LCI uses a variety of channels to market its services. In addition to its
internal sales force, LCI uses a combination of other channels, such as
advertising and third party sales agents. For certain third party sales
agents, compensation is paid to agents in the form of an ongoing commission
based upon collected long distance revenue attributable to customers obtained
through the agents. LCI retains responsibility for the customer relationship,
including billing and customer service. ACN, a nationwide network of third
party sales agents, continued to be the largest of LCI's sales agents for
residential/small business customers. LCI does, however, continue to expand
its sales presence across the country using a variety of channels.
GROSS MARGIN. LCI's gross margin increased 27% to $189 million for the three
months ended March 31, 1998 from $149 million for the three months ended March
31, 1997. During the first quarter of 1998, gross margin as a percentage of
revenue increased to 42% from 40% for the same period in 1997. The increase as
a
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<PAGE>
percentage of revenue reflects efficiencies gained as LCI expands its owned
fiber network and traffic is moved from current leased facilities to the new
owned facilities. In addition, the improvement in gross margin as a percentage
of revenue reflects a favorable change in the mix of LCI's services from
wholesale to commercial and residential/small business. LCI continues to
evaluate strategies to reduce its cost of services and improve the reliability
and efficiency of the LCI Network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 26% to $106 million for the three months
ended March 31, 1998, as compared to the same periods in 1997. As a percentage
of revenues, selling, general and administrative expenses were 24% for the
three months ended March 31, 1998, as compared to 23% for the same period in
1997. The increase in selling, general and administrative expenses is due to
the expansion of LCI's geographic sales presence, entrance into the local
service market, and temporarily, due to acquisition integration activity. The
increase also reflects the slow down of wholesale revenue which carries a
lower selling, general and administrative burden as compared to commercial
revenue, which became a larger part of the revenue mix.
LCI's selling, general and administrative expense increases year-over-year
were substantially impacted by payroll and commissions. Payroll expenses
increased 31% for the three months ended March 31, 1998, as compared to the
same period in 1997. LCI experienced increases in the number of employees from
acquisitions and the expansion of the sales and customer support
infrastructure.
The increase in selling, general and administrative expenses includes a 30%
increase in commission expense for the three months ended March 31, 1998 over
the comparable prior period. The increase in commission expense is
attributable to the growth in commercial and residential/small business
revenue, which carry a higher commission rate than wholesale revenue.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
for the three months ended March 31, 1998 was $27 million, a 29% increase over
the same period in 1997. The increase reflects the investments made in
infrastructure for sales, customer service and other service delivery systems
in support of LCI's growth in revenues and MOUs. LCI anticipates that
depreciation and amortization will continue to increase due to investments in
new technology, as well as the expansion of the owned portion of the LCI
Network. The increase in depreciation and amortization for the additional LCI
Network facilities is expected to continue into the fourth quarter of 1998,
but should be offset by a decrease in the cost of the leased LCI Network which
is reflected in cost of services. Depreciation and amortization expense as a
percentage of revenues was a consistent 6% for the three months ended March
31, 1998 and 1997.
OPERATING INCOME. Operating income increased 27% to $56 million for the
three months ended March 31, 1998, over the same period in 1997. As a
percentage of revenues, operating income was 13% for the three months ended
March 31, 1998, compared to 12% for the same period in 1997. The increase in
operating income as a percentage of revenue reflects operating efficiencies
and management of LCI's cost structures.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net of
capitalized interest, increased to $8 million for the three months ended March
31, 1998, compared to $7 million for the same period in 1997. This increase is
primarily due to an increase in interest expense as a result of the higher
long-term debt balance when compared to the average debt balance for the
period a year ago.
INCOME TAX EXPENSE. Income tax expense was $19 million for the three months
ended March 31, 1998 as compared to $15 million for the same period in 1997.
The increase in income tax expense resulted from the increase in the growth in
earnings before taxes. LCI analyzes and adjusts its effective tax rate, if
necessary, on a quarterly basis.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1996
REVENUES. In 1997, total revenues increased 26% to $1.6 billion, compared to
$1.3 billion in 1996. Total revenues in 1996 increased 58% from $824 million
in 1995. Revenues for all periods presented are reduced by estimated
allowances for credits and uncollectible accounts (sales allowance).
D-12
<PAGE>
Revenues from business customers increased approximately 25% during 1997, as
compared to approximately 42% and 26% during 1996 and 1995, respectively.
Business revenues represented in excess of
70% of LCI's total revenues in 1997. The decline in business revenue growth
rates are the result of current competitive pricing and acquisition revenue in
1996 and 1995. Residential/small business revenues increased approximately 30%
in 1997, compared to approximately 125% in 1996 and 170% in 1995, and
represented nearly 30% of total revenues for 1997. Growth in international
service revenues across all revenue service lines was more than 80% in 1997,
compared to more than 100% in both 1996 and 1995. The decline in
residential/small business and international revenue growth rates reflect both
competitive pricing and LCI's larger base of customers and revenue. LCI's
growth rates remain substantially higher than the general industry growth
rates.
LCI experienced a 6% decrease year-over-year in revenue per MOU for 1997,
compared to a 4% and 2% decrease in 1996 and 1995, respectively. Revenue per
MOU is affected by several factors, including competitive pricing and the mix
of services, market segments and regions. The growth in business and
international service volumes, as measured in MOUs, exceeded the growth in
revenue due to competitive pricing pressures, changes in the mix of services
and changes in the mix of international country traffic. LCI's growth in
various segments, which have different rate structures and generate different
gross margins, has changed its revenue mix and consequently impacted average
revenue per MOU.
In addition to its internal sales force, LCI uses a combination of other
channels, such as advertising and third-party sales representatives, to market
its services. For certain third-party sales representatives, compensation is
paid through a combination of upfront payments and an ongoing commission based
upon collected long-distance revenue attributable to customers identified by
the representatives. LCI retains responsibility for the customer relationship,
including billing and customer service. ACN continued to be the largest of
LCI's sales representatives for residential/small business customers. LCI has
diversified and expanded other sales channels and, as a result, channels other
than ACN currently are generating more than 70% of new residential/small
business sales.
GROSS MARGIN. LCI's gross margin increased 25% to $656 million in 1997 from
$526 million in 1996. Gross margin in 1996 increased 60% from $328 million in
1995. The following table provides information regarding gross margin:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................ $1,642 $1,304 $824
Cost of services.................................... 986 778 496
Gross margin........................................ $ 656 $ 526 $328
Gross margin %...................................... 40.0% 40.3% 39.8%
</TABLE>
Gross margin as a percentage of revenue remained relatively flat in 1997,
reflecting several market conditions. LCI experienced a shift in the revenue
mix to higher volume customers with a lower gross margin per MOU, and
continued competitive pricing pressures existed in all market segments. The
domestic market has seen a significant rate decline due to forward pricing, or
pricing reductions that anticipated access charge reductions. Access charge
reform lowered access charges on January 1, 1998; however, this is expected to
be offset by higher customer line charges and increased costs for universal
service funding. LCI expects that the impact of access reform will not
significantly impact the cost of providing service.
LCI continues to evaluate strategies for reducing its cost of services.
These strategies include using its owned fiber-optic capacity and gaining
access to fiber-optic and broadband capacity through contract negotiations or
other arrangements with carriers. LCI's substantial fiber expansion will
continue into early 1998 and will temporarily result in redundant facilities
and increased costs while traffic is migrated from current leased facilities
to the new owned facilities. In addition, while awaiting delivery of the fiber
in 1998, LCI is continuing
D-13
<PAGE>
the current LCI Network expansion on a temporary leased basis. The increased
cost of these leased facilities has pressured gross margin; however, after
delivery of the fiber, these temporary leased facilities will no longer be
needed in the LCI Network. The transition from the current and incremental
leased facilities to LCI's owned facilities will occur throughout 1998.
Expansion of the fiber capacity will require only minimal incremental costs.
As a result, as LCI's volume grows, costs per MOU are expected to decline. In
addition, the LCI Network expansion allows LCI to begin to compete more
aggressively and to accelerate the growth of data and private line services.
The costs associated with the growth of these services are primarily embedded
in the fixed cost of the owned LCI Network and should allow LCI to improve
overall gross margins. The historical results as restated do not reflect
synergies LCI expects to realize from the transition of USLD traffic to the
owned LCI Network or the significant cost reductions from the fiber expansion.
The expected owned LCI Network synergies will occur primarily in the second
half of 1998 and should lower cost of services.
OPERATING EXPENSES AND OPERATING INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Gross margin.................................................. $656 $526 $328
Selling, general and administrative expenses.................. 408 305 193
Merger charges................................................ 45 -- --
Restructuring charges......................................... 9 16 --
Depreciation and amortization................................. 96 75 54
Operating income.............................................. $ 98 $130 $ 81
As a percent of revenue:
Gross margin.................................................. 40.0% 40.3% 39.8%
Selling, general and administrative expenses.................. 24.8% 23.4% 23.4%
Merger charges................................................ 2.7% -- --
Restructuring charges......................................... 0.6% 1.2% --
Depreciation and amortization................................. 5.8% 5.8% 6.6%
Operating income.............................................. 6.0% 10.0% 9.8%
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34% to $408 million in 1997, and increased
58% to $305 million in 1996 from $193 million in 1995. As a percentage of
revenues, SG&A expenses were 24.8% in 1997 and 23.4% for both 1996 and 1995.
SG&A expenses increased in 1997 due to several one-time charges, which are
discussed below.
LCI's SG&A expenses are affected primarily by payroll and commissions.
Payroll expenses increased 28%, 46% and 34% in 1997, 1996 and 1995,
respectively. Payroll expenses represented approximately 7% of revenue in each
of the years 1997, 1996 and 1995. In 1996 and 1995, LCI experienced increases
in the number of employees from LCI's acquisitions and the expansion of the
sales and customer support infrastructure. For each of the years 1997, 1996
and 1995, commission expenses represented approximately 6% of revenue and grew
in proportion to revenue growth for the same periods. Residential/small
business revenue related to third-party sales agents was the primary driver of
the dollar increase in commission expense. The costs incurred for third-party
commissions primarily replace other variable marketing and selling expenses
for this revenue segment.
Included in SG&A for 1997 was $35 million of costs that LCI does not expect
to continue. This primarily included strengthening the allowance for doubtful
accounts for the combined customer base of LCI and USLD through a $21 million
charge. This charge was required as a result of several large customers that
either filed bankruptcy or were identified at risk for collection during the
fourth quarter of 1997; reserve strengthening for RBOC uncollectible rates;
and increased credits associated with LCI's conversion to its in-house billing
system for residential/small business customers. The one-time charges also
included approximately $6 million of costs
D-14
<PAGE>
for the write-off of assets associated with the $300 million investment in the
LCI Network as LCI moves from a primarily leased to a primarily owned network.
The remaining charges were for the write-off of certain assets, and one-time
charges related to salary and commissions expenses and other miscellaneous
items.
LCI anticipates an incremental increase in SG&A expenses with the continued
expansion of its geographic sales presence, and expansion in the data and
local services markets. LCI's efforts to resell services in the local services
market have not been profitable due to pricing discrimination and other
difficulties with the LECs, as well as the uncertain regulatory and judicial
proceedings governing the provision of local service. LCI expects continued
increases in SG&A expenses to correspond with growth in the residential/small
business segment, which incurs higher proportional costs, but also provides a
higher gross margin than other segments. LCI continues to expand its growth
geographically, in market segments and services, and actively manages LCI's
investment in and expected profitability of this growth. SG&A expenses should
be positively impacted by efficiencies resulting from the integration of
USLD's operations, which should be realized in the second half of 1998.
MERGER CHARGE. During 1997, LCI recorded a charge of $45 million in
connection with the merger of USLD. The merger charge included $7 million for
direct transaction costs, including fees for investment bank and other
professional fees, $31 million for the elimination of redundant facilities and
the write-off of assets, and $7 million for employee severance and termination
costs.
RESTRUCTURING CHARGE. Restructuring costs of $9 million were recorded in
1997, which included $8 million for the move to a new corporate headquarters
and for employee severance costs, and $1 million for the resignation of USLD's
former chairman of the board of directors.
During 1996, USLD recorded a $13 million charge for the spin-off of its
billing clearinghouse and information management services business ("Billing")
and $3 million for restructuring costs associated with the consolidation of
support functions and the write-off of certain assets.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
("D&A") for 1997, 1996 and 1995 increased 28%, 39% and 20% year-over-year,
respectively. The increase reflects the investments made in infrastructure for
sales, customer service and other service delivery systems in support of LCI's
growth in revenues and MOUs, as well as additional amortization expenses from
acquisitions. D&A as a percentage of revenues was consistent at 5.8% in both
1997 and 1996, which decreased from 6.6% in 1995. LCI's revenue growth has
exceeded the growth in the cost of additional LCI Network and other capital
assets, due to LCI's ability to take advantage of improved technology with
higher capacity at lower costs. An increase in D&A for the additional LCI
Network facilities is expected beginning in the first quarter of 1998 as LCI
moves from a primarily leased network to a primarily owned network. The
increase will be offset by lower cost of services paid to third-party
providers for leased facilities.
OPERATING INCOME. Operating income decreased 25% to $98 million in 1997 and
increased 60% to $130 million in 1996 from $81 million in 1995. As a
percentage of revenues, operating income decreased to 6.0% for the year ended
December 31, 1997, from approximately 10% for each of the years ended December
31, 1996 and 1995. The merger costs, restructuring costs and the one-time
items in SG&A had an adverse effect on operating income as a percentage of
revenue. In addition, the decline in operating income as a percentage of
revenue reflects the competitive pressure on gross margin, the higher leased
facilities costs for USLD off-LCI Network traffic and the increase in SG&A.
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net of
capitalized interest, increased to $36 million in 1997 from $29 million in
1996 and $16 million in 1995. The $350 million senior debt securities (the
"LCI Notes") issued in June 1997, which carry a higher interest rate than
previously outstanding short-term debt, resulted in increased interest expense
for more than half of the year. Interest expense is expected to increase due
to the higher fixed rate of interest on the LCI Notes compared to LCI's
floating short-term rates. However, the issuance provides interest rate
stability and provides additional availability under LCI's other credit
facilities.
D-15
<PAGE>
Interest and other expense in 1997 includes a $5 million write-off of deferred
financing fees associated with prior credit facilities and $5 million and $2
million in 1997 and 1996, respectively, for the costs of the LCI
Securitization Program.
The increases in interest and other expense, net in 1996 and 1995 were the
result of higher debt levels to fund LCI's acquisitions and capital
expenditures. Interest and other expense, net in 1996 included a gain of
approximately $2 million on the sale of a wholly owned subsidiary, which
provided service to non-strategic geographic locations, and in 1995 included a
gain of approximately $2 million related to the resolution of an investment in
STN Incorporated.
INCOME TAXES. Income tax expense was $31 million, $38 million and $16
million in 1997, 1996 and 1995, respectively. In 1997, the effective tax rate
increased to 50% as a result of non-deductible costs incurred in connection
with the merger of USLD. However, LCI believes that its recurring effective
tax rate is between 39% and 40%. Increased income tax expense resulted from an
increase in the effective tax rate and the increase in income before income
taxes for 1996 as compared to 1995. The effective income tax rate was lower
than the statutory rate in 1996 and 1995, primarily due to LCI's expected use
of available net operating losses. Previously generated net operating losses
for financial reporting purposes were fully realized as of December 31, 1996.
DISCONTINUED OPERATIONS. In August 1996, USLD completed the spin-off of
Billing. The spin-off was accounted for as discontinued operations and,
accordingly, $11 million and $15 million were recorded, net of income taxes of
$7 million and $9 million, in 1996 and 1995, respectively.
PREFERRED DIVIDENDS. Preferred dividends were $3 million and $6 million for
1996 and 1995, respectively, as a result of the dividend requirements on LCI's
previously outstanding 5% Cumulative Convertible Exchangeable Preferred Stock
("Convertible Preferred Stock"). During 1996, nearly all of the 4.6 million
shares of Convertible Preferred Stock outstanding were converted into shares
of LCI Common Stock.
NET INCOME AND EARNINGS PER COMMON SHARE. Net income decreased to $31
million from $74 million in 1996 and $64 million in 1995. Income on common
stock was $31 million, $71 million and $58 million for 1997, 1996 and 1995,
respectively.
LCI adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," for the fiscal year ending December 31, 1997, and
accordingly, all periods have been restated to calculate basic and diluted
earnings per share. Basic earnings per share were calculated as income
available to common shareowners divided by the weighted average number of
common shares outstanding. For the years ended December 31, 1996 and 1995, the
diluted weighted average number of common shares included the assumed
conversion of any Convertible Preferred Stock then outstanding at any time
during the period into 12 million shares of LCI Common Stock. For all years
presented, LCI Common Stock equivalents were reflected in the diluted weighted
average number of common shares using the treasury stock method.
LIQUIDITY AND CAPITAL RESOURCES
LCI is a holding company and conducts its operations through its direct and
indirect wholly owned subsidiaries. LCI SPC I, Inc. ("SPC") is a wholly owned
subsidiary of LCI and facilitates the LCI Securitization Program. Except in
limited circumstances, SPC is subject to certain contractual prohibitions
concerning the payment of dividends and the making of loans and advances to
LCI. There are, however, no restrictions on the movement of cash within the
remainder of the consolidated group. Therefore, LCI's discussion of its
liquidity is based on the consolidated group.
CASH FLOWS--OPERATING ACTIVITIES. LCI's operations provided $78 million of
cash for the three months ended March 31, 1998, compared to $41 million for
the same period in 1997. Excluding the securitization activity, cash from
operations was $47 million for the three month period ended March 31, 1998,
compared to $41 million for the same period in 1997.
D-16
<PAGE>
CASH FLOWS--INVESTING ACTIVITIES. LCI has supported its growth strategy with
capital expenditures and acquisitions. During the three months ended March 31,
1998, LCI used $97 million for investing activities as compared to $53 million
for the same period in 1997. In the first quarter of 1998, LCI spent $97
million, as compared to $47 million for the quarter ended March 31, 1997, in
capital expenditures to acquire additional switching, transmission and
distribution capacity, as well as to develop and license information systems
support, representing an increase of $50 million. This increase includes
progress payments totaling $14 million for various fiber routes which LCI is
purchasing to extend the owned portion of the LCI Network.
CASH FLOWS--FINANCING ACTIVITIES. Financing activities provided a net $19
million for the three months ended March 31, 1998, compared with $9 million
provided by financing activities during the same period in 1997. Financing
activities for the quarter ended March 31, 1998 included proceeds of $14
million from employee stock plans and warrants.
CAPITAL RESOURCES. The net proceeds from the issuance of LCI Notes in June
1997 were used to repay outstanding indebtedness and for working capital and
general corporate purposes.
LCI has a $750 million credit facility with a syndicate of banks, which
allows LCI to borrow funds on a daily basis. As a result, LCI uses its
available cash to reduce the balance of its borrowings and usually maintains
no cash on hand. As of March 31, 1998, there was no outstanding balance on the
credit facility. The interest rate on the debt outstanding is variable based
on several indices. See note 5 to the Condensed Consolidated Financial
Statements. The credit facility contains certain financial and negative
covenants. As of March 31, 1998, LCI was in compliance with all covenants.
LCI has three separate discretionary line of credit agreements with
commercial banks for a total of $75 million. The LCI Lines of Credit provide
flexible short-term borrowing facilities at competitive rates dependent upon a
market indicator. Any outstanding balance is reflected in long-term debt in
the accompanying consolidated balance sheets due to borrowing availability
under the credit facility to repay such balances. As of March 31, 1998, there
was a $14 million outstanding balance on the LCI Lines of Credit.
LCI maintains the LCI Securitization Program to sell a percentage ownership
interest in a defined pool of LCI's trade accounts receivable. LCI can
transfer an undivided interest in a designated pool of accounts receivable on
an ongoing basis to maintain the participation interest up to $150 million. At
March 31, 1998, the pool of trade accounts receivable which was available for
sale was approximately $140 million and the amount of receivables sold, but
not collected was approximately $100 million.
D-17
<PAGE>
MANAGEMENT OF LCI
The following table sets forth the executive officers of LCI as of May 1,
1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Chairman of the Board of Directors and Chief Executive
H. Brian Thompson 59 Officer
Joseph A. Lawrence 48 Executive Vice President and Chief Financial Officer
Marshall W. Hanno 52 Senior Vice President--Commercial Segment
Senior Vice President--Engineering, Operations and
Lawrence J. Bouman 51 Technology
Roy N. Gamse 52 Senior Vice President--Business Marketing
Senior Vice President--Local Telecommunications
Anne K. Bingaman 54 Division
John G. Musci 41 Senior Vice President--Wholesale Segment
John C. Taylor 40 Senior Vice President--Consumer Segment
</TABLE>
Mr. Thompson has been Chairman of the Board of Directors and Chief Executive
Officer of LCI and its subsidiaries since July 1991. Mr. Thompson previously
served as Executive Vice President of MCI and its affiliates where he was
responsible for all eight of MCI's operating divisions and held various other
senior executive positions from 1981 to 1991. Mr. Thompson is a director of
Bell Canada International Inc., Microdyne Corporation, Golden Books Family
Entertainment, Inc. and Comcast UK Cable Partners Limited. He is a member of
the Listed Company Advisory Committee to the NYSE Board of Directors.
Mr. Lawrence was named Executive Vice President of LCI in 1997, and has
served as LCI's Chief Financial Officer of LCI since October 1993. From
January 1985 through October 1993, ~Mr. Lawrence held several executive
positions at MCI, including Senior Vice President--Finance and Vice President
Finance and Administration for the Consumer Division and Vice President
Finance for the Mid-Atlantic Division. Mr. Lawrence is a director of Journal
Register Company.
Mr. Hanno was named to Senior Vice President--Commercial Segment in January
1997. Since July 1991, Mr. Hanno held the positions of Senior Vice President--
Sales and Vice President of Sales. From 1987 to July 1991, Mr. Hanno was Vice
President of Sales of MCI and prior thereto was Vice President of Sales and
Marketing with Allnet Communications.
Mr. Bouman has been Senior Vice President--Engineering, Operations and
Technology of LCI and its subsidiaries since October 1995. From October 1990
through October 1995, Mr. Bowman held several executive positions at MCI,
including Senior Vice President of Network Operations, Senior Vice President
of Network Engineering and Senior Vice President of Planning and Program
Management.
Mr. Gamse has been Senior Vice President--Business Marketing of LCI since
March 1996. From 1982 to 1993, Mr. Gamse held several positions at MCI,
including Senior Vice President of Marketing for Consumer Markets and Senior
Vice President of Customer Service. In addition, Mr. Gamse was previously a
policy advisor at the U.S. Environmental Protection Agency.
Ms. Bingaman was appointed Senior Vice President--Local Telecommunications
Division in January 1997. From 1993 to 1996, Ms. Bingaman was Assistant
Attorney General at the U.S. Department of Justice and Chief of the Antitrust
Division.
Mr. Musci was named Senior Vice President--Wholesale segment in 1997. From
1985 to 1997, Mr. Musci has held several executive positions at LCI in sales
and marketing. Prior to joining LCI, Mr. Musci held marketing and sales
positions with AT&T Information Systems and Ohio Bell Telephone.
Mr. Taylor was named Senior Vice President--Consumer Segment in 1997, after
serving as Vice President of Corporate Development and Investor Relations at
LCI since 1995. Prior to joining LCI, Mr. Taylor spent 12 years at MCI in a
variety of key positions in financial and strategic planning, business
development, sales channel development and partner marketing.
D-18
<PAGE>
COMPENSATION OF LCI'S EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The table below sets forth all compensation paid by LCI to each of the named
executive officers for the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL
COMPENSATION
---------------------- SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ------------------ ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
H. Brian Thompson....... 1997 560,000 744,800 200,000 145,276(/2/)(/5/)(/6/)
Chairman and Chief
Executive Officer 1996 530,000 403,740 200,000 139,314(/2/)(/3/)(/5/)(/6/)
1995 500,000 508,750 300,000 19,338(/3/)(/5/)(/6/)
Joseph A. Lawrence...... 1997 295,000 238,373 190,000 68,230(/2/)(/5/)(/6/)
Executive Vice President
and Chief 1996 260,000 120,675 115,000 68,845(/2/)(/4/)(/5/)(/6/)
Financial Officer 1995 235,000 143,478 160,000 7,403(/4/)(/5/)(/6/)
Anne K. Bingaman........ 1997 215,000 155,500 125,000 --
Senior Vice President
and President -- Local
Telecommunications
Division
Lawrence J. Bouman...... 1997 225,000 171,000 175,000 160,149(/5/)(/7/)
Senior Vice President --
Engineering, 1996 215,000 98,034 100,000 --
Operations and
Technology 1995 48,000(/1/) 29,400(/1/) 150,000 1,150(/7/)
Marshall W. Hanno....... 1997 225,000 165,240 100,000 161,168(/5/)(/7/)
Senior Vice President --
Commercial Segment 1996 215,000 88,984 100,000 103,536(/5/)(/7/)
1995 195,000 119,058 140,000 4,500(/5/)
</TABLE>
- --------
(/1/)Represents partial year, Mr. Bouman joined LCI as an executive officer in
October 1995.
(/2/)Includes the cost to LCI of split-dollar life insurance policies on the
lives of Messrs. Thompson and Lawrence. See "--Employment Contracts,
Termination of Employment and Change-in-Control Arrangements." LCI paid
premiums on these policies of $318.000 in 1997 and 1996 for Mr. Thompson
and of $156,000 in 1997 and 1996 for Mr. Lawrence. LCI is entitled to a
refund of the cumulative annual premiums paid by it to the insurer
pursuant to the split-dollar life insurance arrangement before any
benefits are paid by the insurer to the owner or beneficiaries of the
policy. The amount of "All Other Compensation" associated with the split-
dollar insurance arrangements includes (i) amounts representing the term
life insurance component of the policy of $7,177 in 1997 and $5,842 in
1996 for Mr. Thompson; and $l,215 in 1997 and $l,092 in 1996 for Mr.
Lawrence, and (ii) the actuarial value of the benefit of the remainder of
the premiums paid by LCI of $97,816 in 1997 and $104,323 in 1996 for Mr.
Thompson and $55,174 in 1997 and $59,033 in 1996 for Mr. Lawrence.
(/3/)Includes premiums of $3,224 and $2,865 in 1996 and 1995, respectively,
paid by LCI on a former split-dollar life insurance policy, the proceeds
of which were payable to designated beneficiaries of Mr. Thompson. Such
policy was converted to paid up key man life insurance during 1996.
(/4/)Includes premiums of $599 and $553 in 1996 and 1995, respectively, paid
by LCI on a former split dollar life insurance policy, the proceeds of
which were payable to designated beneficiaries of Mr. Lawrence. Such
policy was converted to paid-up key man life ~insurance during 1996.
(/5/)Includes the following matching contributions made to officers' accounts
in LCI's 401 (k) Plan: $1,969 in 1997, $l,904 in 1996, and $2,108 in 1995
for Mr. Thompson; $4,620 in 1997, $4,500 in 1996 and $4,500 in 1995 for
Mr. Lawrence; $4,620 in 1997, $4,327 in 1996, $4,500 in 1995 for Mr.
Hanno; and $1,970 in 1997 for Mr. Bouman.
(/6/)Includes the following matching contributions made to officers' accounts
in LCI's Supplemental Plan: $14,769 in 1997, $13,996 in 1996 and $9,692
in 1995 for Mr. Thompson and $3,450 in 1997, $3,300 in 1996 and $l,765 in
1995 for Mr. Lawrence. Also includes the following imputed return on
investment for contributions to LCI's Supplemental Plan at the same rate
as achieved in LCI's 401 (k) Plan: $23,545 in 1997, $10,025 in 1996 and
$4,673 in 1995 for Mr. Thompson and $3,771 in 1997, $321 in 1996 and $585
in 1995 for Mr. Lawrence.
(/7/)Includes reimbursement for relocation expenses of $156,548 in 1997 and
$99,209 in 1996 for Mr. Hanno and $158,179 in 1997 and $l,150 in 1995 for
Mr. Bouman.
D-19
<PAGE>
The following table contains information concerning the grant of options
under LCI's 1997/1998 Stock Option Plan to each of the named executive
officers of LCI during the year ended December 31, 1997. No stock appreciation
rights ("SARs") were granted in 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ------------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
H. Brian Thompson....... 200,000 7.0% $19.31 2/13/07 $ 2,428,791 $ 6,155,033
Joseph A. Lawrence...... 115,000 $19.31 2/13/07 $ 1,396,555 $ 3,539,144
75,000 $20.53 8/04/07 $ 968,340 $ 2,453,965
------- ----------- -----------
190,000 6.7% $ 2,364,895 $ 5,993,109
Anne K. Bingaman........ 125,000 4.4% $20.50 1/03/07 $ 1,611,542 $ 4,083,965
Lawrence J. Bouman...... 100,000 $19.31 2/13/07 $ 1,214,396 $ 3,077,517
75,000 $20.53 8/04/07 $ 968,340 $ 2,453,965
------- ----------- -----------
175,000 6.2% $ 2,182,736 $ 5,531,482
Marshall W. Hanno....... 100,000 3.5% $19.31 2/13/07 $ 1,214,396 $ 3,077,517
</TABLE>
- --------
(1) 20% of these options become exercisable a year from the date of grant and
1.66% become exercisable each month thereafter for 48 months. Options were
granted with an exercise price at the fair market value of a share of LCI
Common Stock determined pursuant to LCI's 1997/1998 Stock Option Plan on
the date of grant and expire ten years from the date of grant.
(2) The potential realizable value represents the estimated future gain in the
value of the options over their exercise price which may exist immediately
prior to the scheduled expiration date of the options. The calculation
assumes the specified compounded rates of appreciation in the per share
price of LCI Common Stock starting on the date of the grant and further
assumes that the options will be exercised on their expiration date. The
actual value, if any, which may be realized will depend upon the market
price of the shares of LCI Common Stock on the date the option is
exercised.
The following table sets forth information with respect to the exercise of
options during 1997 and the options held as of December 31, 1997 by each of
the named executive officers. As of December 31, 1997, no SARs were
outstanding.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY
ACQUIRED UNEXERCISED OPTIONS OPTIONS AT FY-END
ON VALUE AT FY-END(#) ($)(2)
EXERCISE REALIZED ------------------------- -------------------------
(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Brian Thompson....... 300,000 $4,986,000 1,745,347 554,121 $44,891,554 $8,306,382
Joseph A. Lawrence...... 100,000 $1,138,204 334,752 385,248 $ 6,420,126 $5,336,780
Anne K. Bingaman........ -- -- -- 125,000 -- $1,281,250
Lawrence J. Bouman...... -- -- 103,333 321,667 $ 1,264,113 $3,673,887
Marshall W. Hanno....... 20,000 $ 388,646 324,188 249,068 $ 7,076,031 $3,524,803
</TABLE>
- --------
(1) The value realized is calculated by subtracting the aggregate exercise
price from the fair market value of the shares of LCI Common Stock as of
the exercise date multiplied by the number of shares exercised.
(2) Represents the difference between the closing market price of the shares
of LCI Common Stock at December 31, 1997 of $30.75 per share and the
exercise price of in-the-money options multiplied by the number of shares
underlying the in-the-money options.
D-20
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Effective April 19, 1993, LCI and LCI International Management Services,
Inc. ("LCIM") entered into employment agreements with Messrs. Thompson and
Hanno, pursuant to which each executive agreed to serve full time in his
present position. In July 1997 and December 1997, the employment agreements
for Messrs. Hanno and Thompson, respectively, renewed for two-year periods.
Effective in October 1993, LCI and LCIM entered into an employment agreement
with Mr. Lawrence, pursuant to which Mr. Lawrence agreed to serve full time as
Chief Financial Officer. In October 1997, Mr. Lawrence's employment agreement
renewed for a two-year period. Effective October 2, 1995, LCIM entered into an
employment agreement with Mr. Bouman, pursuant to which Mr. Bouman agreed to
serve full time as Senior Vice President-Engineering, Operations and
Technology. In October 1997, Mr. Bouman's employment agreement renewed for a
two-year period. Effective January 3, 1997, LCIM entered into an employment
agreement with Ms. Bingaman, pursuant to which Ms. Bingaman agreed to serve
full time for two years as Senior Vice President and President-Local
Telecommunications Division. The term of the employment agreements for Messrs.
Thompson, Hanno and Lawrence will automatically extend for successive two-year
periods except that any party may terminate the agreement by giving written
notice no later than 90 days prior to the end of any term. The employment
agreements for Mr. Bouman and Ms. Bingaman provide for a single two-year
renewal. The annual base salary under the agreements for Messrs. Thompson,
Lawrence, Hanno, and Bouman and Ms. Bingaman will be set by LCI, but cannot be
less than $400,000, $206,000, $150,000, $200,000 and $215,000, respectively.
In addition, each of these executives will be eligible to receive bonus
payments under LCI's incentive plans in amounts determined by the LCI Board.
Pursuant to these employment agreements, if the executive is terminated for
cause (as defined in the agreements) or the executive voluntarily terminates
his or her employment, he or she will receive base salary plus any amounts due
under benefit plans or otherwise through the date of termination. If the
executive's employment is terminated without cause, he or she will receive (i)
base salary plus any amounts due under benefit plans or otherwise through the
date of termination, (ii) a severance payment in an amount equal to the
executive's annual base salary, and (iii) bi-weekly payments in an amount
equal to the last such payment received by the executive prior to the date of
termination for up to one year after the termination of employment (the
"Termination Payments"). In addition, Mr. Bouman and Ms. Bingaman may
participate in group insurance plans for one year following any termination
without cause. For executive officers other than Mr. Bouman and Ms. Bingaman,
if there is a material change in an executive's position or duties (and in the
case of Mr. Lawrence, compensation or benefits) without the executive's
consent, and the executive thereafter terminates employment, such termination
shall be deemed to be without cause and the executive will be entitled to the
rights of an executive terminated without cause. Mr. Lawrence is also entitled
to receive the Termination Payments if he resigns as a result of any material
breach by LCI of his employment agreement or his office being moved to a
location outside the McLean or Arlington, Virginia areas.
The employment agreements further provide that if there is a "change in
control" of LCI, all stock options granted to the executives will vest and
become immediately exercisable. "Change in control" is defined under the
employment agreements as the acquisition by any person, entity or group
(within the meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act)
other than Warburg, Pincus Capital Company, L.P. or its affiliates, of more
than 50% of the then outstanding voting securities of LCI. All other employees
with stock options have the same "change in control" provision in their stock
option agreements.
LCI and each of Messrs. Thompson and Lawrence have entered into split-dollar
life insurance arrangements dated as of November 1, 1996 (the "Split-Dollar
Plans"). Under the Split-Dollar Plans, LCI has agreed to pay to an insurer
annual premiums on split-dollar life insurance policies on the lives of
Messrs. Thompson and Lawrence. Such split-dollar policies are currently owned
by trusts established by each of Messrs. Thompson and Lawrence. LCI will
receive a reimbursement of all premiums before any benefits are paid by the
insurer to the owner or beneficiaries of the policies. The premiums advanced
are secured through collateral assignments of the respective policies. Until
such time as the cash surrender value of each policy exceeds the cumulative
annual premiums paid by LCI, the deficiency will be secured by notes from the
respective trusts to LCI. As of December 31, 1997, the amount of the
deficiency was $82,083 for Mr. Thompson's trust, and $29,659 from Mr.
Lawrence's trust.
D-21
<PAGE>
SECURITY OWNERSHIP OF LCI MANAGEMENT AND OTHERS
The following table sets forth certain information regarding the ownership
of LCI Common Stock as of the LCI Record Date by (i) each person known by LCI
to be the beneficial owner of more than 5% of the outstanding LCI Common
Stock, (ii) each of the executive officers named in "Compensation of LCI's
Executive Officers," (iii) each director of LCI and (iv) all directors and
executive officers of LCI as a group. To LCI's knowledge, except as otherwise
noted, the named beneficial owner has sole voting and investment power.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY OF
NAME OWNED TOTAL
- ---- ------------ ----------
<S> <C> <C>
FMR Corp. .................................. 13,121,460(/1/) 13.4%
82 Devonshire Street
Boston, MA 02109
The Capital Group Companies, Inc............ 5,912,300(/2/) 6.0%
333 South Hope Street
Los Angeles, CA 90071
AMVESCAP PLC................................ 5,175,964(/3/) 5.3%
11 Devonshire Square
London EC2M 4YR
England
Anne K. Bingaman............................ 37,500(/4/) *
Lawrence J. Bouman.......................... 156,251(/4/) *
Richard E. Cavanagh......................... 16,000(/4/) *
William F. Connell.......................... 39,000(/4/) *
Julius W. Erving, II........................ 30,000(/4/) *
Marshall W. Hanno........................... 409,718(/4/) *
Douglas M. Karp............................. 208,493(/4/),(/5/) *
Joseph A. Lawrence.......................... 431,067(/4/) *
George M. Perrin............................ 51,000(/4/) *
H. Brian Thompson........................... 2,246,471(/4/) 2.3%
John L. Vogelstein.......................... 302,843(/4/),(/6/) *
All executive officers and directors as a
group (14 persons)......................... 3,981,873(/7/) 3.9%
</TABLE>
- --------
* Less than one percent.
(/1/) On May 8, 1998, FMR Corp. notified LCI by means of a Statement on
Schedule 13G that it may be deemed to be the beneficial owner of
13,121,460 shares of LCI Common Stock over which certain of its
subsidiaries exercised investment and/or dispositive power as of April
30, 1998. FMR Corp. may be deemed to have sole dispositive power over all
such shares and sole voting power over 436,200 shares. Fidelity
Management & Research Company, a wholly-owned subsidiary of FMR Corp.,
may be deemed to be the beneficial owner of 12,681,360 of such shares.
(/2/) On February 10, 1998, The Capital Group Companies, Inc. ("CGC") notified
LCI by means of a Statement on Schedule 13G that it may be deemed to be
the beneficial owner of 5,912,300 shares of LCI Common Stock over which
certain of its subsidiaries had investment and/or dispositive power as of
December 31, 1997. Capital Research and Management Company, a wholly-
owned subsidiary of CGC, may be deemed to be the beneficial owner of
4,500,000 shares of LCI Common Stock with sole dispositive power over all
shares and no voting power over any shares.
(/3/) On February 11, 1998, AMVESCAP PLC notified LCI by means of a Statement
on Schedule 13G that certain of its subsidiaries have shared investment
and dispositive power over various investment accounts which as of
December 31, 1997 held 5,175,964 shares of LCI Common Stock.
(/4/) Includes shares of LCI Common Stock which the directors and named
executive officers had the right to acquire through the exercise of
options as of the LCI Record Date as follows: Anne K. Bingaman--33,333;
Lawrence J. Bouman--143,333; Richard E. Cavanagh--8,000; William F.
Connell--17,000; Julius W. Erving, II--17,000; Marshall W. Hanno--
373,975; Douglas M. Karp--8,000; Joseph A. Lawrence--395,920; George M.
Perrin--33,000; H. Brian Thompson--1,866,249; and John L. Vogelstein--
8,000. Also includes shares of LCI Common Stock which the executive
officers have the right to acquire through the exercise of options
exercisable within 60 days of the LCI Record Date as follows: Anne K.
Bingaman--4,167; Lawrence J. Bouman--11,667; Richard E. Cavanagh--8,000;
William F. Connell--8,000; Julius W. Erving, II--8,000; Marshall W.
Hanno--15,947; Douglas M. Karp--8,000; Joseph A. Lawrence--21,000; George
M. Perrin--8,000; H. Brian Thompson--40,219; and John L. Vogelstein--
8,000.
(/5/) 5,650 of shares of LCI Common Stock indicated above are owned directly by
Mr. Karp. 186,843 of the shares of LCI Common Stock indicated as owned by
Mr. Karp are beneficially owned by Warburg, Pincus & Co., a New York
general partnership ("WP"). As a partner of WP, Mr. Karp may be deemed to
have an indirect pecuniary interest (within the meaning of Rule 16a-1
under the Securities Exchange Act of 1934 (the "Exchange Act")) in an
indeterminate portion of the shares beneficially owned by WP. Mr. Karp
disclaims beneficial ownership of these shares of LCI Common Stock within
the meaning of Rule 13d-3 under the Exchange Act.
(/6/) 100,000 of the shares of LCI Common Stock indicated above are owned
directly by the John L. Vogelstein Revocable Trust. Mr. Vogelstein has
sole voting power and sole investment power with respect to such shares.
186,843 of the shares of LCI Common Stock indicated as owned by Mr.
Vogelstein are beneficially owned by WP. As a partner of WP, Mr.
Vogelstein may be deemed to have an indirect pecuniary interest (within
the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate
portion of the shares beneficially owned by WP. Mr. Vogelstein disclaims
beneficial ownership of these shares of LCI Common Stock within the
meaning of Rule 13d-3 under the Exchange Act.
(/7/) Includes shares of LCI Common Stock set forth in the preceding footnotes.
D-22
<PAGE>
BUSINESS OF QWEST
Qwest is a facilities-based provider of multimedia communications services
to interexchange carriers and other communications entities, businesses and
consumers, and it constructs and installs fiber optic communications systems
for interexchange carriers and other communications entities, as well as for
its own use. Qwest is expanding its existing long distance network into the
Qwest Network, an approximately 16,250 route mile coast-to-coast,
technologically advanced, fiber optic telecommunications network. Qwest will
employ, throughout substantially all of the Qwest Network, a self-healing
SONET ring architecture equipped with the most advanced commercially available
fiber and transmission electronics manufactured by Lucent and Nortel,
respectively. The Qwest Network's advanced fiber and transmission electronics
are expected to provide Qwest with lower installation, operating and
maintenance costs than older fiber systems in commercial use today. In
addition, Qwest has entered into construction contracts for the sale of dark
fiber along the route of the Qwest Network, which will reduce Qwest's net cost
per fiber mile with respect to the fiber it retains for its own use. As a
result of these cost advantages, Qwest believes it will be well-positioned to
capture market share and take advantage of the rapidly growing demand for long
haul voice and data transmission capacity and services.
The executive offices of Qwest Communications International Inc., a Delaware
corporation, are located at 1000 Qwest Tower, 555 Seventeenth Street, Denver,
CO 80202, and its telephone number is (303) 291-1400.
RECENT DEVELOPMENTS
EUnet Transaction. On April 14, 1998, Qwest acquired EUnet, an Amsterdam-
based, European internet service provider with business units operating in 13
European countries, for approximately $154.4 million in cash and Qwest Common
Stock. At the time of the acquisition, EUnet had approximately 60,000
customers throughout Europe. Under the terms of the acquisition, Qwest
acquired all of the preference shares, "A" ordinary shares and options of
EUnet and approximately 97% of the ordinary shares of EUnet. Following the
closing, certain EUnet stockholders and optionholders will receive
approximately 3.6 million newly issued shares of Qwest Common Stock, having a
deemed 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
Qwest Common Stock to be issued in the transaction under the Securities Act,
as described below, EUnet stockholders will receive at Qwest's option, either
(i) approximately $14.4 million in cash (plus interest to the date of payment)
or (ii) additional newly issued shares of Qwest Common Stock having the value
of such cash payment, based upon an average of the Qwest 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 Qwest Common Stock
to be issued in the transaction, approximately .6 million shares will be
placed in escrow for two years, and may be recovered by Qwest, to satisfy any
indemnification claims. Qwest will acquire the remaining 3% of the ordinary
shares of EUnet by means of a compulsory purchase under applicable law. The
EUnet acquisition was accounted for as a purchase. The shares of Qwest Common
Stock will be issued to EUnet stockholders and optionholders in a private
placement exempt from registration under the Securities Act. Qwest has agreed
to undertake the registration of the resale of the shares of Qwest Common
Stock under the Securities Act not later than the earlier of (i) three weeks
after the closing of the Merger or (ii) September 30, 1998 (or, under certain
circumstances, a later date, but no later than October 31, 1998). See "RISK
FACTORS--Shares Eligible for Future Sale."
Phoenix Transaction. On March 30, 1998, Qwest acquired Phoenix, a non-
facilities-based reseller of long distance services. At the time of the
acquisition, Phoenix had approximately 40,000 customers, primarily in the
business market. Under the terms of the acquisition, approximately .8 million
shares of Qwest Common Stock having a deemed value of approximately $27.2
million (based upon an adjusted average price of $34.67 per share) were
exchanged for the outstanding shares of Phoenix. Additional cash consideration
to the Phoenix Stockholders of up to $4.0 million is being withheld pending
the outcome of litigation for which Phoenix or its affiliates may have certain
potential liability.
AGIS Transaction. In January 1998, Qwest signed a long-term contract to
provide Apex Global Internet Services, Inc. ("AGIS"), an Internet service
provider ("ISP"), telecommunications capacity along
D-23
<PAGE>
approximately 10,000 route miles of the Qwest Network. In consideration, Qwest
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 Qwest of AGIS's common stock, and AGIS has the
right to repurchase the common stock until the contract's second anniversary.
Qwest 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 Qwest. 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 Qwest to purchase an additional $10.0 million of its common
stock. If Qwest 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 Qwest to return all consideration received.
Note Offering. In January 1998, Qwest issued $450.5 million in principal
amount at maturity of its 8.29% Senior Discount Notes (the "New Senior
Discount Notes"), generating net proceeds of approximately $299.2 million,
after deducting offering costs which are included in intangible and other
long-term assets and will be amortized to interest expense over the term of
the New Senior Discount Notes. The net proceeds will be used primarily to fund
the activation and expansion of the Qwest Network and the growth of its
multimedia communications services and informational systems infrastructure.
In addition, Qwest may use a portion of the proceeds to increase its presence
in international markets, such as Mexico and Europe. The principal amount of
the New Senior Discount Notes is due and payable in full on February 1, 2008.
The New Senior Discount Notes are redeemable at Qwest'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, Qwest may use the net cash
proceeds from certain specified equity transactions to redeem up to 35% of the
New Senior Discount Notes at specified redemption prices. Cash interest on the
New Senior Discount Notes will not accrue until February 1, 2003, and
thereafter will accrue at a rate of 8.29% per annum, and will be payable semi-
annually in arrears commencing on August 1, 2003 and thereafter on August 1
and February 1 (each an interest payment date) of each year. Qwest has the
option of commencing the accrual of cash interest on an interest payment date
on or after February 1, 2001 and prior to February 1, 2003, in which case the
outstanding principal amount at maturity of the New Senior Discount 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.
The indenture for the New Senior Discount Notes contains certain covenants
that are substantially identical to Qwest's 9.47% Senior Discount Notes due
2007 (the "Senior Discount Notes") and Qwest 10 7/8% Series B Senior Notes due
2007 (the "Senior Notes") described under "QWEST'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources."
In connection with the sale of the New Senior Discount Notes, Qwest agreed
to make an offer to exchange new notes (the "Exchange Offer"), registered
under the Securities Act and with terms identical in all material respects to
the New Senior Discount Notes or, alternatively, to file a shelf registration
statement under the Securities Act with respect to the New Senior Discount
Notes. In April 1998, Qwest 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 (each, a "New Senior
Discount Registration Default"), additional cash interest will accrue at a
rate per annum equal to 0.50% of the principal amount at maturity of the New
Senior Discount Notes during the 90-day period immediately following the
occurrence of a New Senior Discount Registration Default and increasing in
increments of 0.25% per annum of the principal amount at maturity of the New
Senior Discount Notes up to a maximum of 2.0% per annum, at the end of each
subsequent 90-day period until the New Senior Discount Registration Default is
cured.
OPPORTUNITIES
Qwest believes that demand from interexchange carriers and other
communications entities for advanced, high bandwidth voice, data and video
transmission capacity will increase over the next several years due to
D-24
<PAGE>
regulatory and technological changes and other industry developments. These
anticipated changes and developments include: (i) continued growth in capacity
requirements for high speed data transmission, ATM and Frame Relay services,
Internet and multimedia services and other new technologies and applications;
(ii) continued growth in demand for existing long distance services; (iii)
entry into the market of new communications providers; (iv) requirements of
the four principal nationwide carriers (AT&T, MCI, Sprint and WorldCom) to
replace or augment portions of their older systems; and (v) reform in
regulation of domestic access charges and international settlement rates,
which Qwest expects will lower long distance rates and fuel primary demand for
long distance services.
. Accommodation of the Internet and Other New Applications. Qwest believes
that additional network transmission capacity and faster response times
will be required to accommodate multimedia (voice, data and video) and
other potential high bandwidth applications, such as increasing use of
the Internet by commercial users, the deployment of corporate intranets
and the use of telecommunications infrastructure for providing cable
television and other entertainment services. Qwest believes this growth
will result in increased demand for high bandwidth dedicated circuits and
other network services provided by Qwest (such as Frame Relay and ATM).
. Base Growth of Existing Telecommunications Providers. Domestic long
distance industry revenue has increased in recent years. The revenue
increases were achieved against a backdrop of declining unit prices for
most telecommunications services, which suggests that the demand for
telecommunications bandwidth has increased at an even higher rate. Qwest
believes that these growth trends generally will continue and that
certain companies that do not own most of their networks have potential
needs to invest in network facilities or lease high bandwidth network
capacity in order to remain competitive. In addition, Qwest believes that
the Qwest Network will allow Qwest to offer an attractive alternative for
leased capacity simply to meet current levels of demand for wholesale
telecommunications services.
. Capacity Required by New Communications Entrants. Competition and
deregulation are bringing new entrants into the telecommunications
market. Qwest anticipates that this trend will accelerate as a result of
the Telecommunications Act. The Telecommunications Act allows the RBOCs
and GTE to enter the long distance business and enables other entities,
including entities affiliated with power utilities and ventures between
LECs and cable television companies, to provide an expanded range of
telecommunications services. As these entities emerge as long distance
competitors, Qwest believes they will need their own facilities and
additional high bandwidth capacity to compete effectively with
facilities-based providers.
. Augmentation of Older Systems. The coast-to-coast fiber systems currently
operated by the Tier 1 carriers were constructed for the most part prior
to 1990, using standard, single mode fiber. Most of these systems were
buried directly in the ground without protective conduit. The conversion
of these older systems to the use of SONET ring architecture requires
increasingly more bandwidth over additional route miles. Accordingly,
Qwest believes that the Tier 1 carriers will generally need to replace or
augment parts of their networks to add more capacity, route diversity and
redundancy to their systems and to lower their overall operating costs.
Qwest believes that the older, legacy systems operated by certain of the
Tier 1 carriers generally face certain other disadvantages when compared
to the Qwest Network, such as: (i) lower transmission speeds; (ii) lower
overall capacity; (iii) shorter distances between regeneration/amplifier
facilities; (iv) more costly maintenance requirements; (v) greater
susceptibility to system interruption from physical damage to the network
infrastructure; and (vi) greater difficulty in upgrading to more advanced
fiber due to lack of a spare conduit.
. Access Charge and International Settlement Rate Reform. Qwest anticipates
that primary demand for long distance services will be stimulated by
reforms of domestic access charges and international settlement rates and
recent international trade negotiations. As long distance prices decline,
Qwest expects that overall demand for its services by carriers,
businesses and consumers will increase.
D-25
<PAGE>
STRATEGY
Qwest's objective is to become a leading, coast-to-coast facilities-based
provider of multimedia communications services to other communications
providers, businesses and consumers. To achieve this objective, Qwest intends
to:
. Deploy a Technologically Advanced Network. Qwest believes the technical
characteristics of the Qwest Network will enable it to provide highly
reliable services to interexchange carriers and other communications
entities at low per unit costs as it expands its customer base and
increases network traffic volume. For instance, the Qwest Network's
advanced fiber optic cable and electronic equipment permit high capacity
transmission over longer distances between regeneration/amplifier
facilities than older fiber systems. This translates into generally lower
installation and operating costs. These costs typically constitute a
significant portion of the overall cost of providing telecommunications
services.
. Build on Network Construction Expertise and Existing Network Assets. As
of March 31, 1998, Qwest had built over 11,400 route miles of
telecommunications conduit systems over the last eight years for itself
and major interexchange carriers including AT&T, MCI, Sprint and
WorldCom. As of March 31, 1998, Network Construction Services employed
approximately 1,000 experienced construction personnel led by a senior
construction management team. Qwest utilizes its own fleet of owned and
leased railroad equipment. Qwest had in place railroad and other right-
of-way agreements covering approximately 97% of the Qwest Network and had
installed approximately 68% of the route miles of conduit required for
the Qwest Network as of March 31, 1998. In addition, Qwest has fixed-
price supply agreements for the provision of all the fiber and
transmission electronics necessary to construct and activate the Qwest
Network.
. Establish Low Cost Position. Qwest has entered into major construction
contracts for the sale of dark fiber in the Qwest Network that will allow
Qwest to achieve a low net capital investment in the Qwest Network and
share future operating and maintenance costs. Earnings from these
agreements will reduce Qwest's net cost per fiber mile with respect to
the fiber that it retains for its own use. Qwest believes that this
network cost advantage, coupled with the operating and maintenance cost
advantages of owning an entirely new network with advanced fiber and
equipment uniformly deployed systemwide, will enable it to establish a
low cost position in the long distance industry relative to its
competitors.
. Build on Management Experience. Qwest's management team and board of
directors include individuals with significant experience at major
telecommunications companies. These executives have extensive management
experience in marketing, sales, finance, construction, information
technology, network operations and engineering, having served in various
capacities within large, rapidly growing organizations. See "MANAGEMENT
OF QWEST."
. Grow Carrier Revenue Base. Qwest is currently 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 long-term, high
volume capacity agreements from major carriers. In addition to
traditional telecommunications carriers, Qwest is marketing to ISPs and
other data service companies.
. Develop Commercial Services. Qwest plans to build on its Carrier Services
experience to expand its presence in the Commercial Services market by
developing its distinctive "Ride the Light(TM)" brand identity and
aggressively marketing its existing and planned voice, data and other
transmission products and services. Qwest plans to build 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.
. Acquire Complementary Businesses. Qwest continually evaluates
opportunities to acquire or invest in complementary, attractively valued
businesses, facilities, contract positions and assets to improve its
ability to offer new products and services to customers, to compete more
effectively and to facilitate
D-26
<PAGE>
further growth of its business. See "QWEST'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources." Qwest recently announced the following acquisitions or
proposed acquisitions:
In October 1997, Qwest acquired SuperNet, an ISP, for $20.2 million in
cash, including acquisition costs. SuperNet is a regional ISP in the
Rocky Mountain region that offers Internet services ranging from metered
dial-in access to Internet-based data management and hosting services.
SuperNet provides a customer base, existing product lines and technical
expertise from which Qwest can build product lines in Commercial
Services, including corporate intranet and extranet services and virtual
private networks.
In March 1998, Qwest acquired Phoenix, a non-facilities based seller of
long distance services. See "--Recent Developments--Phoenix Transaction."
In April 1998, Qwest acquired EUnet, a European ISP. See "--Recent
Developments--EUnet Transaction."
THE QWEST NETWORK
As of March 31, 1998, Qwest's network infrastructure included, among other
assets: (i) approximately 11,100 route miles of conduit in place, consisting
of more than 5,400 route miles of lit fiber including the spans connecting
California to New York (this includes the April 10, 1998 activation of the
transcontinental network from Los Angeles to San Francisco to New York City),
Dallas to Houston and Phoenix to Austin, Texas; approximately 3,300 route
miles of dark fiber installed in conduit; and approximately 2,400 route miles
of vacant conduit; (ii) right-of-way agreements in place for approximately
4,800 additional route miles of planned construction for the Qwest Network;
(iii) an approximately 3,500 mile digital microwave system (the "Microwave
System"); (iv) approximately 15,000 DS-3 miles of fiber transmission capacity
leased by Qwest from other carriers, used primarily to extend Qwest's switched
services for originating and terminating traffic beyond the boundaries of
Qwest's lit fiber network; and (v) five digital switches (two of which are
leased).
The physical components of the Qwest Network are: (i) high density
polyethylene conduit, which is hollow tubing 1 1/2 to 2 inches in diameter;
(ii) fiber optic cable, which consists of fiber strands placed inside a
plastic sheath and strengthened by metal; (iii) electronic equipment necessary
to activate the fiber for transmission; (iv) switches that enable Qwest to
provide switched services to carrier and commercial customers; and (v)
approximately 125 points of presence, which allow Qwest to concentrate
customers' traffic at locations where Qwest does not have switches and carry
the traffic to switching centers over the Qwest Network.
With the completion of the Qwest Network, Qwest will provide
telecommunications services nationally to its customers primarily over its own
facilities, using leased facilities in those portions of the country not
covered by the Qwest Network. Qwest is evaluating the economics of extending
its core network versus continuing to lease network capacity. Qwest expects to
deploy three new DMS 250 switches from Nortel. The new switches are planned to
be installed in Atlanta, Indianapolis, and New York City. The additional
switches will expand Qwest's on-net switch network to include key business
centers in the Northeast, Southeast and Midwest regions of the United States.
Also, Qwest continues to evaluate opportunities to acquire or invest in
complementary, attractively valued businesses, facilities, contract positions
and assets to improve its ability to offer new products and services to
customers, to compete more effectively and to facilitate further growth of its
business.
Advanced Technology. Qwest is installing technologically advanced fiber
optic cable and electronic equipment in a uniform configuration throughout the
Qwest Network, using an advanced network management system. The Qwest
Network's technologies include Lucent's non-zero dispersion shifted fiber and
Nortel's dense wave division multiplexing, forward error correction technology
and SONET ring technology that enable OC-192 transmission capacity and high
integrity levels.
The Qwest Network is designed for superior security and reliability, based
on (i) bi-directional SONET ring architecture, a self-healing system that
allows for nearly instantaneous rerouting and virtually eliminates
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downtime in the event of a fiber cut; (ii) fiber cable installed in high
density polyethylene conduit generally buried 42-56 inches below the ground;
and (iii) extensive use of railroad rights-of-way, which typically offer
greater protection of the fiber system than other systems built over more
public rights-of-way such as highways, telephone poles or overhead power
transmission lines.
The Qwest Network is designed for expandability and flexibility and will
contain two conduits along substantially all of its route. The first conduit
will contain a cable generally housing at least 96 fibers, and the second
conduit will serve as a spare. The spare conduit will allow for future
technology upgrades and expansion of capacity at costs significantly below the
cost of new construction. After existing and anticipated dark fiber sales,
Qwest generally plans to retain a minimum of 48 fibers for its own use in the
Qwest Network. With the combined use of non-zero dispersion shifted fiber,
dense wave division multiplexing and high bit rate transmission electronics,
each of the fibers retained by Qwest can achieve substantially greater
capacity per fiber than standard, single mode fiber now in use.
Qwest monitors its current network, and will monitor the Qwest Network, 24
hours a day, seven days a week from its Network Management Center in Denver,
Colorado. This facility provides centralized network surveillance,
troubleshooting and customer service, using technology that enables Qwest to
reduce service costs and customer downtime. The system currently allows
Qwest's technicians to detect a component malfunction in the Qwest Network,
quickly reroute the customer to an available alternate path and effect an
expedited repair. Upon completion of the Qwest Network with its SONET ring
architecture, the rerouting function will be fully automated. In addition,
Qwest is deploying new management tools, including Nortel's Integrated Network
Management Solutions, that will give Qwest's Carrier Services customers the
ability to monitor and reconfigure their leased capacity on an essentially
real time basis from their own network management centers and the ability to
rapidly increase or reduce bandwidth to better match their needs. The
available software features equipment inventory management, bandwidth
inventory management, configuration management, fault isolation management,
"point-and-click" provisioning on partitioned network and alarm monitoring. As
of March 31, 1998, Qwest maintained a staff of approximately 390 technicians
and other related personnel across the system to provide maintenance and
technical support services. Qwest has also implemented a "Call Before U Dig"
("CBUD") program, backed up by its 24-hour Network Management Center to reduce
the risk of damage to the conduit or fiber system. Additionally, above ground
markers are placed at frequent intervals along the route of the Qwest Network.
Railroad Rights-of-Way. Qwest has agreements in place with major railroads
that provide it with rights-of-way throughout the United States. Qwest
believes that use of railroad rights-of-way, along with the protective
conduit, give Qwest inherent advantages over other systems built over more
public rights-of-way, such as highways, telephone poles or overhead power
transmission lines. These advantages include higher security for the Qwest
Network and greater protection of the fiber system.
Railroad rights-of-way also provide the Qwest Network generally with a
direct, continuous route between cities. This eliminates the potential need,
and the associated time and costs, to piece together rights-of-way using a
combination of agreements with private owners and state or municipal agencies.
In addition, railroad rights-of-way typically extend into downtown areas of
cities that are strategically important to Qwest. Qwest's right-of-way
agreements provide for continuing or lump-sum cash payments, exchanges of
rights-of-way for network capacity or a combination of both. Between 70% and
80% of the Qwest Network will be installed on railroad rights-of-way.
Qwest has other right-of-way agreements in place, where necessary or
economically preferable, with highway commissions, utilities, political
subdivisions and others. As of March 31, 1998, Qwest had in place agreements
for approximately 97% of the rights-of-way needed to complete the Qwest
Network. As of March 31, 1998, the remaining rights-of-way needed for
completion of the Qwest Network consisted of approximately 360 route miles
located primarily in the Midwest and Mid-Atlantic regions. Qwest has
identified alternative rights-of-way for these route miles and is currently in
negotiations with respect to all of them.
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Network Installation. As of March 31, 1998, Qwest employed approximately
1,000 experienced construction personnel and uses its own fleet of equipment,
as well as leased equipment. Qwest supplements these resources with
independent contractors.
Dark Fiber Sales. Qwest has entered into agreements with Frontier, WorldCom
and GTE and others whereby each is purchasing dark fiber along the Qwest
Network. The proceeds from these contracts for the sale of dark fiber will
provide cash for a significant portion of the total estimated costs to
construct the Qwest Network and provide the dark fiber sold to Frontier,
WorldCom and GTE and others. This is expected to provide Qwest with a
strategic network cost advantage on the fibers that Qwest retains for the
Qwest Network. Each agreement requires the purchaser to pay an aggregate price
consisting of an initial payment followed by installments during the
construction period based on Qwest's achievement of certain milestones (e.g.,
commencement of construction, conduit installation and fiber installation),
with final payment for each segment made at the time of acceptance. Each
agreement provides for the sharing of certain maintenance costs. The Frontier
and GTE agreements also provide for sharing of certain operating costs. The
agreements establish anticipated delivery dates for construction and delivery
of segments along the route of the Qwest Network. Delivery may be extended
under each agreement for force majeure events. The Frontier and GTE agreements
provide for penalties in the event of delay of segments and, in certain
circumstances, allow Frontier and GTE to delete non-delivered segments from
the contracts.
Qwest believes that significant opportunities exist to sell additional dark
fiber throughout the Qwest Network and management has identified and is in
various stages of negotiations with potential customers. However, Qwest does
not expect to enter into additional agreements of the size and scope of the
Frontier and GTE contracts. These potential customers include other
interexchange carriers, cable, entertainment and data transmission companies,
RBOCs, ISPs, LECs and CLECs. Qwest believes that these potential customers
will view Qwest as an attractive source for certain of their long distance
transmission needs. In order to meet the needs of this diverse group of
customers, Qwest expects to offer a wide variety of pricing and system options
to meet specific needs of each customer. For example, customers may purchase
or lease dark fiber or purchase capacity on a short- or long-term basis.
The Frontier and GTE agreements each provide for the purchase of 24 fibers
along major portions of the Qwest Network, while the WorldCom agreement
generally provides for the purchase of 24 or, in certain segments, 36 fibers.
Several smaller construction contracts for sales of dark fiber provide for the
sale of smaller numbers of fibers over a more limited number of segments. In
segments where Qwest agrees to sell dark fiber to others, it generally will
install enough fibers so that it can retain 48 fibers for its own use along
substantially all of the route of the Qwest Network.
SIGNIFICANT CUSTOMERS
Qwest's top ten customers accounted for approximately 74.6%, 83.6% and 69.3%
of its consolidated gross revenue during the first three months of 1998 and in
1997 and 1996, respectively. Frontier, WorldCom and GTE accounted for 26.9%,
6.0% and 27.4%, respectively, of such revenue in the first three months of
1998, 31.2%, 6.1% and 36.6%, respectively, of such revenue in 1997 and 26.3%,
27.8% and 0.0%, respectively, of such revenue in 1996, attributable primarily
to construction contracts for the sale of dark fiber to these customers that
extend through 1998 or into 1999 pursuant to the applicable contract.
CARRIER SERVICES
General. Qwest has been positioned historically in the long distance
business as a "carrier's carrier," providing dedicated line and switched
services to other carriers over Qwest's owned or leased fiber optic network
facilities. Management believes that Qwest has earned a reputation of
providing quality services at competitive prices to meet specific customer
needs. Total revenue from Carrier Services was approximately $55.6 million,
$57.6 million and $67.8 million for the years 1997, 1996 and 1995,
respectively, and approximately $19.2 million and $11.2 million for the three
months ended March 31, 1998 and 1997, respectively. These revenue amounts have
not been adjusted for the sale of Qwest's resale dedicated line services on
leased capacity which occurred in July 1996.
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Products. Products offered by Carrier Services fall into three primary
categories: (i) high volume capacity services; (ii) conventional dedicated
line services; and (iii) switched services.
. High Volume Capacity Services. Qwest provides high volume transmission at
or above the OC-3 level (or its equivalent) through service agreements
for terms of one year or longer. As the Qwest Network is deployed, Qwest
also is targeting potential large users in the inter-LATA market that may
seek to augment their own networks or provide diverse routing
alternatives in strategic areas of their systems.
. Conventional Dedicated Line Services. Qwest provides dedicated line
services on owned capacity to a wide range of customers at capacities
below the OC-3 level generally for terms of one year or less. Qwest
expects the Qwest Network will enable Qwest to offer these services over
a significantly expanded geographic area.
. Switched Services. Qwest provides switched terminating services over its
switched service network to large and small long distance carriers. The
carrier switched terminating service business is specifically used to
increase volume on Qwest's switched service network to allow for more
efficient "trunking" of calls. While the carrier switched services
generate revenue at lower margins than the dedicated line services, such
services facilitate cost effective management of the Qwest Network.
Qwest also plans to provide high speed ATM and Frame Relay data services to
carriers and Internet Service Providers ("ISPs") by installing ATM and Frame
Relay switching equipment. Qwest expects such services to become available in
1998.
Customers. Carrier Services' customer base in the inter-LATA carrier market
consists of the following:
. Tier 1 and Tier 2 Carriers. Qwest offers high volume transmission
capacity, conventional dedicated line services and dedicated switched
services to the Tier 1 and Tier 2 carriers on a national or regional
basis. As RBOCs enter the long distance market, Qwest believes they will
be potential customers to lease high volume capacity from Qwest on a
national basis.
. Tier 3 Carriers. Qwest currently offers switchless resale services to
Tier 3 carriers on a limited basis. Qwest anticipates that this business
will expand as coverage of Qwest's switched network grows.
. Internet Service Providers. Qwest currently offers high volume capacity
to ISPs on a limited basis.
. Operator Services Companies and Other Niche Companies. These companies
concentrate on providing operator services and other communications
services to the long distance industry, private payphone operators,
prisons and credit card companies. These carriers also manage their own
networks and switching equipment while leasing virtually all of their
transmission facilities. Qwest provides transmission services to these
carriers.
Service Agreements. Qwest provides high volume transmission capacity
services through service agreements for terms of one year or longer. Dedicated
line services are generally offered under service agreements for an initial
term of one year. High volume capacity service agreements and dedicated line
service agreements generally provide for "take or pay" monthly payments at
fixed rates based on the capacity and length of circuit used. Customers are
typically billed on a monthly basis and also may incur an installation charge
or certain ancillary charges for equipment. After contract expiration, the
contracts may be renewed or the services may be provided on a month-to-month
basis. Switched services agreements are generally offered on a month-to-month
basis and the service is billed on a minutes-of-use basis. Revenue from
carrier customers that is billed on a minutes-of-use basis has the potential
to fluctuate significantly based on changes in usage that are highly dependent
on differences between the prices charged by Qwest and its competitors. Qwest,
however, has not experienced significant fluctuations to date.
In April 1998, Qwest signed an agreement with the U.S. government valued at
up to $430.0 million over a ten year period whereby Qwest will provide the
government with the fiber, hardware, engineering, communications services and
network management that will compose a custom virtual private network
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("VPN"). Leveraging the Qwest Network and Qwest's Terabit Points of Presence
network design, this custom VPN will provide the customer with the privacy,
service features and price performance designed to meet its application
requirements.
In April 1998, Qwest announced it will provide its native IP network for
CalREN2, a high-performance, next generation Internet project initiated by the
Corporation for Education Network Initiatives in California (a not-for-profit
corporation formed by the University of California, Stanford University, the
California Institute of Technology, the University of Southern California and
California State University). The CalREN2 network will enable new research and
educational applications that currently do not work effectively over the
existing Internet, such as interactive simulation and collaborative
environments allowing students at different campuses to participate in 3D
virtual experiments, remote transmission of high-precision medical images for
clinical diagnosis and high-speed access to digital library resources.
Also in April 1998, Qwest announced that, together with the University
Corporation for Advanced Internet Development ("UCAID"), it will provide the
Internet2 IP backbone network, Project Abilene (a collaboration of Qwest,
Cisco Systems and Nortel, led by UCAID), to create the farthest reaching,
highest capacity research and education network in the world, available to
Internet2 member universities. Project Abilene's initial operation is expected
to begin before the end of 1998, with full deployment completed by the end of
1999, and will work with existing advanced research and education networking
efforts, such as the U.S. government's Next Generation Internet initiative.
Internet2 is a collaboration of over 120 U.S. research universities, industry
leaders and U.S. government agencies, to develop a new family of advanced
applications to meet emerging academic requirements in research, teaching and
learning.
COMMERCIAL SERVICES
General. Qwest began offering Commercial Services in 1993. Commercial
Services focuses primarily on the sale of inter-LATA long distance services to
the retail market, principally to small- and medium-sized businesses and to
consumers. Qwest currently provides facilities-based services along the
majority of its lit routes, and is a switch based reseller elsewhere. Total
revenue from Commercial Services was approximately $59.6 million, $34.3
million and $20.4 million in 1997, 1996 and 1995, respectively, and
approximately $23.4 million and $9.4 million for the three months ended March
31, 1998 and 1997, respectively. Qwest plans to transfer carrier and
commercial switched traffic from leased facilities onto the Qwest Network as
it is activated. As traffic volume increases and Qwest carries a greater
percentage of traffic on the Qwest Network, Qwest believes it will realize
economies of scale and thereby lower its cost of sales as a percentage of
revenue. See "RISK FACTORS--Managing Rapid Growth."
Products. Qwest markets the following products:
. One Plus. This basic service offers customers the ability to make
outbound long distance calls from any local telephone line by simply
dialing a 1, plus the area code and phone number. Customers select Qwest
as their primary long distance provider by placing an order with it. This
service may be used for both domestic and international calling.
. 10056. This service allows the customer to access the Qwest Network by
dialing 10056 plus 1, plus the area code and phone number, with no need
to change their primary long distance provider. These customers are
solicited through direct mailing.
. Dedicated Access Service. These lines are designed for larger users with
enough traffic volume to warrant the use of a dedicated access line to
originate calls. Instead of a switched access line that is shared by many
users, this service uses a high capacity line that is used exclusively to
connect between the end user and the long distance carrier's switch. This
results in lower originating access cost and reduced rates to the user.
. Toll Free 800/888. This inbound service, where the receiving party pays
for the call, is accessed by dialing an 800/888 area code. This is used
in a wide variety of applications, many of which generate
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revenue for the user (such as reservation centers or customer service
centers). Qwest plans to introduce additional enhanced features such as
call routing by origination point, time of day routing and other premium
features in 1998.
. Calling Card. These traditional, basic telephone calling cards allow the
user to place calls from anywhere in the United States or Canada. Qwest
offers additional higher margin features such as conference calling,
international origination, information service access (such as weather or
stock quotes), speed dialing and voice messaging.
. Prepaid Card. Prepaid cards allow a customer to purchase and pay in
advance for a card with a fixed amount of calling time. The card is then
used as a standard calling card. Prepaid cards may be purchased with
enhanced features similar to those of calling cards and also may be
renewed by purchasing additional time.
. Media Express(TM). This is an exclusive switched digital broadband
service that provides variable bandwidth for video communications and
other data applications on demand and allows users to control all the
required components of a video conference from a personal computer.
. Voice Over IP. In February 1998, Qwest began commercial service for its
voice over Internet protocol ("IP") telephony service, Q.talkSM, with
customers using the service through a controlled introduction in nine
cities. Qwest expects to expand its service offering to approximately 25
cities by mid-1998, and continue the expansion of the service in
conjunction with the planned Qwest Network buildout. Qwest offers to
customers uncompressed voice over IP service at 7.5 cents per minute, 24
hours a day, seven days a week.
Other services offered by Commercial Services include audio conferencing,
operator services, directory assistance, special rate structures, custom
services, special contract pricing and special local access arrangements in
selected markets. In addition, Qwest intends to develop and offer additional
value-added services to its customers, particularly business customers, to
differentiate Qwest from its competitors and enhance Commercial Services profit
margins. Qwest also is evaluating and intends to introduce in the future a
variety of services specifically designed to capture a share of the growing
data networking market.
In September 1997, Qwest entered into an arrangement with Cisco Systems Inc.
under which they will jointly define and test new broadband business multimedia
services.
In April 1998, Qwest began expanding its high-speed data networking service
offerings. Through agreements with various technology partners. Qwest will
offer Remote Access VPN or native IP and advanced Frame Relay/ATM services
along the Qwest Network.
Customers. Commercial Services currently targets small and medium to large
businesses. The strategy of Commercial Services is to develop a customer base
in geographic proximity to the Qwest Network.
NETWORK CONSTRUCTION SERVICES
General. Qwest's Network Construction Services operations commenced in 1988
with the construction of conduit systems for major interexchange carriers.
Total revenue from Network Construction Services was approximately $581.4
million, $139.2 million and $36.9 million in 1997, 1996 and 1995, respectively,
and approximately $134.5 million and $52.1 million for the three months ended
March 31, 1998 and 1997, respectively.
Products. The principal product of Network Construction Services historically
has been turn-key conduit systems built for other carriers. In most cases,
while fulfilling customer contracts, Qwest installed additional conduit that it
retained for its own use. Qwest is using its Network Construction Services
resources to implement its strategic plan to complete the Qwest Network, in
addition to providing Network Construction Services to third party customers
along Qwest Network routes.
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In 1996, Qwest began selling dark fiber to telecommunications entities to
help fund development of the Qwest Network. In 1996, Qwest's Network
Construction Services revenue was derived largely from two principal dark
fiber sales contracts with Frontier and WorldCom. These two contracts, along
with the contracts with GTE, generated the majority of Network Construction
Services revenue in 1997, and it is expected that these contracts will also
generate the majority of such revenue in 1998. In addition, Qwest expects to
generate additional revenue through the sale of dark fiber along various
segments of the Qwest Network to other carriers.
Customers. Network Construction Services customers historically have been
primarily interexchange carriers, as well as major LECs and other
telecommunications companies. In the first three months of 1998, GTE was the
largest single Network Construction Services customer, accounting for
approximately 27.4% of Qwest's consolidated gross revenue, with Frontier
accounting for approximately 26.9%. For the year ended December 31, 1997, GTE
was the largest single Network Construction Services customer, accounting for
approximately 36.6% of Qwest's consolidated gross revenue, with Frontier
accounting for approximately 31.2%. For the year ended December 31, 1996,
WorldCom was Qwest's largest single customer, accounting for approximately
27.8% of Qwest's consolidated gross revenue, and Frontier accounted for
approximately 26.3% of Qwest's consolidated gross revenue. No other customers
accounted for more than 10% of consolidated gross revenue in 1997 and 1996.
For the year ended December 31, 1995, MCI was Qwest's largest single customer,
accounting for approximately 35.4% of consolidated gross revenue. No other
customer accounted for more than 10% of consolidated gross revenue in 1995.
SALES AND MARKETING
Qwest sells network dedicated and switched services to carriers through its
carrier sales organization. This organization consists of senior level
management personnel and experienced sales representatives with extensive
knowledge of the industry and key contacts within the industry at various
levels in the carrier organizations.
In Commercial Services, Qwest currently solicits targeted businesses through
telemarketing personnel, independent contractors and a direct sales channel.
Qwest plans to expand its presence in the Commercial Services market by
developing its distinctive "Ride the Light(TM)" brand identity and
aggressively marketing its existing and planned voice, data and other
transmission products and services. Qwest plans to build 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.
In September 1997, Qwest entered into a marketing agreement with Innova,
Inc. ("Innova") under which Innova will be an authorized sales representative
of Qwest marketing Qwest's long distance products through affinity groups.
Innova is a marketing company that wholesales and retails telecommunication
products on a national basis with an emphasis on developing bundled product
packages.
Also in September 1997, Qwest entered into a marketing agreement with en-
able, a joint venture of KN Energy, Inc. ("KN") and PacifiCorp. Jordan Haines,
a Director of Qwest, is also a Director of KN. Qwest's One Plus and Calling
Card services (with competitive international pricing for both) will be
offered to utilities across the nation along with other services provided by
en-able under its Simple ChoiceSM brand name.
In February 1998, Qwest introduced its QwestLinked(TM) partner marketing
program. Carriers, corporations and technology partners who choose the Qwest
Network for their data, multimedia and voice connections are eligible to
become QwestLinked and share the brand trademark.
COMPETITION
The telecommunications industry is highly competitive. Many of Qwest's
existing and potential competitors in the Carrier Services, Commercial
Services and Network Construction Services markets have financial, personnel,
marketing and other resources significantly greater than those of Qwest, as
well as other competitive
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advantages. Increased consolidation and strategic alliances in the industry
resulting from the Telecommunications Act could give rise to significant new
competitors to Qwest.
In the Carrier Services market, Qwest's primary competitors are other
carrier service providers. Within the Carrier Services market, Qwest competes
with large and small facilities-based interexchange carriers. For high volume
capacity services, Qwest competes primarily with other coast-to-coast and
regional fiber optic network providers. There are currently four principal
facilities-based long distance fiber optic networks (AT&T, MCI, Sprint and
WorldCom, although a proposed WorldCom/MCI merger is pending). Qwest is aware
that others are planning additional networks that, if constructed, could
employ advanced technology similar to the Qwest Network. Upon completion of
the Qwest Network, Frontier and GTE will each have a fiber network similar in
geographic scope and potential operating capability to that of Qwest. Another
competitor is constructing, and has already obtained a significant portion of
the financing for, a fiber optic network. The scope and capacity of that
competitor's network, as publicly announced, is less than that of Qwest, and
does not contain all of the advanced technologies designed for the Qwest
Network, but is expected to compete directly with the Qwest Network for many
of the same customers along a significant portion of the same routes. A
carrier's carrier announced in January 1998 that it plans to sell wholesale
capacity on its fiber optic network and that it has entered into an agreement
with one of the RBOCs to be the primary user of its network. Qwest believes
that this network, although potentially competitive, is different in operating
capability from the Qwest Network. Another potential competitor, a new
telecommunications company, has announced its intention to create a
telecommunications network based on Internet technology.
Qwest's competitors in Carrier Services include many large and small
interexchange carriers. Qwest's Carrier Services business competes primarily
on the basis of pricing, transmission quality, network reliability and
customer service and support. The ability of Qwest to compete effectively in
this market will depend upon its ability to maintain high quality services at
prices equal to or below those charged by its competitors.
Commercial Services has been and expects to continue to be a provider of
high quality, low cost service primarily to small- and medium-sized business
customers and consumers. Qwest intends to move into the market for higher
volume business customers as the Qwest Network is completed and new products
are introduced. In recent years the small- and medium-sized business market
has experienced increased competition. The industry wide changes in technology
and the effects of deregulation resulting from the Telecommunications Act are
likely to further increase competition. Many of Qwest's competitors and
potential competitors have financial, personnel and other resources
substantially greater than those of Qwest. In the Commercial Services market,
Qwest's primary competitors include AT&T, MCI, Sprint and WorldCom, all of
whom have extensive experience in the long distance market. On November 10,
1997, MCI and WorldCom announced a proposed merger, and on March 11, 1998, the
stockholders of both companies approved the merger. The impact on Qwest of
such a merger or other consolidation in the industry is uncertain. In
addition, the Telecommunications Act will allow the RBOCs and others to enter
the long distance market. See "RISK FACTORS--Competition" and "INDUSTRY
OVERVIEW--Telecommunications Markets."
In the future, Qwest may be subject to additional competition due to the
development of new technologies and increased supply of domestic and
international transmission capacity. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite transmission capacity
for services similar to those provided by Qwest. For instance, recent
technological advances permit substantial increases in transmission capacity
of both new and existing fiber, and the introduction of new products or
emergence of new technologies may reduce the cost or increase the supply of
certain services similar to those provided by Qwest.
High initial network cost and low marginal costs of carrying long distance
traffic have led to a trend among nonfacilities-based carriers to consolidate
in order to achieve economies of scale. Such consolidation could result in
larger, better capitalized competitors. However, Qwest believes that such
competitors would also be stronger prospects as potential Carrier Services
customers.
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REGULATORY MATTERS
General Regulatory Environment. Qwest's operations are subject to extensive
federal and state regulation. Carrier Services and Commercial Services (but
not Network Construction Services) are subject to the provisions of the
Communications Act of 1934, as amended, including the Telecommunications Act
and the FCC regulations thereunder, as well as the applicable laws and
regulations of the various states, including regulation by PUCs and other
state agencies. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate
or terminate in the United States), while state regulatory authorities have
jurisdiction over telecommunications both originating and terminating within
the state. The regulation of the telecommunications industry is changing
rapidly, and the regulatory environment varies substantially from state to
state. Moreover, as deregulation at the federal level occurs, some states are
reassessing the level and scope of regulation that may be applicable to Qwest.
All of Qwest's operations are also subject to a variety of environmental,
safety, health and other governmental regulations. There can be no assurance
that future regulatory, judicial or legislative activities will not have a
material adverse effect on Qwest, or that domestic or international regulators
or third parties will not raise material issues with regard to Qwest's
compliance or noncompliance with applicable regulations.
The Telecommunications Act may have potentially significant effects on the
operations of Qwest. The Telecommunications Act, among other things, allows
the RBOCs and GTE to enter the long distance business, and enables other
entities, including entities affiliated with power utilities and ventures
between LECs and cable television companies, to provide an expanded range of
telecommunications services. Entry of such companies into the long distance
business would result in substantial competition to Qwest's Commercial
Services and Carrier Services customers, and may have a material adverse
effect on Qwest and such customers. However, Qwest believes that the RBOCs'
and other companies' participation in the market will provide opportunities
for Qwest to sell fiber or lease long distance high volume capacity.
Under the Telecommunications Act, the RBOCs may immediately provide long
distance service outside those states in which they provide local exchange
service ("out-of-region" service), and long distance service within the
regions in which they provide local exchange service ("in-region" service)
upon meeting certain conditions. GTE may enter the long distance market
without regard to limitations by region. The Telecommunications Act does,
however, impose certain restrictions on, among others, the RBOCs and GTE in
connection with their provision of long distance services. Out-of-region
services by RBOCs are subject to receipt of any necessary state and/or federal
regulatory approvals that are otherwise applicable to the provision of
intrastate and/or interstate long distance service. In-region services by
RBOCs are subject to specific FCC approval and satisfaction of other
conditions, including a checklist of pro-competitive requirements. On December
31, 1997, the U.S. District Court, Northern District of Texas (Wichita Falls)
(the "District Court"), in SBC Communications, Inc. v. FCC and U.S. (the "SBC
Communications Case"), overturned as unconstitutional the provisions of the
Telecommunications Act which prohibited RBOCs from providing inter-LATA long
distance services within their own region without demonstrating that the local
exchange market was opened to local competition. The decision, however,
affects only SBC, U.S. West and Bell Atlantic. Bell South has filed a recent
suit making similar claims. Ameritech has not yet filed such a suit. Following
the filing of respective petitions for stay by AT&T, MCI, the FCC and other
intervenors in the SBC Communications Case, the District Court on February 11,
1998, stayed its decision, pending appellate review. In an order entered on
January 22, 1998, the Eighth Circuit Court of Appeals ruled that the FCC may
not require the RBOCs to comply with other checklist items, including the
FCC's standard for pricing of access and interconnection, as a condition of
providing in-region service. Under the Telecommunications Act, the RBOCs may
provide in-region long distance services only through separate subsidiaries
with separate books and records, financing, management and employees, and all
affiliate transactions must be conducted on an arm's length and
nondiscriminatory basis. The RBOCs are also prohibited from jointly marketing
local and long distance services, equipment and certain information services
unless competitors are permitted to offer similar packages of local and long
distance services in their market. Further, the RBOCs must obtain in-region
long distance authority before jointly marketing local and long distance
services in a particular state. Additionally, AT&T and other major carriers
serving more than 5% of presubscribed long distance access lines in the United
States are also
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<PAGE>
restricted from packaging other long distance services and local services
provided over RBOC facilities. GTE is subject to the provisions of the
Telecommunications Act that impose interconnection and other requirements on
LECs, and must obtain regulatory approvals otherwise applicable to the
provision of long distance services in connection with its providing long
distance services.
Federal Regulation. The FCC has classified QCC, Qwest's principal operating
subsidiary, as a non-dominant carrier. Generally, the FCC has chosen not to
exercise its statutory power to closely regulate the charges, practices or
classifications of non-dominant carriers. However, the FCC has the power to
impose more stringent regulation requirements on Qwest and to change its
regulatory classification. In the current regulatory atmosphere, Qwest
believes that the FCC is unlikely to do so with respect to Qwest's domestic
service offerings.
The FCC regulates many of the charges, practices and classifications of
dominant carriers to a greater degree than non-dominant carriers. Among
domestic carriers, large LECs and the RBOCs are currently considered dominant
carriers for the provision of interstate access services, while all other
interstate service providers are considered non-dominant carriers. On April
18, 1997, the FCC ordered that the RBOCs and independent LECs offering
domestic interstate inter-LATA services, in-region or out-of-region, be
regulated as non-dominant carriers. However, such services offered in-region
must be offered in compliance with the structural separation requirements
mentioned above. AT&T was classified as a dominant carrier, but AT&T
successfully petitioned the FCC for non-dominant status in the domestic
interstate interexchange market in October 1995 and in the international
market in May 1996. Therefore, certain pricing restrictions that once applied
to AT&T have been eliminated. A number of parties sought the FCC's
reconsideration of AT&T's status, but the FCC denied these petitions on
October 9, 1997.
As a non-dominant carrier, QCC may install and operate facilities for the
transmission of domestic interstate communications without prior FCC
authorization, so long as QCC obtains all necessary authorizations from the
FCC for use of any radio frequencies. Non-dominant carriers are required to
obtain prior FCC authorization to provide international telecommunications,
and Qwest has obtained international authority that permits it to operate as a
facilities-based carrier to all permissible international points and to
operate as a resale carrier (including the resale of private lines for the
provision of switched services) to all permissible points. The FCC also
imposes prior approval requirements on certain transfers of control and
assignments of operating authorizations. Non-dominant carriers are required to
file periodic reports with the FCC concerning their interstate circuits and
deployment of network facilities. International carriers are also required to
file periodic reports regarding traffic and revenue and regarding circuit
status and additions. Qwest is required to offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remains subject to
FCC complaint procedures. While the FCC generally has chosen not to exercise
direct oversight over cost justification or levels of charges for services of
non-dominant carriers, the FCC acts upon complaints against such carriers for
failure to comply with statutory obligations or with the FCC's rules,
regulations and policies. Qwest or any of its operating subsidiaries could be
subject to legal actions seeking damages, assessment of monetary forfeitures
and/or injunctive relief filed by any party claiming to have been injured by
Qwest's practices. Qwest cannot predict either the likelihood of the filing of
any such complaints or the results if filed.
Under existing regulations, non-dominant carriers are required to file with
the FCC tariffs listing the rates, terms and conditions of both interstate and
international services provided by the carrier. Pursuant to such regulations,
Qwest has filed with the FCC tariffs for its interstate and international
services. On October 29, 1996, the FCC adopted an order in which it
eliminated, as of September 1997, the requirement that non-dominant interstate
carriers such as Qwest maintain tariffs on file with the FCC for domestic
interstate services and in fact prohibited the filing of such tariffs,
although tariffs for international service must still be filed. Such carriers
were given the option to cease filing tariffs during a nine-month transition
period that concluded on September 22, 1997. The FCC's order was issued
pursuant to authority granted to the FCC in the Telecommunications Act to
"forbear" from regulating any telecommunications service provider if the FCC
determines that the public interest will be served. However, on February 19,
1997, the United States Court of Appeals for the District of Columbia Circuit
stayed the FCC's order pending further expedited judicial review or FCC
reconsideration or both. In August 1997, the FCC issued an order on
reconsideration in which it affirmed its decision to impose
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<PAGE>
complete or mandatory detariffing, although it decided to allow optional or
permissive tariffing in certain limited circumstances (including for
interstate, domestic, interexchange dial-around services, which end users
access by dialing a carrier's 10XXX access code). Petitions for further
reconsideration of this order are pending, and this order also remains subject
to the Court of Appeals' stay pending further judicial review and the pending
appeals of the order on reconsideration. Qwest cannot predict the ultimate
outcome of these or other proceedings on its service offerings or operations.
On May 8, 1997, the FCC released an order intended to reform its system of
interstate access charges to make that regime compatible with the pro-
competitive deregulatory framework of the Telecommunications Act. Access
service is the use of local exchange facilities for the origination and
termination of interexchange communications. The FCC's historic access charge
rules were formulated largely in anticipation of the 1984 divestiture of AT&T
and the emergence of long distance competition, and were designated to replace
piecemeal arrangements for compensating LECs for use of their networks for
access, to ensure that all long distance companies would be able to originate
and terminate long distance traffic at just, reasonable, and non-
discriminatory rates, and to ensure that access charge revenues would be
sufficient to provide certain levels of subsidy to local exchange service.
While there has been pressure on the FCC historically to revisit its access
pricing rules, the Telecommunications Act has made access reform timely. The
FCC's access reform order adopts various changes to its rules and policies
governing interstate access service pricing designed to move access charges,
over time, to more economically efficient levels and rate structures. Among
other things, the FCC modified rate structures for certain non-traffic
sensitive access rate elements, moving some costs from a per-minute-of-use
basis to flat-rate recovery, including one new flat rate element; changed its
structure for interstate transport services; and affirmed that ISPs may not be
assessed interstate access charges. In response to claims that existing access
charge levels are excessive, the FCC stated that it would rely on market
forces first to drive prices for interstate access to levels that would be
achieved through competition but that a "prescriptive" approach, specifying
the nature and timing of changes to existing access rate levels, might be
adopted in the absence of competition. The FCC intends to address these and
other related matters in subsequent proceedings. Several parties have filed
petitions for reconsideration or judicial appeals or both of this order, many
of which are still pending. Though Qwest believes that access reform through
lowering and/or eliminating excessive access service charges will have a
positive effect on its service offerings and operations, it cannot predict how
or when such benefits may present themselves, or the outcome of the pending
judicial appeals or petitions for FCC reconsideration.
The FCC also released a companion order on universal service reform on May
8, 1997. The universal availability of basic telecommunications service at
affordable prices has been a fundamental element of U.S. telecommunications
policy since enactment of the Communications Act of 1934. The current system
of universal service is based on the indirect subsidization of LEC pricing,
funded as part of a system of direct charges on some LEC customers, including
interexchange carriers such as QCC, and above-cost charges for certain LEC
services such as local business rates and access charges. In accordance with
the Telecommunications Act, the FCC adopted plans to implement the
recommendations of a Federal-State Joint Board to preserve universal service,
including a definition of services to be supported, and defining carriers
eligible for contributing to and receiving from universal service subsidies.
The FCC ruled, among other things, that: contributions to universal service
funding be based on all interexchange carriers' gross retail revenues from
both interstate and international telecommunications services; only common
carriers providing a full complement of defined local services be eligible for
support; and up to $2.25 billion in new annual subsidies for discounted
telecommunications services used by schools, libraries, and rural health care
providers be funded by an assessment on total interstate and intrastate
revenues of all interexchange carriers. The FCC stated that it intends to
study the mechanism for continued support of universal service in high cost
areas in a subsequent proceeding. Several parties have filed petitions for
reconsideration or judicial appeals or both of this order, many of which are
still pending. Further to its study of the mechanism for support of universal
service, the FCC on April 10, 1998 released a report to Congress suggesting
that the FCC might, in a later proceeding, classify some kinds of "phone-to
phone" voice services using the Internet protocol as telecommunications. Such
an outcome would extend new regulatory obligations and associated costs,
including the obligation to support universal service, to providers of those
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<PAGE>
services, such as Qwest. Qwest is unable to predict the outcome of the further
FCC proceedings or of the pending judicial appeals or petitions for FCC
reconsideration on its operations. Qwest is required to contribute in 1998 a
percentage of its gross retail revenue to the universal services fund and
includes charges for these contributions in its 1998 billings.
On April 11, 1997, the FCC released an order requiring that all carriers
transition from three-digit to four-digit Carrier Identification Codes
("CICs") by January 1, 1998. CICs are the suffix of a carrier's Carrier Access
Code ("CAC"), and the transition will expand CACs from five (10XXX) to seven
digits (101XXXX). These codes permit customers to reach their carrier of
choice from any telephone. Parties filed petitions for reconsideration of this
design, arguing in part that this short transition (following the FCC's
proposal for a six-year transition) does not permit carriers sufficient time
to make necessary hardware and software upgrades or to educate their customers
regarding the need to dial additional digits to reach their carrier of choice.
In response to these petitions, the FCC on October 22, 1997 issued an order on
reconsideration that modified the transition to create a "two-step" process.
LECs must have completed switch changes to recognize the new codes by January
1, 1998, but interexchange carriers have until June 30, 1998 to prepare for
and educate their consumers about the change to new codes. Petitions for
reconsideration and judicial appeals of the FCC's orders are pending. Qwest
cannot predict the outcome of these proceedings or whether this transition
period will permit adequate customer notification.
Qwest's Microwave System subsidiary is subject to applicable FCC regulations
for the use of radio frequencies. The FCC issues domestic microwave radio
licenses for limited periods not to exceed 10 years. Qwest must seek renewal
of such licenses prior to their expiration. Qwest knows of no facts that would
result in the denial of any such renewals, although there can be no assurance
in that regard. Although the FCC has never denied a microwave license
application made by Qwest, there can be no assurance that Qwest will receive
all authorizations or licenses necessary to implement its business plan or
that delays in the licensing process will not adversely affect Qwest's
business.
The Communications Act of 1934 limits the ownership by non-U.S. citizens,
foreign corporations and foreign governments of an entity directly or
indirectly holding a common carrier radio license. These ownership
restrictions apply to Qwest's Microwave System but currently do not apply to
non-radio facilities, such as fiber optic cable. The FCC adopted rules
relating to requests to exceed the statutory limit on indirect foreign
ownership of common carrier radio licenses, and the participation of foreign
carriers or U.S. entities with foreign carrier affiliates (generally an
ownership interest greater than 25% or a controlling interest) in an entity
holding U.S. international authority. Under those rules, the FCC has
scrutinized either form of foreign participation to determine whether the
relevant foreign market offers "effective competitive opportunities" ("ECO").
The FCC may impose restrictions (including prohibition of the proposed
participation or investment) on applicants not meeting the ECO test. These
rules have also required international carriers to notify the FCC 60 days in
advance of an acquisition of a 10% or greater interest by a foreign carrier in
that U.S. carrier. The FCC has discretion to determine that unique factors
require application of the ECO test or a change in regulatory status of the
U.S. carrier even though the foreign carrier's interest is less than 25%.
These rules also reduce international tariff notice requirements for dominant,
foreign-affiliated carriers from 45 days' notice to 14 days' notice. Such
reduced tariff notice requirements may make it easier for dominant, foreign-
affiliated carriers to compete with Qwest. The Telecommunications Act
partially amends existing restrictions on foreign ownership of radio licenses
by allowing corporations with non-U.S. citizen officers or directors to hold
radio licenses. Other non-U.S. ownership restrictions, however, currently
remain unchanged, but the U.S. has agreed in recent world trade negotiations
to allow for a significant increase in permissible foreign investment,
including 100% indirect foreign ownership of U.S. common carrier radio
licensees. On November 26, 1997, the FCC issued an order that modified the
continued applicability of its ECO test in light of this agreement. In that
order, which became effective February 9, 1998, the FCC eliminated the ECO
test for applicants from the World Trade Organization ("WTO") member countries
seeking international authority from the FCC or seeking to exceed the indirect
foreign ownership limits on US common carrier radio licenses. The FCC instead
adopted an open entry standard with a presumption that such participation by
WTO member countries is permissible. The FCC retained the ECO
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<PAGE>
test, however, for applicants from non-WTO member countries. The FCC also
modified certain dominant carrier safeguards and further reduced the tariff
notice requirements from 14 to one day's notice. Finally, the FCC raised the
threshold for the required 60-day advance notification of foreign carrier
affiliations from 10% to 25%. Petitions for reconsideration of this order are
pending at the FCC. Qwest cannot predict the outcome of this proceeding.
Although Qwest believes these changes will have a positive effect on its
ability to identify potential sources of capital, they will also increase the
number of competitors for international traffic. The effect on Qwest of the
Telecommunications Act or other new legislation, negotiations or regulations
which may become applicable to Qwest cannot be determined.
International Settlements. Under the international settlement system,
international long distance traffic is exchanged under bilateral correspondent
agreements between facilities-based carriers in two countries. Correspondent
agreements generally are three to five years in length and provide for the
termination of traffic in, and return traffic to, the carriers' respective
countries at a negotiated accounting rate, known as the Total Accounting Rate
("TAR"). In addition, correspondent agreements provide for network
coordination and accounting and settlement procedures between the carriers.
Both carriers are responsible for their own costs and expenses related to
operating their respective halves of the end-to-end international connection.
Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to a
correspondent agreement at a negotiated rate (which must be the same for all
U.S. based carriers, unless the FCC approves an exception). For example, if a
foreign carrier charges a U.S. carrier $0.30 per minute to terminate a call in
the foreign country, the U.S. carrier would charge the foreign carrier the
same $0.30 per minute to terminate a call in the United States. Additionally,
the TAR is the same for all carriers transporting traffic into a particular
country, but varies from country to country. The term "settlement costs"
arises because carriers essentially pay each other on a net basis determined
by the difference between inbound and outbound traffic between them.
The difference in cost between providing domestic long distance and
international service is minimal, and technical advances in facilities
deployed for international calling are making distance largely irrelevant to
cost. Increased worldwide competition has already brought about certain
reductions in settlement rates and end user prices, thereby reducing overseas
termination costs for United States based carriers. However, it is believed
that certain foreign countries use settlement rates to subsidize their
domestic call rates. As a result, domestic customers currently pay
significantly more for an international call than they do for a domestic long
distance call. The FCC has adopted measures intended to overhaul the system of
international settlements by mandating that U.S. carriers negotiate settlement
rates with foreign correspondents at or below FCC-mandated benchmark levels.
Several parties have filed petitions for reconsideration with the FCC or
judicial appeals or both following this order, so it remains subject to
modification. Additionally, recent worldwide trade negotiations may have a
significant impact on settlement rates.
Qwest believes that the average cost of international telephone calls will
be reduced, and anticipates further international opportunities will be
created as a result of recent worldwide trade negotiations. On February 15,
1997, representatives of 70 countries, including the United States, finalized
the WTO Basic Telecommunications Agreement ("WTO Agreement"), a compact
addressing market access, investment and pro-competitive regulatory principles
in areas currently generating over 95% of the world's telecommunications
revenue. The WTO Agreement took effect on February 5, 1998. Among other
things, the agreement provides U.S. companies market access for local, long
distance and international service in 53 historically monopolized countries
through any means of network technology, either as a facilities-based provider
or as a reseller of existing network capacity. The countries providing market
access for telecommunications services as a result of the WTO Agreement
account for 99% of the world's telecommunications revenue. Although some
countries have reserved specific exceptions, the agreement generally ensures
that U.S. companies may acquire, establish, or hold a significant stake in
telecommunications companies around the world, and that foreign companies may
acquire, establish or hold such a stake in U.S. telecommunications companies.
Additionally, pro-competitive regulatory principles based largely upon the
Telecommunications Act were adopted by 65 countries within the WTO
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Agreement. U.S. companies will be able to enforce these principles, as well as
the WTO Agreement's market access and investment commitments, at the WTO and
through enabling legislation in the U.S. Qwest expects to benefit from the
anticipated effects of the WTO Agreement, but cannot predict where or when
such opportunities may present themselves.
State Regulation. Qwest's intrastate long distance telecommunications
operations are subject to various state laws and regulations including, in
many jurisdictions, certification and tariff filing requirements.
Generally, Qwest must obtain and maintain certificates of authority from
regulatory bodies in most states in which it offers intrastate services. In
most of these jurisdictions Qwest must also file and obtain prior regulatory
approval of tariffs for its intrastate services. Certificates of authority can
generally be conditioned, modified, canceled, terminated, or revoked by state
regulatory authorities for failure to comply with state law and/or the rules,
regulations, and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations. Qwest is currently
authorized to provide intrastate services in the 48 contiguous United States.
Qwest intends to have authority in all states where competition is allowed.
Those states that permit the offering of intrastate/intra-LATA service by
interexchange carriers generally require that end users desiring to use such
services dial special access codes. Historically, this has put Qwest at a
competitive disadvantage compared with LECs whose customers can make
intrastate/intra-LATA calls simply by dialing 1 plus the desired number. If a
long distance carrier's customer attempts to make an intra-LATA call by simply
dialing 1 plus the desired number, the call will be routed to and completed by
the LEC. Regulatory agencies in a number of states have issued decisions that
would permit Qwest and other interexchange carriers to provide intra-LATA
calling on a 1 + basis. Further, the Telecommunications Act requires in most
cases that the RBOCs provide such dialing parity coincident to their providing
in-region inter-LATA services. Qwest expects to benefit from the ability to
offer 1 + intra-LATA services in states that allow this type of dialing
parity.
Local Regulation. Qwest is occasionally required to obtain street use and
construction permits and licenses and/or franchises to install and expand its
fiber optic network using municipal rights-of-way. Termination of the existing
franchise or license agreements prior to their expiration dates or a failure
to renew the franchise or license agreements and a requirement that Qwest
remove its facilities or abandon its network in place could have a material
adverse effect on Qwest. In some municipalities where Qwest has installed or
anticipates constructing networks, it will be required to pay license or
franchise fees based on a percentage of gross revenue or on a per linear foot
basis. There can be no assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In addition, Qwest could
be at a competitive disadvantage if its competitors do not pay the same level
of fees as Qwest. However, the Telecommunications Act requires municipalities
to manage public rights-of-way in a competitively neutral and non-
discriminatory manner.
Other. Qwest monitors compliance with federal, state and local regulations
governing the discharge and disposal of hazardous and environmentally
sensitive materials, including the emission of electromagnetic radiation.
Qwest believes that it is in compliance with such regulations, although there
can be no assurance that any such discharge, disposal or emission might not
expose Qwest to claims or actions that could have a material adverse effect on
Qwest.
PROPERTIES
The Qwest Network in progress and its component assets are the principal
properties owned by Qwest. Qwest owns substantially all of the
telecommunications equipment required for its business. Qwest's installed
fiber optic cable is laid under the various rights-of-way held by Qwest. Other
fixed assets are located at various leased locations in geographic areas
served by Qwest. Qwest is opening sales offices in selected major geographic
locations.
Qwest's executive, administrative and sales offices and its Network
Management Center are located at its principal office in Denver, Colorado.
Qwest leases this space from an affiliate of Anschutz Company at market rates
under an agreement that expires in October 2004. Qwest also leases office
space in the Denver area for customer service operations. Qwest leases
additional space in Dallas, Texas, housing the headquarters for operation of
its Microwave System.
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In December 1995, Qwest entered into an agreement (as amended in January
1997) with Ferrocarriles Nacionales de Mexico whereby Qwest was granted
easements for the construction of multiple conduit systems along railroad
rights-of-way within Mexico for consideration of approximately $7.7 million,
including $1.1 million in value-added taxes. Qwest has capitalized total
costs, including right-of-way, equipment, construction and design costs,
relating to this investment of approximately $13.0 million as of December 31,
1997.
In July 1997, Qwest entered into an agreement with an unrelated third party
whereby Qwest will receive (i) four dark fibers along a 2,220 kilometer route
to be constructed in Mexico by the third party, and (ii) certain construction
inventory and value-added tax refunds, totaling approximately $2.9 million. In
exchange for these assets, the third party will receive the stock of Qwest's
subsidiary, SP Servicios de Mexico S.A. de C.V., and approximately $6.7
million in cash.
EMPLOYEES
As of March 31, 1998, Qwest employed approximately 1,965 employees of which
240 perform corporate and administrative services, 1,000 provide Network
Construction Services, 300 provide Commercial Services, 35 provide Carrier
Services, and 390 perform network engineering and related functions. Qwest
uses the services of independent contractors for installation and maintenance
of portions of the Qwest Network. None of the Qwest's employees are currently
represented by a collective bargaining unit. Qwest believes that its relations
with its employees are good.
LEGAL PROCEEDINGS
Qwest and its subsidiaries are subject to various claims and proceedings in
the ordinary course of business. Based on information currently available,
Qwest believes that none of such current claims or proceedings, individually
or in the aggregate, will have a material adverse effect on Qwest's financial
condition or results of operations, although there can be no assurances in
this regard. See also "PLAN OF MERGER--Litigation."
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF QWEST
The selected data presented below under the captions "Statement of
Operations and Other Financial Data" and "Summary Balance Sheet Data" as of
the end of and for each of the years in the five-year period ended December
31, 1997 and as of March 31, 1998 and 1997, and for the three months ended
March 31, 1998 and 1997, have been taken or derived from the historical
Consolidated Financial Statements of Qwest. Consolidated Financial Statements
of Qwest as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 are included elsewhere in this Joint
Proxy Statement/Prospectus. The information set forth below should be read in
conjunction with the discussion under "QWEST'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS OF
QWEST" and the Historical Consolidated Financial Statements and the unaudited
Pro Forma Condensed Combined Financial Statements of Qwest and the notes
thereto, appearing elsewhere in this Joint Proxy Statement/Prospectus.
SELECTED HISTORICAL FINANCIAL DATA OF QWEST
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
AND OTHER FINANCIAL
DATA:
Total revenue........... $ 69,327 $ 70,873 $125,102 $230,996 $ 696,703 $ 72,693 $ 177,047
Total operating
expenses............... 80,247 81,488 161,158 243,010 673,222 85,337 180,572
Earnings (loss) from
operations............. (10,920) (10,615) (36,056) (12,014) 23,481 (12,644) (3,525)
Other income
(expense)(1)........... 122,631 (70) (2,411) 1,813 99 5,410 (6,302)
Earnings (loss) before
income taxes........... 111,711 (10,685) (38,467) (10,201) 23,580 (7,234) (9,827)
Net earnings (loss)..... $ 68,526 $ (6,898) $(25,131) $ (6,967) $ 14,523 (4,776) $ (6,649)
======== ======== ======== ======== ========= ======== =========
Earnings (loss) per
share-basic............ $ 0.40 $ (0.04) $ (0.15) $ (0.04) $ 0.08 $ (0.03) $ (0.03)
Earnings (loss) per
share-diluted.......... $ 0.40 $ (0.04) $ (0.15) $ (0.04) $ 0.07 $ (0.03) $ (0.03)
EBITDA(2)............... $ (824) $ (6,338) $(26,007) $ 6,912 $ 41,733 $(10,678) $4,506
Net cash provided by
(used in) operating
activities............. $ (7,125) $ 3,306 $(56,635) $ 32,524 $ (36,488) $ 33,359 $ 53,540
Net cash provided by
(used in) investing
activities............. $107,496 $(41,712) $(58,858) $(52,622) $(356,824) $(56,922) $(141,644)
Net cash provided by
(used in) financing
activities............. $(95,659) $ 34,264 $113,940 $ 25,519 $ 766,191 $177,327 $ 281,481
Capital
expenditures(3)........ $ 3,794 $ 40,926 $ 48,732 $ 85,842 $ 444,659 $ 78,922 $ 159,704
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA:
Total assets............ $60,754 $89,489 $184,178 $262,551 $1,398,105 $469,614 $1,779,568
Long-term debt.......... $ 2,141 $27,034 $ 68,793 $109,268 $ 630,463 $286,325 $ 959,270
Total stockholders'
equity(4).............. $12,079 $24,581 $ 26,475 $ 9,442 $ 381,744 $ 4,666 $ 407,162
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Route miles of conduit
installed.............. 3,200 3,650 9,500 4,900 11,100
Route miles of lit fiber
installed.............. 580 900 3,400 900 5,400
Total minutes of
use(5)................. 237,000,000 382,000,000 669,000,000 107,000,000 262,000,000
</TABLE>
- -------
(1) In November 1993, Qwest sold substantially all of its then owned fiber
optic network capacity and related equipment and assets to a third-party
purchaser for $185.0 million (the "1993 Capacity Sale"). After deducting
the carrying value of the assets sold and direct costs associated with the
1993 Capacity Sale, Qwest recognized a gain of approximately $126.5
million. See "QWEST'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS OF QWEST."
(2) EBITDA represents net earnings (loss) before interest, income taxes,
depreciation and amortization, a nonrecurring expense of $2.6 million in
the year ended December 31, 1996 to restructure operations, the gain on
sale of telecommunications agreements of $6.1 million (which is non-
recurring) in the year ended December 31, 1996, and the gain on sale of
contract rights of approximately $9.3 million (which is non-recurring) in
the year ended December 31, 1997. EBITDA includes earnings from the
construction contracts for the sale of dark fiber that Qwest will use to
provide cash for the construction cost of the Qwest Network. EBITDA does
not represent cash flow for the periods presented and should not be
considered as an alternative to net earnings (loss) as an indicator of
Qwest's operating performance or as an alternative to cash flows as a
source of liquidity, and may not be comparable with EBITDA as defined by
other companies. Qwest believes that EBITDA is commonly used by financial
analysts and others in the telecommunications industry. Without the effect
of Growth Share Plan expense, EBITDA would have been $115.2 million, $20.0
million, and $1.8 million for the years ended December 31, 1997, 1996 and
1993, respectively, and $6.8 million and $2.4 million for the three months
ended March 31, 1998 and 1997, respectively.
(3) Capital expenditures include expenditures for property and equipment,
accrued capital expenditures, capital expenditures financed with the
equipment credit facility and initial obligations under capital leases.
(4) Qwest has not declared or paid cash dividends on the Qwest Common Stock
since becoming a public company in June 1997.
(5) Represents total minutes of use for the years ended December 31, 1997,
1996 and 1995 and the three months ended March 31, 1998 and 1997.
D-42
<PAGE>
QWEST'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Qwest's audited Consolidated Financial Statements and unaudited interim
financial statements and the notes thereto, appearing elsewhere in this Joint
Proxy Statement/Prospectus.
OVERVIEW
Qwest is a facilities-based provider of multimedia communications services
to interexchange carriers and other telecommunications entities, businesses
and consumers and constructs and installs fiber optic communications systems
for interexchange carriers and other telecommunications entities, as well as
for its own use.
Qwest is expanding its existing voice and data network into the Qwest
Network, an approximately 16,250 route-mile, coast-to-coast, technologically
advanced fiber optic telecommunications network. The domestic network is
expected to be completed in 1999. In April 1998, Qwest 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 IP fiber network. Qwest 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 to 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 Qwest's growth into the European market.
In October 1997, Qwest acquired SuperNet, an ISP, for $20.2 million in cash,
including acquisition costs.
On March 30, 1998, Qwest consummated its acquisition of Phoenix, a non-
facilities-based reseller of long distance services, for approximately $27.2
million in Qwest Common Stock. Additional cash consideration to the Phoenix
Stockholders of up to $4.0 million is being withheld pending the outcome of
litigation for which Phoenix or its affiliates may have potential liability.
At the time of the acquisition, Phoenix had approximately 40,000 customers,
primarily in the business market. The merger was accounted for as a purchase.
On April 14, 1998, Qwest acquired EUnet, a European Internet service
provider with business units operating in 13 European countries, for
approximately $154.4 million in Qwest Common Stock and cash. At the time of
the acquisition, EUnet had approximately 60,000, primarily business, customers
throughout Europe. The acquisition was accounted for as a purchase.
Carrier Services. Carrier Services provides high-volume and conventional
dedicated line services over Qwest's owned capacity and switched services over
owned and leased capacity to interexchange carriers and other
telecommunications providers. Qwest is currently focusing on 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, Qwest is marketing to ISPs and other data service companies. For the
three months ended March 31, 1998 and the years ended December 31, 1997 and
1996, Qwest's five largest carrier customers accounted for approximately
46.2%, 42.3% and 41.3% of Carrier Services revenue, respectively.
Commercial Services. Commercial Services provides voice, data and video
services to businesses and consumers. Qwest 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.
D-43
<PAGE>
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, Qwest entered into an arrangement with a third party under which they
will jointly define and test new broadband business multimedia services.
Network Construction Services. Network Construction Services constructs and
installs fiber optic communication systems for interexchange carriers and
other telecommunications providers, as well as for Qwest's own use. Qwest
began operations in 1988 constructing fiber optic conduit systems primarily
for major long distance carriers in exchange for cash and capacity rights. In
1996, Qwest entered into major construction contracts for the sale of dark
fiber to Frontier and WorldCom whereby Qwest 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, Qwest expects that revenue from Network
Construction Services will be less significant to Qwest's operations. See
"BUSINESS OF QWEST--The Qwest Network --Dark Fiber Sales."
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Qwest 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, Qwest'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. Additionally, commercial services experienced growth in
switched services provided to businesses and consumers as a result of
continued expansion of Qwest'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 WorldCom, GTE, Frontier and other carriers under contracts
entered into subsequent to the first quarter 1997.
D-44
<PAGE>
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, 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, Qwest 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 Qwest's own use are capitalized. Expenses for network construction
services increased due to costs of construction contracts relating to
increased dark fiber sales revenue.
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 Qwest's direct mail sales
program, the marketing of Qwest's new brand identity and new service
offerings, administrative and information services support of Qwest'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. Qwest is in the process of opening commercial sales offices in
selected major geographic markets to implement Qwest's strategy, as segments
of the Qwest Network become operational. In addition, SG&A expenses will
increase as Qwest continues to expand its Carrier Services and Commercial
Services, initiate its United States and international direct sales
operations, and recruit experienced telecommunications industry personnel to
implement Qwest's strategy.
Qwest has a Growth Share Plan for certain of its employees and directors,
which was Qwest's management incentive plan prior to the initial public
offering. Growth Share Plan expense reflects Qwest'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 Qwest over a
specified measuring period. Qwest anticipates total additional expense of up
to approximately $21.1 million through the year 2002 in connection with this
plan. Qwest does not anticipate any future grants under the Growth Share Plan.
Qwest'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 Qwest's growth and
amortization of goodwill related to the SuperNet acquisition. Qwest expects
that depreciation and amortization expense will continue to increase in
subsequent periods as Qwest continues to activate additional segments of the
Qwest Network and amortizes goodwill recorded from acquisitions.
D-45
<PAGE>
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 Senior Notes, the Senior
Discount Notes and the New Senior Discount Notes, partially offset by
increases in capitalized interest resulting from construction of the Qwest
Network. See, "--Liquidity and Capital Resources." Interest income increased
due primarily to increased cash equivalent balances.
Pursuant to a capacity sale in 1993, Qwest 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, Qwest 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 Qwest
received in the three months ended March 31, 1997 and recorded as gain on sale
of contract rights.
Qwest sold a portion of its dedicated line services on leased capacity in
July 1996. During the transition of the service agreements to the buyer, Qwest
incurred certain facilities costs on behalf of the buyer, which were to be
reimbursed to Qwest. A dispute arose with respect to the reimbursement of such
costs and, as a result, Qwest 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.
Income Taxes. Qwest is included in the consolidated federal income tax
return of Anschutz Company. A tax sharing agreement provides for allocation of
tax liabilities and benefits to Qwest, in general, as though it filed a
separate tax return. Qwest's effective tax rate during the three months ended
March 31, 1998 and 1997 approximated the statutory federal rate.
If the Merger is consummated, Qwest will no longer be included in the
consolidated federal income tax return of Anschutz Company, its majority
stockholder. As a result, the net operating losses for income tax purposes of
Qwest, included in the consolidated federal income tax returns of Anschutz
Company from January 1, 1997 through the Closing Date, will not be available
for use by Qwest in its separate tax returns after the Merger. Qwest
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 Anschutz Company. Based on an analysis of the tax
attributes of Qwest and Anschutz Company, Anschutz Company will not be able to
realize the benefit of Qwest's net operating losses. Accordingly, the deferred
tax assets attributable to Qwest's net operating loss carryforwards,
calculated on a separate return basis, will be reported on the consummation
date of the Merger as an adjustment to Qwest's capital in the form of an in-
substance dividend.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Qwest reported net earnings of $14.5 million in the year ended December 31,
1997, compared to a net loss of $7.0 million in the same period of the prior
year. Excluding the effect of the compensation expense relating to the Growth
Share Plan, net of income tax, Qwest's reported net earnings would have been
approximately $61.6 million and $1.5 million for the years ended December 31,
1997 and 1996, respectively.
D-46
<PAGE>
Revenue. Total revenue increased $465.7 million, or 202% during the year
ended December 31, 1997, as compared to 1996. Carrier Services revenue
decreased $1.9 million, or 3% for the year ended December 31, 1997, as
compared to 1996, primarily due to Qwest's sale of its resale dedicated line
services on leased capacity on July 1, 1996. The sold business generated
revenue of $18.8 million for the year ended December 31, 1996. Exclusive of
this revenue, Carrier Services revenue increased $16.9 million, or 44%, during
the year ended December 31, 1997, as compared to 1996. This increase in
Carrier Services revenue was due primarily to increases in revenue from
carrier switched services and carrier dedicated line services provided on the
Qwest Network. Commercial Services revenue increased $25.4 million, or 74% for
the year ended December 31, 1997, as compared to 1996. The increase was due
primarily to growth in switched services provided to small- and medium-sized
businesses and to consumers as a result of continued expansion of Qwest's
direct sales, direct mail, agent and telemarketing sales channels. Revenue
from Network Construction Services increased $442.2 million, or 318% during
the year ended December 31, 1997, as compared to the corresponding period in
1996. The increase was due primarily to revenue from dark fiber sales to
WorldCom, GTE and Frontier.
Operating Expenses. Qwest's principal operating expenses consist of expenses
for telecommunications services, network construction incurred by Network
Construction Services, SG&A, Growth Share Plan expense and depreciation and
amortization. Total operating expenses increased $430.2 million, or 177%
during the year ended December 31, 1997 as compared to the corresponding
period in 1996. Expenses for telecommunications services primarily consist of
the cost of leased capacity, LEC access charges, engineering and other
operating costs. Expenses for telecommunications services increased $10.8
million, or 13% for the year ended December 31, 1997, as compared to 1996. The
growth in telecommunications services expenses was primarily attributable to
the continued growth in switched services and network engineering and
operations, partially offset by the reduction in expenses resulting from the
sale on July 1, 1996 of Qwest's resale dedicated line services on leased
capacity and an increase in on-net traffic over the Qwest Network. When the
Qwest Network is completed and activated, Qwest will be able to serve more
customer needs over its own capacity on the Qwest Network.
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 Qwest's own use are capitalized. Expenses for Network Construction
Services increased $309.6 million, or 354% in the year ended December 31,
1997, as compared to 1996, due to costs of construction contracts relating to
increased dark fiber sales revenue.
SG&A includes the cost of salaries, benefits, occupancy costs, commissions,
sales and marketing expenses and administrative expenses. SG&A increased $45.4
million, or 99% in the year ended December 31, 1997, as compared to 1996. The
increase was due primarily to increases in expenses related to Qwest's direct
mail sales program, the development of Qwest's new brand identity,
administrative and information services support of Qwest's growth, and the
recruiting and hiring of additional personnel. Qwest is in the process of
opening commercial sales offices in selected major geographic markets to
implement Qwest's strategy, as segments of the Qwest Network become
operational. In addition, SG&A expenses will increase as Qwest continues to
expand its Carrier and Commercial Services, initiate its United States and
international direct sales operations, and recruit experienced
telecommunications industry personnel to implement Qwest's strategy.
Qwest has a Growth Share Plan for certain of its employees and directors.
Growth Share Plan expense, reflects Qwest'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 Qwest over a specified
measuring period. Qwest estimated an increase in the value of growth shares,
primarily triggered by the Qwest Initial Public Offering, and has recorded
$73.5 million of additional compensation expense in the year ended December
31, 1997, and $13.1 million in the year ended December 31, 1996. Qwest
anticipates total additional expense of up to approximately $23.4 million
through the year 2002 in connection with this plan. Qwest does not anticipate
any future grants under the Growth Share Plan.
Qwest's depreciation and amortization expense increased $4.0 million, or 25%
during the year ended December 31, 1997 as compared to 1996. This increase
resulted primarily from activating segments of the Qwest
D-47
<PAGE>
Network during 1997, purchases of additional equipment used in constructing
the Qwest Network and purchases of other fixed assets to accommodate Qwest's
growth. Qwest expects that depreciation and amortization expense will continue
to increase in subsequent periods as Qwest continues to activate additional
segments of the Qwest Network and amortizes the goodwill acquired with the
SuperNet purchase. See, "--Overview."
Other Income (Expense). Pursuant to a capacity sale in 1993, Qwest 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 first quarter of 1997, Qwest
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, which Qwest
received in 1997 and has recorded as gain on sale of contract rights.
During 1997, Qwest's net interest income (expense) increased $2.8 million as
compared to 1996. The increase resulted from an increase in interest on long-
term indebtedness, related primarily to the Senior Notes and the Senior
Discount Notes, partially offset by increases in capitalized interest
resulting from construction of the Qwest Network and interest income
attributable to the increase in cash equivalent balances. In January 1998,
Qwest issued the New Senior Discount Notes which are expected to increase net
interest expense in subsequent periods. See, "--Liquidity and Capital
Resources."
As previously discussed, Qwest sold a portion of its dedicated line services
on leased capacity in July 1996. During the transition of the service
agreements to the buyer, Qwest incurred certain facilities costs on behalf of
the buyer, which were to be reimbursed to Qwest. A dispute arose with respect
to the reimbursement of such costs and, as a result, Qwest made a provision of
approximately $2.0 million in the first quarter of 1997.
Income Taxes. Qwest is included in the consolidated federal income tax
return of Anschutz Company. A tax sharing agreement provides for allocation of
tax liabilities and benefits to Qwest, in general, as though it filed a
separate tax return. Qwest's effective tax rate in 1997 was higher than the
statutory federal rate as a result of permanent differences between book and
tax expense relating to the Growth Share Plan and amortization of goodwill.
Qwest's effective tax rate in the year ended December 31, 1996 approximated
the statutory federal rate.
Net Earnings (Loss). Qwest realized net earnings of $14.5 million in the
year ended December 31, 1997, as compared to a net loss of $7.0 million in the
corresponding period of 1996 as a result of the factors discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Total revenue increased $105.9 million, or 85%, due primarily to
significantly higher revenue from Network Construction Services, as well as
increased revenue from Commercial Services, offset in part by lower revenue
from Carrier Services. Revenue from Network Construction Services increased
$102.3 million, or 277%, due to revenue from dark fiber sales of approximately
$121.0 million to WorldCom and Frontier. Commercial Services revenue increased
$13.9 million, or 68%. This increase is largely attributable to growth in
switched services provided to small- and medium-sized business and consumers
as a result of the expansion of Qwest's agent, telemarketing and direct mail
sales channels. Carrier Services revenue decreased $10.2 million or 15%,
primarily due to decreases in revenue resulting from Qwest's sale of a portion
of its dedicated line services on leased capacity on July 1, 1996. The sold
business generated revenues of $18.8 million for the year ended December 31,
1996 and $39.7 million for the year ended December 31, 1995. The decrease in
Carrier Services revenue was partially offset by an increase in revenue from
carrier switched services, which increased to $19.4 million in 1996 from $13.8
million in 1995.
Operating Expenses. Total operating expenses increased $81.9 million, or
51%, due primarily to increases in Network Construction Services, SG&A and
compensation expenses associated with the Growth Share Plan. Expenses for
telecommunications services decreased $0.8 million or 1%. The sale on July 1,
1996 of Qwest's dedicated line services on leased capacity generated a
reduction in expenses, which was partially offset by an increase in
telecommunications services expenses associated with the growth in switched
services and servicing the Qwest Network. Expenses for Network Construction
Services increased $54.8 million or 167%. This increase was due to cost of
construction contracts relating to increased dark fiber sales.
D-48
<PAGE>
SG&A expenses increased $8.6 million, or 23%. Qwest incurred additional SG&A
expenses as a result of growth in Qwest's telecommunications services and the
construction of the Qwest Network, including additional sales commissions on
higher revenue, expenses incurred in the implementation of Qwest's direct mail
sales channel and expenses for customer service personnel added to support
Qwest's expansion of its commercial customer base. The SG&A expenses in 1996
also included restructuring expenses of $1.6 million incurred by Qwest as a
result of its decision to close 13 sales offices and the termination of
approximately 130 employees involved in sales, marketing and administrative
functions. As a result of this restructuring, Qwest experienced a reduction in
payroll, commissions and rental expense. Qwest anticipates that, as it deploys
the Qwest Network and expands its Carrier Services and Commercial Services,
SG&A expenses will continue to increase.
Qwest estimated a $13.1 million increase in value of the growth shares at
December 31, 1996, due to the Frontier dark fiber sale. No expense was
recognized for the year ended December 31, 1995, as there were no significant
compensatory elements in those periods.
Qwest's depreciation and amortization expense increased $6.3 million, or
63%. This increase was primarily due to Qwest's investment in the Qwest
Network. Qwest expects that depreciation and amortization expense will
continue to increase in subsequent periods as Qwest continues to activate
additional segments of the Qwest Network.
Other Income (Expense). Qwest's net interest and other expenses increased
$1.9 million, or 79%. This increase was primarily attributable to additional
debt incurred in 1996 to finance capital expenditures and to provide working
capital. For a discussion of additional indebtedness, see "--Liquidity and
Capital Resources."
Income Taxes. Qwest is included in the consolidated federal income tax
return of Anschutz Company. A tax sharing agreement provides for allocation of
tax liabilities and benefits to Qwest, in general, as though it filed a
separate tax return. Qwest's effective tax rate in 1996 and 1995 approximated
the statutory federal rate. The difference between the income tax benefit of
$3.2 million in 1996 as compared to $13.3 million in 1995 resulted from a
$28.3 million decrease in loss before income taxes.
Net Loss. Qwest experienced a net loss of $7.0 million in 1996 compared to a
net loss of $25.1 million in 1995 as a result of the factors discussed above.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure About Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for the manner in which business
enterprises are to report information about operating segments in its annual
statements and requires those enterprises to report selected information
regarding operating segments in interim financial reports issued to
shareholders. SFAS 131 is effective for fiscal years beginning after December
15, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to March 31, 1997, Qwest 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
Anschutz Company or affiliates, as well as external borrowings collateralized
by certain of Qwest's assets. Since March 31, 1997, Qwest 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. Qwest also received net proceeds of $299.2 million from the issuance
of the New Senior Discount Notes in January 1998. Qwest intends to finance its
operations in the future through internally and externally generated funds
without relying on cash advances, contributions or guarantees from Anschutz
Company.
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,
Qwest had working capital of $568.9 million resulting primarily from the
issuance of the New Senior Discount Notes in January 1998. Total cash expended
during the three years ended December 31, 1997 to fund capital expenditures,
repayments of long-term debt to third parties, repayment of net advances from
Anschutz Company, and for
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<PAGE>
acquisitions was $449.2 million, $223.9 million, $9.9 million and $32.6
million, respectively. Total cash used in operations was $60.6 million during
the same period. Total cash provided during this same period from revolving
loans secured by collateral owned by Anschutz Company or an affiliate was
$138.0 million, and capital contributions from Anschutz Company were
approximately $28.0 million. The loans from Anschutz Company were repaid in
1997. In addition, during this same period, Qwest's net cash provided by
secured borrowings under long-term debt agreements with third parties
aggregated $67.6 million. At December 31, 1996 and 1995, Qwest had working
capital deficits of approximately $75.7 million and $2.6 million,
respectively.
Qwest 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, Qwest had already expended
approximately $1.0 billion as of March 31, 1998. Qwest anticipates remaining
total cash outlays (including capital expenditures) for these purposes of
approximately $750.0 million in 1998 and $235.0 million in 1999. Estimated
total Qwest Network expenditures for 1998 include Qwest'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, Qwest 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, Qwest 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 Senior 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 Senior Discount Notes; (v) $299.2 million
in net proceeds from the sale of the New Senior Discount Notes; and (vi)
approximately $319.5 million in net proceeds from the Qwest Initial Public
Offering. Qwest 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, Qwest issued its New Senior Discount Notes, generating net
proceeds of approximately $299.2 million, after deducting offering costs. The
New Senior Discount 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 New Senior Discount Notes mature on February 1, 2008.
The New Senior Discount Notes are redeemable at Qwest's option, in whole or in
part, at any time on or after February 1, 2003, at specified redemption
prices. Cash interest on the New Senior Discount 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 New Senior Discount
Notes indenture contains certain covenants that, among other things, limit the
ability of Qwest 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 Qwest or its Restricted
Subsidiaries, issue or sell capital stock of Qwest's Restricted Subsidiaries
or enter into certain mergers and consolidations.
In connection with the sale of the New Senior Discount Notes, Qwest agreed
to make the Exchange Offer or, alternatively, to file a shelf registration
statement under the Securities Act with respect to the New Senior Discount
Notes. In April 1998, Qwest 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, resulting in a New
Senior Discount Registration Default, additional cash interest will accrue at
a rate per annum equal to 0.50% of the principal amount at maturity of the New
Senior Discount Notes during the 90-day period immediately following the
occurrence of a New Senior Discount Registration Default and increasing in
increments of 0.25% per annum of the principal amount at maturity of the New
Senior Discount Notes up to a maximum of 2.0% per annum, at the end of each
subsequent 90-day period until the New Senior Discount Registration Default is
cured.
D-50
<PAGE>
In October 1997, Qwest issued and sold its Senior Discount Notes, generating
net proceeds of approximately $342.1 million, after deducting offering costs.
In February 1998, Qwest completed an exchange of identical notes, registered
under the Securities Act, for all of the Senior Discount Notes.
In June 1997, Qwest received approximately $319.5 million in net proceeds
from the sale of 31,050,000 shares of Qwest's Common Stock in the Qwest
Initial Public Offering.
In May 1997, Qwest and Nortel, individually and as agent for itself and
other specified lenders, entered into a $90.0 million credit agreement (the
"Equipment Credit Facility") to fund a portion of certain capital expenditures
required to equip the Qwest Network. Under the Equipment Credit Facility,
Qwest may borrow funds up to 75% of the purchase price of such equipment and
related engineering and installation services provided by Nortel as vendor as
it purchases the equipment, with the purchased equipment and related items
serving as collateral for the loans of a third party lender. Qwest is
committed to purchase from Nortel a minimum of $100.0 million of such
equipment and services under a separate procurement agreement. Qwest's total
remaining commitment under the procurement agreement was approximately $68.4
million as of December 31, 1997. Principal amounts outstanding under the
Equipment Credit Facility will be payable in quarterly installments commencing
on June 30, 2000, with full repayment due on March 31, 2004. Borrowings bear
interest at Qwest's option at either: (i) a floating base rate announced by a
designated reference bank plus an applicable margin; or (ii) LIBOR plus an
applicable margin.
In March 1997, Qwest issued and sold its Senior Notes, generating net
proceeds of approximately $242.0 million, after deducting offering costs. A
portion of the net proceeds were used to repay amounts due under the then
existing revolving credit facility, the construction term loan, equipment
loans and term notes, described below. Interest on the Senior Notes is payable
semiannually in arrears on April 1 and October 1 of each year, commencing
October 1, 1997. The Senior Notes mature on April 1, 2007. The Senior Notes
are subject to redemption at the option of Qwest, in whole or in part, at any
time on or after April 1, 2002, at specified redemption prices. The indenture
for the Senior Notes contains certain covenants that are substantially
identical to the New Senior Discount Notes and Senior Discount Notes described
above.
In 1996, Qwest entered into and subsequently amended a long-term $100.0
million revolving credit facility agreement, which was collateralized by
shares of common stock owned and pledged by Anschutz Company. In October 1997,
Qwest repaid the outstanding balance and terminated this facility.
In April 1995, Qwest 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.
Qwest also incurred other indebtedness during the three-year period ended
December 31, 1997, including five equipment loans in 1995 and 1996 aggregating
$10.0 million and two term notes in January 1995 aggregating $12.0 million,
the proceeds of which were used to repay a portion of the prior advance from
Anschutz Company. In addition, Qwest had other outstanding indebtedness in
1997 which it had incurred prior to 1995, including amounts payable under a
network credit facility and an additional equipment loan. Such indebtedness
had a weighted average interest rate of approximately 9% in 1997, and was
repaid in the second quarter of 1997 with proceeds from the Senior Notes.
YEAR 2000
Qwest has created a project team including internal and external resources
that is in the process of identifying and addressing the impact of problems
and uncertainties related to the year 2000 on its operating and application
software and products. Qwest expects to resolve year 2000 compliance issues
primarily through replacement and normal upgrades of its software and
products. However, there can be no assurance that such replacements and
upgrades can be completed on schedule and within the estimated costs.
INFLATION
Inflation has not significantly affected Qwest's operations during the past
three years.
D-51
<PAGE>
MANAGEMENT OF QWEST
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Qwest, their ages and positions with
Qwest, and brief biographies are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Philip F. Anschutz.................... 58 Director and Chairman
Director, President and Chief
Joseph P. Nacchio..................... 48 Executive Officer
Robert S. Woodruff.................... 49 Director, Executive Vice
President--Finance and Chief
Financial Officer and
Treasurer
Jordan L. Haines...................... 70 Director
Cannon Y. Harvey...................... 57 Director
Richard T. Liebhaber.................. 63 Director
Douglas L. Polson..................... 56 Director
Craig D. Slater....................... 41 Director
W. Thomas Stephens.................... 55 Director
Roy A. Wilkens........................ 55 Director
Joseph T. Garrity..................... 46 Secretary
</TABLE>
OTHER MANAGEMENT
In addition, senior management of QCC includes the individuals set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Senior Vice President--Carrier
Gregory M. Casey...................... 39 Markets
Senior Vice President--Consumer
Stephen M. Jacobsen................... 39 Markets
Executive Vice President and Chief
Brij Khandelwal....................... 52 Information Officer
Reynaldo U. Ortiz..................... 51 Managing Director and Senior Vice
President-- International
Larry A. Seese........................ 52 Executive Vice President--Network
Engineering and Operations
Executive Vice President--Product
Nayel S. Shafei....................... 38 Development
Senior Vice President--Network
August B. Turturro.................... 51 Construction
Senior Vice President--New
A. Dean Wandry........................ 57 Business Development
Senior Vice President--Corporate
Marc B. Weisberg...................... 40 Development
Lewis O. Wilks........................ 44 President--Business Markets
</TABLE>
Philip F. Anschutz has been a Director and the Chairman of the Qwest Board
since February 1997. He was a Director and Chairman of the Board of QCC from
November 1993 until September 1997. He has been a Director and Chairman of the
Board of Anschutz Company, Qwest's majority stockholder, for more than five
years, and a Director and Chairman of the Board of The Anschutz Corporation, a
wholly owned subsidiary of Anschutz Company, for more than five years. Since
the merger of Southern Pacific Rail Corporation ("SPRC") and Union Pacific
Corporation ("UP") in September 1996, Mr. Anschutz has served as Vice-Chairman
of UP. Prior to the merger, Mr. Anschutz was a Director of SPRC from June 1988
to September 1996, Chairman of SPRC from October 1988 to September 1996, and
President and Chief Executive Officer of SPRC from October 1988 to July 1993.
He also has been a Director of Forest Oil Corporation since 1995. Mr. Anschutz
serves as a member of the Compensation Committee of the Qwest Board (the
"Compensation Committee").
Joseph P. Nacchio became Director, President and Chief Executive Officer of
Qwest in February 1997, having been appointed to the same positions at QCC in
January 1997. Prior to joining Qwest he was Executive Vice President of AT&T's
Consumer and Small Business Division since January 1996. In that capacity he
was
D-52
<PAGE>
responsible for AT&T's core consumer long distance business, and AT&T's
DirecTV, AT&T Alascom and Language Line businesses. He was also responsible
for marketing and sales targeted at all consumer and small businesses in the
United States. In 1994 and 1995 Mr. Nacchio was President of AT&T's Consumer
Communications Services long distance, a winner of the Malcolm Baldrige
National Quality Award for Excellence. From November 1991 until August 1994,
Mr. Nacchio was President of AT&T's Business Communications Services unit
focused on the long distance communications needs of business customers. Since
joining AT&T in June 1970 he held assignments in network operations,
engineering, marketing and sales. Mr. Nacchio earned an M.S. degree in
management from the Massachusetts Institute of Technology in the Sloan Fellows
Program. He also received an M.B.A. degree and a B.S. degree in electrical
engineering, both from New York University.
Robert S. Woodruff became a Director and Executive Vice President--Finance
and Chief Financial Officer of Qwest in February 1997. He served as interim
Chief Operating Officer of Qwest and QCC from November 1996 through April
1997. He has served as a Director of QCC since December 1996. He became
Executive Vice President--Finance, Chief Financial Officer and Treasurer of
QCC in August 1994. He serves as a Director of FSI Acquisition Corp.,
Government Communications Inc., Qwest Transmission Inc., Qwest Properties,
Inc., and U.S. TeleSource, Inc., all of which are wholly owned subsidiaries of
QCC. He is also Sole Administrator of QCC's Mexican subsidiaries, Opticom,
S.A. de C.V., Servicios Derecho de Via, S.A. de C.V., and S.P. Servicios
Mexico, S.A. de C.V. Prior to joining Qwest he had been a partner in the
accounting firm of Coopers & Lybrand since 1984, where his responsibilities
included providing services to communications companies. Mr. Woodruff received
a B.B.A. degree in accounting, with honors, from the University of Wisconsin.
Jordan L. Haines was appointed a Director of Qwest in June 1997. He was
Chairman of the Board of Fourth Financial Corporation, a Kansas-based bank
holding company, and its subsidiary, Bank IV Wichita, N.A., from 1983 until
his retirement in 1991. He has been a member of the Board of Directors of KN
Energy, Inc. since 1983 and a Director of Forest Oil Corporation since 1996.
Mr. Haines serves as a member of the Audit Committee of the Qwest Board (the
"Audit Committee") and the Compensation Committee.
Cannon Y. Harvey has been a Director of Qwest since February 1997, and was
Director of QCC from December 1996 until September 1997. He has been President
and Chief Operating Officer of both Anschutz Company and The Anschutz
Corporation since December 1996. From February 1995 until September 1996 he
served as Executive Vice President--Finance and Law of SPRC; from September
1993 to February 1995 he served as Senior Vice President and General Counsel
of SPRC; from May 1993 to September 1993 he served as Vice President--Finance
and Law and General Counsel of SPRC. Prior to joining SPRC, Mr. Harvey was a
Partner in the law firm of Holme Roberts & Owen LLP for more than five years.
Mr. Harvey serves on the Audit Committee.
Richard T. Liebhaber has been a Director of Qwest since February 1997. He
has been a Managing Director of Veronis, Suhler & Associates, Inc., the New
York media merchant banking firm, since June 1, 1995. Mr. Liebhaber has been a
member of the board of directors of Objective Communications, Inc. since
August 1994, the board of directors of Alcatel Network Systems, Inc. since
June 1995, the board of directors of Geotek Communications, Inc. since April
1995, the Board of Directors of Internet Communications Corporation since May
1997, and the Board of Directors of Scholz Master Builders since December
1985. From December 1985 to his retirement in May 1995, Mr. Liebhaber served
as Executive Vice President of MCI Communications Corporation and as a member
of its Management Committee. Mr. Liebhaber was a member of the Board of
Directors of MCI Communications Corporation from July 1992 until his
retirement in May 1995.
Douglas L. Polson has been a Director of Qwest since February 1997, and was
Director of QCC for more than five years until 1997. He has been a Director
and Vice President--Finance of both Anschutz Company and The Anschutz
Corporation for more than five years. He was a Director of SPRC from June 1988
to September 1996; Vice Chairman of SPRC from June 1988 to September 1996; and
a Vice President of SPRC from October 1988 to September 1996.
D-53
<PAGE>
Craig D. Slater has been a Director of Qwest since February 1997 and a
Director of QCC since November 1996. He has been President of Anschutz
Investment Company since August 1997 and Vice President--Acquisitions and
Investments of both Anschutz Company and The Anschutz Corporation since August
1995. Mr. Slater served as Corporate Secretary of Anschutz Company and The
Anschutz Corporation from September 1991 to October 1996 and held various
other positions with those companies from 1988 to 1995. He has been a Director
of Forest Oil Corporation since 1995 and Internet Communications Corporation
since 1996.
W. Thomas Stephens was appointed a Director of Qwest in June 1997. He is
President, Chief Executive Officer and a Director of MacMillan Bloedel
Limited, Canada's largest forest products company. He served from 1986 until
his retirement in 1996 as President and Chief Executive Officer of Manville
Corporation, an international manufacturing and resources company. He also
served as a member of the Manville Corporation Board of Directors from 1986 to
1996, and served as Chairman of the Board from 1990 to 1996. Mr. Stephens is a
Director of The Putnam Funds and New Century Energies. He serves as a member
of the Audit Committee and the Compensation Committee.
Roy A. Wilkens was appointed a Director of Qwest in March 1998. Mr. Wilkens
was President of Williams Pipeline Company when he founded WilTel Network
Services as an operating unit of The Williams Companies, Inc. in 1985. He was
Founder/CEO of WilTel Network Services from 1985 to 1997. In 1995, WilTel
Network Services was acquired by LDDS Communications, which now operates under
the name WorldCom. In 1997, Mr. Wilkens retired from WorldCom as Vice
Chairman. In 1992, Mr. Wilkens was appointed by President George Bush to the
National Security Telecommunications Advisory Council. He has also served as
Chairman of both the Competitive Telecommunications Association ("CompTel")
and the National Telecommunications Network. Mr. Wilkens is a member of the
Board of Directors of Paging Network Inc., UniDial Inc. and Invensys
Corporation Inc.
Joseph T. Garrity has been Secretary of Qwest since February 1997, Secretary
of QCC since November 1996, and has been a Director of QCC since September
1997. He is also Senior Director--Legal, Regulatory and Legislative Affairs of
QCC since November 1996 and was Director--Regulatory and Legislative Affairs
of QCC from March 1995 to November 1996. Prior to joining Qwest, from 1992 to
March 1995, Mr. Garrity was Senior Attorney with MCI Telecommunications
Corporation; and from 1991 to 1992 he was President of Garrity, Inc. and
Joseph T. Garrity, P.C., where he was an attorney and consultant in the areas
of domestic and international telecommunications. From 1988 to 1991 he was
Counsel and Assistant Secretary to Jones International, Ltd., Jones
Intercable, Inc. and Jones Spacelink, Ltd. and from 1989 to 1991 was
President, Jones Programming Services, Inc. He has B.S. and M.S. degrees from
Northwestern University and a J.D. degree from DePaul University College of
Law.
Gregory M. Casey became Senior Vice President--Carrier Markets of QCC in
June 1997. In this capacity, he is responsible for all of Qwest's carrier
marketing and sales programs. Prior to joining QCC, Mr. Casey was, since 1996,
Vice President of Carrier Relations and Regulatory Affairs at LCI, with
responsibility for managing relationships with RBOCs and LECs and negotiating
interconnection arrangements and wholesale pricing for resale of local
service. From 1991 to 1996, he was employed by ONCOR Communications Inc.,
where he served as Senior Vice President of Regulatory Affairs and Telephone
Company Relations. Prior to joining ONCOR, he was Senior Vice President and
General Counsel for Telesphere International Inc. Mr. Casey holds a B.A.
degree in political science from the University of Connecticut and a J.D.
degree from DePaul University College of Law.
Stephen M. Jacobsen became Senior Vice President--Consumer Markets of QCC in
March 1997. In this capacity, he is responsible for all of QCC's consumer
marketing and sales programs. Prior to joining QCC, Mr. Jacobsen was Regional
Vice President--Consumer and Small Business for AT&T in Southern California
and Nevada since 1996, with responsibility for all marketing functions for
consumer and small business customers in those geographic areas. During his
nearly sixteen-year career at AT&T, Mr. Jacobsen held key managerial positions
in the network services division, including responsibility for AT&T's network
operations center in the
D-54
<PAGE>
western region as well as positions in sales, marketing and product
management. Mr. Jacobsen holds an M.S. degree in management from the
Massachusetts Institute of Technology in the Sloan Fellows Program and a
B.S.B.A. degree from the University of Arizona.
Brij Khandelwal became Executive Vice President and Chief Information
Officer of QCC in October 1997. Prior to joining Qwest he was Vice President
and Chief Information Officer at Lucent Technologies Network Systems from
November 1995 to October 1997. At Lucent from August 1994 to October 1997, he
was responsible for global delivery of enterprise information systems and
services aligned with corporate strategic and tactical goals. He is
experienced in a wide range of information technologies, systems and processes
affecting the business enterprise, including sales, marketing, financial,
operations, and R&D. From August 1990 through August 1994 he was Director,
Systems Development at GE Aerospace/Martin Marietta, where he was responsible
for architecture and delivery of enterprise information systems. Mr.
Khandelwal holds a B.S. from the University of Roorkee (Roorkee, India), an
M.S. from the University of Nebraska, and a Ph.D. from the University of
Wisconsin.
Reynaldo U. Ortiz became Managing Director and Senior Vice President--
International of QCC in December 1997. Before joining Qwest full time, Mr.
Ortiz was a consultant to QCC. In this capacity, he negotiated with the
government of Mexico and arranged a transaction with Bestel S.A. de C.V. to
extend the Qwest network into 14 major cities in Mexico. Previously, Mr. Ortiz
served as President and CEO of US West International, Inc., where he developed
and implemented a successful strategy for US West's entry into the cable
television-telephony and wireless communications markets in Asia, Europe and
Latin America. He also developed international distribution sales and
marketing agreements and product sourcing for International Business Machines,
Inc. Mr. Ortiz received an honorary doctorate degree in law from New Mexico
State University for his international achievements. He also holds an M.S. in
management from Stanford University.
Larry A. Seese became Executive Vice President--Network Engineering and
Operations of QCC in October 1997. From 1968 to October 1997, he was employed
by AT&T, most recently as Vice President of Network Operations. During Mr.
Seese's 29 year tenure at AT&T, he was responsible for managing the
operations, reliability and cost performance of AT&T's voice and data networks
and worked on the development of advanced switching systems and the
development of lightwave systems. He has experience in all aspects of network
planning, development, certification and deployment. Mr. Seese holds a B.S.
from the University of Kentucky and an M.S. from Columbia University, both in
electrical engineering. He also received an M.S. from the Sloan School of
Management at Massachusetts Institute of Technology.
Nayel S. Shafei became Executive Vice President--Product Development of QCC
in August 1997. From August 1996 to August 1997 he was Senior Vice President
and General Manager of Arrowsmith Corporation's Telecommunications Division.
From July 1994 to August 1996, he was Vice President and General Manager for
AlliedSignal. From April 1992 to July 1994, he was Vice President, Development
and General Manager for Computervision Corporation, and was Principal
Architect, Research and Development for Computervision from August 1986 to
February 1991. Mr. Shafei serves as a computer/communications consultant for
the United Nations Development Program and is a member of the IEEE Computer
Society, Association of Computer Machinery, Society of Cable Engineers and
Product Data Exchange Standards. He holds an undergraduate degree from Cairo
University and an M.S. and a Ph.D. in computer science from the school of
engineering at Massachusetts Institute of Technology.
August B. Turturro became Senior Vice President--Network Construction for
QCC in September 1997 and President and Chief Operating Officer of Qwest
Network Construction Services. From January 1996 to September 1997, Mr.
Turturro was President and Chief Operating Officer of Inliner American, a
specialty trenchless utility contractor. From January 1992 to January 1996 he
was President and Chief Executive Officer of Fishbach Corporation and its
Natkin Group, which is the second largest specialty contractor in the United
States. Mr. Turturro has over 27 years of construction experience as a
professional engineer and holds contractor licenses in several states. He
holds a B.S. degree in Mechanical Engineering from West Virginia University.
D-55
<PAGE>
A. Dean Wandry became Senior Vice President--Cable & Access Services for QCC
in November 1994 and Senior Vice President--New Business Development for QCC
in December 1995. In 1981 Mr. Wandry formed Citation Cable Systems Limited,
which merged into Fanch Communications, Inc. in 1986. Following the merger, he
served as Vice President-Operations until he joined QCC. He joined Bayly
Corp., a multinational apparel manufacturer, in 1967 and served as President
of the Sales and Marketing Division from 1977 to 1981. He holds a B.S. degree
in economics from the University of Colorado.
Marc B. Weisberg became Senior Vice President--Corporate Development of QCC
in September 1997. Prior to joining QCC, he was the founder and owner of
Weisberg & Company, where he provided investment banking and advisory services
to clients in several industries, including telecommunications, multimedia and
emerging technologies. Mr. Weisberg holds a B.A. from Michigan State
University.
Lewis O. Wilks became President--Business Markets of QCC in October 1997.
Mr. Wilks, who previously was President of GTE Communications, has extensive
senior-level management experience in delivering communications services to
the corporate sector. While Mr. Wilks served as President of GTE
Communications, he oversaw national sales, service and marketing activities
for the competitive local exchange markets. The business unit, under his
leadership, was responsible for all consumer, business and strategic accounts
as well as long distance, media ventures and Internet product distribution.
Before joining GTE, Mr. Wilks was a senior executive with MCI Corporation, and
held a variety of management positions with Wang Laboratories. Mr. Wilks holds
a B.S. degree in public relations and data processing from Central Missouri
State University.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Qwest Board held 14 meetings during 1997, including both regularly
scheduled and special meetings and actions by unanimous written consent.
Audit Committee. The Qwest Board established an Audit Committee in May 1997
to: (i) make recommendations concerning the engagement of independent public
accountants; (ii) review with Qwest management and the independent public
accountants the plans for, and scope of, the audit procedures to be utilized
and results of audits; (iii) approve the professional services provided by the
independent public accountants; (iv) review the adequacy and effectiveness of
Qwest's internal accounting controls; and (v) perform any other duties and
functions required by any organization under which Qwest's securities may be
listed. Cannon Y. Harvey, Jordan L. Haines and W. Thomas Stephens are the
members of the Audit Committee. The Audit Committee did not meet during 1997.
Compensation Committee. In December 1996, the Board of Qwest's predecessor
company created a Compensation Committee and appointed Philip F. Anschutz and
Cannon Y. Harvey to serve on the committee. In July 1997, Mr. Harvey resigned
from the committee. Since July 1997, Philip F. Anschutz, Jordan L. Haines and
W. Thomas Stephens have served on the committee. The Compensation Committee
determines the salaries, cash bonuses and fringe benefits of the executive
officers, reviews the salary administration and benefit policies of Qwest and
administers the Growth Share Plan and the Equity Incentive Plan. Effective as
of November 1997, Mr. Anschutz elected not to participate in the grant of
options and other awards under the Equity Incentive Plan. During 1997, the
Compensation Committee held one formal meeting in conjunction with a meeting
of the Board, took action by unanimous written consent four times and had
informal meetings preceding the actions taken by unanimous written consent.
Each Director attended more than 75% of the aggregate number of the Qwest
Board and/or applicable committee meetings in 1997.
D-56
<PAGE>
COMPENSATION OF QWEST'S DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR COMPENSATION
Directors who are officers or employees of Qwest or any of its affiliates do
not receive compensation, except as officers or employees of Qwest or its
affiliates.
Directors who are neither officers nor employees of Qwest or any of its
affiliates, other than Mr. Liebhaber, are entitled to receive $24,000 per
annum for serving as directors of Qwest. Each director who is neither an
officer nor an employee of Qwest or any of its affiliates, other than Mr.
Liebhaber, is entitled to receive an attendance fee of $2,000 per meeting of
the Board and of a committee of which he is a member. The Board has adopted
the Qwest Communications International Inc. Equity Compensation Plan for Non-
Employee Directors (the "Director Equity Plan") pursuant to which each
director who is not an employee of Qwest or any of its affiliates may elect to
receive directors' fees in the form of Qwest Common Stock. Directors may elect
on a quarterly basis to receive their directors' fees either in Qwest Common
Stock or in cash.
Mr. Liebhaber has a consulting agreement with QCC. The consulting agreement
provides that he will be paid an annual retainer fee of $250,000 plus
reimbursement for out-of-pocket expenses not to exceed $10,000 without QCC's
prior approval. Mr. Liebhaber agreed to waive director's fees in consideration
for these payments. See "CERTAIN QWEST TRANSACTIONS."
Messrs. Slater, Polson and Liebhaber, directors of Qwest, have been granted
a total of 20,000, 7,500 and 10,000 growth shares, respectively, under the
Growth Share Plan. All of Mr. Polson's growth shares became 100% vested and
payable at the time of the Qwest Initial Public Offering and he received
compensation attributable to his growth shares in 1997 of $1,772,449. 7,500 of
Mr. Slater's growth shares became 100% vested and payable at the time of the
Qwest Initial Public Offering and he received compensation attributable to
such growth shares in 1997 of $1,772,449. The balance of Mr. Slater's growth
shares and all of Mr. Liebhaber's growth shares remain outstanding, but the
value of such growth shares has been capped at a value generally determined by
the $11.00 per share price (as adjusted to reflect the Qwest Stock Split) of
Qwest's Common Stock in the Initial Public Offering and the performance cycle
will end on a date in 2001 selected by Qwest in its sole discretion. Based
upon the provisions of the Growth Share Plan and their respective growth share
agreements, as amended, the maximum amount payable to Messrs. Slater and
Liebhaber with respect to the balance of their growth shares is $2.3 million
and $1.8 million, respectively. Messrs. Slater and Liebhaber also received
stock options at the time of the Qwest Initial Public Offering to provide
incentive compensation with respect to appreciation in the Qwest Common Stock
subsequent to the Qwest Initial Public Offering.
Messrs. Slater, Liebhaber and Harvey have each been granted stock options
pursuant to the Equity Incentive Plan. Mr. Slater has been granted stock
options covering a total of 650,000 shares of Qwest Common Stock with 250,000
options having an exercise price of $11.00 per share and vesting at the rate
of 20% per year beginning at the same time as Mr. Slater's growth shares and
400,000 options having an exercise price of $30.00 per share and vesting at
the rate of 20% per year beginning on December 1, 1998. Mr. Liebhaber has been
granted stock options covering a total of 300,000 shares of Qwest Common
Stock, with 200,000 options having an exercise price of $11.00 per share and
vesting at the rate of 20% per year beginning at the same time as Mr.
Liebhaber's growth shares and 100,000 shares having an exercise price of
$30.00 per share and vesting at the rate of 20% per year beginning on December
1, 1998. Mr. Harvey has been granted stock options covering a total of 200,000
shares of Qwest Common Stock with an exercise price of $30.00 per share and
vesting at the rate of 20% per year beginning on December 1, 1998.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued to Qwest's
Chief Executive Officer and four other most highly compensated executive
officers of Qwest and its operating subsidiaries (the "Named Executives")
during the fiscal years ended December 31, 1997, 1996, and 1995, together with
the compensation
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<PAGE>
paid or accrued to additional executive officers of Qwest and its operating
subsidiaries who joined Qwest in 1997 whose annualized rate of salary would
place them among the four most highly compensated executive officers. The
position identified in the table for each person is that person's current
position at Qwest unless otherwise indicated. Mr. Nacchio joined Qwest as its
Chief Executive Officer effective January 4, 1997. Mr. Woodruff served as
interim Chief Operating Officer of QCC from November 1996 to April 28, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ---------------------
AWARDS PAYOUTS
---------- ----------
NUMBER OF
SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS PAYOUTS COMPENSATION
----------------------- ---- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph P. Nacchio....... 1997 $593,461 $300,000 -- 6,000,000 -- $7,405,273(1)
President and Chief 1996 -- -- -- -- -- --
Executive Officer 1995 -- -- -- -- -- --
Robert S. Woodruff...... 1997 $200,000 $ 70,000 $25,000(2) 400,000 $9,453,025 $ 7,750(3)
Executive Vice
President-- 1996 182,200 25,000 2,083 -- -- 5,466
Finance and Chief 1995 167,766 16,500 -- -- -- 1,671
Financial Officer and
Treasurer
A. Dean Wandry........... 1997 $157,000 $ 47,100 -- 150,000 $8,271,383 $ 7,930(3)
Senior Vice President-- 1996 148,300 30,000 -- -- -- 7,725
New Business 1995 141,866 14,000 -- -- -- 2,310
Development of QCC
Anthony J. Brodman....... 1997 $157,000 $ -- -- 50,000 $5,908,127 $ 7,930(3)
Senior Vice President-- 1996 152,333 30,000 -- -- -- 7,945
Fiber Markets of QCC 1995 130,270 11,364 $15,752(4) -- -- 7,163
Stephen M. Jacobson...... 1997 $143,020(5) -- $132,085(6) 600,000 -- --
Senior Vice President-- 1996 -- -- -- -- -- --
Consumer Markets of QCC 1995 -- -- -- -- -- --
Lewis O. Wilks........... 1997 $ 50,750(7) -- $200,000(6) 700,000 -- --
President--Business 1996 -- -- -- -- -- --
Markets of QCC 1995 -- -- -- -- -- --
Brij Khandelwal.......... 1997 $ 47,740(8) -- $150,000(6) 700,000 -- --
Executive Vice President 1996 -- -- -- -- -- --
and Chief Information 1995 -- -- -- -- -- --
Officer of QCC
Larry A. Seese........... 1997 $ 54,994(9) -- $200,000(6) 750,000 -- --
Executive Vice President 1996 -- -- -- -- -- --
--Network Engineering
and 1995 -- -- -- -- -- --
Operations of QCC
</TABLE>
- --------
(1) The amount shown represents the first installment of the "equalization
payment" (see "--Employment Contracts and Termination of Employment and
Change-in-Control Arrangements") paid to Mr. Nacchio in 1997 together with
interest of $173,273 that accrued with respect to the remaining portion of
the "equalization payment." That interest was paid to Mr. Nacchio in
January 1998.
(2) The amount shown represents QCC's forgiveness of a portion of a loan.
(3) The amount shown represents QCC's contribution to QCC's 401(k) plan.
(4) The amount shown represents commissions.
(5) Mr. Jacobsen began his employment with QCC in March 1997 and amounts
disclosed for Mr. Jacobsen for 1997 represent compensation paid after that
date. Mr. Jacobsen will receive an annual salary of $192,770 for 1998.
(6) The amount shown represents relocation payments.
(7) Mr. Wilks began his employment with QCC in October 1997 and amounts
disclosed for Mr. Wilks for 1997 represent compensation paid after that
date. Mr. Wilks will receive an annual salary of $273,000 for 1998.
(8) Mr. Khandelwal began his employment with QCC in October 1997 and amounts
disclosed for Mr. Khandelwal for 1997 represent compensation paid after
that date. Mr. Khandelwal will receive an annual salary of $225,000 for
1998.
(9) Mr. Seese began his employment with QCC in October 1997 and amounts
disclosed for Mr. Seese for 1997 represent compensation paid after that
date. Mr. Seese will receive an annual salary of $230,000 for 1998.
D-58
<PAGE>
STOCK OPTION GRANTS
The following table sets forth information with respect to the Named
Executives concerning the grant of stock options in 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS AWARDS FOR OPTION
--------------------------------------------------- -----------------------
NUMBER OF % OF TOTAL EXERCISE
SECURITIES OPTIONS GRANTED OR BASE
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- --------------- --------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Joseph P. Nacchio....... 6,000,000(1) 43.18% $ 11.00 6/30/03 $22,617,341 $51,375,214
Robert S. Woodruff...... 400,000(2) 2.88% $ 30.00 12/1/07 7,546,736 19,124,910
Lewis O. Wilks.......... 700,000(3) 5.04% $ 23.75 10/3/07 10,455,373 26,495,968
Brij Khandelwal......... 700,000(4) 5.04% $22.875 9/27/07 10,070,175 25,519,801
Larry A. Seese.......... 750,000(5) 5.40% $22.875 9/26/07 10,789,473 27,342,644
A. Dean Wandry.......... 150,000(2) 1.08% $ 30.00 12/1/07 2,830,026 7,171,841
Stephen M. Jacobsen..... 600,000(6) 4.32% $ 11.00 9/24/03 2,299,861 5,248,074
Anthony J. Brodman...... 50,000(7) 0.36% $ 11.00 4/1/03 182,584 413,888
</TABLE>
- --------
(1) Granted on June 23, 1997 and exercisable in five annual increments of 20%
each commencing December 31, 1997.
(2) Granted on December 1, 1997 and exercisable in five annual increments of
20% each commencing December 1, 1998.
(3) Granted on October 3, 1997 and exercisable in increments of 140,000 shares
each year for four years beginning October 27, 1998 and in two additional
increments of 70,000 shares each on October 27, 2002 and October 27, 2003.
(4) Granted on September 27, 1997 and exercisable in five annual increments of
20% each commencing October 16, 1998.
(5) Granted on September 26, 1997 and exercisable in two annual increments of
200,000 shares each commencing October 6, 1998, three annual increments of
100,000 shares for each of three years beginning October 6, 2000 and a
final increment of 50,000 shares on October 6, 2003.
(6) Granted on June 23, 1997 and exercisable in 15% increments on each of
March 24, 1998 through March 24, 2001 and in an increment of 40% on March
24, 2002.
(7) Granted on June 23, 1997 and exercisable in 15% increments commencing
October 1, 1997 through October 1, 2000 and in an increment of 40% on
October 1, 2001.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executives concerning unexercised options held at the end of 1997. None of the
Named Executives exercised options during 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR OPTIONS AT FISCAL YEAR
END END
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph P. Nacchio........... 1,200,000 4,800,000 $22,500,000 $90,000,000
Robert S. Woodruff.......... -- 400,000 -- --
Lewis O. Wilks.............. -- 700,000 -- 4,200,000
Brij Khandelwal............. -- 700,000 -- 4,812,500
Larry A. Seese.............. -- 750,000 -- 5,156,250
A. Dean Wandry.............. -- 150,000 -- --
Stephen M. Jacobsen......... -- 600,000 -- 11,250,000
Anthony J. Brodman.......... 7,500 42,500 140,625 796,875
</TABLE>
D-59
<PAGE>
GROWTH SHARE PLAN
Qwest's Growth Share Plan (the "Growth Share Plan"), as amended, provides
for the grant of "growth shares" to selected employees and directors of Qwest
and certain affiliates who can significantly affect the long-term financial
success of Qwest. The Growth Share Plan is unfunded and is a general,
unsecured obligation of Qwest. A growth share is a unit of value based on the
increase in the value of Qwest over a specified performance cycle or other
specified measuring period. The value of a growth share is generally equal to
(i) the value of Qwest at or near the date of a "triggering event" (as defined
below), minus (ii) the value of Qwest as of a date determined by the Qwest
Board in its sole discretion at the time of grant of a growth share
("Beginning Company Value"), minus (iii) the value of contributions to capital
during the period beginning with the date as of which Qwest's value for
purposes of the growth share grant is determined and ending with the date as
of which the value of the growth shares is determined (the "Measuring Period")
together with an amount equal to 9% of each such contribution made by entities
controlled by Philip F. Anschutz, compounded annually, reduced for any return
of capital, plus (iv) dividends paid during the Measuring Period, divided by
(v) 10,000,000 (the total number of growth shares authorized). The value of
Qwest for this purpose will be based on the trading price of Qwest's equity
securities over the 20 consecutive trading days ending on the last day of the
Measuring Period if all classes of Qwest's outstanding equity securities are
publicly traded and Qwest is subject to the reporting and disclosure rules of
the Exchange Act, otherwise the value will be determined by independent
appraisal. Payment for growth shares is generally made at the end of the
performance cycle or upon the occurrence of certain "triggering events", which
consist of termination of the Growth Share Plan and a "change in control" (see
"--Employment Contracts and Termination of Employment and Change-in-Control
Arrangements"). Qwest has entered into amendments to the growth share
arrangements with Messrs. Nacchio and Jacobsen which provide that (i)
following completion of the Qwest Initial Public Offering, the value of the
growth shares is capped at a value generally determined by the $11 per share
price (as adjusted to reflect the Qwest Stock Split) of the Qwest Common Stock
in the Qwest Initial Public Offering and (ii) the performance cycle will end
on a date in 2001 selected by Qwest in its sole discretion. Based upon the
provisions of the Growth Share Plan and their respective growth share
agreements, as amended, the maximum amount payable to Messrs. Nacchio and
Jacobsen with respect to their growth shares is $27.7 million and $2.8
million, respectively. The growth shares vest at the rate of 20% per year,
beginning on January 1, 1998 for Mr. Nacchio and March 24, 1998 for Mr.
Jacobsen. In addition, the growth shares will become fully vested in the event
of death, disability or retirement after age 65. See "--Employment Contracts
and Termination of Employment and Change-in-Control Arrangements" for a more
detailed description of Mr. Nacchio's growth share grant.
The following table sets forth the growth shares that were granted to the
Named Executives in 1997.
LONG-TERM INCENTIVE PLANS--AWARDS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
NUMBER
OF GROWTH
NAME SHARES PERFORMANCE PERIOD
---- --------- -----------------------
<S> <C> <C>
Joseph P. Nacchio............................. 300,000 January 1, 1997 to 2001
Stephen M. Jacobsen........................... 30,000 January 1, 1997 to 2001
</TABLE>
EQUITY INCENTIVE PLAN
Qwest adopted the Qwest Communications International Inc. Equity Incentive
Plan (the "Equity Incentive Plan") effective June 23, 1997. The purposes of
the Equity Incentive Plan are to provide those who are selected for
participation with added incentives to continue in the long-term service of
Qwest and to create in such persons a more direct interest in the future
success of the operations of Qwest by relating incentive compensation to
increases in shareholder value, so that the income of those participating in
the Equity Incentive Plan is more closely aligned with the income of the Qwest
Stockholders. The Equity Incentive Plan is also designed to provide a
financial incentive that will help Qwest attract, retain and motivate the most
qualified employees and consultants.
D-60
<PAGE>
The Equity Incentive Plan provides for the grant of non-qualified stock
options, incentive stock options, stock appreciation rights, restricted stock,
stock units and other stock grants to employees of Qwest and affiliated
companies and consultants to Qwest and affiliated companies. A maximum of
20,000,000 shares of Qwest Common Stock may be subject to awards under the
Equity Incentive Plan. The number of shares is subject to adjustment on
account of stock splits, stock dividends and other dilutive changes in the
Qwest Common Stock. Shares of Qwest Common Stock covered by unexercised non-
qualified or incentive stock options that expire, terminate or are canceled,
together with shares of Qwest Common Stock that are forfeited pursuant to a
restricted stock grant or any other award (other than an option) under the
Equity Incentive Plan or that are used to pay withholding taxes or the option
exercise price, will again be available for option or grant under the Equity
Incentive Plan.
Participation. The Equity Incentive Plan provides that awards may be made to
eligible employees and consultants who are responsible for Qwest's growth and
profitability. Qwest currently considers all of its employees and consultants
to be eligible for grant of awards under the Equity Incentive Plan. As of
March 31, 1998, there were approximately 1,965 eligible participants.
Administration. The Equity Incentive Plan is administered by the
Compensation Committee. The Compensation Committee must be structured at all
times so that the Equity Incentive Plan satisfies the requirements of Rule
16b-3 under the Exchange Act. To the extent practicable, Qwest intends to
satisfy the requirement for administration by "outside" directors under
Section 162(m) of the Code ("Section 162(m)") with respect to grants to
employees whose compensation is subject to Section 162(m). The Compensation
Committee has the sole discretion to determine the employees and consultants
to whom awards may be granted under the Equity Incentive Plan and the manner
in which such awards will vest. Options, stock appreciation rights, restricted
stock and stock units are granted by the Compensation Committee to employees
and consultants in such numbers and at such times during the term of the
Equity Incentive Plan as the Compensation Committee shall determine, except
that the maximum number of shares subject to one or more awards that can be
granted during the term of the Equity Incentive Plan to any employee or
consultant is 20,000,000 shares of Qwest Common Stock, and except that
incentive stock options may be granted only to employees. In granting options,
stock appreciation rights, restricted stock and stock units, the Compensation
Committee will take into account such factors as it may deem relevant in order
to accomplish the Equity Incentive Plan's purposes, including one or more of
the following: the extent to which performance goals have been met, the duties
of the respective employees and consultants and their present and potential
contributions to Qwest's success.
Exercise of Options. The Compensation Committee determines the exercise
price for each option; however, incentive stock options must have an exercise
price that is at least equal to the fair market value of the Qwest Common
Stock on the date the incentive stock option is granted (at least equal to
110% of fair market value in the case of an incentive stock option granted to
an employee who owns Qwest Common Stock having more than 10% of the voting
power). An option holder may exercise an option by written notice and payment
of the exercise price in (i) cash or certified funds, (ii) by the surrender of
a number of shares of Qwest Common Stock already owned by the option holder
for at least six months with a fair market value equal to the exercise price,
or (iii) through a broker's transaction by directing the broker to sell all or
a portion of the Qwest Common Stock to pay the exercise price or make a loan
to the option holder to permit the option holder to pay the exercise price.
Option holders who are subject to the withholding of federal and state income
tax as a result of exercising an option may satisfy the income tax withholding
obligation through the withholding of a portion of the Qwest Common Stock to
be received upon exercise of the option. Options, stock appreciation rights,
stock units and restricted stock awards granted under the Equity Incentive
Plan are not generally transferable other than by will or by the laws of
descent and distribution.
Option Term. The Compensation Committee determines the term of each Option,
which shall be no longer than ten years (five years in the case of an
incentive stock option granted to an employee who owns Qwest Common Stock
having more than 10% of the voting power). Unless the Compensation Committee
provides otherwise, the following provisions apply in the event of an
employee's termination of employment. If the option
D-61
<PAGE>
holder's services are terminated for cause, as determined by Qwest, the option
terminates immediately. If the option holder becomes disabled, the option may
be exercised for one year after the option holder terminates employment on
account of disability. If the option holder dies during employment or in the
one-year period referred to in the preceding sentence, the option may be
exercised for one year after the option holder's death. If the option holder
terminates employment for any reason other than cause, disability, or death,
the option may be exercised for three months after termination of employment.
In all cases, the option can be exercised only to the extent it is vested at
the time of termination of employment.
Restricted Stock. The Compensation Committee may grant a Participant a
number of shares of restricted stock as determined by the Compensation
Committee in its sole discretion. Grants of restricted stock may be subject to
such restrictions, including for example, continuous employment with Qwest for
a stated period of time or the attainment of performance goals and objectives,
as determined by the Compensation Committee in its sole discretion. The
restrictions may vary among awards and participants. If a participant dies or
becomes disabled or retires pursuant to Qwest's retirement policy, the
restricted stock will become fully vested as to a pro rata portion of each
award based on the ratio of the number of months of employment completed at
termination of employment from the date of the award to the total number of
months of employment required for each award to become fully vested. The
remaining portion of the restricted stock will be forfeited. If a participant
terminates employment for any other reason, all unvested shares of restricted
stock will be forfeited.
Stock Units. The Compensation Committee may grant stock units to
participants. The Compensation Committee determines the number of stock units
to be granted, the goals and objectives to be satisfied, the time and manner
of payment, and any other terms and conditions applicable to the stock units.
Stock Appreciation Rights. The Compensation Committee may grant stock
appreciation rights to participants, either separately or in tandem with the
grant of options. The Compensation Committee determines the period during
which a stock appreciation right may be exercised and the other terms and
conditions applicable to the stock appreciation rights. Upon exercise of a
stock appreciation right, a participant is entitled to a payment equal to the
number of shares of Qwest Common Stock as to which the stock appreciation
right is exercised times the excess of the fair market value of a share of
Qwest Common Stock on the date the stock appreciation right is exercised over
the fair market value of a share of Qwest Common Stock on the date the stock
appreciation right was granted. The amount may be paid in shares of Qwest
Common Stock, in cash, or in a combination of cash and Qwest Common Stock as
the Compensation Committee determines in its sole discretion. Upon termination
of employment, stock appreciation rights are exercisable in the same manner as
options. See "--Option Term." If a stock appreciation right is granted in
tandem with an option, exercise of the stock appreciation right or the option
will result in an equal reduction in the number of shares subject to the
corresponding option or stock appreciation right.
Other Stock Grants. The Compensation Committee may award stock bonuses to
such participants, subject to such conditions and restrictions, as it
determines in its sole discretion. Stock bonuses may be outright grants or may
be conditioned on continued employment or attainment of performance goals as
the Compensation Committee determines in its sole discretion. The Qwest Board
may, in its sole discretion, establish other incentive compensation
arrangements pursuant to which participants may acquire Qwest Common Stock or
provide that other incentive compensation will be paid in Qwest Common Stock
under the Equity Incentive Plan.
Nontransferability. Except as may be otherwise permitted by the Compensation
Committee, options, stock appreciation rights, stock units and restricted
stock awards granted under the Equity Incentive Plan are not transferable
other than by will or by the laws of descent and distribution.
Change in Control. All awards granted under the Equity Incentive Plan shall
immediately vest upon any "change in control" of Qwest unless provided
otherwise by the Compensation Committee at the time of grant. A "change in
control" occurs if (i) 20% or more of Qwest's voting stock or outstanding
stock is acquired by persons or entities (other than Anschutz Company, The
Anschutz Corporation, a Delaware corporation wholly owned by Anschutz Company,
or any other entity controlled by Philip F. Anschutz ("Anschutz Entities"))
and
D-62
<PAGE>
the beneficial ownership so acquired exceeds the beneficial ownership of the
Anschutz Entities or (ii) the Anschutz Entities no longer have beneficial
ownership of at least 20% of Qwest's voting stock or outstanding stock.
Merger and Reorganization. Upon the occurrence of (i) the reorganization
(other than a bankruptcy reorganization), merger or consolidation of Qwest
(other than a reorganization, merger or consolidation in which Qwest is the
continuing company and that does not result in any change in the outstanding
shares of Qwest Common Stock), (ii) the sale of all or substantially all of
the assets of Qwest (other than a sale in which Qwest continues as a holding
company of an entity that conducts the business formerly conducted by Qwest),
or (iii) the dissolution or liquidation of Qwest, all outstanding options will
terminate automatically when the event occurs if Qwest gives the option
holders 30 days' prior written notice of the event. Notice is also given to
holders of other awards. Notice is not required for a merger or consolidation
or for a sale if Qwest, the successor, or the purchaser makes adequate
provision for the assumption of the outstanding options or the substitution of
new options or awards on terms comparable to the outstanding options or
awards. When the notice is given, all awards shall immediately vest and all
restrictions shall lapse and all outstanding options can be immediately
exercised prior to the event and all other awards become exercisable and/or
payable.
Amendment and Termination. The Qwest Board may amend the Equity Incentive
Plan in any respect at any time provided stockholder approval is obtained when
necessary or desirable, but no amendment can impair any option, stock
appreciation right, award or unit previously granted or deprive an option
holder, without his or her consent, of any Qwest Common Stock previously
acquired. The Equity Incentive Plan will terminate in 2007 unless sooner
terminated by the Qwest Board.
Federal Income Tax Consequences of Issuance and Exercise of Options Under
the Equity Incentive Plan. When a non-qualified stock option is granted, there
are no income tax consequences for the option holder or Qwest. When a non-
qualified stock option is exercised, in general, the option holder recognizes
compensation equal to the excess of the fair market value of the Qwest Common
Stock on the date of exercise over the exercise price. If, however, the sale
of the Qwest Common Stock at a profit would subject the option holder to
liability under Section 16(b) of the Exchange Act ("Section 16(b)"), the
option holder will recognize compensation income equal to the excess of (i)
the fair market value of the Qwest Common Stock on the earlier of the date
that is six months after the date of exercise or the date the option holder
can sell the Qwest Common Stock without Section 16(b) liability over (ii) the
exercise price. The option holder who is subject to Section 16(b) can make an
election under Section 83(b) of the Code to measure the compensation as of the
date the non-qualified option is exercised. The compensation recognized by an
employee is subject to income tax withholding. Qwest is entitled to a
deduction equal to the compensation recognized by the option holder for
Qwest's taxable year that ends with or within the taxable year in which the
option holder recognized the compensation, assuming that the compensation
amounts satisfy the ordinary and necessary and reasonable compensation
requirements for deductibility and that the deduction is not limited by
Section 162(m).
When an incentive stock option is granted, there are no income tax
consequences for the option holder or Qwest. When an incentive option is
exercised, the option holder does not recognize income and Qwest does not
receive a deduction. The option holder, however, must treat the excess of the
fair market value of the Qwest Common Stock on the date of exercise over the
exercise price as an item of adjustment for purposes of the alternative
minimum tax. If the option holder makes a "disqualifying disposition" of the
Qwest Common Stock (described below) in the same taxable year the incentive
stock option was exercised, there are no alternative minimum tax consequences.
If the option holder disposes of the Qwest Common Stock after the option
holder has held the Qwest Common Stock for at least two years after the
incentive stock option was granted and one year after the incentive stock
option was exercised, the amount the option holder receives upon the
disposition over the exercise price is treated as capital gain for the option
holder. Qwest is not entitled to a deduction. If the option holder makes a
"disqualifying disposition" of the Qwest Common Stock by disposing of the
Qwest Common Stock before a date at least two years after the date the
incentive option was granted and one year after the date the incentive
D-63
<PAGE>
option was exercised, the option holder recognizes compensation income equal
to the excess of (i) the fair market value of the Qwest Common Stock on the
date the incentive option was exercised or, if less, the amount received on
the disposition over (ii) the exercise price. In the event of a disqualifying
disposition, Qwest is entitled to a deduction equal to the compensation
recognized by the option holder for Qwest's taxable year that ends with or
within the taxable year in which the option holder recognized the
compensation, assuming that the compensation amounts satisfy the ordinary and
necessary and reasonable compensation requirements for deductibility and that
the deduction is not limited by Section 162(m).
The Equity Incentive Plan provides that option holders are responsible for
making appropriate arrangements with Qwest to provide for any additional
withholding amounts. Furthermore, Qwest shall have no obligation to deliver
shares of Qwest Common Stock upon the exercise of any options, stock
appreciation rights, awards or units under the Equity Incentive Plan until all
applicable federal, state and local income and other tax withholding
requirements have been satisfied.
The following table sets forth the options granted from inception of the
Equity Incentive Plan to the specified individuals and groups and outstanding
as of March 27, 1998.
<TABLE>
<CAPTION>
OPTIONS
NAME AND POSITION GRANTED
- ----------------- ----------
<S> <C>
Joseph P. Nacchio................................................... 5,824,451
Robert S. Woodruff.................................................. 400,000
A. Dean Wandry...................................................... 150,000
Anthony J. Brodman.................................................. 50,000
Steven M. Jacobson.................................................. 600,000
Lewis O. Wilks...................................................... 700,000
Brij Khandelwal..................................................... 700,000
Larry M. Seese...................................................... 750,000
All Current Executive Officers as a Group........................... 11,174,000
All Current Directors who are not Executive Officers as a Group..... 1,150,000
All Employees as a Group other than Executive Officers.............. 3,647,600
</TABLE>
- --------
Detailed information with respect to option grants under Qwest's Equity
Incentive Plan with respect to the Named Executives is set forth above. See,
"--Stock Option Grants." The options reflected in the above table were granted
at exercise prices ranging between $7.50 and $36.25 per share. The options
generally provide for vesting at the rate of 20% per year commencing on the
first anniversary of the date of grant and expire either five years or ten
years from the date of grant, as determined by the Compensation Committee at
the time of grant. The market value of the shares of Qwest's Common Stock
covered by all outstanding options under the Equity Incentive Plan as of March
25, 1998 was approximately $621 million.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Nacchio. Qwest and Joseph P. Nacchio entered into an employment
agreement dated as of December 21, 1996 and amended as of January 3, 1997,
pursuant to which Mr. Nacchio joined Qwest as its President and Chief
Executive Officer effective January 4, 1997 for a term through the close of
business on December 31, 2001, unless terminated earlier by either party. The
agreement provides for an annual base salary of $600,000, a $300,000 bonus for
1997, and a $300,000 bonus for 1998. Mr. Nacchio may participate in the
employee benefit plans available to Qwest's senior executives according to the
plans' terms and conditions. Under the agreement, Mr. Nacchio has been granted
300,000 growth shares under the Growth Share Plan, with a five year
performance cycle commencing January 1, 1997 and a "beginning company value"
of $1 billion. See "--Growth Share Plan."
The value of the growth shares is capped at a value generally determined by
the $11.00 per share price (as adjusted to reflect the Qwest Stock Split) of
the Qwest Common Stock in the Qwest Initial Public Offering. The
D-64
<PAGE>
growth shares will vest in 20% increments on each January 1 beginning January
1, 1998, provided that the final 20% increment will vest on the date in 2001
that ends the performance cycle, as determined by Qwest in its sole
discretion. The growth share agreement between Qwest and Mr. Nacchio provides
for terms that are different from the general terms of the Growth Share Plan
in certain respects. Annually, Mr. Nacchio may elect to receive payment for up
to 20% of his vested growth shares in shares of Qwest Common Stock; the growth
shares for which he has received payment will be canceled. The number of
growth shares granted to Mr. Nacchio are subject to adjustment upon changes in
Qwest's capital structure in connection with mergers and other
reorganizations. If Mr. Nacchio's employment is terminated for good reason
(generally, resignation after a reduction in title or responsibility) or other
than for cause (as defined below), he will vest in one-twelfth of the 20% of
growth shares subject to annual vesting for the year of termination for each
full month of employment in such calendar year. A change in control (as
defined in the employment agreement) will not result in full vesting of, or
payment for, the growth shares unless Mr. Nacchio is terminated without cause
or resigns for good reason after the change in control. If his employment is
terminated for cause, he will be paid for his vested growth shares based on
the value of Qwest as of the end of the immediately preceding calendar year.
Upon payment of certain dividends, the growth shares will vest 100% and Mr.
Nacchio will be paid for a portion of the growth shares. Termination of the
Plan will not be a "triggering event," see "--Growth Share Plan," with respect
to Mr. Nacchio's growth shares.
Qwest has granted Mr. Nacchio an option under Qwest's Equity Incentive Plan
to purchase six million shares of Qwest Common Stock. See "--Equity Incentive
Plan." The exercise price is $11.00 per share. The option will vest 20% per
year beginning on December 31, 1997 and will become fully vested upon Mr.
Nacchio's death, disability or retirement. If Mr. Nacchio resigns for good
reason (as defined in the growth share agreement) or if Qwest terminates his
employment other than for cause, he will vest in one-twelfth of the 20%
increment scheduled to vest for the year of termination for each full month of
employment with Qwest during such year. If Qwest terminates his employment
without cause or if he resigns for good reason (as defined in the employment
agreement, provided that for this purpose the occurrence of a change in
control by itself is not good reason), in each case following a change in
control, the option will become fully vested. If Mr. Nacchio's employment
terminates for any other reason, he will forfeit the unvested portion of his
option and retain the vested portion of his option, provided that if his
employment is terminated for cause, he can exercise the vested portion of the
option only until the first to occur of (1) the date that is six months after
the day after his termination or (2) June 30, 2003. He can exercise the vested
portion of the option at any time before the option expires. Generally, the
option will terminate and expire on June 30, 2003.
The employment agreement also provides that in order to compensate Mr.
Nacchio for certain benefits from his former employer, AT&T, that Mr. Nacchio
may lose or forfeit as a result of his termination of employment and
commencement of employment with Qwest, Qwest will pay him $10,735,861, as
adjusted (the "equalization payment"). The equalization payment is to be made
in three installments. The first installment of $7,232,000 was paid in 1997
and the second installment of $1,469,861, together with interest of $173,273,
was paid in January 1998. The remaining installment of $2,034,000 is scheduled
to be paid on January 1, 1999, with annual interest at the rate of 5% from
January 7, 1997 to the date of payment. If Mr. Nacchio's employment is
terminated for cause (including any willful misconduct materially detrimental
to Qwest, felony conviction, or nonfeasance with respect to duties set forth
in the employment agreement) on or before December 31, 1999, the agreement
provides that he will repay to Qwest a portion of the equalization payment
previously paid. If a termination for cause occurs after December 31, 1999,
the equalization payment will not be repaid. If Qwest terminates Mr. Nacchio's
employment other than for cause or if Mr. Nacchio resigns for good reason,
which for this purpose includes a change in control of Qwest or certain other
events, Qwest will be obligated to make certain payments to him, including an
amount equal to two times his base salary at the rate in effect on the date of
employment termination and any installments of the equalization payment that
have not yet been made, with interest. Mr. Nacchio will also be entitled to
continuation of certain benefits, including welfare benefits and participation
in the Growth Share Plan for a two-year period following termination. For this
purpose, change in control means the acquisition of 20% or more of Qwest by an
individual, entity (not controlled by Philip F. Anschutz) or group if the new
acquirors own a larger percentage of Qwest than entities controlled by Philip
F.
D-65
<PAGE>
Anschutz. The agreement provides that if Mr. Nacchio receives any payments
upon a change in control that are subject to the excise tax of Section 4999 of
the Code, Qwest will pay Mr. Nacchio an amount that reimburses him in full for
the excise tax.
Mr. Woodruff. In November 1996 QCC extended Robert S. Woodruff an unsecured,
noninterest-bearing loan in the principal amount of $100,000. The principal
amount is forgiven in monthly increments of $2,083 beginning December 1, 1996.
As of December 1997 the outstanding principal balance of the loan was $72,921.
If Mr. Woodruff terminates employment voluntarily or if QCC terminates his
employment on account of willful misconduct, QCC may declare the unforgiven
outstanding principal amount due and payable within 45 days after the date he
terminates employment. If Mr. Woodruff's employment terminates for any other
reason, the outstanding principal balance will be forgiven. In December 1996,
QCC and Mr. Woodruff entered into a letter agreement to provide that if his
employment is terminated for reasons other than willful misconduct, he will
receive either a lump sum payment equal to one year's compensation at his then
current rate or payment in accordance with QCC's severance policy then in
effect, as he elects.
Mr. Wilks. Qwest and Lewis O. Wilks entered into an employment letter
agreement dated October 8, 1997 pursuant to which Mr. Wilks joined Qwest as
President--Business Markets. Under the agreement, Mr. Wilks is entitled to an
annual base salary of $273,000 and a minimum bonus at the end of his first
year of employment of $100,000. Mr. Wilks also received reimbursement for
relocation expenses in the amount of $200,000. The agreement also provides for
the grant to Mr. Wilks of a stock option pursuant to the Equity Incentive Plan
covering 700,000 shares of Qwest Common Stock with an exercise price per share
of $23.75. The option becomes exercisable as to 140,000 shares of Qwest Common
Stock at the end of each of the first four years of employment and an
additional 70,000 shares at the end of each of the fifth and sixth years of
employment. Mr. Wilks will also receive a transition payment of $200,000 in
1998, payable $50,000 during each calendar quarter beginning January 1, 1998.
If Mr. Wilks' employment with Qwest terminates for any reason other than cause
during his first year of employment, he will be entitled to a lump sum payment
of one year's base salary.
Mr. Khandelwal. Qwest and Brij Khandelwal entered into an employment letter
agreement dated September 26, 1997 pursuant to which Mr. Khandelwal joined
Qwest as its Executive Vice President and Chief Information Officer. Under the
agreement, Mr. Khandelwal is entitled to an annual base salary of $225,000 and
a minimum bonus at the end of the first year of employment of $112,500. Mr.
Khandelwal also received reimbursement for relocation expenses of $150,000.
The agreement also provides for the grant to Mr. Khandelwal of a stock option
pursuant to the Equity Incentive Plan covering 700,000 shares of Qwest Common
Stock with an exercise price of $22.875. The option becomes exercisable as to
140,000 shares of Qwest Common Stock at the end of each of the first five
years of employment. If Mr. Khandelwal's employment with Qwest terminates for
any reason other than cause during his first year of employment, he will be
entitled to a lump sum payment of one year's base salary.
Mr. Seese. Qwest and Larry A. Seese entered into an employment letter
agreement dated September 19, 1997 pursuant to which Mr. Seese joined Qwest as
Executive Vice President--Network Engineering and Operations. Mr. Seese is
entitled to an annual base salary of $230,000 and a minimum bonus at the end
of his first year of employment of $92,000. Mr. Seese also received
reimbursement for relocation expenses of $200,000. The agreement also provides
for the grant to Mr. Seese of a stock option pursuant to Qwest's Equity
Incentive Plan covering 750,000 shares of Qwest Common Stock with an exercise
price per share of $22.875. The option becomes exercisable as to 200,000
shares of Qwest Common Stock at the end of each of the first two years of
employment, an additional 100,000 shares of Qwest Common Stock at the end of
each of the third through the fifth years of employment and an additional
50,000 shares of Qwest Common Stock at the end of the sixth year of
employment. If the value of Mr. Seese's options is less than $1,000,000 on the
sixth anniversary of his employment Qwest will pay him the difference. If Mr.
Seese's employment is terminated for any reason other than cause during his
first two years of employment, he will be entitled to a lump sum payment of
one year's base salary.
D-66
<PAGE>
Mr. Jacobsen. Qwest and Stephen M. Jacobsen entered into an employment
letter agreement dated March 7, 1997 pursuant to which Mr. Jacobsen joined
Qwest as its Senior Vice President--Consumer Markets. Under the agreement, Mr.
Jacobsen is entitled to an annual base salary of $185,000, which has been
increased to $192,770 for 1998. Mr. Jacobsen also received reimbursement for
relocation expenses in the amount of $132,085. The agreement provides for the
grant to Mr. Jacobsen of 30,000 growth shares pursuant to the Growth Share
Plan. If Mr. Jacobsen's employment with Qwest terminates for any reason other
than cause, he will be entitled to a lump sum payment of one year's base
salary.
Change in Control. The Growth Share Plan provides that upon a "change of
control" of Qwest or a termination of the Growth Share Plan, the outstanding
growth shares will become fully vested. For this purpose, "change of control"
is defined as either (A) the acquisition by an individual, entity or group (as
defined in the Exchange Act), other than the Anschutz Entities, of beneficial
ownership of 20% or more of either (1) the then-outstanding shares of Qwest
Common Stock or (2) the combined voting power of the then-outstanding voting
securities of Qwest entitled to vote generally in the election of directors
and the beneficial ownership of the individual, entity or group exceeds the
beneficial ownership of the Anschutz Entities or (B) the Anschutz Entities no
longer have beneficial ownership of at least 20% of the then-outstanding
shares of Qwest Common Stock or 20% of the combined voting power. See "--
Growth Share Plan" above.
The Equity Incentive Plan provides that, upon a change in control, all
awards granted under the Equity Incentive Plan will vest immediately. See "--
Equity Incentive Plan" above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Anschutz, a member of the Compensation Committee, is a Director and
Chairman (not an executive officer position) of Qwest, a Director and Chairman
of Anschutz Company, Qwest's majority stockholder, and a Director and Chairman
of The Anschutz Corporation, a subsidiary of Anschutz Company. Mr. Harvey, who
served on the Compensation Committee until July 1997, is a Director of Qwest
and President and Chief Operating Officer of Anschutz Company and The Anschutz
Corporation. Certain transactions and relationships between Qwest and Anschutz
Company or one of its affiliates are described directly below under "CERTAIN
QWEST TRANSACTIONS."
D-67
<PAGE>
PRINCIPAL QWEST STOCKHOLDER
Philip F. Anschutz is the sole beneficial owner of the Anschutz Shares,
which constitute approximately 83.4% of the outstanding shares of Qwest Common
Stock. Qwest has granted a warrant to Anschutz Family Investment Company LLC,
an affiliate of Anschutz Company, to purchase 8,600,000 shares of Qwest Common
Stock. See "CERTAIN QWEST TRANSACTIONS." Anschutz Company has granted or
expects to grant from time to time security interests in all or part of its
shares of the Qwest Common Stock in connection with transactions entered into
by it or its affiliates. Although not anticipated, under certain
circumstances, shares of Qwest Common Stock could be sold pursuant to such
security interests, which could result in a change of control of Qwest for
purposes of Delaware law.
In connection with the execution of the Merger Agreement, LCI, Mr. Anschutz,
the beneficial owner of the Anschutz Shares, and Anschutz Company, the record
holder of the Anschutz Shares, entered into the Voting Agreement pursuant to
which, among other things, Mr. Anschutz has agreed to cause Anschutz Company,
and Anschutz Company has agreed, to vote the Anschutz Shares in favor of the
Qwest Share Issuance and the Qwest Certificate Amendment at the Qwest Special
Meeting. Because the affirmative vote of the Anschutz Shares is sufficient to
approve the Qwest Share Issuance and the Qwest Certificate Amendment, it is
expected that each of such proposals will be adopted at the Qwest Special
Meeting, even if no other Qwest Stockholder votes to approve either of the
Qwest Share Issuance or the Qwest Certificate Amendment. See "PLAN OF MERGER--
The Voting Agreement."
CERTAIN QWEST TRANSACTIONS
Certain affiliates of Anschutz Company indirectly provide facilities to
Qwest at prevailing market rates. Qwest rents its corporate office in Denver,
Colorado from a limited partnership in which Mr. Anschutz serves as a general
partner and indirectly holds limited partner interests and rents certain
telecommunications equipment used by Qwest at its corporate office from an
affiliate of Anschutz Company. Such expenses totaled $600,000 and $1.4 million
for the three months ended March 31, 1998 and the year ended December 31,
1997, respectively.
Affiliates of Anschutz Company incur certain costs on Qwest's behalf,
including primarily insurance and corporate transportation services, and
allocate such costs to Qwest based on actual usage. The cost to Qwest for such
services was approximately $1.0 million and $4.3 million for the three months
ended March 31, 1998 and the year ended December 31, 1997, respectively.
Qwest historically has received capital contributions and noninterest-
bearing advances from Anschutz Company and an affiliate of Anschutz Company to
fund operations. Outstanding advances totaled $19.1 million at December 31,
1996. In May 1997, all outstanding advances, then totaling approximately $28.0
million, were repaid, and no further advances are expected to be made.
Effective May 23, 1997, Qwest sold to the Anschutz Family Investment Company
LLC, for $2.3 million in cash, a warrant to acquire 8,600,000 shares of Qwest
Common Stock at an exercise price of $14.00 per share, exercisable on May 23,
2000, with certain exceptions. The warrant is not transferable. Shares of
Qwest Common Stock issued upon exercise of the warrant would be subject to
restrictions on sale and transfer for two years after exercise. Anschutz
Company is the manager of, and owns a 1% equity interest in, the Anschutz
Family Investment Company LLC, and a trust, of which members of Mr. Anschutz's
immediate family are beneficiaries, owns the remainder of the equity
interests.
Qwest has a tax sharing agreement with Anschutz Company that provides for
the allocation of tax liabilities and benefits. In general, the agreement
requires Qwest to pay to Anschutz Company the applicable income taxes for
which Qwest would be liable if it filed a separate return and requires
Anschutz Company to pay Qwest for losses or credits which would have resulted
in a refund of taxes if Qwest had filed a separate return. The
D-68
<PAGE>
payments under the agreement may be made in the form of cash, setoffs,
contributions of capital, dividends, notes or any combination of the
foregoing. The tax benefits payable to Qwest under the existing agreement
through December 31, 1996 of $11.1 million were forgiven. The tax sharing
agreement was amended, effective as of January 1, 1997, to provide that Qwest
will be responsible to Anschutz Company to the extent of income taxes for
which Qwest would have been liable if it had filed a separate return after
giving effect to any loss or credit carryover belonging to Qwest from taxable
periods after January 1, 1997. Anschutz Company will be responsible to Qwest
to the extent an unused loss or credit can be carried back to an earlier
taxable period after January 1, 1997.
If the Merger is consummated, Qwest will no longer be included in the
consolidated federal income tax return of Anschutz Company, its majority
stockholder. As a result, the net operating losses for income tax purposes of
Qwest, included in the consolidated federal income tax returns of Anschutz
Company from January 1, 1997 through the Closing Date, will not be available
for use by Qwest in its separate tax returns after the Merger. Qwest
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 Anschutz Company. Based on an analysis of the tax
attributes of Qwest and Anschutz Company, Anschutz Company will not be able to
realize the benefit of Qwest's net operating losses. Accordingly, the deferred
tax assets attributable to Qwest's net operating loss carryforwards,
calculated on a separate return basis, will be reported on the consummation
date of the Merger as an adjustment to Qwest's capital in the form of an in-
substance dividend.
Qwest had a $100.0 million three-year revolving credit facility with ABN
AMRO that was collateralized by shares owned and pledged by an affiliate of
Anschutz Company. In October 1997, Qwest repaid the then outstanding balance
and terminated this credit facility.
Anschutz Company guaranteed a QCC construction loan with an outstanding
balance at December 31, 1997, of approximately $10.9 million. The construction
loan, which was repaid in 1998, pertained to a network construction project
undertaken by QCC for an interexchange carrier. The guarantee was limited to
indemnification against defective construction, warranty or other claims of
the interchange carrier that would reduce or eliminate the interexchange
carrier's obligation to pay QCC. In addition, Anschutz Company has guaranteed
bonds totaling $175.0 million furnished by Qwest to support its construction
obligations under a contract for sale of dark fiber. Qwest has agreed to
indemnify Anschutz Company and its subsidiaries against any cost or losses
incurred by any of them as a result of their providing credit support to Qwest
(in the form of collateral pledges, guarantees, bonds or otherwise).
Richard T. Liebhaber, a Director of Qwest, entered into a consulting
agreement with an affiliate of Anschutz Company in December 1996 to provide
consulting services in 1997 and serve on the boards of directors of Qwest and
its subsidiaries upon request. The agreement was assigned to Qwest in February
1997. Mr. Liebhaber was required under the contract to provide a minimum of 30
days of consulting services to QCC during 1997 and was paid $250,000 plus out-
of-pocket expenses during 1997. The agreement was renewed for 1998.
Mr. Liebhaber was granted 10,000 growth shares, effective December 1, 1996,
with a performance cycle ending in 2001 under the Growth Share Plan. See
"COMPENSATION OF QWEST'S DIRECTORS AND EXECUTIVE OFFICERS--Growth Share Plan"
and "--Equity Incentive Plan."
No director or executive officer of Qwest and its operating subsidiaries was
indebted to Qwest or its subsidiaries at any time since the beginning of 1997
in excess of $60,000, except Mr. Woodruff as described above under the
description of his employment contract. See "COMPENSATION OF QWEST'S DIRECTORS
AND EXECUTIVE OFFICERS--Employment Contracts and Termination of Employment and
Change-In-Control Arrangements."
D-69
<PAGE>
BENEFICIAL OWNERSHIP OF QWEST COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Qwest Common Stock as of the Qwest Record Date by (i) each person
known by Qwest to beneficially own more than five percent of the Qwest Common
Stock; (ii) each director of Qwest; (iii) each of the current executive
officers of Qwest named in the Summary Compensation Table under the heading
"COMPENSATION OF QWEST'S DIRECTORS AND EXECUTIVE OFFICERS"; and (iv) all
current directors and executive officers of Qwest as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL OUTSTANDING
NAME ADDRESS FOR 5% OWNERS OWNERSHIP(1) SHARES(2)
---- ---------------------- ------------ -----------
<S> <C> <C> <C>
Philip F. Anschutz........... 555 Seventeenth Street 173,019,002(3) 83.4%
Suite 1000
Denver, CO 80202
Joseph P. Nacchio............ 1,234,336(4) *
Robert S. Woodruff........... 358,710(5) *
Cannon Y. Harvey............. 6,000 *
Richard T. Liebhaber......... 30,000(6) *
Douglas L. Polson............ 68,008 *
Craig D. Slater.............. 98,668(7) *
Jordan L. Haines............. 4,000 *
W. Thomas Stephens........... 4,000 *
Roy A. Wilkens............... 42,080(8) *
A. Dean Wandry............... 147,222 *
Stephen M. Jacobsen.......... 90,000(6) *
Lewis O. Wilks............... -- *
Brij Khandelwal.............. -- *
Larry A. Seese............... -- *
Directors and Executive
Officers
as a Group (20 persons)..... 175,102,026 84.4%
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise indicated, Qwest believes that the persons listed in
the above table have sole investment and voting power with respect to all
shares beneficially owned by them, subject to applicable community
property laws. For purposes of this table, beneficial ownership is
determined in accordance with Rule 13d-3 under the Exchange Act, and
generally includes voting or investment power with respect to securities.
Under that Rule, securities relating to options are deemed to be
beneficially owned if they are currently exercisable or exercisable within
60 days. The amounts shown in the table do not include shares relating to
options not currently exercisable or exercisable within 60 days.
(2) Based upon 207,541,517 shares of Qwest Common Stock issued and outstanding
as of the Qwest Record Date plus, as to the holder thereof only and no
other person, exercise of all derivative securities that are exercisable
or convertible currently or within 60 days of the Qwest Record Date.
Assuming 211,335,531 shares of Qwest Common Stock and 111,300,413 shares
of LCI Common Stock are outstanding immediately prior to the Effective
Time and assuming Exchange Ratios of 1.5583 and 1.0625, respectively,
immediately after the Effective Time (a) Mr. Anschutz would own 45.0% and
52.5%, respectively, of the Qwest Common Stock and (b) the directors and
executive officers as a group would own 45.5% and 53.1%, respectively, of
the Qwest Common Stock.
(3) Includes 20,336 shares held as custodian for one of Mr. Anschutz's
children, as to which beneficial ownership is disclaimed. Does not include
8,600,000 shares issuable upon exercise of a warrant held by Anschutz
Family Investment Company LLC of which Anschutz Company, a corporation
wholly owned by Mr. Anschutz, is the manager and one percent equity owner.
(4) Includes 1,024,451 shares currently issuable upon exercise of options and
1,600 shares owned by or for the benefit of Mr. Nacchio's children.
(5) Includes 1,000 shares owned by Mr. Woodruff's spouse as to which
beneficial ownership is disclaimed.
(6) Represents shares issuable within 60 days upon exercise of options.
(7) Includes 37,500 shares currently issuable upon exercise of options.
(8) Includes 3,930 shares held by a limited liability company in which one of
Mr. Wilkens's children owns a 99% interest, as to which beneficial
ownership is disclaimed.
D-70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ D-73
Consolidated Balance Sheets as of December 31, 1997 and 1996............ D-74
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... D-76
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995....................................... D-77
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... D-78
Notes to Consolidated Financial Statements.............................. D-79
LCI INTERNATIONAL, INC.
AUDITED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................ D-98
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... D-99
Consolidated Balance Sheets as of December 31, 1997 and 1996............ D-100
Consolidated Statements of Shareowners' Equity for the Years Ended
December 31, 1997, 1996 and 1995....................................... D-101
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... D-102
Notes to Consolidated Financial Statements.............................. D-103
UNAUDITED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997.......................................... D-118
Condensed Consolidated Balance Sheets as of March 31, 1998 and December
31, 1997............................................................... D-119
Condensed Consolidated Statement of Shareowners' Equity for the Three
Months Ended March 31, 1998............................................ D-120
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997.......................................... D-121
Notes to Interim Condensed Consolidated Financial Statements............ D-122
PHOENIX NETWORK, INC.
Report of Independent Certified Public Accountants...................... D-127
Consolidated Balance Sheets as of December 31, 1997 and 1996............ D-128
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... D-129
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995....................................... D-130
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... D-131
Notes to Consolidated Financial Statements.............................. D-133
</TABLE>
D-71
<PAGE>
SUPERNET, INC.
<TABLE>
<S> <C>
Independent Auditor's Report............................................. D-146
Balance Sheet as of June 30, 1997 and September 30, 1997 (Unaudited)..... D-147
Statements of Operations for the Year Ended June 30, 1997 and for the
Three-Month Period Ended September 30, 1997 and 1996 (Unaudited)........ D-148
Statements of Changes in Stockholder's Equity for the Year Ended June 30,
1997 and for the Three Months Ended September 30, 1997 (Unaudited)...... D-149
Statements of Cash Flows for the Year Ended June 30, 1997 and for the
Three Months Ended September 30, 1997 and 1996 (Unaudited).............. D-150
Notes to Financial Statements (information as of September 30, 1997, and
for the Three Months Ended September 30, 1997 and 1996 is Unaudited).... D-151
</TABLE>
D-72
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
QWEST COMMUNICATIONS INTERNATIONAL INC.:
We have audited the accompanying consolidated balance sheets of Qwest
Communications International Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Qwest
Communications International Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 24, 1998,
except as to note 22,
which is as of
March 8, 1998
D-73
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 379,784 $ 6,905
Accounts receivable, net.................................. 67,395 29,248
Costs and estimated earnings in excess of billings........ 256,566 4,989
Notes and other receivables............................... 10,855 14,934
Other current assets...................................... 9,342 328
---------- --------
Total current assets.................................... 723,942 56,404
Property and equipment, net................................. 614,640 186,535
Deferred income tax asset................................... 17,988 4,593
Notes and other receivables................................. 59 11,052
Intangible and other long-term assets, net.................. 41,476 3,967
---------- --------
Total assets............................................ $1,398,105 $262,551
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-74
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--CONTINUED
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 253,313 $ 80,129
Billings in excess of costs and estimated earnings..... 21,390 5,034
Deferred income tax liability.......................... 22,344 --
Current portion of long-term debt...................... 12,011 25,193
Payable to Majority Shareholder........................ 2,091 19,138
Deferred revenue....................................... 4,273 2,649
---------- --------
Total current liabilities............................ 315,422 132,143
Long-term debt......................................... 630,463 109,268
Other liabilities...................................... 70,476 11,698
---------- --------
Total liabilities.................................... 1,016,361 253,109
---------- --------
Stockholders' equity:
Preferred Stock, $.01 par value. Authorized 25,000,000
shares
No shares issued and outstanding...................... -- --
Common Stock, $.01 par value. Authorized 400,000,000
shares.
206,669,874 shares and 173,000,000 shares issued and
outstanding at December 31, 1997 and December 31,
1996, respectively.................................... 2,066 1,730
Additional paid-in capital............................. 411,605 54,162
Accumulated deficit.................................... (31,927) (46,450)
---------- --------
Total stockholders' equity............................. 381,744 9,442
---------- --------
Commitments and contingencies
Total liabilities and stockholders' equity........... $1,398,105 $262,551
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-75
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Revenue:
Carrier services.............................. $ 55,644 $ 57,573 $ 67,789
Commercial services........................... 59,649 34,265 20,412
-------- -------- ---------
115,293 91,838 88,201
Network construction services................. 581,410 139,158 36,901
-------- -------- ---------
696,703 230,996 125,102
-------- -------- ---------
Operating expenses:
Telecommunications services................... 91,166 80,368 81,215
Network construction services................. 397,153 87,542 32,754
Selling, general and administrative........... 91,190 45,755 37,195
Growth share plan............................. 73,451 13,100 --
Depreciation and amortization................. 20,262 16,245 9,994
-------- -------- ---------
673,222 243,010 161,158
Earnings (loss) from operations................. 23,481 (12,014) (36,056)
Other income (expense):
Interest expense, net......................... (18,895) (6,827) (4,248)
Interest income............................... 11,708 2,454 1,782
Other income, net............................. 7,286 6,186 55
-------- -------- ---------
Earnings (loss) before income taxes......... 23,580 (10,201) (38,467)
Income tax expense (benefit).................... 9,057 (3,234) (13,336)
-------- -------- ---------
Net earnings (loss)......................... $ 14,523 $ (6,967) $ (25,131)
======== ======== =========
Earnings (loss) per share--basic................ $ 0.08 $ (0.04) $ (0.15)
======== ======== =========
Earnings (loss) per share--diluted.............. $ 0.07 $ (0.04) $ (0.15)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
D-76
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1995................... 173,000,000 $1,730 $ 37,203 $(14,352) $ 24,581
Cash contribution from
Majority Shareholder... -- -- 28,000 -- 28,000
Reduction in additional
paid-in capital
attributable to effect
of the tax allocation
agreement with Majority
Shareholder............ -- -- (975) -- (975)
Net loss................ -- -- -- (25,131) (25,131)
----------- ------ -------- -------- --------
BALANCES, DECEMBER 31,
1995................... 173,000,000 1,730 64,228 (39,483) 26,475
Cancellation of income
tax benefit receivable
from Majority
Shareholder............ -- -- (11,088) -- (11,088)
Equity contribution from
Majority Shareholder... -- -- 1,022 -- 1,022
Net loss................ -- -- -- (6,967) (6,967)
----------- ------ -------- -------- --------
BALANCES, DECEMBER 31,
1996................... 173,000,000 1,730 54,162 (46,450) 9,442
Issuance of common stock
in initial public
offering, net.......... 31,050,000 310 319,171 -- 319,481
Issuance of common stock
warrants............... -- -- 2,300 -- 2,300
Issuance of common stock
for Growth Shares...... 2,591,532 26 35,284 -- 35,310
Issuance of common stock
upon exercise of
employee stock
options................ 9,644 -- 132 -- 132
Issuance of common stock
under Equity Incentive
Plan................... 18,698 -- 556 -- 556
Net earnings............ -- -- -- 14,523 14,523
----------- ------ -------- -------- --------
BALANCES, DECEMBER 31,
1997................... 206,669,874 $2,066 $411,605 $(31,927) $381,744
----------- ------ -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
D-77
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $ 14,523 $ (6,967) $ (25,131)
Adjustments to reconcile net earnings (loss)
to net cash (used in) provided by operating
activities:
Depreciation and amortization................. 20,262 16,245 9,994
Gain on sale of contract rights............... (9,296) -- --
Gain on sale of telecommunications service
agreements................................... -- (6,126) --
Deferred income tax expense (benefit)......... 8,949 (1,123) (2,839)
Changes in operating assets and liabilities:
Receivables--accounts and notes, net......... (22,397) (25,680) (21,379)
Costs and estimated earnings in excess of
billings, net............................... (235,221) 24,172 (21,650)
Accounts payable and accrued liabilities..... 189,797 34,455 5,852
Payable to related parties, net.............. -- (2,983) 1,263
Other changes................................ (3,105) 531 (2,745)
--------- -------- ---------
Net cash (used in) provided by operating
activities................................. (36,488) 32,524 (56,635)
--------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of contract rights......... 9,000 -- --
Proceeds from sale of telecommunications
service agreements........................... -- 4,500 --
Expenditures for property and equipment....... (345,788) (57,122) (46,313)
Cash paid for acquisitions, net of cash
acquired..................................... (20,036) -- (12,545)
--------- -------- ---------
Net cash used in investing activities....... (356,824) (52,622) (58,858)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock in
initial public offering, net................. 319,481 -- --
Proceeds from issuance of common stock
warrants..................................... 2,300 -- --
Proceeds from exercise of employee stock
options...................................... 132 -- --
Borrowings of long-term debt.................. 678,003 65,000 62,606
Repayments of long-term debt.................. (200,233) (21,322) (2,331)
Debt issuance costs........................... (16,445) (112) (591)
Net (payments to) advances from Majority
Shareholder.................................. (17,047) (19,069) 26,256
Contributions from Majority Shareholder....... -- 1,022 28,000
--------- -------- ---------
Net cash provided by financing activities... 766,191 25,519 113,940
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................ 372,879 5,421 (1,553)
Cash and cash equivalents, beginning of
period........................................ 6,905 1,484 3,037
--------- -------- ---------
Cash and cash equivalents, end of period....... $ 379,784 $ 6,905 $ 1,484
========= ======== =========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net................... $ 16,696 $ 8,825 $ 3,972
========= ======== =========
Cash paid for taxes, other than to Majority
Shareholder.................................. $ 244 $ 160 $ 725
========= ======== =========
Supplemental disclosure of significant non-cash
investing and financing activities:
Accrued capital expenditures.................. $ 76,267 $ 28,000 $ --
========= ======== =========
Capital expenditures financed with equipment
credit facility.............................. $ 22,604 $ -- $ --
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
D-78
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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
December 31, 1997, the Majority Shareholder owns approximately 83.7% 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 a single business segment, 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) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying audited consolidated financial statements as of December
31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995
include the accounts of the Company and all majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
(b) Telecommunications Services Revenue
Revenue from telecommunications services is recognized monthly as the
services are provided. Amounts billed in advance of the service month are
recorded as deferred revenue.
(c) Long-Term Construction Contracts
The Company accounts for long-term construction contracts relating to the
development of telecommunications networks using the percentage of completion
method. Under the percentage of completion method, progress is generally
measured on performance milestones relating to the contract where such
milestones fairly reflect progress toward contract completion.
Network construction costs include all direct material and labor costs and
those indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred. When necessary, the
estimated loss on an uncompleted contract is expensed in the period in which
it is identified. Contract costs are estimated using allocations of the total
cost of constructing the Qwest Network, a coast-to-coast, technologically
advanced, fiber optic telecommunications network (the "Qwest Network").
Revisions to estimated profits on contracts are recognized in the period they
become known.
(d) Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents.
D-79
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(e) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis using the estimated useful lives of the assets, commencing
when they are available for service. Leasehold improvements are amortized over
the lesser of the useful lives of the assets or the lease term. Expenditures
for maintenance and repairs are expensed as incurred. Network construction
costs, including interest during construction, are capitalized. Interest
capitalized in the years ended December 31, 1997, 1996 and 1995 was
approximately $17.7 million, $2.4 million and $1.9 million, respectively.
The useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Facility and leasehold improvements................ 5--25 years or lease term
Communications and construction equipment.......... 3--10 years
Fiber and conduit systems.......................... 15--25 years
Office equipment and furniture..................... 3--7 years
Capital leases..................................... lease term
</TABLE>
While constructing network systems for customers, the Company may install
additional conduit for its own use. This additional conduit is capitalized at
the incremental cost of construction. Costs of the initial conduit, fiber and
facilities are allocated to the customer and the Company based upon the number
of fibers retained by the Company relative to the total fibers installed, or
square footage in the case of facilities.
(f) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying value of such assets may
not be recoverable, in accordance with Statement of Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121"). This review consists of a comparison of
the carrying value of the asset with the asset's expected future undiscounted
cash flows without interest costs. Estimates of expected future cash flows are
to represent management's best estimate based on reasonable and supportable
assumptions and projections. If the expected future cash flow exceeds the
carrying value of the asset, no impairment is recognized. If the carrying
value of the asset exceeds the expected future cash flows, an impairment
exists and is measured by the excess of the carrying value over the fair value
of the asset. Any impairment provisions recognized are permanent and may not
be restored in the future. No impairment expense was recognized in 1997, 1996
or 1995.
(g) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
(h) Intangible and Other Long-Term Assets
Intangible and other long-term assets include debt issuance costs, deferred
compensation, goodwill and acquired intangibles such as customer contracts and
non-compete covenants. Such costs are amortized on a straight-line basis over
a period ranging from three to fifteen years.
D-80
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(i) Earnings Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which requires the
presentation of basic earnings per share and, for companies with potentially
dilutive securities, such as convertible debt, options and warrants, diluted
earnings per share. Basic earnings per share amounts are determined on the
basis of the weighted average number of common shares outstanding during the
year. Potentially dilutive instruments for the periods prior to the Company's
IPO, as defined by Securities and Exchange Commission Staff Accounting
Bulletin Number 98, Earnings Per Share, were not material and were excluded
from the computation of earnings per share. Diluted earnings per share give
effect to all potential dilutive common shares that were outstanding during
the year.
(j) Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company accounts for compensation
expense under the Growth Share Plan and the Equity Incentive Plan in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
(k) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(l) Reclassifications
Certain prior year balances have been reclassified to conform with 1997
presentation.
(3) OTHER INCOME (EXPENSE)
On March 10, 1997, the Company entered into an agreement with an unrelated
third party to terminate certain equipment purchase and telecommunications
capacity rights and options of the Company exercisable against the third party
for $9.0 million in cash, which the Company received in 1997 and has recorded
as gain on sale of contract rights.
On July 1, 1996, the Company sold its right, title and interest in certain
telecommunications service agreements to an unrelated third party (the
"Buyer") for $5.5 million. During the transition of service agreements to the
Buyer, the Company incurred certain facilities costs on behalf of the Buyer,
which are reimbursable to the Company. On March 31, 1997, the arrangement
relating to the transition services agreements expired and has not yet been
renegotiated. A dispute has arisen with respect to reimbursement of these
costs and, as a result, the Company made a provision of $2.0 million in the
three months ended March 31, 1997. Negotiations with the Buyer are continuing.
As of December 31, 1997 and 1996, net amounts of approximately $5.0 million
and $2.0 million, respectively, were due to the Company for such costs. The
Company believes that the receivable balance as of December 31, 1997 is
collectible.
(4) ACQUISITIONS
On October 22, 1997, the Company and an unrelated third party consummated an
agreement whereby the Company acquired from the third party all of the issued
and outstanding shares of capital stock of SuperNet, Inc.
D-81
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
("SNI"), a regional internet service provider, and the capital stock of SNI
issued at the closing of the acquisition, for approximately $20.0 million in
cash, plus acquisition costs. The acquisition was accounted for using the
purchase method of accounting. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Working capital.................................................... $(1,517)
Property and equipment............................................. 2,890
Goodwill........................................................... 19,200
Other.............................................................. ( 423)
-------
$20,150
=======
</TABLE>
The accompanying consolidated statements of operations include the operating
results of SNI since October 22, 1997. The following pro forma operating
results of the Company and SNI for the years ended December 31, 1997 and 1996
have been prepared assuming the acquisition had been consummated as of January
1, 1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue.................................................. $702,260 $236,538
Net earnings (loss)...................................... $ 10,783 $(14,226)
Earnings (loss) per share -- basic....................... $ 0.06 $ (0.08)
Earnings (loss) per share--diluted....................... $ 0.06 $ (0.08)
</TABLE>
(5) NETWORK CONSTRUCTION SERVICES REVENUE AND EXPENSES
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
--------- --------
<S> <C> <C>
Costs incurred on uncompleted contracts............... $ 473,760 $ 82,840
Estimated earnings.................................... 238,191 48,853
--------- --------
711,951 131,693
Less: billings to date 476,775 131,738
--------- --------
$ 235,176 $ (45)
========= ========
Costs and estimated earnings in excess of billings.... $ 256,566 $ 4,989
Billings in excess of costs and estimated earnings.... (21,390) (5,034)
--------- --------
$ 235,176 $ (45)
========= ========
Revenue the Company expects to realize for work to be
performed on the above uncompleted contracts......... $ 506,791 $328,688
========= ========
</TABLE>
The Company has entered into various agreements to provide indefeasible
rights of use of multiple fibers along the Qwest 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 which have been guaranteed by the Majority
Shareholder. Network Construction Services revenue relating to the contracts
with these major customers was approximately $513.0 million and $121.0 million
in 1997 and 1996, respectively. Progress billings are made upon customers'
acceptance of performance milestones.
D-82
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The Company expects to bill and collect all costs and estimated earnings in
excess of billings as of December 31, 1997, in 1998.
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.
(6) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Carrier services........................................... $11,833 $ 9,978
Commercial services........................................ 14,095 5,736
Network construction services.............................. 37,085 13,751
Due from affiliate......................................... 1,804 --
Other...................................................... 7,189 3,452
------- -------
72,006 32,917
Less allowance for doubtful accounts..................... (4,611) (3,669)
------- -------
Accounts receivable, net................................... $67,395 $29,248
======= =======
</TABLE>
(7) NOTES AND OTHER RECEIVABLES
In 1994, an unrelated third party entered into a $45.0 million agreement to
purchase a single conduit from the Company. Contract revenue from this
agreement was approximately $3.1 million and $29.7 million in the years ended
December 31, 1996 and 1995, respectively. The Company may be required to pay
up to $13.0 million to the third party in the event of the sale of the
Company-owned conduits. The balance of the notes receivable related to the
contract was paid subsequent to year end.
(8) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Land...................................................... $ 991 $ 506
Facility and leasehold improvements....................... 17,910 7,951
Communications and construction equipment................. 83,313 52,076
Fiber and conduit systems................................. 118,192 42,446
Office equipment and furniture............................ 16,019 6,360
Capital leases............................................ 3,778 3,197
Work in progress.......................................... 417,042 99,915
-------- --------
657,245 212,451
Less accumulated depreciation and amortization.......... (42,605) (25,916)
-------- --------
Property and equipment, net............................... $614,640 $186,535
======== ========
</TABLE>
D-83
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
-------- -------
<S> <C> <C>
Accounts payable........................................... $ 80,862 $41,642
Construction accrual....................................... 75,543 18,071
Property, sales and other taxes............................ 33,926 3,582
Capacity service obligation................................ 8,196 3,658
Accrued interest........................................... 7,704 707
Right-of-way obligations................................... 34,006 3,290
Other...................................................... 13,076 9,179
-------- -------
Accounts payable and accrued expenses...................... $253,313 $80,129
======== =======
</TABLE>
(10) OTHER LIABILITIES
Other liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Right-of-way obligations.................................... $39,014 $ 1,297
Growth share accrual........................................ 17,686 9,291
Equipment to be financed.................................... 10,756 --
Other....................................................... 3,020 1,110
------- -------
Other liabilities........................................... $70,476 $11,698
======= =======
</TABLE>
(11) RIGHT-OF-WAY OBLIGATIONS
The Company has easement agreements with railroads and public transportation
authorities. The following is a schedule by years of future minimum payments
under easement agreements together with the present value of the net minimum
payments as of December 31, 1997.
<TABLE>
<S> <C>
Year ended December 31:
1998............................................................. $ 34,225
1999............................................................. 4,228
2000............................................................. 4,228
2001............................................................. 4,250
2002............................................................. 6,099
Thereafter....................................................... 83,788
--------
Total minimum payments........................................... $136,818
Less amount representing interest................................ (63,798)
--------
Present value of net minimum payments............................ $ 73,020
========
</TABLE>
The present value of net minimum payments is included in accounts payable
and accrued expenses and other liabilities. (See note 9--Accounts Payable and
Accrued Expenses and note 10--Other Liabilities.)
D-84
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In certain limited instances the Company may be obligated to pay costs of
relocating certain conduits owned by third parties on approximately 500 miles
of railroad rights-of-way. The majority of such commitments expire in February
2001. The Company has made a provision of approximately $2.9 million for such
costs in 1997.
Pursuant to certain easement agreements, the Company is required to provide
easement grantors with communications capacity for their own internal use.
(12) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
9.47% Notes.............................................. $356,908 $ --
10 7/8% Notes............................................ 250,000 --
Revolving credit facility................................ -- 60,000
Equipment credit facility................................ 22,604 --
Network credit facility.................................. -- 27,077
Equipment loans.......................................... -- 9,820
Term notes............................................... -- 9,416
Capital lease and other obligations...................... 12,962 28,148
-------- --------
Total debt............................................... 642,474 134,461
Less current portion................................... (12,011) (25,193)
-------- --------
Long-term debt........................................... $630,463 $109,268
======== ========
</TABLE>
In October 1997, the Company issued and sold $555.9 million in principal
amount at maturity of 9.47% Senior Discount Notes, due 2007 (the "9.47%
Notes"), generating net proceeds of approximately $342.1 million, after
deducting offering costs which are included in intangible and other long-term
assets. The 9.47% Notes will accrete at a rate of 9.47% per annum, compounded
semiannually, to an aggregate principal amount of $555.9 million by October
15, 2002. The principal amount of the 9.47% Notes is due and payable in full
on October 15, 2007. The 9.47% Notes are redeemable at the Company's option,
in whole or in part, at any time on or after October 15, 2002, at specified
redemption prices. In addition, prior to October 15, 2000, the Company may use
the net cash proceeds from certain equity transactions to redeem up to 35% of
the 9.47% Notes at specified redemption prices. Cash interest on the 9.47%
Notes will not accrue until October 15, 2002, and thereafter will accrue at a
rate of 9.47% per annum, and will be payable semiannually in arrears
commencing on April 15, 2003 and thereafter on April 15 and October 15 of each
year. The Company has the option of commencing the accrual of cash interest on
an interest payment date on or after October 15, 2000, in which case the
outstanding principal amount at maturity of the 9.47% Notes will, on such
interest payment date, be reduced to the then accreted value, and cash
interest will be payable thereafter. 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 Securities Act of 1933 (the "Act"), for all of
the 9.47% Notes. The 9.47% Exchange Notes are identical in all material
respects to the originally issued 9.47% Notes.
In May 1997, the Company entered into a $90.0 million credit agreement (the
"Equipment Credit Facility") with an unrelated third party supplier of
transmission electronics equipment (the "Supplier") to fund a portion of
certain capital expenditures required to equip the Qwest Network currently
under construction. The facility subsequently was assigned by the Supplier to
another institution, which assumed the Equipment Credit Facility
D-85
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
and currently acts as the agent. Under the Equipment Credit Facility, the
Company may borrow up to 75% of the price of purchased equipment and related
engineering and installation services provided by the Supplier, with the
purchased equipment and related items serving as collateral for the loans. The
Company is committed to purchase from the Supplier a minimum of $100.0 million
of such equipment and services under a separate procurement agreement, which
was executed in May 1997. The Company's total remaining commitment under the
procurement agreement was approximately $68.4 million as of December 31, 1997.
Principal amounts outstanding under the Equipment Credit Facility will be
payable in quarterly installments commencing on June 30, 2000, with full
repayment due on March 31, 2004. Borrowings will bear interest at the
Company's option at either (i) a floating base rate offered by a designated
reference bank plus an applicable margin; or (ii) LIBOR plus an applicable
margin.
On March 31, 1997, the Company issued and sold 10 7/8% Senior Notes due 2007
having an aggregate principal amount at maturity of $250.0 million. The net
proceeds of the 10 7/8% Senior Notes were approximately $242.0 million, after
deducting offering costs which are included in intangible and other long-term
assets. Interest on the 10 7/8% Senior Notes is payable semiannually in
arrears on April 1 and October 1 of each year, commencing October 1, 1997. The
10 7/8% Senior Notes are subject to redemption at the option of the Company,
in whole or in part, at any time on or after April 1, 2002, at specified
redemption prices. In addition, prior to April 1, 2000, the Company may use
the net cash proceeds from certain specified equity transactions to redeem up
to 35% of the 10 7/8% Senior Notes at specified redemption prices. In August
1997, the Company completed an exchange of 10 7/8% Series B Senior Notes (the
"10 7/8% Notes"), registered under the Act, for all of the 10 7/8% Senior
Notes. The 10 7/8% Notes are identical in all material respects to the
originally issued 10 7/8% Senior Notes.
In April 1996, the Company entered into a long-term $100.0 million revolving
credit facility agreement as amended in September 1996 (the "Facility") which
was collateralized by shares of common stock owned and pledged by the Majority
Shareholder. In October 1997, the Company repaid the outstanding balance and
terminated the Facility.
In April 1995, the Company entered into a $45.0 million customer contract
credit facility agreement to finance certain construction projects undertaken
at that time. The facility converted to a term loan upon completion of the
construction projects in 1996 and 1995 and is now secured by notes receivable
issued in connection with these construction projects. The facility bears
interest at the Company's option at either (i) the higher of (a) the bank's
base rate of interest, or (b) the Federal Funds Rate plus 1/2%; or (ii) LIBOR
plus 9/16%. The outstanding balance was repaid in February 1998.
The Company also incurred other indebtedness during the three-year period
ended December 31, 1997, including in 1995 and 1996 $10.0 million in aggregate
under five equipment loans and in January 1995 $12.0 million in aggregate
under two term notes, the proceeds of which were used to repay a portion of
the advance from the Majority Shareholder used to purchase Qwest Transmission
Inc. In addition, the Company had other outstanding indebtedness in 1997 which
it had incurred prior to 1995, including amounts payable under a network
credit facility and an additional equipment loan. Such indebtedness had a
weighted average interest rate of approximately 9% in 1997, and was repaid in
the second quarter of 1997 with proceeds from the 10 7/8% Senior Notes.
The indentures for the 10 7/8%, 9.47% and 8.29% Notes (defined below)
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
D-86
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
The Company leases certain network construction equipment under capital
lease agreements. The amortization charge applicable to capital leases is
included in depreciation expense. Future minimum payments under capital lease
obligations is included in contractual maturities of long-term debt summarized
below.
Contractual maturities of long-term debt as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Year ended December 31:
1998.............................................................. $ 12,011
1999.............................................................. 622
2000.............................................................. 3,671
2001.............................................................. 5,078
2002.............................................................. 5,877
Thereafter........................................................ 615,215
--------
$642,474
========
</TABLE>
The carrying amounts of the Term Loan and the Equipment Credit Facility
approximate fair value since the interest rates are variable and reset
periodically. The estimated fair values of the 9.47% Notes and the 10 7/8%
Notes, each with a carrying value at December 31, 1997 of approximately $356.9
million and $250.0 million, respectively, were approximately $382.2 million
and $283.8 million, respectively, at December 31, 1997, based on current rates
offered for debt of similar terms and maturity.
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, 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. If the registration statement for the exchange
offer or the shelf registration statement, as applicable, is not declared
effective within specified time periods or, after being declared effective,
ceases to be effective or usable for resale of the 8.29% Notes during
specified time periods (each a "Registration Default"), additional cash
interest will
D-87
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 Discount 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.
(13) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $(1,673) $(10,497)
State........................................... 108 (438) --
------ ------- --------
Total current income tax expense (benefit).... 108 (2,111) (10,497)
------ ------- --------
Deferred:
Federal......................................... 8,949 (1,123) (2,839)
State........................................... -- -- --
------ ------- --------
Total deferred income tax expense (benefit)... 8,949 (1,123) (2,839)
------ ------- --------
Total income tax expense (benefit)............ $9,057 $(3,234) $(13,336)
====== ======= ========
</TABLE>
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items for the years
ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
Expected income tax expense (benefit)........... $8,253 $(3,570) $(13,463)
State income taxes, net of federal income tax
expense (benefit)................................. 70 (279) --
Goodwill amortization........................... 306 568 56
Compensation and growth share expenses.......... 345 -- --
Other, net...................................... 83 47 71
------ ------- --------
Total income tax expense (benefit).......... $9,057 $(3,234) $(13,336)
====== ======= ========
</TABLE>
D-88
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Current deferred tax assets (liabilities):
Allowance for doubtful accounts....................... $ 1,130 $ 1,283
Accrued liabilities................................... 1,219 1,277
Deferred compensation................................. 492 --
-------- -------
2,841 2,560
Network construction contracts........................ (25,185) (2,560)
-------- -------
$(22,344) $ --
======== =======
Long-term deferred tax assets (liabilities):
Deferred compensation................................. $ 6,503 $ 3,252
Depreciation.......................................... 4,337 2,205
Accrued liabilities................................... 1,235 --
Net operating loss carryforward....................... 34,773 --
-------- -------
46,848 5,457
Intangible assets, principally due to differences in
basis and amortization............................... (71) (112)
Property and equipment................................ (28,789) (752)
-------- -------
(28,860) (864)
-------- -------
$ 17,988 $ 4,593
======== =======
</TABLE>
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable
to deductible temporary differences will be realized by recognition of future
taxable amounts. Accordingly, the Company believes a valuation allowance for
its federal deferred tax assets is not necessary.
At December 31, 1997, the Company has net operating loss carryforwards for
income tax purposes of approximately $99.4 million which, if not utilized to
reduce taxable income in future periods, will expire in 2012.
The Company is included in the consolidated federal income tax return of the
Majority Shareholder, which has a July 31 year-end for income tax purposes.
There is a tax allocation agreement between the Company and the Majority
Shareholder which encompasses U. S. federal tax consequences. The Company is
responsible to the Majority Shareholder to the extent of income taxes for
which the Company and its subsidiaries would have been liable if the Company
had filed a consolidated federal income tax return, giving effect to any loss
or credit carryover belonging to the Company and its subsidiaries from periods
after the Effective Date (defined below). The Majority Shareholder would be
responsible to the Company to the extent an unused loss or credit can be
carried back to an earlier taxable period after the Effective Date.
The tax agreement was amended effective as of January 1, 1997 (the
"Effective Date"). Prior to the amendment, the Company was responsible to the
Majority Shareholder for its share of the current consolidated income tax
liabilities. The Majority Shareholder was responsible to the Company to the
extent that the Company's income tax attributes were utilized by the Majority
Shareholder to reduce its consolidated income
D-89
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
tax liabilities, subject to certain limitations on net operating loss and
credit carryforwards. At December 31, 1996, the income tax benefit receivable
from Majority Shareholder of approximately $11.1 million was canceled, which
resulted in a reduction of additional paid-in capital.
In certain cases, differences may arise between amounts reported in the
financial statements under generally accepted accounting principles and the
amounts actually payable or receivable under the tax allocation agreement.
Those differences are generally reported as adjustments to capital, as in-
substance dividends.
(14) RELATED PARTY TRANSACTIONS
(a) Transactions with Majority Shareholder
The Majority Shareholder incurs certain costs on the Company's behalf,
including primarily insurance and corporate transportation services, and
allocates such costs to the Company based on actual usage. The cost to the
Company for such services was approximately $4.3 million, $2.1 million and
$2.5 million in the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, accounts receivable from (payable to) the Majority
Shareholder are recognized to reflect federal income tax benefits receivable
(income taxes payable) pursuant to the tax allocation agreement between the
Company and the Majority Shareholder. Advances from Majority Shareholder of
approximately $19.1 million outstanding at December 31, 1996 were repaid in
1997.
The Company has agreed to indemnify the Majority Shareholder and its
subsidiaries against any costs or losses incurred by them as a result of their
providing credit support to the Company (in the form of collateral pledges,
guarantees, performance bonds or otherwise).
(b) Transactions with Other Related Parties
The Company leases its corporate office in Denver, Colorado from an
affiliate of the Majority Shareholder. The cost to the Company for such lease
was approximately $1.4 million, $1.2 million and $1.0 million in the years
ended December 31, 1997, 1996 and 1995, respectively.
The Majority Shareholder owned approximately 25% of Southern Pacific Rail
Corporation and its subsidiaries ("SPRC") at December 31, 1995. In September
1996, SPRC was acquired by Union Pacific Corporation. As a result of this
transaction, the Majority Shareholder's ownership was reduced to approximately
5% of Union Pacific Corporation, and SPRC ceased to be a related party. While
a related party, the Company provided telecommunications services to SPRC and
charged SPRC approximately $1.5 million and $3.6 million in the years ended
December 31, 1996 and 1995, respectively. Additionally, the Company purchased
and has made future commitments relating to right-of-way easements from SPRC
and utilizes specialized SPRC personnel and equipment for its construction
projects. While a related party, SPRC charged the Company approximately $3.3
million and $2.2 million for these services in the years ended December 31,
1996 and 1995, respectively.
(c) Equity Contribution From Majority Shareholder
On November 11, 1996, the former president and chief executive of the
Company resigned his position. Upon his resignation, the Majority Shareholder
forgave a note receivable from him in the amount of approximately $1.0
million. This charge was allocated to the Company in 1996 and is included in
selling, general and administrative expenses and additional paid-in capital in
the Company's consolidated financial statements.
D-90
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the short-
term maturities of these assets and liabilities. The carrying amounts of notes
and other receivables approximate fair value due to the relatively short
period of time between the origination of these instruments and their expected
realization. The carrying amount of long-term right-of-way obligation
approximates fair value since it is based upon current interest rates of
obligations with similar maturities.
(16) COMMITMENTS AND CONTINGENCIES
(a) Network Construction Project
In 1996, the Company commenced construction of the Qwest Network. The
Company projects its total remaining cost at December 31, 1997 for completing
the construction of the Qwest Network will be approximately $1.1 billion. This
amount includes the Company's remaining commitment through December 31, 1998
to purchase a minimum quantity of materials for approximately $147.0 million
as of December 31, 1997, subject to quality and performance expectations, and
contracts for the construction of conduit systems aggregating approximately
$24.7 million.
(b) Network and Telecommunications Capacity Exchanges
The Company enters into agreements to exchange telecommunications capacity
rights and to exchange network assets. In 1997, the Company entered into
agreements to acquire network assets from unrelated third parties in exchange
for certain of the Company's network assets under construction. Title to the
network assets will pass to the exchange parties upon completion of
construction and consummation of the exchange.
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. It is
anticipated that the Company will make cash payments for a portion of the
telecommunications capacity it receives pursuant to the agreement 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.
D-91
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(c) Leases and Telecommunications Service Commitments
The Company leases certain terminal locations and office space under
operating lease agreements and has committed to use certain telecommunications
capacity services. Future minimum payments under noncancelable operating lease
and service commitments as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPACITY
SERVICE OPERATING
COMMITMENTS LEASES TOTAL
----------- --------- -------
<S> <C> <C> <C>
Year ended December 31:
1998........................................ $3,977 $ 6,187 $10,164
1999........................................ 250 5,113 5,363
2000........................................ -- 3,170 3,170
2001........................................ -- 2,280 2,280
2002........................................ -- 1,950 1,950
Thereafter.................................. -- 4,848 4,848
------ ------- -------
Total minimum payments.................... $4,227 $23,548 $27,775
====== ======= =======
</TABLE>
Capacity service expenses are included in telecommunications service
expenses. Amounts expensed related to capacity service commitments in the
years ended December 31, 1997, 1996 and 1995 were approximately $7.3 million,
$19.0 million and $19.6 million, respectively.
Amounts expensed in the years ended December 31, 1997, 1996 and 1995 related
to operating leases were approximately $6.2 million, $5.0 million and $4.6
million, respectively.
(d) Mexico Fiber Purchase Agreement
In July 1997, the Company entered into an agreement with an unrelated third
party whereby the Company will receive (i) four dark fibers along a 2,220
kilometer route to be constructed in Mexico by the third party, and (ii)
certain construction inventory and value-added tax refunds, totaling
approximately $2.9 million. In exchange for these assets, the third party will
receive the stock of the Company's subsidiary, SP Servicios de Mexico S. A. de
C. V., and approximately $6.7 million upon the achievement of certain
milestones.
(17) GROWTH SHARE PLAN
The Company has a Growth Share Plan (the "Plan") for certain of its
employees and directors. A "Growth Share" is a unit of value based on the
increase in value of the Company over a specified measurement period. All
Growth Share grants made through December 31, 1997 have been made based on a
beginning Company value that was greater than or equal to the fair value of
the Company at the grant date. The total number of Growth Shares is set at 10
million and the maximum presently available for grant under the Plan is
850,000. All participants, except those granted Growth Shares under the
October 1996 Plan, vested fully upon completion of the Company's IPO and
settlement was made with 2,591,532 common shares, net of amounts relating to
tax withholdings of approximately $21.9 million. Growth Shares granted under
the October 1996 Plan vest at the rate of 20% for each full year of service
completed after the grant date subject to risk of forfeiture and are to be
settled with the Company's Common Stock. The future compensation expense
associated with the remaining shares has been capped at $11.00 per share, or
approximately $23.4 million, and will be amortized as expense over the
remaining approximately four-year vesting period. At December 31, 1997,
approximately $14.9 million is included in other long-term liabilities related
to outstanding Growth Shares. The Company does not presently
D-92
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
intend to make any additional Growth Share grants under this plan. Certain
triggering events, such as a change in control of the Company, cause immediate
vesting of the remaining Growth Shares and would result in accelerated expense
recognition of all unamortized compensation. Participants receive their vested
portion of the increase in value of the Growth Shares upon a triggering event,
which includes the end of a Growth Share performance cycle.
The Company has estimated an increase in value of the Growth Shares during
1997 and has recorded approximately $73.5 million of additional compensation
expense for this plan in the year ended December 31, 1997. Had the Company
accounted for compensation under the Growth Share Plan pursuant to the fair
value method in Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the amount of compensation would not
have been different from what has been reflected in the accompanying
consolidated financial statements.
The following table summarizes Growth Share grants and Growth Shares
outstanding:
<TABLE>
<CAPTION>
OUTSTANDING
GROWTH SHARES
-------------
<S> <C>
December 31, 1994.............................................. 676,000
1995 grants.................................................. 11,000
1995 forfeitures............................................. (42,500)
--------
December 31, 1995.............................................. 644,500
1996 grants.................................................. 67,500
1996 forfeitures and settlements............................. (436,600)
--------
December 31, 1996.............................................. 275,400
1997 grants.................................................. 358,050
1997 settlements............................................. (253,950)
--------
December 31, 1997.............................................. 379,500
========
</TABLE>
The Company estimated an increase in value of the Growth Shares at December
31, 1996 due to the signing of an agreement to provide an indefeasible right
of use to a major customer and recorded approximately $13.1 million of
additional compensation expense in 1996, approximately $6.0 million of which
is payable subsequent to December 31, 1997. No expense was recognized in the
accompanying consolidated financial statements for the year ended December 31,
1995, as there were no significant compensatory elements in that period.
(18) CAPITAL STOCK
On January 20, 1998, the Board of Directors declared a stock dividend of one
share for every share outstanding to stockholders of record as of February 2,
1998, to be distributed on February 24, 1998. This dividend was accounted for
as a two for one stock split. All share and per share information included in
the consolidated financial statements and the notes hereto have been adjusted
to give retroactive effect to the change in capitalization.
On May 23, 1997, the Board of Directors approved a change in the Company's
capital stock to authorize 400 million shares of $.01 par value Common Stock
(of which 20 million shares are reserved for issuance under the Equity
Incentive Plan, 2 million shares are reserved for issuance under the Growth
Share Plan, and 8.6 million shares are reserved for issuance upon exercise of
warrants, as described below), and 25 million shares of $.01 par value
Preferred Stock. On May 23, 1997, the Board of Directors declared a stock
dividend to the existing
D-93
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
stockholder of 172,980,000 shares of Common Stock, which was paid immediately
prior to the effectiveness of the registration statement on June 23, 1997.
This dividend was accounted for as a stock split. The Company completed the
IPO of 31,050,000 shares of Common Stock on June 27, 1997, raising net
proceeds of approximately $319.5 million.
Effective May 23, 1997, the Company sold to an affiliate of the Majority
Shareholder for $2.3 million in cash, a warrant to acquire 8.6 million shares
of Common Stock at an exercise price of $14.00 per share, exercisable on May
23, 2000. The warrant is not transferable. Stock issued upon exercise of the
warrant will be subject to restrictions on sale or transfer for two years
after exercise.
Effective June 23, 1997, the Company adopted the Equity Incentive Plan. This
plan permits the grant of non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock, stock units and other
stock grants to key employees of the Company and affiliated companies and key
consultants to the Company and affiliated companies who are responsible for
the Company's growth and profitability. A maximum of 20 million shares of
Common Stock may be subject to awards under the Equity Incentive Plan.
The Company's Compensation Committee (the "Committee") determines the
exercise price for each option; however, stock options must have an exercise
price that is at least equal to the fair market value of the Common Stock on
the date the stock option is granted, subject to certain restrictions.
Stock option awards generally vest in equal increments over a five-year
period, and awards granted under the Equity Incentive Plan will immediately
vest upon any change in control of the Company, as defined, unless provided
otherwise by the Committee at the time of grant. Options granted in 1997 have
terms ranging from six to ten years.
Stock option transactions during 1997 were as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding January 1, 1997..................... -- --
Granted......................................... 13,958,000 $15.88
Exercised....................................... (12,000) $11.00
----------
Outstanding December 31, 1997................... 13,946,000 $15.89
==========
Exercisable December 31, 1997................... 1,340,000 $11.00
==========
</TABLE>
The following table summarizes certain information about the Company's stock
options at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
------------------------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ 7.50 - $11.00................ 8,654,000 5.6 $10.80
$14.69 - $18.06................ 535,000 9.6 $15.84
$22.88 - $24.00................ 3,100,000 9.7 $23.15
$25.13 - $30.19................ 1,657,000 9.9 $29.39
----------
$ 7.50 - $30.00................ 13,946,000 7.2 $15.88
==========
</TABLE>
D-94
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Compensation expense recognized for grants under the Equity Incentive Plan
was not material in 1997. If compensation expense for the Equity Incentive
Plan had been determined using the fair value method described in SFAS 123,
the Company's net earnings and earnings per share for 1997 would have been
reduced to the pro forma amounts shown in the following table (in thousands,
except per share information):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Net earnings
As reported....................................................... $14,523
Pro forma......................................................... 861
Earnings per share--basic
As reported....................................................... 0.08
Pro forma......................................................... --
Earnings per share--diluted
As reported....................................................... 0.07
Pro forma......................................................... --
</TABLE>
The weighted-average fair value of each option grant is estimated as of the
date of grant to be $7.94 using the Black-Scholes option pricing model, with
the following weighted average assumptions: risk-free interest rate of 5.8%,
no expected dividend yields, expected option lives of 7.6 years, and expected
volatility of 31%.
(19) EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the denominators of the basic and
diluted earnings per share computations (in thousands, except per share
information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net earnings (loss)........................... $ 14,523 $ (6,967) $(25,131)
======== ======== ========
Shares:
Weighted average number of shares outstanding
during the period for computing basic
earnings per share........................... 190,505 173,000 173,000
-------- -------- --------
Incremental common shares attributable to
dilutive securities:
Common shares issuable for warrants.......... 1,635 -- --
Common shares issuable under stock option
plan........................................ 1,621 -- --
Common shares issuable for outstanding growth
shares...................................... 294 -- --
-------- -------- --------
Number of shares as adjusted for purposes of
computing diluted earnings per share......... 194,055 173,000 173,000
======== ======== ========
Earnings per share--basic..................... $ 0.08 $ (0.04) $ (0.15)
======== ======== ========
Earnings per share--diluted................... $ 0.07 $ (0.04) $ (0.15)
======== ======== ========
</TABLE>
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 800,000 for 1997.
D-95
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(20) 401(K) PLAN
The Company sponsors a 401(k) Plan (the "Plan") which permits employees to
make contributions to the Plan on a pre-tax salary reduction basis in
accordance with the Internal Revenue Code. All full-time employees are
eligible to participate after one year of service. The Company contributes a
base percentage and matches a portion of the voluntary employee contributions.
The cost of the Plan charged to expense was not material in the periods
presented in the consolidated financial statements.
(21) SIGNIFICANT CUSTOMERS
During the years ended December 31, 1997, 1996 and 1995, two or more
customers, in aggregate, have accounted for 10% or more of the Company's total
revenue in one or more periods, as follows:
<TABLE>
<CAPTION>
CUSTOMER A CUSTOMER B CUSTOMER C CUSTOMER D
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997............................. 6% 31% 37% --
1996............................. 28% 26% -- 4%
1995............................. 7% -- -- 35%
At December 31, 1997 and 1996, one or more of the customers described above
have accounted for 10% or more of the Company's combined accounts receivable,
net, and costs and estimated earnings in excess of billings, as follows:
<CAPTION>
CUSTOMER A CUSTOMER B CUSTOMER C
---------- ---------- ----------
<S> <C> <C> <C> <C>
1997............................. -- 26% 32%
1996............................. 11% 20% --
</TABLE>
(22) SUBSEQUENT EVENTS
In January 1998, the Company entered into a merger agreement (the "Merger
Agreement") with an unrelated third party non-facilities-based reseller of
long distance services. In the Merger, each outstanding share of the third
party's Common Stock (including shares of the third party's Common Stock
issued upon conversion of its Series I Stock) will be acquired for that many
shares of the Qwest's Common Stock having an aggregate market value equal to
$28.5 million, reduced by certain adjustments and limitations to $26.8
million, and future payments of $4.0 million. The proposed acquisition is
subject to certain closing conditions that include requisite shareholder
approval. If consummated, the proposed acquisition will be accounted for using
the purchase method of accounting.
Also in January 1998, the Company signed a long-term contract to provide an
unrelated third party telecommunications capacity along approximately 10,000
route miles of the Qwest Network (the "Contract"). In consideration, the
Company will receive 19.99% of the third party's common stock and up to $310.0
million in cash over an extended payment term. There are restrictions on the
sale by the Company of the unrelated third party's common stock, and the
unrelated third party has the right to repurchase the common stock until the
Contract's second anniversary. The Company will also receive monthly
operations and maintenance fees over the term of the multi-year Contract.
Prior to delivery of the telecommunications capacity and acceptance by the
unrelated third party, the unrelated third party 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 the unrelated third party
for purchases of interim capacity. Pursuant to the terms of the Contract, the
unrelated third party 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
the unrelated third party's network by the Contract's third anniversary, the
unrelated third party may at
D-96
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
its option either: (i) accept the completed portion and pay for it on a pro
rata basis; or (ii) terminate the Contract and require the Company to return
all consideration received.
On March 8, 1998, the Company signed a definitive merger agreement with an
unrelated third party 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 the third party's outstanding
common shares and the assumption of all of the third party'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.
(23) SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER
SHARE INFORMATION) (UNAUDITED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue................. $ 72,693 $228,673 $188,955 $206,382
Earnings (loss) from
operations............. (12,644) (7,098) 19,860 23,363
Net earnings (loss)..... (4,776) (5,612) 12,651 12,260
Earnings (loss) per
share--basic........... (0.03) (0.03) 0.06 0.06
Earnings (loss) per
share--diluted......... (0.03) (0.03) 0.06 0.06
<CAPTION>
1996
---------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue................. $ 34,632 $ 50,871 $ 44,333 $101,160
Earnings (loss) from
operations............. (14,653) (2,262) 571 4,330
Net earnings (loss)..... (9,979) (2,376) 3,454 1,934
Earnings (loss) per
share--basic........... (0.06) (0.01) 0.02 0.01
Earnings (loss) per
share--diluted......... (0.06) (0.01) 0.02 0.01
</TABLE>
The Company adopted SFAS 128 in the fourth quarter of 1997. All per share
information reflected in the selected consolidated quarterly financial data
above has been restated.
D-97
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
AND SHAREOWNERS OF LCI INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of LCI
International, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareowners' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LCI
International, Inc. and subsidiaries, as of December 31, 1997 and 1996, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 16, 1998
(except with respect to the matter
Discussed in Note 15, as to which
the date is March 16, 1998)
D-98
<PAGE>
LCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT EARNINGS PER COMMON SHARE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues....................................... $ 1,642 $ 1,304 $ 824
Cost of services............................. 986 778 496
---------- ---------- ---------
Gross margin................................... 656 526 328
Selling, general and administrative
expenses.................................... 408 305 193
Merger charges............................... 45 -- --
Restructuring charges........................ 9 16 --
Depreciation and amortization................ 96 75 54
---------- ---------- ---------
Operating income............................... 98 130 81
Interest and other expense, net.............. 36 29 16
---------- ---------- ---------
Income from continuing operations before income
taxes......................................... 62 101 65
Income tax expense........................... 31 38 16
---------- ---------- ---------
Income from continuing operations.............. 31 63 49
Discontinued operations:
Income from discontinued operations, net of
income taxes of $7 and $9 for 1996 and 1995,
respectively................................ -- 11 15
---------- ---------- ---------
Net income..................................... 31 74 64
---------- ---------- ---------
Preferred dividends............................ -- 3 6
---------- ---------- ---------
Income on common stock......................... $ 31 $ 71 $ 58
========== ========== =========
Earnings per common share
Continuing operations:
Basic........................................ $ 0.34 $ 0.73 $ 0.60
========== ========== =========
Diluted...................................... $ 0.32 $ 0.64 $ 0.53
========== ========== =========
Earnings per common share:
Basic........................................ $ 0.34 $ 0.86 $ 0.81
========== ========== =========
Diluted...................................... $ 0.32 $ 0.75 $ 0.69
========== ========== =========
Weighted average number of common shares:
Basic........................................ 91 83 71
Diluted...................................... 99 99 92
</TABLE>
The accompanying notes are an integral part of these statements.
D-99
<PAGE>
LCI INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................... $ -- $ 12
Trade accounts receivable, less allowance for doubtful
accounts of $52 and $30 for 1997 and 1996, respectively..... 190 121
Current deferred tax assets, net............................. 59 51
Prepaids and other........................................... 22 22
------ ------
Total current assets....................................... 271 206
------ ------
Property and equipment
Fiber-optic network.......................................... 558 450
Technology platforms, equipment and building lease........... 231 125
Less--accumulated depreciation and amortization.............. (206) (204)
------ ------
583 371
Property under construction.................................. 88 61
------ ------
Total property and equipment, net.......................... 671 432
------ ------
Other assets
Excess of cost over net assets acquired, net of accumulated
amortization of $38 and $28 for 1997 and 1996,
respectively................................................ 359 364
Other, net................................................... 53 51
------ ------
Total other assets......................................... 412 415
------ ------
Total assets............................................... $1,354 $1,053
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Accounts payable............................................. $ 43 $ 40
Facility costs accrued and payable........................... 154 135
Accrued expenses and other................................... 91 63
------ ------
Total current liabilities.................................. 288 238
------ ------
Long-term debt and capital lease obligations................. 413 252
------ ------
Other liabilities and deferred credits....................... 101 73
------ ------
Commitments and contingencies
Shareowners' equity
Preferred Stock--authorized 15 million shares, no shares
issued and outstanding in 1997 and 1996..................... -- --
Common Stock--authorized 300 million shares, issued and
outstanding 96 million shares in 1997 and 89 million shares
in 1996..................................................... 1 1
Paid-in capital.............................................. 511 480
Retained earnings............................................ 40 9
------ ------
Total shareowners' equity.................................... 552 490
------ ------
Total liabilities and shareowners' equity.................. $1,354 $1,053
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
D-100
<PAGE>
LCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PREFERRED COMMON
STOCK STOCK
--------- -------------------- RETAINED TOTAL
$.01 PAR ISSUED AND $.01 PAR PAID-IN EARNINGS SHAREOWNERS'
VALUE OUTSTANDING VALUE CAPITAL (DEFICIT) EQUITY
--------- ----------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... $115 69 $ 1 $242 $(104) $254
Acquisition of CTG...... -- 5 -- 93 -- 93
Employee stock purchases
and exercises of
options/warrants,
including related tax
benefits............... -- 1 -- 10 -- 10
Conversion/redemption of
Convertible Preferred
Stock.................. (1) -- -- 1 -- --
Other transactions...... -- -- -- 1 -- 1
Net income.............. -- -- -- -- 64 64
Preferred dividends..... -- -- -- -- (6) (6)
---- --- --- ---- ----- ----
BALANCE AT DECEMBER 31,
1995................... $114 75 $ 1 $347 $ (46) $416
---- --- --- ---- ----- ----
Employee stock purchases
and exercises of
options/warrants,
including related tax
benefits............... -- 2 -- 19 -- 19
Conversion/redemption of
Convertible Preferred
Stock.................. (114) 12 -- 114 -- --
Spin-off of Billing..... -- -- -- -- (16) (16)
Net income.............. -- -- -- -- 74 74
Preferred dividends..... -- -- -- -- (3) (3)
---- --- --- ---- ----- ----
BALANCE AT DECEMBER 31,
1996................... $-- 89 $ 1 $480 $ 9 $490
---- --- --- ---- ----- ----
Employee stock purchases
and exercises of
options/warrants,
including related tax
benefits............... -- 7 -- 31 -- 31
Net income.............. -- -- -- -- 31 31
---- --- --- ---- ----- ----
BALANCE AT DECEMBER 31,
1997................... $-- 96 $ 1 $511 $ 40 $552
---- --- --- ---- ----- ----
</TABLE>
The accompanying notes are an integral part of these statements.
D-101
<PAGE>
LCI INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Operating activities
Income from continuing operations...................... $ 31 $ 63 $ 49
Adjustments to income from continuing operations:
Depreciation and amortization........................ 96 75 54
Change in deferred taxes............................. 20 36 (1)
Merger and restructuring charges..................... 43 -- --
Change in assets/liabilities:
Trade accounts receivable............................ (16) (52) (67)
Net securitization activity.......................... (53) 112 --
Accounts payable and facility costs accrued and
payable............................................. 34 53 21
Other assets/liabilities............................. 32 21 (2)
------ ------ ------
Net cash provided by operating activities.......... 187 308 54
------ ------ ------
Net cash provided by discontinued operations....... -- 15 8
------ ------ ------
Investing activities
Capital expenditures--property and equipment......... (321) (156) (106)
Payment for acquisitions and other................... (17) (124) (79)
------ ------ ------
Net cash (used in) investing activities............ (338) (280) (185)
------ ------ ------
Financing activities
Proceeds from issuance of debt....................... 350 6 5
Net debt (payments) borrowings....................... (228) (48) 115
Preferred dividend payments.......................... -- (3) (6)
Proceeds from employee stock plans and warrants...... 17 14 9
------ ------ ------
Net cash provided by (used in) financing
activities........................................ 139 (31) 123
------ ------ ------
Change in cash and cash equivalents.................... (12) 12 --
------ ------ ------
Cash and cash equivalents at the beginning of the
year.................................................. 12 -- --
------ ------ ------
Cash and cash equivalents at the end of the year....... $ -- $ 12 $ --
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
D-102
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND PURPOSE
The financial statements presented herein include the Consolidated Balance
Sheets of LCI International, Inc., a Delaware corporation, and its wholly
owned subsidiaries (LCI or the Company) as of December 31, 1997 and 1996, and
the related Consolidated Statements of Operations, Shareowners' Equity and
Cash Flows for the three years ended December 31, 1997.
LCI is a facilities-based telecommunications carrier that provides a broad
range of domestic and international voice and data services to the commercial,
wholesale, residential/small business and local market segments, and operator
assisted services. The Company serves its customers primarily through owned
and leased digital fiber-optic facilities.
On December 22, 1997, the Company acquired USLD Communications Corp. (USLD)
in a stock-for-stock transaction that has been accounted for as a pooling of
interests. The Company exchanged approximately 12 million shares of its common
stock, par value $.01 per share (Common Stock) for all of the outstanding
shares of USLD common stock. The Company's Consolidated Financial Statements
have been restated to include the results for USLD, as though the companies
had always been a combined entity.
2. ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to the Consolidated Financial Statements for 1996 and 1995 to
conform with the 1997 presentation. In August 1996, USLD completed the spin-
off of its billing clearinghouse and information management services business,
Billing Information Concepts Corp. (Billing). The spin-off has been accounted
for as discontinued operations and, accordingly, the Company restated its
Consolidated Financial Statements for all periods presented prior to that date
in accordance with Accounting Principles Board Opinion (APB) No. 30. Financial
disclosures for all periods presented reflect that restatement.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company uses
its available cash to reduce the balance of its revolving credit facility
(Credit Facility) and generally maintains no cash on hand.
Trade Accounts Receivable
Trade accounts receivable represent amounts due from customers for
telecommunications services, less an allowance for uncollectible accounts.
Revenues and, therefore, trade accounts receivable, include amounts recognized
for services provided but not yet billed.
Accounts Receivable Securitization Program
In accordance with Statement of Financial Accounting Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the transfers of receivable balances meet the
criteria to be classified as a sale for accounting purposes. As such, amounts
sold under the
D-103
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accounts receivable securitization program (Securitization Program) are not
included in the accompanying Consolidated Financial Statements. The costs of
the Securitization Program are included in interest and other expense, net in
the accompanying Consolidated Statements of Operations. The cash proceeds are
included in operating activities in the accompanying Consolidated Statements
of Cash Flows.
Prepaids and Other
Prepaids and other assets include deferred customer promotion costs and
customer acquisition costs that are amortized over the estimated life of the
related contract term, and various other accounts and notes receivable
expected to be received within the next year.
Property and Equipment
These assets are stated at cost or at fair market value if obtained as part
of an acquisition. Construction costs include material, labor, interest and
overhead costs. Property and equipment as of December 31, 1997 and 1996
includes the net book value of $25 million and $9 million for a capitalized
building lease for the Company's operating subsidiaries' headquarters. Routine
repairs and maintenance of property and replacements of minor items are
charged to expense as incurred. Depreciation of buildings and equipment is
provided using the composite method over the estimated useful lives of these
assets. The cost of equipment retired in the ordinary course of business, less
proceeds, is charged to accumulated depreciation. The capitalized building
lease is amortized on a straight-line basis over the term of the lease.
The estimated depreciation and amortization periods by asset type:
<TABLE>
<CAPTION>
ASSET CATEGORY YEARS
-------------- -----
<S> <C>
Fiber-optic network:
Fiber-optic cable and buildings...................................... 30
Transmission, distribution and switching equipment................... 10-15
Installation costs................................................... 3
Technology platforms................................................... 5
Equipment:
Information systems--hardware and software........................... 3-5
General office equipment............................................. 5-10
Capitalized building lease............................................. 15
</TABLE>
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets acquired (goodwill) consists of the excess of
the cost to acquire an entity over the estimated fair market value of the net
assets acquired. Goodwill is amortized on a straight-line basis over 40 years.
The Company continually evaluates whether events and circumstances have
occurred which indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. If such an event has occurred, the Company estimates the sum of
the expected future cash flows, undiscounted and without interest charges,
derived from such goodwill over its remaining life. The Company believes that
no such impairment existed at December 31, 1997. Amortization of goodwill was
$10 million, $10 million and $5 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Other Assets
Other assets consist of debt issuance costs, rights-of-way, customer lists,
non-compete agreements and other deferred costs, which are amortized over the
estimated life or contract term of the agreement.
D-104
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Liabilities and Deferred Credits
Other liabilities and deferred credits primarily include long-term deferred
income taxes and other long-term liabilities. As of December 31, 1997 and
1996, net long-term deferred tax liabilities of $84 million and $56 million,
respectively, were included in other liabilities and deferred credits.
Revenue Recognition
Telecommunications revenues are recognized when services are provided and
are net of estimated credits and uncollectible amounts.
Advertising Cost
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," costs for advertising are expensed as incurred within the fiscal year.
If it is determined that the advertising costs will provide a future economic
benefit, the costs are capitalized and amortized over the period of benefit,
not to exceed one year.
Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes" (see Note
13).
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their
fair market value. The fair market value of long-term debt is discussed
further in Note 7.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. The risk is
limited due to the number of market segments, the large number of entities
comprising the Company's customer base and the dispersion of those entities
across many different industries and geographic regions. As of December 31,
1997, the Company had no significant concentrations of credit risk.
Statements of Cash Flows
Cash payments and significant non-cash activity:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Cash payments for interest............................ $ 30 $ 27 $ 17
Cash payments for income taxes........................ $ 4 $ 2 $ 3
Non-cash investing and financing activities:
Tax benefit recognized in connection with stock
option exercises................................... $ 12 $ 6 $ 1
Capital lease obligations incurred.................. $ 17 $ 1 $ --
Dividend pursuant to spin-off of Billing............ $ -- $ 34 $ --
</TABLE>
During 1997, the Company exchanged approximately 12 million shares of Common
Stock for all of the outstanding common stock of USLD to affect the business
combination, and 5 million shares of Common Stock were issued in connection
with the non-cash exercise of warrants. During 1996, shareowners converted
approximately 5 million shares of Convertible Preferred Stock into
approximately 12 million shares of Common Stock. During 1995, the Company
issued 5 million shares of Common Stock with a market value of approximately
$93 million, as partial consideration in a purchase acquisition.
D-105
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Pronouncements Not Yet Effective
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Both are required for
financial statements in fiscal years beginning after December 15, 1997.
SFAS No. 130 requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. As the Company does not currently have any components of
comprehensive income, it is not expected that this statement will affect the
Consolidated Financial Statements.
SFAS No. 131 requires entities to disclose financial and detailed
information about its operating segments in a manner consistent with internal
segment reporting used by the Company to allocate resources and assess
financial performance. The Company has not completed the analyses required to
determine the additional disclosures requirements, if any, for the adoption of
SFAS No. 131.
In anticipation of the year 2000 (Year 2000), management has developed a
plan to review software that was internally developed and/or externally
purchased or licensed for compliance with Year 2000 processing requirements.
In accordance with Emerging Issues Task Force Opinion No. 96-14, "Accounting
for the Costs Associated with Modifying Computer Software for the Year 2000,"
the Company will expense all costs as incurred.
3. MERGER & RESTRUCTURING
Merger
On December 22, 1997, the Company acquired USLD in a stock-for-stock
transaction that resulted in USLD becoming a wholly owned subsidiary of LCI.
Under the terms of the agreement, USLD shareholders received .7576 of a share
of Common Stock of the Company for each USLD share. Accordingly, the Company
issued approximately 12 million shares of Common Stock for all outstanding
shares of USLD common stock. Additionally, outstanding options and warrants to
acquire USLD common stock were converted to options and warrants to purchase
approximately 2 million shares of Common Stock of the Company.
The merger qualified as a tax-free reorganization and was accounted for as a
pooling of interests. Accordingly, the Company's financial statements have
been restated to include the accounts and operations of USLD for all periods
presented as though the two companies had always been a combined entity.
Combined and separate results of LCI and USLD during the periods preceding
the merger:
<TABLE>
<CAPTION>
LCI USLD COMBINED
------ ---- --------
(IN MILLIONS)
<S> <C> <C> <C>
Nine months ended September 30, 1997
Revenues............................................. $1,018 $178 $1,196
Net income........................................... $ 65 $ 4 $ 69
------ ---- ------
Year ended December 31, 1996
Revenues............................................. $1,103 $201 $1,304
Net income........................................... $ 75 $ (1) $ 74
------ ---- ------
Year ended December 31, 1995
Revenues............................................. $ 673 $151 $ 824
Net income........................................... $ 51 $ 13 $ 64
------ ---- ------
</TABLE>
D-106
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No adjustments were necessary to the combined financial results presented
above to conform the accounting policies of the two companies, other than
reclassifications of certain revenue and expense reporting to conform
financial statement presentation. There were no material intercompany
transactions between the two companies for the periods presented.
In connection with the merger, the Company recorded a $45 million one-time
merger charge during 1997. The charge included $7 million of transaction costs
for investment bank and other professional fees, $31 million for the
elimination of duplicate facilities and the write-off of assets, and $7
million for employee severance and termination costs.
Restructuring
In the fourth quarter of 1997, the Company recorded restructuring charges of
$8 million for the costs associated with relocation to the new headquarters
building and for employee severance and termination costs. In addition, during
the second quarter of 1997, there was a $1 million one-time charge by USLD for
the resignation of its former chairman of the board of directors.
In 1996, USLD charged $13 million for the direct spin-off costs related to
Billing. In addition, $3 million of restructuring charges were recorded for
the costs associated with consolidating support functions and the write-off of
assets.
4. ACQUISITIONS
The Company has supplemented growth from its base business with several
strategic acquisitions. Each acquisition during 1996 and 1995 was accounted
for as a purchase.
In January 1996, the Company purchased the long-distance business assets of
Teledial America, Inc. (Teledial America), which did business as U.S. Signal
Corporation, and an affiliated company, ATS Network Communications, Inc.
(ATS). The Company acquired both companies for approximately $99 million in
cash, and the amount of goodwill recorded in the purchase transactions was
$100 million. The results of operations for Teledial America and ATS were
included in the Consolidated Statement of Operations from January 1, 1996.
In September 1995, the Company acquired Corporate Telemanagement Group, Inc.
(CTG), for approximately $140 million in cash and Common Stock, and assumed
approximately $24 million in debt. The amount of goodwill recorded in the
purchase transaction was $157 million. The Consolidated Statements of
Operations include the results of CTG from September 1, 1995. The combination
of the operations of the Company and CTG provided pro forma net revenues of
$815 million, pro forma net income of $54 million and pro forma earnings per
common share of $0.63. The pro forma information is provided as if the
acquisition had occurred at the beginning of the 1995 fiscal year and is for
informational purposes only.
USLD had insignificant business combinations in 1997 and 1995 that were not
material for financial statement purposes.
5. DISCONTINUED OPERATIONS
In August 1996, USLD completed the spin-off of Billing. The spin-off has
been accounted for as discontinued operations and, accordingly, the Company
restated its Consolidated Financial Statements for all periods presented prior
to that date. The spin-off was a tax-free distribution of 100% of the common
stock of Billing to USLD's shareowners. Revenue of the discontinued operations
of Billing was $86 million and $81 million for the years ended December 31,
1996 and 1995, respectively. Basic and diluted earnings per share for
D-107
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
discontinued operations for the year ended December 31, 1996 were $0.13 and
$0.11, respectively, and for the year ended December 31, 1995 were $0.21 and
$0.16.
In connection with the spin-off, USLD distributed, for financial statement
purposes, a dividend of $16 million to record the net effect of forgiven
intercompany payable/receivable balances, the reimbursement by Billing of
direct spin-off costs, and the transfer of a working capital balance of $22
million to USLD. Direct spin-off costs of $13 million were included in
restructuring charges in the Consolidated Statements of Operations for the
year ended December 31, 1996. These costs included professional fees, tax
payments triggered by the spin-off, payments under employment agreements and
costs associated with accelerated stock grants.
6. ACCOUNTS RECEIVABLE SECURITIZATION
In August 1996, the Company entered into an agreement to sell a percentage
ownership interest in a defined pool of its trade accounts receivable
(Securitization Program). Under the Company's Securitization Program, LCI SPC
I, Inc. (SPC), a wholly owned, bankruptcy-remote subsidiary of the Company,
sells accounts receivable. Under this Securitization Program, the Company can
transfer an undivided interest in a designated pool of its accounts receivable
on an ongoing basis to maintain the participation interest up to a maximum of
$150 million. The accounts receivable balances sold, but not yet collected, of
approximately $59 million and $112 million at December 31, 1997 and 1996,
respectively, are not included in the accompanying Consolidated Balance
Sheets. SPC had approximately $130 million and $120 million of accounts
receivable available for sale as of December 31, 1997 and 1996. The cost of
the Securitization Program is based on a discount rate equal to the short-term
commercial paper rate plus certain fees and expenses. The Company retains
substantially all the same risk of credit loss as if the receivables had not
been sold, and has established reserves for such estimated credit losses.
Under the Securitization Program agreement, the Company acts as agent for
the purchaser of the receivables by performing recordkeeping and collection
functions on the interest sold and receives a fee providing adequate
compensation for such services. The agreement also contains certain covenants
regarding the quality of the accounts receivable portfolio, as well as
financial covenants that are substantially identical to those contained in the
Company's Credit Facility (see Note 7). Except in limited circumstances, SPC
is subject to certain contractual prohibitions concerning the payment of
dividends and the making of loans and advances to LCI.
7. DEBT
In June 1997, the Company issued $350 million of 7.25% Senior Notes (Notes),
which mature June 15, 2007. The net proceeds from the issuance of the Notes
were used to repay outstanding indebtedness and for working capital and
general corporate purposes. As of December 31, 1997, the fair market value of
the Notes was approximately $361 million.
The Company had approximately $10 million in various fixed-rate notes as of
December 31, 1997. These notes are expected to be repaid during early 1998.
Credit Facility
The Company has an aggregate $750 million revolving credit (Credit Facility)
from a syndicate of banks. The Credit Facility is comprised of two separate
facilities of $500 million and $250 million. The first facility has a term of
five years, while the second facility has a one-year term. Each facility may
be extended for a limited number of periods. Both facilities bear interest at
a rate consisting of two components: The base rate component is dependent upon
a market indicator; the second component varies from 0.30% to 0.75% based on
the more favorable of the relationship of borrowing levels to operating cash
flow (leverage ratio) or the Company's senior unsecured debt rating.
D-108
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Credit Facility contains various financial covenants, the most
restrictive being the leverage ratio requirement. As of December 31, 1997 and
1996, the Company was in compliance with all Credit Facility covenants. The
company had no outstanding balance under the Credit Facility as of December
31, 1997, compared to $215 million outstanding as of December 31, 1996. The
weighted average interest rate on the outstanding borrowings under the Credit
Facility as of December 31, 1996 was 6.09%. The carrying amount of the Credit
Facility approximates its fair value, as the underlying instruments are
variable rate notes that reprice frequently.
The Company also has an interest rate cap agreement with certain banks to
manage interest rate risk on the Credit Facility. The agreement is for a two-
year period ending February 1998 and limits the base interest rate exposure to
7.5% on $130 million notional principal balance of the Credit Facility. In the
event of non-performance by the banks, the Company would be obligated to make
the contractual payments under the Credit Facility, and would have exposure to
the extent of any increase in the base rate component above 7.5%. The Company
believes the probability of such an event is remote.
Lines of Credit
The Company has three separate discretionary line of credit agreements
(Lines of Credit) with commercial banks for a total of $75 million. The Lines
of Credit provide flexible short-term borrowing at competitive rates dependent
upon a market indicator. As of December 31, 1997 and 1996, the outstanding
balances under the Lines of Credit were $25 million and $8 million,
respectively, with interest rates of 6.26% and 5.93%, respectively.
The outstanding balance in the accompanying Consolidated Balance Sheets is
reflected in long-term debt, due to the borrowing availability under the
Credit Facility to repay such balances. The carrying value of the Lines of
Credit approximates its fair market value.
8. LEASES
The Company's capital leases primarily include two building leases, which
expire at various times through 2012. The noncurrent portions of all capital
lease obligations were $28 million and $13 million as of December 31, 1997 and
1996, respectively. The Company has operating leases for other office space
and equipment with lease terms from three to ten years with options for
renewals.
During 1996, the Company entered into an operating lease agreement for the
rental of a new corporate headquarters being developed in Arlington, Virginia.
This agreement has a three-year base term with two options to renew for one
year each. The agreement includes a maximum residual guarantee of $62 million
at the end of the base term, which is included in the minimum lease payments,
below. However, the Company expects to exercise the renewal options, which
will extend the lease term and defer the residual guarantee payment. The
property is owned by an unrelated entity that is leasing the facility to the
Company. The Company plans to occupy the building in June 1998.
D-109
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total expenses for operating leases for the years ended December 31, 1997,
1996 and 1995 were $15 million, $12 million and $9 million, respectively. The
Company is required, at a minimum, to make the following payments on capital
and operating leases:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(IN MILLIONS)
<S> <C> <C>
1998....................................................... $ 5 $ 19
1999....................................................... 5 80
2000....................................................... 5 14
2001....................................................... 5 11
2002....................................................... 5 10
Thereafter................................................. 28 49
--- ----
Total minimum lease payments............................... 53 $183
====
Less--amounts representing interest........................ 23
---
Capital lease obligations.................................. 30
Less--amounts due within one year.......................... 2
---
Noncurrent portion of capital lease obligations............ $28
===
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Capital Requirements
During 1998, the Company expects that its nonbinding commitment for capital
expenditures (excluding acquisitions) will increase from the levels expended
in 1997 and is dependent on the Company's geographic and revenue growth. The
Company's capital requirements are primarily for switching and transmission
facilities and technology platforms arising from the Company's strategic
expansion plans. In addition to its ongoing capital requirements, the Company
has entered into several agreements to extend its fiber-optic network. These
commitments will extend the Network throughout several geographic areas of the
United States, and are expected to require incremental capital expenditures of
approximately $250 million for fiber-optic capacity and related equipment. The
timing of payments will depend on the delivery and acceptance of facilities,
which are expected to be completed in the first half of 1998.
Vendor Agreements
The Company has agreements with certain interexchange carriers, LECs and
third-party vendors to lease facilities for originating, terminating and
transport services. Some agreements require the Company to maintain minimum
monthly and/or annual billings based on usage. The Company has met and expects
to continue to meet these minimum usage requirements.
During 1997, the Company amended an agreement with its largest provider of
leased and international services. Under the terms of the amended contract,
the Company is no longer obligated to use that carrier for its leased
facilities and the minimum usage commitments were significantly reduced. In
addition, the Company received a usage credit in exchange for agreeing to
increases in certain domestic and international switch services. The Company
expects to mitigate the impact of increased rates by applying the credit
against future use of services during the two-year agreement period, as well
as using alternative arrangements and strategic investments to reduce the
reliance on this third-party carrier.
Legal Matters
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has adequate accrued loss contingencies.
D-110
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Although the ultimate outcome of these claims cannot be ascertained at this
time, in management's opinion, current pending or threatened litigation
matters will not have a material adverse impact on the Company's results of
operations or financial condition.
10. SHAREOWNERS' EQUITY
Preferred Stock
In January 1997, the Board of Directors adopted a shareholder rights
agreement (Rights Agreement) designed to ensure that shareowners receive fair
and equal treatment in the event of a proposed takeover of the Company. One
preferred share purchase right (Right) has been attached to each share of the
Company's Common Stock to shareowners of record on January 22, 1997 (and all
subsequently issued shares) and, until distributed, may be transferred only
with the Common Stock. Each Right, when exercisable, represents the right to
purchase one one-thousandth of a share of a newly issued series of preferred
stock of the Company, designated as Junior Participating Preferred Stock, par
value $.01 per share or, in certain circumstances, to purchase shares of
Common Stock at less than the prevailing market price. The exercise price is
$100 per Right, the redemption price is $.01 per Right, and the Right expires
on January 22, 2007. The Rights will be distributed and become exercisable
only in the event that any person or entity, together with its affiliates or
associates, acquires more than a certain specified percentage of Common Stock
of the Company.
On September 3, 1996, the remaining outstanding shares of the Company's
previously outstanding 5% Cumulative Convertible Exchangeable Preferred Stock
(Convertible Preferred Stock) were redeemed by the Company. Preferred
dividends, cumulative from the date of issuance, were paid quarterly at an
annual rate of $1.25 per share on the outstanding shares until redemption.
Prior to redemption, shareowners converted 4.6 million shares of Convertible
Preferred Stock into 12.1 million shares of Common Stock.
Common Stock
In December 1997, the Company issued 12.4 million shares of Common Stock in
connection with the merger of USLD with LCI Acquisition Corp., a wholly owned
subsidiary of the Company. In September 1995, the Company issued 4.6 million
shares of Common Stock to purchase CTG.
Common Stock Warrants
In 1993, the Company issued warrants for 5.4 million shares of Common Stock,
at $2.83 per share. During 1997 and 1996, respectively, warrant holders
exercised 5.2 million and 0.2 million warrants for an aggregate amount of 4.6
million and 0.2 million shares of Common Stock. As of December 31, 1997, all
Common Stock warrants had been exercised. USLD had granted warrants to
purchase shares of Common Stock pursuant to telecommunications service
agreements in 1992, 1995 and 1997. Pursuant to the merger agreement, each
outstanding warrant was converted into a warrant to purchase Common Stock of
LCI based on the conversion ratio stated in the terms of the merger agreement.
As of December 31, 1997, approximately 0.2 million of these warrants were
outstanding.
Employee Benefit Plans
The Company maintains a defined contribution retirement plan for its
employees. Under this plan, eligible employees may contribute a percentage of
their base salary, subject to certain limitations. Beginning in 1994, the
Company elected to match a portion of the employees' contributions. The
expense of the Company's matching contribution was approximately $1 million
for each year ending December 31, 1997, 1996 and 1995.
D-111
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCENTIVE STOCK PLANS
Stock Options
The Company has stock option plans under which options to purchase shares of
Common Stock may be granted to directors and key employees. Under the plans,
the Company may grant incentive stock options (ISOs), as defined by the
Internal Revenue Code, or non-qualified options (NQOs). Stock options
generally have a five-year vesting period. In the event of a change in control
of the Company, all options outstanding would become 100% exercisable. Under
the plans, options expire up to 10 years after the date of the grant and
shares of Common Stock underlying surrendered options may be re-granted by the
Board of Directors. Options that had been issued pursuant to USLD option plans
were converted to options to purchase Common Stock of LCI based on the
conversion ratio stated in the terms of the merger agreement. Upon the
effective date of the merger, all USLD options became fully vested and
exercisable, but otherwise have the same terms and conditions in effect prior
to the merger.
The option price under all plans is fixed at the discretion of the
compensation committee of the Board of Directors at the time of grant. During
1997, 1996 and 1995, the option prices for all options granted were the fair
market value of the shares on the date of grant. As of December 31, 1997,
there were 18 million options authorized under the Company's stock option
plans.
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF EXERCISABLE AVERAGE
SHARES OPTIONS EXERCISE PRICE
------ ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
OUTSTANDING AS OF DECEMBER 31, 1994...... 7 3 $ 5.28
Options granted.......................... 4 12.49
Options exercised........................ (1) 6.52
Options surrendered...................... (1) 14.09
--- --- ------
OUTSTANDING AS OF DECEMBER 31, 1995...... 9 4 7.37
--- --- ------
Options granted.......................... 3 18.92
Options exercised........................ (1) 7.17
Options surrendered...................... -- 16.66
--- --- ------
OUTSTANDING AS OF DECEMBER 31, 1996...... 11 5 10.27
--- --- ------
Options granted.......................... 4 19.76
Options exercised........................ (2) 5.18
Options surrendered...................... (1) 19.67
--- --- ------
OUTSTANDING AS OF DECEMBER 31, 1997...... 12 7 $13.44
--- --- ------
Options available for grant as of
December 31, 1997....................... 4
</TABLE>
The following table presents information for the 12 million options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
PRICE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
-------- --------- -------- ------------ ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$ 0.17 -
$ 2.83 1 $ 2.00 4 1 $ 2.00
$ 4.56 -
$ 8.91 3 $ 6.93 5 2 $ 6.88
$ 9.75 -
$11.21 2 $ 11.05 7 2 $ 10.94
$11.25 -
$19.31 3 $ 18.68 8 1 $ 15.55
$19.35 -
$35.13 3 $ 22.62 8 1 $ 22.65
</TABLE>
D-112
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (ESPP) that enables
substantially all employees to purchase shares of Common Stock on monthly
offering dates at a purchase price equal to the lesser of 85% of the fair
market value of the Common Stock on the date of its purchase or 85% of the
fair market value of the Common Stock, as established at intervals from time
to time. In August 1997, the Company amended the ESPP to extend the offering
period through February 2000 or until shares authorized under the ESPP are
exhausted. A maximum of 1.8 million shares of Common Stock were authorized for
purchase under the ESPP. During 1997, 1996 and 1995, respectively, 0.4
million, 0.3 million and 0.2 million shares were issued under the ESPP at
average prices of $19.02, $24.64 and $11.59. As of December 31, 1997, the
amount of Common Stock available for issuance under the ESPP was 0.7 million
shares.
Stock-Based Compensation Plans
The Company follows the requirements of APB No. 25 to account for its stock
option plans and ESPP and, accordingly, no compensation cost is recognized in
the Consolidated Statements of Operations for these plans. In 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
requires certain disclosures about stock-based employee compensation
arrangements. SFAS No. 123 requires pro forma disclosure of the impact on net
income and earnings per share if the fair value method defined in SFAS No. 123
had been used.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model, with the following weighted
average assumptions used for grants in 1997, 1996 and 1995, respectively:
risk-free interest rates of 6.2%, 5.7% and 6.7% for the stock option plans and
5.6%, 5.5% and 5.6% for the ESPP; no expected dividend yields; expected lives
of 5.2 years, 3.9 years and 4.0 years for the stock option plans and 0.7
years, 1.5 years and 2.2 years for the ESPP; and expected volatility of 46.7%,
39.6% and 48.3% for the stock option plans and 44.1%, 45.3% and 47.5% for the
ESPP. The weighted compiled average fair values of options granted during
1997, 1996 and 1995 for the stock option plans were $8.48, $6.69 and $4.53,
respectively, and for the employee stock purchase plan were $6.02, $9.48 and
$7.17, respectively.
Pro forma net income, as if the fair value method had been applied, was $15
million, $66 million and $60 million for the years ended December 31, 1997,
1996 and 1995, respectively. The pro forma earnings per share on a diluted
basis for the same periods were $0.16, $0.66 and $0.65.
In accordance with SFAS No. 123, the fair value method was not applied to
options granted prior to January 1, 1995. The resulting pro forma impact may
not be representative of results to be expected in future periods and is not
reflective of actual stock performance.
D-113
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. EARNINGS PER SHARE
In February 1997, SFAS No. 128, "Earnings per Share," was issued, which
required the Company to change the method used to calculate earnings per
share. Basic earnings per share were calculated as income available to common
shareowners divided by the weighted average number of common shares
outstanding. Diluted earnings per share were calculated as net income divided
by the diluted weighted average number of common shares. Diluted weighted
average number of common shares was calculated using the treasury stock method
for Common Stock equivalents, which included Common Stock issuable pursuant to
stock options, Common Stock warrants and Convertible Preferred Stock. The
following is provided to reconcile the earnings per share calculations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
INCOME:
Net income............................................ $ 31 $ 74 $ 64
Less--preferred dividends........................... -- (3) (6)
------ ------ ------
Income available to common shareowners................ $ 31 $ 71 $ 58
====== ====== ======
Shares:
Weighted average shares (Basic)....................... 91 83 71
------ ------ ------
Effect of dilutive securities:
Stock options....................................... 4 6 5
Warrants............................................ 4 5 4
Convertible Preferred Stock......................... -- 5 12
------ ------ ------
Diluted weighted average shares....................... 99 99 92
------ ------ ------
PER SHARE AMOUNTS:
Basic earnings per share.............................. $ 0.34 $ 0.86 $ 0.81
====== ====== ======
Diluted earnings per share............................ $ 0.32 $ 0.75 $ 0.69
====== ====== ======
</TABLE>
13. INCOME TAXES
Income tax expenses for the years ended December 31, 1997, 1996 and 1995,
consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current tax expense (benefit):
Federal................................................... $ 1 $ 3 $ (4)
State..................................................... 3 1 --
Deferred tax expense:
Increase in deferred tax liability........................ 22 4 5
Decrease in deferred tax asset............................ 5 38 27
Decrease in valuation allowance........................... -- (8) (12)
--- --- ----
Income tax expense....................................... $31 $38 $ 16
=== === ====
</TABLE>
The decrease in the valuation allowance in 1996 and 1995 resulted from the
Company's realization of its net operating loss (NOL) carryforwards based on
the Company's growth in recurring operating income.
D-114
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company pays state income taxes on the greater of a net worth basis or
an income basis in a majority of the states in which it operates. The Company
records state deferred tax assets and liabilities, net of its federal benefit,
at an average blended rate of 4%.
The effective income tax rate varies from the federal statutory rate for the
years ended December 31, 1997, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense at federal statutory
income tax rate.......................... $ 22 35% $ 35 35% $ 23 35%
Effect of:
State income tax expense................ 2 3 5 5 2 3
Merger-related expenses................. 5 9 -- -- -- --
Non-deductible expenses................. 2 3 4 4 1 2
Change in valuation allowance........... -- -- (8) (8) (12) (18)
Other, net.............................. -- -- 2 2 2 3
---- --- ---- --- ---- ---
Income tax expense.................... $ 31 50% $ 38 38% $ 16 25%
==== === ==== === ==== ===
</TABLE>
The significant items giving rise to the deferred tax (assets) and
liabilities as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities:
Property and equipment..................................... $ 65 $ 42
Acquisition related........................................ 26 24
Deferred expenses.......................................... 4 3
------ ------
Total deferred tax liabilities........................... 95 69
------ ------
Deferred tax (assets):
Other loss contingencies................................... (2) (6)
Property and other taxes................................... (8) (4)
Accrued expenses........................................... (9) (5)
Acquired assets............................................ (5) (5)
NOLs and tax credit carryforwards.......................... (46) (44)
------ ------
Total deferred tax (assets).............................. (70) (64)
------ ------
Net deferred tax liability............................. $ 25 $ 5
====== ======
</TABLE>
The Company's 1997 deferred income tax balances were included in current
deferred tax assets, net of $59 million, and in other liabilities and other
deferred credits of $84 million. The 1996 deferred income tax balances were
included in current deferred tax assets, net of $51 million, and in other
liabilities and other deferred credits of $56 million.
The Company has generated significant NOLs that may be used to offset future
taxable income. Each year's NOL has a maximum 15-year carryforward period. The
Company's ability to fully use its NOL carryforwards is dependent on future
taxable income. As of December 31, 1997, the Company has NOL carryforwards of
$104 million for income tax return purposes subject to various expiration
dates beginning in 1998 and ending in 2010. The future tax benefit of these
NOL carryforwards of $43 million and $41 million in 1997 and 1996,
respectively, has been recorded as a deferred tax asset.
D-115
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of
operations for the two years ended December 31:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ------------ ----------- -------------
(IN MILLIONS, EXCEPT EARNINGS PER COMMON SHARE)
<S> <C> <C> <C> <C>
Revenues................ $ 368 $ 399 $ 430 $ 446
Cost of services........ 219 240 256 271
----------- ----------- ----------- -------------
Gross margin.......... 149 159 174 175
Selling, general and
administrative
expenses............... 84 90 98 136
Merger charges.......... -- -- 1 44
Restructuring charges... -- 1 -- 8
Depreciation and
amortization........... 21 23 26 25
----------- ----------- ----------- -------------
Operating income
(loss)............... 44 45 49 (38)
Interest and other
expense, net........... 7 7 9 13
----------- ----------- ----------- -------------
Income (loss) before
income taxes......... 37 38 40 (51)
Income tax expense
(benefit).............. 15 15 16 (14)
----------- ----------- ----------- -------------
Net income (loss)..... 22 23 24 (37)
----------- ----------- ----------- -------------
EARNINGS PER COMMON
SHARE
Earnings per share--
basic................ $ 0.25 $ 0.25 $ 0.27 $ (0.39)
----------- ----------- ----------- -------------
Earnings per common
share--diluted....... $ 0.22 $ 0.23 $ 0.24 $ (0.39)
----------- ----------- ----------- -------------
Basic weighted average
shares............... 89 90 91 95
----------- ----------- ----------- -------------
Diluted weighted
average shares....... 99 98 99 95(a)
----------- ----------- ----------- -------------
<CAPTION>
1996
--------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ------------ ----------- -------------
(IN MILLIONS, EXCEPT EARNINGS PER COMMON SHARE)
<S> <C> <C> <C> <C>
Revenues................ $ 297 $ 321 $ 341 $ 344
Cost of services........ 180 193 201 203
----------- ----------- ----------- -------------
Gross margin.......... 117 128 140 141
Selling, general and
administrative
expenses............... 70 75 81 80
Restructuring charges... -- 7 9 --
Depreciation and
amortization........... 17 18 20 20
----------- ----------- ----------- -------------
Operating income...... 30 28 30 41
Interest and other
expense, net........... 8 7 8 6
----------- ----------- ----------- -------------
Income before income
taxes.................. 22 21 22 35
Income tax expense.... 8 7 10 12
----------- ----------- ----------- -------------
Income from continuing
operations............. 14 14 12 23
Discontinued
operations............. 5 4 2 --
----------- ----------- ----------- -------------
Net income............ 19 18 14 23
Income on common
stock................ $ 18 $ 17 $ 14 $ 23
----------- ----------- ----------- -------------
EARNINGS PER COMMON
SHARE
Earnings per common
share--basic......... $ 0.23 $ 0.21 $ 0.16 $ 0.26
----------- ----------- ----------- -------------
Earnings per common
share--diluted....... $ 0.20 $ 0.18 $ 0.14 $ 0.23
----------- ----------- ----------- -------------
Basic weighted average
shares............... 77 81 86 89
----------- ----------- ----------- -------------
Diluted weighted
average shares....... 98 99 99 100
----------- ----------- ----------- -------------
</TABLE>
- --------
(a) Common Stock equivalents were antidilutive and therefore excluded from
weighted average shares.
D-116
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENT
On March 8, 1998, the Company entered into a merger agreement with Qwest
Communications International Inc. (Qwest) and a subsidiary of Qwest pursuant
to which LCI will become a wholly owned subsidiary of Qwest. The all-stock
transaction is valued at approximately $4.4 billion. Under the terms of the
agreement, each of the outstanding shares of the Company's common stock, par
value $.01 per share, will be converted into $42 of Qwest common stock,
subject to certain exceptions. The number of shares of Qwest common stock to
be exchanged for each share of the Company's common stock will be determined
by dividing $42 by a 15-day volume weighted average of trading prices for
Qwest common stock prior to the closing, but will not be less than 1.0625
shares (if Qwest's average stock price exceeds $39.53) or more than 1.5583
shares (if Qwest's average stock price is less than $26.95). The Company may
terminate the merger agreement if Qwest's average stock price is less than
$26.95, unless Qwest then agrees to exchange for each share of common stock of
the Company the number of Qwest shares determined by dividing $42 by such
average price. The merger is intended to qualify as a tax-free reorganization
and will be accounted for as a purchase. It is anticipated that the merger
will occur by the end of the third quarter of 1998. The transaction is subject
to the majority vote of the outstanding shares of Qwest and LCI and to other
customary conditions such as receipt of regulatory approvals. The majority
shareholder of Qwest has entered into an agreement to vote in favor of the
merger. There can be no assurances that the conditions to closing of the
merger will be met.
D-117
<PAGE>
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN MILLIONS, EXCEPT FOR PER SHARE AMOUNTS) (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
REVENUES........................................................... $ 448 $ 368
Cost of services................................................... 259 219
----- -----
GROSS MARGIN....................................................... 189 149
Selling, general and administrative expenses....................... 106 84
Depreciation and amortization...................................... 27 21
----- -----
OPERATING INCOME................................................... 56 44
Interest and other expense, net.................................... 8 7
----- -----
INCOME BEFORE INCOME TAXES......................................... 48 37
Income tax expense................................................. 19 15
----- -----
NET INCOME......................................................... $ 29 $ 22
===== =====
PER SHARE DATA
Earnings Per Common Share
Basic............................................................ $0.30 $0.25
===== =====
Diluted.......................................................... $0.29 $0.22
===== =====
Weighted Average Number of Common Shares
Basic............................................................ 97 89
===== =====
Diluted.......................................................... 102 99
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
D-118
<PAGE>
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Trade accounts receivable, net.......................... $ 164 $ 190
Current deferred tax assets, net........................ 51 59
Prepaids and other...................................... 25 22
------ ------
Total current assets.................................. 240 271
------ ------
Property and Equipment:
Fiber optic network..................................... 593 558
Technology platforms, equipment and building leases..... 255 231
Less--Accumulated depreciation and amortization......... (224) (206)
------ ------
624 583
Property and equipment under construction............... 118 88
------ ------
Total property and equipment, net..................... 742 671
------ ------
Other Assets:
Excess of cost over net assets acquired, net............ 356 359
Other, net.............................................. 61 53
------ ------
Total other assets.................................... 417 412
------ ------
Total Assets.......................................... $1,399 $1,354
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 64 $ 43
Facility costs accrued and payable...................... 127 154
Accrued expenses and other.............................. 111 91
------ ------
Total current liabilities............................. 302 288
------ ------
Long-term Debt and Capital Lease Obligations.............. 395 413
------ ------
Other Liabilities and Deferred Credits.................... 103 101
------ ------
Commitments and Contingencies
Shareowners' Equity:
Preferred Stock--Authorized 15 shares, no shares issued
and outstanding........................................ -- --
Common stock--Authorized 300 million shares, issued and
outstanding 97 million shares as of March 31, 1998 and
96 million shares as of December 31, 1997.............. 1 1
Paid-in capital......................................... 529 511
Retained earnings....................................... 69 40
------ ------
Total shareowners' equity............................. 599 552
------ ------
Total Liabilities and Shareowners' Equity............. $1,399 $1,354
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
D-119
<PAGE>
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN MILLIONS) (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
ISSUED AND $.01 PAR PAID- RETAINED
OUTSTANDING VALUE IN CAPITAL EARNINGS TOTAL
----------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.... 96 $ 1 $511 $ 40 $552
Employee stock purchases and
exercise of options/warrants,
including related tax
benefits....................... 1 -- 18 -- 18
Net Income...................... -- -- -- 29 29
---- ---- ---- ---- ----
BALANCE AT MARCH 31, 1998....... 97 $ 1 $529 $ 69 $599
==== ==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of this statement.
D-120
<PAGE>
LCI INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN MILLIONS) (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities......................... $ 78 $ 41
---- ----
INVESTING ACTIVITIES:
Capital expenditures.............................................. (97) (47)
Other payments.................................................... -- (6)
---- ----
Net cash used in investing activities........................... (97) (53)
---- ----
FINANCING ACTIVITIES:
Net debt borrowings............................................... 5 3
Proceeds from employee stock plans and warrants................... 14 6
---- ----
Net cash provided by financing activities....................... 19 9
---- ----
Net increase (decrease) in cash and cash equivalents............ -- (3)
---- ----
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD............ -- 12
---- ----
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD.................. $-- $ 9
==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
D-121
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)
(1) GENERAL
The results of operations for the interim periods shown are not necessarily
indicative of results to be expected for the fiscal year. In the opinion of
management, the information contained herein reflects all adjustments
necessary to make a fair statement of the results for the three months ended
March 31, 1998 and 1997. All such adjustments are of a normal recurring
nature.
(2) BUSINESS ORGANIZATION AND PURPOSE
The financial statements presented herein are for LCI International, Inc., a
Delaware corporation, and its subsidiaries (collectively LCI or the Company).
Included are the condensed consolidated statements of operations for the three
months ended March 31, 1998 and 1997, the condensed consolidated balance
sheets as of March 31, 1998 and December 31, 1997, the condensed consolidated
statement of shareowners' equity for the three months ended March 31, 1998,
and the condensed consolidated statements of cash flows for the three months
ended March 31, 1998 and 1997.
LCI is a facilities-based telecommunications company that provides voice and
data transmission services to business, residential and local customers, as
well as other telecommunications carriers, throughout the United States and
international locations. The Company serves its customers through owned and
leased digital fiber-optic facilities (the Network).
(3) ACCOUNTING POLICIES
Note 2 of the Notes to Consolidated Financial Statements in LCI's 1997
Annual Report to Shareowners summarizes the Company's significant accounting
policies.
Principles of Consolidation. The accompanying Condensed Consolidated
Financial Statements (Unaudited) include the accounts of LCI and its wholly
owned subsidiaries. All material intercompany transactions and balances have
been eliminated. In December 1997, the Company acquired USLD Communications
Corp. (USLD) and accounted for the acquisition as a pooling of interests. The
Company's Condensed Consolidated Financial Statements have been restated to
include the results for USLD, as though the companies had always been a
combined entity.
(4) ACCOUNTS RECEIVABLE SECURITIZATION
Under the Company's agreement to sell a percentage ownership interest in a
defined pool of its trade accounts receivable (Securitization Program), LCI
SPC I, Inc. (SPC), a bankruptcy-remote subsidiary of the Company, sells
accounts receivable. Receivables sold are not included in the accompanying
condensed consolidated balance sheets as of March 31, 1998 and December 31,
1997. SPC had approximately $140 million of accounts receivable available for
sale and had sold, but not yet collected, a total of approximately $100
million as of March 31, 1998. The Company retains substantially the same risk
of credit loss as if the receivables had not been sold, and has established
reserves for such estimated credit losses.
Under the Securitization Program, the Company acts as agent for the
purchaser of the receivables by performing recordkeeping and collection
functions on the participation interest sold. The agreement also contains
certain covenants regarding the quality of the accounts receivable portfolio,
as well as financial covenants which are substantially identical to those
contained in the Company's Revolving Credit Facility (See Note 5). Except in
certain limited circumstances, SPC is subject to certain contractual
prohibitions concerning the payment of dividends and the making of loans and
advances to LCI.
D-122
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998 (UNAUDITED)
(5) DEBT AGREEMENTS
In June 1997, the Company issued $350 million of 7.25% Senior Notes (Notes),
which mature on June 15, 2007. The net proceeds from the issuance of the Notes
were used to repay outstanding indebtedness and for working capital and
general corporate purposes.
The Company also has a $750 million Revolving Credit Facility (Credit
Facility) from a syndicate of banks. The Credit Facility is comprised of two
separate facilities of $500 million and $250 million. The first facility has a
term of five years, while the second facility has a one-year term. Each
facility may be extended for a limited number of periods. Both facilities bear
interest at a rate consisting of two components: The base rate component is
dependent upon a market indicator; the second component varies from 0.30% to
0.75% based on the more favorable of the relationship of borrowings levels to
operating cash flow (leverage ratio) or senior unsecured debt rating. As of
March 31, 1998, the Company had no outstanding balance under the Credit
Facility. The Credit Facility contains various financial covenants, the most
restrictive being the leverage ratio requirement. As of March 31, 1998, the
Company was in compliance with all Credit Facility covenants.
The Company has three separate Discretionary Line of Credit Agreements
(Lines of Credit) with commercial banks for a total of $75 million. As of
March 31, 1998, there was a $14 million outstanding balance on the Lines of
Credit. In addition, the Company had approximately $3 million in various
fixed-rate notes as of March 31, 1998.
(6) COMMITMENTS AND CONTINGENCIES
Vendor Agreements. The Company has agreements with certain
telecommunications interexchange carriers and third party vendors that require
the Company to maintain minimum monthly and/or annual billings based on usage.
The Company has historically met all minimum billing requirements and believes
the minimum usage commitments will continue to be met.
Capital Requirements. During 1998, the Company expects its nonbinding
commitment for capital expenditures, which is dependent on the Company's
geographic and revenue growth, to increase from the level expended in 1997.
The Company's on-going capital requirements are primarily for switching and
transmission facilities and technology platforms arising from the Company's
strategic expansion plans.
In addition to its ongoing capital requirements, the Company has entered
into several agreements to extend its fiber-optic network. These commitments
will extend the Network throughout several geographic areas of the United
States, and are expected to require incremental capital expenditures of
approximately $270 million for fiber-optic capacity and related equipment.
During the first quarter of 1998, the Company made progress payments totaling
$14 million to expand its Network between Cleveland, Ohio and New York, New
York; Chicago, Illinois and Los Angeles, California; and Dallas, Texas and
Washington, D.C. The timing of other payments will depend on the delivery and
acceptance of facilities, which is expected to be completed in 1998.
Proposed Merger. On March 8, 1998, the Company entered into a merger
agreement with Qwest Communications International Inc. (Qwest) and a
subsidiary of Qwest pursuant to which the Company will become a wholly owned
subsidiary of Qwest. The all-stock transaction is valued at approximately $4.4
billion. Under the terms of the agreement, each of the outstanding shares of
the Company's common stock, par value $.01 per share, will be converted into
$42 of Qwest common stock, subject to certain exceptions. The number of shares
of Qwest common stock to be exchanged for each share of the Company's common
stock will be determined by dividing $42 by a 15-day volume weighted average
of trading prices for Qwest common stock prior to the closing, but will not be
less than 1.0625 shares (if Qwest's average stock price exceeds $39.53) or
D-123
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998 (UNAUDITED)
more than 1.5583 shares (if Qwest's average stock price is less than $26.95).
The Company may terminate the merger agreement if Qwest's average stock price
is less than $26.95, unless Qwest then agrees to exchange for each share of
common stock of the Company the number of Qwest shares determined by dividing
$42 by such average price. The merger is intended to qualify as a tax-free
reorganization and will be accounted for as a purchase. It is anticipated that
the merger will occur by the second or third quarter of 1998. The transaction
is subject to the majority vote of the outstanding shares of Qwest and LCI and
to other customary conditions such as receipt of regulatory approvals. The
majority shareholder of Qwest has entered into an agreement to vote in favor
of the merger. There can be no assurances that the conditions to closing the
merger will be met; however the Company does not currently anticipate any
impediments to completing the merger.
Legal Matters. The Company has been named as a defendant in various
litigation matters incident to the character of its business. In addition, the
Company, certain of its directors, and Qwest have been named as defendants in
suits in connection with the Qwest merger agreement. Management intends to
vigorously defend these outstanding claims. The Company believes it has
adequate accrued loss contingencies and that current or threatened litigation
matters will not have a material adverse impact on the Company's results of
operations or financial condition.
(7) SHAREOWNERS' EQUITY
Rights Agreement and Preferred Stock. In January 1997, the Company adopted a
shareholder rights agreement (Rights Agreement), designed to ensure that its
shareowners receive fair and equal treatment in the event of any proposed
takeover of the Company. One preferred share purchase right (Right) has been
attached to each share of the Company's Common Stock and, until distributed,
may be transferred only with the Common Stock. The Rights will be distributed
and become exercisable only in the event that any person or entity, together
with its affiliates or associates, acquires more than a certain percentage of
Common Stock of the Company. As of March 31, 1998, no such preferred stock was
issued or outstanding. On March 8, 1998 the Company's Board of Directors
approved an amendment to exempt the proposed merger with Qwest from the
application of the Rights Agreement.
Common Stock. The Company has stock option plans that grant options to
purchase shares of Common Stock to directors and key employees. During the
three months ended March 31, 1998, the Company granted options to purchase
approximately 3 million shares of Common Stock. The option price for all
options granted was the fair market value of the shares on the date of grant.
The Company issued 1 million shares of Common Stock during the three months
ended March 31, 1998 pursuant to options exercised under all stock option
plans. The stock option plans contain a provision which accelerates vesting in
the event of a change in control of the Company. The merger with Qwest, as
proposed, would result in accelerated vesting of the Company's options
outstanding.
The Company also has an Employee Stock Purchase Plan and a defined
contribution retirement plan for its employees which allow participants to
invest in Common Stock of the Company. The Company issued approximately 0.1
million of Common Stock under these employee benefit plans during the three
months ended March 31, 1998.
D-124
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998 (UNAUDITED)
(8) INCOME TAXES
The provision for income taxes for the three months ended March 31, 1998 and
1997, consists of:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
------- -------
(IN MILLIONS)
<S> <C> <C>
Current tax expense:
Federal.................................................. $ 4 $ 1
State.................................................... 1 1
------- -------
Total current tax expense.............................. 5 2
------- -------
Deferred tax expense:
Increase in deferred tax liabilities..................... 2 1
Decrease in deferred tax asset........................... 12 12
------- -------
Total deferred tax expense............................. 14 13
------- -------
Total income tax expense............................... $ 19 $ 15
======= =======
</TABLE>
The effective income tax rate varies from the Federal statutory income tax
rate for the three months ended March 31, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Expected tax expense at federal statutory income tax
rate: 35% 35%
Effect of:
State income tax expense............................ 4 4
Non-deductible expenses............................. 1 1
Other, net.......................................... (1) --
------- -------
Income tax expense.................................... 39% 40%
======= =======
</TABLE>
The effective tax rate of 39% and 40% for the three months ended March 31,
1998 and 1997, respectively, represents the Company's estimated effective tax
rate for the periods. This effective tax rate is adjusted quarterly based on
the Company's estimate of future taxable income.
The Company has generated significant net operating losses (NOLs) that may
be used to offset future taxable income. Each NOL has a maximum 15-year
carryforward period. The Company's ability to fully use its NOL carryforwards
is dependent upon future taxable income. As of March 31, 1998, the Company had
NOL carryforwards for income tax purposes of $74 million, subject to various
expiration dates from 2000 to 2010. The Company believes the utilization of
such NOLs is likely.
The Company's deferred income tax balances include $50 million in current
deferred tax assets, net and $86 million in other noncurrent liabilities as of
March 31, 1998. As of December 31, 1997, deferred income tax balances included
$59 million in current deferred tax assets, net and $84 million in other
noncurrent liabilities.
D-125
<PAGE>
LCI INTERNATIONAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998 (UNAUDITED)
9. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which changed
the method used to calculate earnings per share. Basic earnings per share has
been calculated as income available to common shareowners divided by the
weighted average number of common shares outstanding. Diluted earnings per
share has been calculated as net income divided by the diluted weighted
average number of common shares. Diluted weighted average number of common
shares has been calculated using the treasury stock method for Common Stock
equivalents, which includes Common Stock issuable pursuant to stock options
and Common Stock warrants. The following is provided to reconcile the earnings
per share calculations:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
---------- ----------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Income:
Net income.......................................... $ 29 $ 22
========== ==========
Shares:
Weighted average shares (Basic)..................... 97 89
Effect of dilutive securities:
Stock options................................... 5 5
Warrants........................................ -- 5
Diluted weighted average shares....................... 102 99
========== ==========
Per Share Amounts:
Basic earnings per share............................ $ 0.30 $ 0.25
========== ==========
Diluted earnings per share.......................... $ 0.29 $ 0.22
========== ==========
</TABLE>
Options to purchase 0.1 million and 2.4 million shares of Common Stock were
outstanding but not included in the computation of diluted earnings per share
during the three months ended March 31, 1998 and 1997, respectively. The
options were excluded because the exercise price of such options was greater
than the average market price of the Common Stock for the period.
D-126
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Phoenix Network, Inc.
We have audited the accompanying consolidated balance sheets of Phoenix
Network, Inc. (a Delaware Corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Phoenix
Network, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements as of December 31, 1997
and 1996, have been prepared assuming that the Company will continue as a
going concern. However, the Company has sustained substantial losses from
operations in recent years and has continually used, rather than provided,
cash in its operations. Such losses, and other items discussed in note B,
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Management's plans in
regard to these matters are also discussed in note B.
GRANT THORNTON LLP
Denver, Colorado
February 19, 1998
D-127
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................ $ 1,548,061 $ 447,983
Accounts receivable, net of allowance for
doubtful accounts of $3,600,830 in 1996 and
$1,280,444 in 1997.............................. 14,419,829 9,623,721
Prepaid carrier costs............................ -- 1,274,790
Deferred commissions............................. 969,940 405,329
Other current assets............................. 686,271 459,808
------------ ------------
Total current assets........................... 17,624,101 12,211,631
Furniture, equipment and data processing systems--
at cost, less accumulated depreciation of
$2,495,701 in 1996 and $3,479,973 in 1997......... 5,522,771 3,078,020
Deferred commissions............................... 414,873 71,617
Customer acquisition costs, less accumulated
amortization of $3,145,245 in 1996 and $4,664,092
in 1997........................................... 2,725,275 1,177,043
Goodwill, less accumulated amortization of
$1,059,613 in 1996 and $2,049,731 in 1997......... 18,553,332 17,816,119
Other assets....................................... 953,831 779,245
------------ ------------
$ 45,794,183 $ 35,133,675
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of capital lease.............. $ -- $ 140,635
Current maturities of note payable to
stockholder..................................... -- 1,388,206
Current maturities of note payable to finance
company......................................... 444,839 483,283
Note payable to vendor........................... 1,161,148 --
Line of credit--finance company.................. 4,698,645 6,663,349
Accounts payable................................. 16,686,690 14,533,446
Accrued liabilities.............................. 2,418,627 1,842,685
------------ ------------
Total current liabilities...................... 25,409,949 25,051,604
LONG-TERM DEBT
Note payable to stockholder...................... 1,388,206 --
Note payable to finance company, less current
maturities...................................... 824,306 355,364
Capital lease, less current maturities........... -- 30,464
COMMITMENTS AND CONTINGENCIES...................... -- --
STOCKHOLDERS' EQUITY
Preferred stock--$.001 par value, authorized
5,000,000 shares, issued and outstanding 546,458
in 1996 and 39,500 in 1997, liquidation
preference aggregating $3,368,020 and $808,181
at December 31, 1996 and 1997, respectively..... 546 39
Common stock--$.001 par value, authorized
50,000,000 shares, issued 25,851,894 in 1996 and
33,575,902 in 1997.............................. 25,851 33,576
Additional paid-in capital....................... 45,225,554 52,587,282
Accumulated deficit.............................. (27,077,707) (42,922,132)
Treasury stock--1,300 common shares at cost...... (2,522) (2,522)
------------ ------------
18,171,722 9,696,243
------------ ------------
$ 45,794,183 $ 35,133,675
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
D-128
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenue.............................. $75,854,969 $ 99,307,277 $ 76,947,454
Cost of revenue...................... 53,775,779 73,438,757 57,195,121
----------- ------------ ------------
Gross profit..................... 22,079,190 25,868,520 19,752,333
Selling, general and administrative
expenses............................ 22,323,202 31,114,723 25,940,774
Depreciation and amortization........ 1,125,563 4,357,720 3,972,924
Relocation expenses.................. -- 1,133,158 --
Acquisition expenses................. -- 1,308,634 513,457
Loss on abandonment of fixed assets.. 1,019,648 15,238 3,260,204
Aborted bond offering expenses....... -- 246,083 --
----------- ------------ ------------
24,468,413 38,175,556 33,687,359
----------- ------------ ------------
Operating loss................... (2,389,223) (12,307,036) (13,935,026)
Other income (expense)
Interest income.................... 103,125 84,627 70,518
Interest expense................... (260,639) (625,817) (1,091,489)
Miscellaneous income (expense)..... (6,767) 4,264 11,013
----------- ------------ ------------
Loss before income taxes......... (2,553,504) (12,843,962) (14,944,984)
Income tax expense................... (500,000) -- --
----------- ------------ ------------
Net loss......................... $(3,053,504) $(12,843,962) $(14,944,984)
Net loss attributable to common
shares
Net loss........................... $(3,053,504) $(12,843,962) $(14,944,984)
Preferred dividends................ (594,381) (1,206,042) (179,126)
----------- ------------ ------------
$(3,647,885) $(14,050,004) $(15,124,110)
=========== ============ ============
Basic loss per common share.......... $ (0.24) $ (0.68) $ (0.52)
=========== ============ ============
Weighted average common shares....... 15,335,268 20,673,276 28,951,196
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
D-129
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED TREASURY
STOCK STOCK CAPITAL DEFICIT STOCK
--------- -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... $ 1,622 $ 13,825 $14,227,069 $ (9,728,142) $ (2,522)
Exercise of stock
options and
warrants............. -- 418 525,914 -- --
Conversion of
preferred stock into
common stock......... (4) 24 7,200 (7,220) --
Issuance of common
stock, net of
expenses............. -- 2,685 6,314,779 -- --
Issuance of preferred
stock, net of
expenses, and
conversion of Series
E and Series F....... 1,119 -- 11,071,674 -- --
Preferred dividends... -- -- -- (187,288) --
Net loss.............. -- -- -- (3,053,504) --
------- -------- ----------- ------------ --------
Balance at December 31,
1995................... 2,737 16,952 32,146,636 (12,976,154) (2,522)
Exercise of stock
options and
warrants............. -- 792 1,327,243 -- --
Conversion of
preferred stock into
common stock......... (2,191) 5,307 1,254,475 (1,257,591) --
Issuance of common
stock in connection
with a business
acquisition.......... -- 2,800 10,497,200 -- --
Net loss.............. -- -- -- (12,843,962) --
------- -------- ----------- ------------ --------
Balance at December 31,
1996................... 546 25,851 45,225,554 (27,077,707) (2,522)
Exercise of stock
options and
warrants............. -- 942 921,563 -- --
Conversion of
preferred
stock into common
stock................ (782) 6,783 893,440 (899,441) --
Issuance of preferred
stock................ 275 -- 5,224,725 -- --
Issuance of 200,000
common stock purchase
warrants............. -- -- 322,000 -- --
Net loss.............. -- -- -- (14,944,984) --
------- -------- ----------- ------------ --------
Balance at December 31,
1997................... $ 39 $ 33,576 $52,587,282 $(42,922,132) $ (2,522)
======= ======== =========== ============ ========
</TABLE>
The accompanying notes are an integral part of this statement.
D-130
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Cash received from customers...... $ 72,103,864 $ 98,612,681 $ 78,250,720
Interest received................. 83,227 84,627 70,518
Cash paid to suppliers and
employees........................ (73,638,371) (102,047,484) (82,823,340)
Interest paid..................... (259,919) (625,817) (1,091,489)
Cash paid for income taxes........ (3,340) (2,245) --
------------ ------------- ------------
Net cash used in operating
activities..................... (1,714,539) (3,978,238) (5,593,591)
Cash flows from investing activities
Note receivable--
director/shareholder............. (3,000) -- --
Purchases of furniture, equipment
and data processing systems...... (589,419) (3,620,989) (1,652,566)
Notes receivable--agents.......... (23,115) -- --
Payments on agents notes
receivable....................... 70,900 -- --
Customer base acquisitions........ (1,553,238) (468,002) --
Business acquisitions, net of cash
acquired......................... (4,692,153) (4,085,093) --
Additions to goodwill............. -- -- (252,907)
------------ ------------- ------------
Net cash used in investing
activities..................... (6,790,025) (8,174,084) (1,905,474)
Cash flows from financing activities
Proceeds from issuance of common
stock, net of offering costs..... 6,317,464 -- --
Proceeds from issuance of
preferred stock, net of offering
costs............................ 11,072,793 -- 5,225,000
Proceeds from notes payable to
bank and finance company......... 6,143,950 6,060,358 3,575,000
Payments on notes payable to bank
and finance company.............. (8,686,625) (134,036) (2,040,794)
Payments on note payable to
vendor........................... -- (1,851,977) (1,161,148)
Payments on capital lease
obligation....................... -- -- (121,576)
Preferred stock dividends......... (187,288) -- --
Proceeds from exercise of options
and warrants..................... 526,332 1,328,035 922,505
------------ ------------- ------------
Net cash provided by financing
activities..................... 15,186,626 5,402,380 6,398,987
------------ ------------- ------------
NET INCREASE (DECREASE) IN
CASH........................... 6,682,062 (6,749,942) (1,100,078)
Cash and cash equivalents at
beginning of year.................. 1,615,941 8,298,003 1,548,061
------------ ------------- ------------
Cash and cash equivalents at end of
year............................... $ 8,298,003 $ 1,548,061 $ 447,983
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
D-131
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Reconciliation of net loss to net cash
provided by (used in) operating
activities
Net loss............................ $(3,053,504) $(12,843,962) $(14,944,984)
Adjustments to reconcile net loss to
net cash used in operating
activities
Provision for doubtful accounts... 2,689,250 3,147,077 3,407,842
Abandonment of fixed assets....... 1,019,648 15,238 3,260,204
Depreciation and amortization..... 1,125,563 4,357,720 3,972,924
Deferred taxes.................... 500,000 -- --
Changes in assets and liabilities
Accounts receivable............. (3,751,105) (959,900) 1,388,266
Deferred commissions............ (1,467,519) 1,718,450 907,867
Prepaid carrier costs........... -- -- (1,274,790)
Other current assets............ (163,740) (217,473) 226,464
Other assets.................... 511 (67,893) 191,802
Accounts payable and accrued
liabilities.................... 1,386,357 872,505 (2,729,186)
----------- ------------ ------------
Net cash used in operating
activities................... $(1,714,539) $ (3,978,238) $ (5,593,591)
=========== ============ ============
Noncash financing and investing
activities
Conversion of preferred stock into
common stock....................... $ 7,224 $ 1,259,782 $ 900,223
Capital lease obligation............ -- -- 292,675
Noncash components of consideration
issued in connection with business
combination
Common stock...................... -- 10,500,000 --
Note payable to stockholder....... -- 1,388,206 --
Assumption of net liabilities..... -- 1,603,576 --
</TABLE>
The accompanying notes are an integral part of these statements.
D-132
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF COMPANY AND SUMMARY OF ACCOUNTING POLICIES
Phoenix Network, Inc. ("Phoenix" or the "Company") was a switchless reseller
of long distance telecommunication services marketing primarily to small- to
medium-sized commercial accounts located throughout the United States.
Effective January 1, 1996, as a result of the acquisition of Automated
Communications, Inc. ("ACI"), the Company became a facilities based reseller.
The Company provides its customers with long distance services utilizing the
networks of facilities-based carriers such as AT&T Corporation, MCI
Communications Corporation, Sprint Communications, L.P., Frontier Corp.,
WorldCom, Inc. (formerly Wiltel, Inc.) and others, who handle the actual
transmission services. The carriers bill Phoenix at contractual rates for the
combined usage of Phoenix's customers utilizing their network. Phoenix then
bills its customers individually at rates established by Phoenix.
The following is a summary of the Company's significant accounting policies
applied in the preparation of the accompanying consolidated financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions are eliminated
in consolidation.
Revenue Recognition
Revenue is recognized in the month in which the Company's customers complete
the telephone call.
Cash and Cash Equivalents
The Company considers demand deposits, certificates of deposit and United
States Treasury bills purchased with a maturity of three months or less as
cash and cash equivalents.
Prepaid Carrier Costs
Prepaid carrier costs consist of contract shortfall billings which are
anticipated to be recovered through increased usage during the remaining term
of the contract.
Deferred Commissions
Deferred commissions consist of direct commissions paid on a one-time basis
to third parties upon the acquisition of new customers. Deferred commissions
are amortized on a four year sum-of-the-year's-digits method.
Furniture, Equipment and Data Processing Systems
Depreciation of furniture, equipment and data processing systems is provided
utilizing the straight-line method over five years.
Customer Acquisition Costs
Customer acquisition costs represent the value of acquired billing bases of
customers and are amortized using the sum-of-the-years-digits method over a
four-year period.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets
acquired and is being amortized by the straight-line method over 20 years.
D-133
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
without interest) is less than the carrying amount of the asset, an impairment
loss is recognized. Measurement of that loss would be based on the fair value
of the asset. SFAS 121 also generally requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
the carrying amount or the fair value, less cost to sell. SFAS 121 is
effective for the Company's 1997 fiscal year end. Any impairment provisions
recognized in accordance with SFAS 121 are permanent and may not be restored
in the future. No impairment expense was recognized in the years ended
December 31, 1997 and 1996.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as revenue and expenses during the period. Significant
estimates made by management include the allowance for doubtful accounts,
estimated carrier credits, and the amortization periods related to acquired
customers and goodwill. Actual results could differ from those estimates.
Income Taxes
Deferred income taxes are recognized for tax consequences of temporary
differences by applying current enacted tax rates to differences between the
financial reporting and the tax basis of existing assets and liabilities.
Loss per Common Share
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS
128 requires the presentation of basic earnings per share (EPS) and, for
companies with potentially dilutive securities such as convertible debt,
options and warrants, diluted EPS.
EPS is computed in accordance with SFAS 128 by dividing net income by the
weighted average number of shares outstanding during the period. All
outstanding securities at the end of 1997 which could be converted into common
shares are anti-dilutive (see note I). Therefore, the basic and diluted EPS
are the same. There is no impact on EPS for prior years as a result of the
adoption of SFAS 128.
NOTE B--REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has
sustained substantial losses from operations in recent years and has
continually used, rather than provided, cash in its operations. In addition,
the Company is delinquent on a payment of approximately $230,000 on a note
payable to a shareholder, which constitutes a default, rendering the entire
amount of the note payable (approximately $1.4 million) due and payable.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which in
turn is dependent upon the Company's ability to meet its financial
requirements on a
D-134
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
continuing basis, to maintain present financing and to succeed in its future
operations. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts
and classifications of liabilities that might be necessary should the Company
be unable to continue in existence.
In 1998, management entered into a merger agreement with a subsidiary of
Qwest Communications International Inc., a facilities-based provider of multi-
media communications services to interexchange carriers and to businesses and
consumers. The merger, subject to approval by Phoenix's shareholders on March
30, 1998, would result in Phoenix shareholders receiving stock of Qwest with
an aggregate market value of approximately $28.5 million, subject to certain
adjustments and limitations described in the merger agreement, and up to $4
million in cash, contingent upon the outcome of certain litigation.
NOTE C--POOLING-OF-INTERESTS, ACQUISITIONS, AND MERGERS
On October 8, 1996, Phoenix Merger Corp., a wholly-owned subsidiary of
Phoenix, was merged with and into Americonnect, Inc. and 2,663,810 shares of
the Company's common stock were issued in exchange for all of the outstanding
common stock of Americonnect. The merger was accounted for as a pooling-of-
interests and, accordingly, the accompanying financial statements have been
restated to include the accounts and operations of Americonnect for all
periods prior to the merger.
Separate results of the combining entities for the year ended December 31,
1995, are as follows (amounts in 000s):
<TABLE>
<S> <C>
Net sales
Phoenix........................................................ $58,755
Americonnect................................................... 17,100
-------
$75,855
=======
Net income (loss)
Phoenix........................................................ $(1,334)
Americonnect................................................... (1,719)
-------
$(3,053)
=======
</TABLE>
In connection with the merger, approximately $1.3 million of merger costs
and expenses were incurred and have been charged to expense in the Company's
fourth quarter of 1996.
In August 1995, the Company acquired in purchase transactions the customer
bases and substantially all of the assets and liabilities of Tele-Trend
Communications, LLC ("Tele-Trend"), a Denver based switchless reseller, and
Bright Telecom L.P. ("Bright"), an international call-back provider, for
$4,369,317 and $356,388, respectively. The operations of Tele-Trend and Bright
are included from August 1, 1995. Additionally, during 1995, the Company
acquired three customer bases at a cost of $2,078,238.
In January 1996, the Company acquired, in a purchase transaction, Automated
Communications, Inc. (ACI), a Golden, Colorado, facilities-based long distance
phone service carrier operating switching centers in Colorado Springs,
Minneapolis, and Phoenix. Consideration for the acquisition was in the form of
$4,085,093 in cash, 2,800,000 shares of the Company's common stock valued at
approximately $10,500,000, a long-term note of $1,388,206 bearing interest at
9%, and the assumption of net liabilities of $1,603,576. The Company's
consolidated results of operations include ACI from January 1, 1996, the
effective date of the purchase transaction. The excess of the purchase price
over the fair market value of the assets and liabilities acquired has
D-135
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
been allocated to customer acquisition costs ($1,950,000) and to goodwill
($15,626,875). Customer acquisition costs are amortized over four years using
the sum-of-the-years-digits method, and goodwill is amortized on a straight-
line basis over 20 years.
The following unaudited condensed pro forma information presents the results
of operations of the Company as if the acquisition of ACI and Tele- Trend had
occurred on January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Revenue................................................. $104,729,000
Net loss................................................ $ (4,428,000)
Net loss attributable to common shares.................. $ (5,603,000)
Basic loss per common share............................. $ (0.31)
Weighted average number of shares outstanding........... 18,135,000
</TABLE>
NOTE D--FURNITURE, EQUIPMENT AND DATA PROCESSING SYSTEMS
Furniture, equipment and data processing systems consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Data processing systems......................... $ 4,872,174 $ 3,012,879
Switching equipment............................. 1,898,593 2,160,972
Furniture and fixtures.......................... 710,234 462,282
Other equipment................................. 537,471 921,860
----------- -----------
8,018,472 6,557,993
Less accumulated depreciation................... (2,495,701) (3,479,973)
----------- -----------
$ 5,522,771 $ 3,078,020
=========== ===========
</TABLE>
The loss on abandonment of assets in 1995 primarily relates to a write-off
of billing and customer service software development costs. Management decided
to minimize the risk of development and to have access to a new system on a
more timely basis and, accordingly, decided to license an existing billing and
customer service system from a vendor at a cost of approximately $3,000,000.
During the fourth quarter of 1997, management abandoned the current billing
system project, resulting in a loss on abandonment of assets in 1997 of
$3,260,204.
NOTE E--LINE OF CREDIT AND BRIDGE LOAN--FINANCE COMPANY
In September 1995, the Company renewed its Loan and Security Agreement (the
"Agreement") with a finance company to make available to the Company a line of
credit of up to $10,000,000. The Company may borrow up to the lesser of
$10,000,000 or its borrowing base, which is defined as a percentage of its
eligible receivables. The amended term of the Agreement is five years,
expiring October 2000, with automatic renewal options. There are penalties for
early termination by the Company. Borrowings bear interest at 1.75% over the
"reference rate," as defined. In connection with the renewal, fees and
transaction costs were incurred, which are being amortized on a straight-line
basis over the term of the agreement. The loan is collateralized by the
Company's accounts receivable, equipment, general intangibles and other
personal property assets. Among other provisions, the Company must maintain
certain minimum financial covenants, is prohibited from paying dividends
without the approval of the finance company, and is subject to limits on
capital expenditures. At December 31, 1997, the Company was in violation of
certain financial covenants. The finance company has waived the covenant
violations in connection with a restructuring of the line of credit agreement.
At December 31, 1997, $6,663,349 was outstanding under the line and the
interest rate was 10.25%.
D-136
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On March 12, 1997, the Phoenix Credit Facility was amended to provide for a
$2,000,000 bridge loan with the principal amount to be paid in eight equal
monthly installments between July 1, 1997 and January 1, 1998. The amendment
included the issuance of 200,000 common stock purchase warrants to the finance
company. Phoenix made installment payments of $250,000 in June, July and
August 1997. On September 1, 1997, the parties entered into an amendment to
provide for a temporary moratorium on payments on the bridge loan with a final
payment of all outstanding principal and accrued and unpaid interest being due
on January 9, 1998. On December 12, 1997, the Phoenix Credit Facility was
again amended to provide for an additional bridge loan of $1,825,000 and the
retention of an over-advance of $300,000. On December 31, 1997, the Phoenix
Credit Facility was further amended to provide that Foothill Capital
Corporation may, in its sole discretion, lend Phoenix an additional amount of
up to $1.25 million, to be treated either as an increase to the bridge loan
amount or as an over-advance. The bridge loan and any overadvance amounts must
be repaid on the earliest to occur of (a) April 30, 1998, (b) the effective
time of the proposed merger with the subsidiary of Qwest, or (c) termination
of the Phoenix Credit Facility. On February 2, 1998, the Phoenix Credit
Facility was amended to provide for an additional over-advance of $500,000 and
to reduce the amount that Foothill Capital Corporation may lend Phoenix from
$1.25 million to $750,000.
Average daily outstanding borrowings for the year ended December 31, 1997,
was $4,092,859 at a weighted average interest rate of 10.25%. The highest
month-end balance outstanding for the year ended December 31, 1997 was
$5,621,926.
NOTE F--LONG-TERM DEBT
During 1996, the Company entered into a note payable with a finance company
to fund the cost of new billing and customer service software. The note
agreement requires twelve quarterly payments of $138,854 plus accrued interest
at 10.5% commencing July 1996 through July 1999.
In addition, as part of the acquisition of Automated Communications, Inc.,
on January 1, 1996, the Company issued a 9% note payable for $1,388,206 to a
current stockholder, which was payable in annual installments through 2001.
However, in January 1998, the Company failed to make the first installment on
the note and is currently in default thereon. On January 17, 1998, Phoenix
received a notice declaring a default under the note and notifying Phoenix
that if the scheduled payment is not received by February 2, 1998, the entire
unpaid principal balance of the note will become due and payable and that
available remedies would be pursued. Foothill Capital Corporation has waived
the resulting cross default in the Phoenix Credit Facility.
During 1997, the Company entered into a capital lease for the acquisition of
equipment with a cost of $292,675. The lease is payable in monthly
installments of $12,266 through March 1999.
Future minimum payments on long-term debt at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
NOTE PAYABLE TO NOTE PAYABLE CAPITAL
YEAR ENDED DECEMBER 31, FINANCE COMPANY TO STOCKHOLDER LEASE TOTAL
----------------------- --------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
1998..................... $483,283 $1,388,206 $140,635 $2,012,124
1999..................... 355,364 -- 30,464 385,828
-------- ---------- -------- ----------
$838,647 $1,388,206 $171,099 $2,397,952
======== ========== ======== ==========
</TABLE>
D-137
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE G--LEASES
The Company has operating leases for office space and equipment which expire
on various dates through 2001 and which require that the Company pay certain
maintenance, insurance and other operating expenses. Rent expense for the
years ended December 31, 1995, 1996 and 1997 was $1,028,462, $1,331,911 and
$1,162,274, respectively.
Future minimum lease payments for years ending December 31, are as follows:
<TABLE>
<S> <C>
1998........................................................... $1,896,558
1999........................................................... 1,680,892
2000........................................................... 820,160
2001........................................................... 358,386
----------
$4,755,996
==========
</TABLE>
NOTE H--COMMITMENTS AND CONTINGENCIES
Carrier Contracts
The Company has contracts with its major vendors to provide
telecommunications services to its customers. The agreements cover the pricing
of the services and are for various periods. Among other provisions, the
agreements contain minimum usage requirements which must be met to receive the
contractual price and to avoid shortfall penalties. The Company is currently
in compliance with the contractual requirements. Total future minimum usage
commitments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, COMMITMENT
------------------------ -----------
<S> <C>
1998........................................................ $18,350,000
1999........................................................ 1,000,000
-----------
Total....................................................... $19,350,000
===========
</TABLE>
Litigation
WorldCom, Inc. (formerly LDDS Communications, Inc.) commenced an action
against ACI and its former owner asserting claims relating to alleged breaches
of noncompete and confidentiality agreements signed in connection with two
transactions in which WorldCom was involved. The case was tried in federal
court in Jackson, Mississippi in October 1996. The trial judge has found that
ACI and its former owner breached the parties contracts, but has not ruled on
whether these breaches caused damage or, if so, in what amount. Damages in
excess of $4 million have been requested by WorldCom. Phoenix believes it is
entitled to be indemnified for any liability with respect to the LDDS
litigation pursuant to an Indemnification and Hold Harmless Agreement entered
into between ACI and its former owner as part of the ACI merger. The ultimate
liability to Phoenix, if any, is not determinable at this time, nor is there
any assurance that the former owner of ACI has adequate financial resources to
pay Phoenix any or all amounts that may be owed pursuant to the
Indemnification and Hold Harmless Agreement. No provision has been made in the
consolidated financial statements for any potential loss related to this
contingency.
In addition, Phoenix is a party, from time to time, in litigation incident
to its business. Management and legal counsel do not believe that any
additional current or pending litigation exists which will have a material
adverse affect on the Company's financial condition.
D-138
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--CAPITAL STOCK
Preferred Stock
The Company's certificate of incorporation authorizes it to issue up to
5,000,000 shares of $.001 par value preferred stock. At December 31, 1997, the
Company's authorized preferred stock is allocated as follows:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED AND
SHARES OUTSTANDING
---------- -----------
<S> <C> <C>
Reserved shares:
Series A......................................... 300,000 --
Series B......................................... 200,000 --
Series C......................................... 1,000,000 --
Series D......................................... 666,666 --
Series F......................................... 1,200,000 --
Series G......................................... 150,000 --
Series I......................................... 125,000 39,500
Undesignated shares................................ 1,358,334 --
--------- ------
Total.............................................. 5,000,000 39,500
========= ======
</TABLE>
Series A Preferred Stock ("Series A"), which were fully converted into
common stock as of December 31, 1997, were entitled to 9% cumulative dividends
and voting rights and were convertible into common stock subject to certain
anti-dilution provisions. In connection with the initial offering, the Company
also issued a warrant for 62,200 shares of common stock with an exercise price
of $2.50 per share to an investment banking firm, controlled by an individual,
who was subsequently elected to the Company's Board of Directors. The warrant
expired in February 1997. During 1995, 3,000 shares of Series A were converted
into 14,449 shares of common stock. During 1996, 3,125 shares of Series A were
converted into 16,664 shares of common stock. During 1997, 98,625 shares of
Series A were converted into 564,779 shares of common stock. The conversions
also include unpaid dividends.
Series B Preferred Stock ("Series B"), which were fully converted into
common stock as of December 31, 1997, were entitled to 9% cumulative dividends
and voting rights and were convertible into shares of common stock subject to
certain anti-dilution provisions. In connection with the initial offering, the
Company issued a warrant to an investment banking firm, controlled by one of
the Company's directors, for 69,750 shares of common stock, with an exercise
price of $2.00 per share. The warrant expired in February 1997. During 1996,
11,750 shares of Series B were converted into 98,717 shares of common stock.
During 1997, 114,500 shares of Series B were converted into 1,055,410 shares
of common stock. The conversions also include unpaid dividends.
In November 1992, the Company issued 1,000,000 shares of its Series C
Preferred Stock ("Series C") to one of its major vendors as collateral for
amounts due the vendor for services provided. The Company was released from
all collateral requirements during 1996 and the preferred stock reverted back
to the Company.
Series D Preferred Stock, which were fully converted into common stock as of
December 31, 1997, were entitled to 6% noncumulative dividends, when and if
declared by the Board of Directors and only after payment of dividends on
previously issued series of preferred stock. These shares were nonvoting and
convertible into 333,333 shares of common stock subject to certain anti-
dilution provisions. In connection with the initial offering, the Company
issued a warrant to an investment banking firm, controlled by one of the
Company's directors, for 22,000 shares of common stock, with an exercise price
of $1.50 per share. The warrant expired in December 1997.
D-139
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 1994, the Company issued 55,893 shares of Series E Preferred
Stock at $10 per share under an agreement to convert a note payable to
stockholder, with a principal balance of $500,000 and accrued interest of
$58,930. In connection with the issuance of the stock, the Company issued the
stockholder a five-year warrant for 100,000 shares of the Company's common
stock which was canceled when the Series E shares were converted to Series F
Preferred Stock (see below).
During the period July 1995 through October 1995, the Company raised
approximately $11,024,207, net of offering costs of $129,963, through a
private placement of 1,115,417 shares of its Series F Preferred Stock at $10
per share. Additionally, the holder of the Company's Series E Preferred Stock
exchanged their Series E shares, plus accumulated and unpaid dividends of
$47,467, for 60,639 shares of Series F Preferred Stock. The Series F shares
are entitled to 9% cumulative dividends, voting rights, demand registration
rights for the underlying common shares after six months and are convertible
initially into 4,704,224 shares of common stock, subject to anti-dilution
provisions. The holders of the Series F also received warrants for the
purchase of 470,422 shares of common stock with an exercise price of $3.00 per
share which expire in October 2000. The Series F shareholders have the right
to place two directors on the Company's board (the "Series F Directors") and
the Company is subject to certain covenants requiring it to obtain the consent
of the Series F Directors for certain transactions including mergers,
acquisitions and incurring additional indebtedness in excess of $20,000,000.
During December 1996, the outstanding Series F Preferred shares were converted
into 5,191,064 shares of common stock. This conversion also included unpaid
dividends.
In March 1997, the Company raised $2,850,000 through a private placement of
150,000 shares of its Series G Preferred Stock at $20 per share. The shares
are entitled to cumulative dividends at a rate per share of 5% per annum when
and as declared by the Board of Directors. These shares are nonvoting and
convertible into common stock subject to certain anti-dilution provisions. In
connection with the initial offering, the Company issued warrants for 60,000
shares of common stock with an exercise price of $2.34 per share. The warrants
expire in April 2002. During 1997, all outstanding shares of Series G
Preferred Stock were converted to 2,491,879 shares of common stock.
In July 1997, the Company raised $2,375,000 through a private placement of
125,000 shares of its Series I Preferred Stock at $20 per share. The shares
are entitled to cumulative dividends at a rate per share of 5% per annum when
and as declared by the Board of Directors. These shares are nonvoting and
convertible into common stock subject to certain anti-dilution provisions. In
connection with the initial offering, the Company issued warrants for 112,500
shares of common stock, with an exercise price of $2.00 per share. The
warrants expire in July 2002. During 1997, 85,500 shares of Series I Preferred
Stock were converted to 2,337,355 shares of common stock. At December 31,
1997, the outstanding Series I Preferred shares are convertible into 2,349,011
shares of common stock.
The common shares reserved for issuance upon the conversion of the remaining
Series I Preferred Stock have been registered for resale with the Securities
and Exchange Commission.
At December 31, 1997, the Company had cumulative, unpaid dividends on Series
I Preferred Stock of $18,072 ($.46 per share).
Common Stock
In May 1995, the Company closed a private placement of its common stock
which raised $727,519, net of offering costs of $119,481. The Company sold
385,000 units, at $2.20 per unit, in an off-shore financing pursuant to
Regulation S under the Securities Act of 1933. A unit consists of one share of
common stock and a five-year warrant for one-half share of common stock. Two
warrants can be exercised to purchase 38,500 units at $2.42
D-140
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
per unit. The Company closed another private placement of its common stock
under Regulation S in September 1995. In this transaction, the Company sold
2,300,000 shares of common stock for $2.75 per share. Proceeds to the Company,
net of offering costs of $735,055, were $5,589,945.
Stock Options and Warrants
The Company has various stock option plans accounted for under APB Opinion
25 and related interpretations. The options generally have a term of ten years
when issued, and generally vest over two to four years. No compensation cost
has been recognized for the plans. Had compensation cost for the plan been
determined based on the fair value of the options at the grant dates
consistent with the method of Statement of Financial Accounting Standards 123,
Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net loss
and loss per common share would have been increased to the pro forma amounts
indicated below. Pro forma results for 1996 and 1997 may not be indicative of
pro forma results in future periods because the pro forma amounts do not
include pro forma compensation cost for options granted prior to January 1,
1996.
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Net loss attributable to common shares
As reported................................... $(14,050,004) $(15,124,110)
Pro forma..................................... (14,474,477) (15,745,339)
Basic loss per common share
As reported................................... $ (0.68) $ (0.52)
Pro forma..................................... (0.70) (0.54)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively: no expected
dividends; expected volatility of 107%; weighted average risk-free interest
rate of 6.3%; and expected lives of four years.
In 1987, the Company granted certain directors stock options to purchase up
to 900,000 shares of common stock at a price of $0.10 per share, expiring no
earlier than ten years from the grant date. All options have been exercised as
of December 31, 1997.
The Company's 1989 Stock Option Plan authorizes the grant of incentive stock
options or supplemental stock options for up to 5,000,000 shares of common
stock. The exercise price of each incentive stock option shall be not less
than 100% of the fair market value of the stock on the date the option is
granted. The exercise price of each supplemental stock option shall be not
less than eighty-five percent (85%) of the fair market value of the stock on
the date the option is granted.
In November, 1992, the Board of Directors approved the 1992 Non-Employee
Directors' Stock Option Plan. Under the Plan, 480,000 shares of common stock
have been reserved for issuance to non-employee directors of the Company.
Options are granted annually based upon length of service at fair market value
at date of grant.
The Company's subsidiary, Americonnect, had two stock option plans. All
options have been converted into options for the Company common stock and are
included in the following summary. The options were granted at prices from
$0.08 to $2.06 per share of Company common stock.
D-141
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, and changes during each of the three years in the period
ended December 31, 1997 is presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
<S> <C> <C>
Outstanding at January 1, 1995.......................... 2,660,065 $ 1.58
Exercised............................................. (382,851) 1.16
Granted............................................... 898,414 2.58
Canceled.............................................. (156,458) 2.43
---------
Outstanding at December 31, 1995........................ 3,019,170 1.91
Exercised............................................. (724,567) 1.64
Granted............................................... 1,017,500 3.27
Canceled.............................................. (177,951) 3.23
---------
Outstanding at December 31, 1996........................ 3,134,152 2.32
Exercised............................................. (869,521) .91
Granted............................................... 127,500 3.38
Canceled.............................................. (151,479) 3.33
---------
Outstanding at December 31, 1997........................ 2,240,652 2.89
=========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OPTIONS PROCEEDS EXERCISE PRICE
----------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Exercisable at December
31, 1997................. $1.00-$2.38 475,558 $ 798,937 $ 1.68
$2.39-$4.38 878,600 2,688,516 3.06
$4.39-$6.38 56,890 356,131 6.26
--------- ----------
1,411,048 $3,843,584 2.72
</TABLE>
Weighted average fair value of options granted during 1995, 1996 and 1997 is
$1.42, $1.70, and $2.51 per share, respectively.
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<S> <C> <C> <C>
Range of exercise prices................... $1.00-$2.38 $2.39-$4.38 $4.38-$6.38
Options outstanding...................... 566,077 1,608,025 66,550
Weighted average exercise price.......... $ 1.79 $ 3.15 $ 6.05
Weighted average remaining contractual
life (years)............................ 6 8 7
Options exercisable...................... 475,558 878,600 56,890
Weighted average exercise price.......... $ 1.68 $ 3.06 $ 6.26
</TABLE>
D-142
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common shares subject to warrants are summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- -----------
<S> <C> <C>
Outstanding at January 1, 1995....................... 511,533 $1.50-$7.00
Exercised.......................................... (34,675) $ 2.42
Granted............................................ 720,672 $2.42-$3.00
Canceled........................................... (100,000) $ 3.25
---------
Outstanding at December 31, 1995..................... 1,097,530 $1.50-$7.00
Exercised.......................................... (58,825) $ 2.42
Granted............................................ -- --
Canceled........................................... -- --
---------
Outstanding at December 31, 1996..................... 1,038,705 $1.50-$7.00
Exercised.......................................... (46,700) $1.81-$2.20
Granted............................................ 372,500 $2.00-$2.94
Canceled........................................... (114,750) $1.81-$2.20
---------
Outstanding at December 31, 1997..................... 1,249,755 $1.50-$7.00
=========
</TABLE>
All warrants are exercisable at grant.
NOTE J--INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using current enacted tax rates. A valuation
allowance is established to reduce net deferred tax assets to their estimated
realizable value.
As of December 31, 1997, the Company has available to offset future federal
taxable income, net operating loss carryforwards (NOLs) of approximately $35.3
million which expire in varying amounts from 2002 through 2012. The NOLs may
be subject to limitations as a result of provisions of the Internal Revenue
Code relating to changes in ownership and utilization of losses by successor
entities.
The Company's effective income tax rate is different from the Federal
statutory income tax rate because of the following factors:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal tax rate applied to loss before taxes...... (34.0)% (34.0)% (34.0)%
State tax rate applied to allowable carry-forward
losses............................................ (5.9) (4.6) (4.6)
Valuation allowance for deferred taxes............. 59.5 38.6 38.6
----- ----- -----
Effective tax rate................................. 19.6 % -- % -- %
===== ===== =====
</TABLE>
D-143
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred federal and state tax assets and valuation allowance are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Current
Allowance for bad debts........................ $ 1,326,000 $ 531,000
Noncurrent
Noncurrent assets.............................. 1,187,000 2,232,000
Net operating loss carryforward................ 8,496,000 14,774,000
------------ ------------
9,683,000 17,006,000
------------ ------------
11,009,000 17,537,000
Valuation allowance............................ (11,009,000) (17,537,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
In 1993, the Company's subsidiary, Americonnect, Inc., reduced its valuation
allowance by $500,000 due to changes in circumstances subsequent to adoption
of SFAS No. 109. The changes in circumstances related to increased cash flows,
increased profitability, and anticipated continued increases. Due to operating
losses in 1995, Americonnect was no longer able to determine if it was more
likely than not that it would realize the deferred asset. As a result of this
change in estimate, the valuation allowance was increased by $500,000.
The components of income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1996 1997
--------- ----- ----
<S> <C> <C> <C>
Current................................................ $ -- $ -- $--
Deferred............................................... (500,000) -- --
--------- ----- ----
$(500,000) $ -- $--
========= ===== ====
</TABLE>
The increase in the valuation allowance was approximately $1,917,000,
$5,080,000 and $6,528,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
NOTE K--EMPLOYEE BENEFIT PLANS
On June 1, 1993, the Company established a 401(k) tax savings plan for all
employees. Employer and participant contributions to the plan vest
immediately. The plan is a defined contribution plan covering all of its
employees. Under this plan, employees with a minimum of one year of qualified
service can elect to participate by contributing a minimum of one percent of
their gross earnings up to a maximum of 20 percent.
For those eligible plan participants, the Company will contribute an amount
equal to 100 percent of each participant's personal contribution up to an
annual maximum of $1,000. The Company's contributions to the 401(k) plan for
the years ended December 31, 1995, 1996 and 1997, were approximately $59,000,
$109,000 and $95,000, respectively.
D-144
<PAGE>
PHOENIX NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE L--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
that value:
<TABLE>
<C> <C> <S>
Cash and cash equivalents -- Carrying amount approximates fair value
because of the short-term maturity of this
instrument
Line of credit -- Carrying amount approximates fair value
because of the short-term maturity of this
instrument
Long-term debt -- Carrying amount approximates fair value
because the interest rate at December 31,
1997 approximates the market rate.
</TABLE>
NOTE M--FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company recorded adjustments
increasing their net loss by $3,260,204 related to the write-off of an
abandoned billing system.
D-145
<PAGE>
SUPERNET, INC.
FINANCIAL STATEMENTS AS OF
JUNE 30, 1997
TOGETHER WITH INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of SuperNet, Inc.:
We have audited the accompanying balance sheet of SuperNet, Inc. as of June
30, 1997 and the related statements of operations, changes in stockholder's
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SuperNet, Inc. as of June
30, 1997, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
Dollinger Smith & Co.
Englewood, Colorado
September 26, 1997
D-146
<PAGE>
SUPERNET, INC.
BALANCE SHEET
AS OF JUNE 30, 1997 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 38,058 $ 29,536
Accounts receivable, net of allowance for doubtful
accounts of $93,317 and $81,117 as of September
30, 1997 and June 30, 1997, respectively......... 625,854 734,392
Prepaid expenses.................................. 116,009 76,239
Current portion of deferred tax asset, less
valuation allowance of $1,294,285 and $1,257,965
as of September 30, 1997 and June 30, 1997,
respectively (note 3)............................ 324,662 324,662
----------- -----------
Total current assets............................ 1,104,583 1,164,829
----------- -----------
Property and equipment:
Equipment......................................... 3,304,007 3,254,534
Equipment under capital leases (note 5)........... 1,158,119 1,066,785
Computer software................................. 91,113 91,113
Office furniture.................................. 112,590 112,590
Leasehold improvements............................ 202,523 202,523
----------- -----------
Total property and equipment.................... 4,868,352 4,727,545
Less accumulated depreciation and amortization...... 1,940,520 1,733,029
----------- -----------
Net Property And Equipment.......................... 2,927,832 2,994,516
----------- -----------
Total assets.................................... $ 4,032,415 $ 4,159,345
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................. $ 816,965 $ 1,158,951
Accrued liabilities (note 11)..................... 497,379 454,379
Bank line of credit (note 6)...................... 600,000 600,000
Current portion of long-term obligations (note
4)............................................... 306,114 303,139
Deferred revenue.................................. 461,856 329,318
----------- -----------
Total current liabilities....................... 2,682,314 2,845,787
----------- -----------
Long-term liabilities:
Long-term obligations (note 4).................... 453,904 448,697
Deferred tax liability (note 3)................... 45,408 45,408
----------- -----------
Total long-term liabilities..................... 499,312 494,105
----------- -----------
Commitments (note 10)
Stockholder's equity:
Common stock, $.01 par, 10,000,000 shares
authorized, 100,000 shares issued and
outstanding...................................... 1,000 1,000
Additional paid-in capital........................ 4,513,600 4,418,020
Retained earnings (deficit)....................... (3,663,811) (3,599,567)
----------- -----------
Total stockholder's equity...................... 850,789 819,453
----------- -----------
Total liabilities and stockholder's equity...... $ 4,032,415 $ 4,159,345
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
D-147
<PAGE>
SUPERNET, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997 AND
THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
---------------------- JUNE 30,
1997 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Dialing fees for services............... $ 634,545 $ 590,381 $ 2,485,160
Dedicated service subscriptions......... 733,054 468,173 2,299,732
Internet information services........... 354,870 526,681 1,735,390
Other income............................ -- -- 59,474
---------- ---------- -----------
Total revenues........................ 1,722,469 1,585,235 6,579,756
---------- ---------- -----------
Operating costs and expenses:
Cost of revenues........................ 327,928 278,978 1,270,442
Selling................................. 198,761 253,993 769,143
Technical service....................... 490,275 483,700 2,150,575
General and administrative.............. 414,156 309,833 1,681,533
Depreciation and amortization........... 207,491 146,216 690,236
Stock option plan (note 7).............. 95,580 -- 3,744,958
---------- ---------- -----------
Total operating costs and expenses.... 1,734,191 1,472,720 10,306,887
---------- ---------- -----------
Net (loss) income from operations..... (11,722) 112,515 (3,727,131)
Interest expense (notes 4 and 6)........ 33,315 29,647 119,411
---------- ---------- -----------
Net (loss) income before income
taxes................................ (45,037) 82,868 (3,846,542)
Income taxes (benefit).................... 19,207 31,490 (203,808)
---------- ---------- -----------
Net (loss) income..................... $ (64,244) $ 51,378 $(3,642,734)
========== ========== ===========
(Loss) earnings per share................. $ (.64) $ .44 $ (36.43)
========== ========== ===========
Weighted average common and common equiva-
lent shares.............................. 100,000 116,260 100,000
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
D-148
<PAGE>
SUPERNET, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED JUNE 30, 1997, AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------- PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996.... 100,000 $1,000 $ 573,062 $ 43,167 $ 617,229
Increase in additional
paid-in capital
attributable to issuance
of stock options (note
7)....................... 3,844,958 3,844,958
Net (loss)................ (3,642,734) (3,642,734)
------- ------ ---------- ----------- -----------
BALANCE, JUNE 30, 1997.... 100,000 $1,000 $4,418,020 $(3,599,567) $ 819,453
Increase in additional
paid-in capital
attributable to issuance
of stock options
(unaudited).............. 95,580 95,580
Net loss (unaudited)...... (64,244) (64,244)
------- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)......... 100,000 $1,000 $4,513,600 $(3,663,811) $ 850,789
======= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
D-149
<PAGE>
SUPERNET, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1997, AND
THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
-------------------- JUNE 30,
1997 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ (64,244) $ 51,378 $(3,642,734)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Stock option plan expense............... 95,580 -- 3,744,958
Depreciation and amortization........... 207,491 146,216 690,236
Changes in operating assets and
liabilities--
Decrease (increase) in accounts
receivable........................... 108,538 (116,075) (138,642)
(Increase) decrease in prepaid
expenses............................. (39,770) (24,863) (23,357)
(Increase) in deferred tax assets..... -- -- (239,167)
(Decrease) increase in accounts
payable and accrued liabilities...... (298,986) (334,318) 810,383
Increase (decrease) in bank overdrafts
liability............................ -- 219,441 (130,223)
Increase in deferred tax liability.... -- -- 2,144
Increase (decrease) in deferred
revenue.............................. 132,538 (86,716) 14,213
--------- --------- -----------
Net cash provided by (used in)
operating activities............... 141,147 (144,937) 1,087,811
--------- --------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment.... (140,807) (254,740) (1,554,573)
--------- --------- -----------
Net cash used in investing
activities......................... (140,807) (254,740) (1,554,573)
--------- --------- -----------
Cash flows from financing activities:
Borrowings under bank line of credit...... -- 225,000 575,000
Payments on line of credit................ -- -- (275,000)
Equipment purchased under capital leases.. 91,334 238,934 475,821
Principal payments on capital lease
obligations.............................. (83,152) (64,648) (279,914)
--------- --------- -----------
Net cash provided by financing
activities......................... 8,182 399,286 495,907
--------- --------- -----------
Net increase in cash................ 8,522 (391) 29,145
Cash, beginning of year..................... 29,536 391 391
--------- --------- -----------
Cash, end of year........................... $ 38,058 $ -- $ 29,536
========= ========= ===========
Supplemental Cash Flow Information:
Interest paid............................. $ 33,315 $ 29,647 $ 119,411
========= ========= ===========
Income taxes paid......................... $ -- $ -- $ --
========= ========= ===========
</TABLE>
In fiscal year ended June 30, 1997, the $100,000 liability for the Company's
Stock Appreciation Rights Plan was eliminated upon the adoption of the
Company's Stock Option Plan (Note 7).
The accompanying notes are an integral part of the financial statements.
D-150
<PAGE>
SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
(1) NATURE OF ORGANIZATION
SuperNet, Inc. (the "Company") is engaged in providing a comprehensive range
of Internet access options, applications and consulting services to businesses
and individuals. The Company is a wholly owned subsidiary of NewSuperNet
("NSN"). NSN is a not-for-profit entity and the Company is a for-profit
corporation organized under the laws of the State of Colorado. The
accompanying financial statements pertain only to the operations of the
Company. The majority of the Company's revenues are derived from business and
individual Internet access service. The majority of the Company's clients are
located in Colorado.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis Of Accounting
The financial statements of the Company have been prepared on the accrual
basis.
Property And Equipment
Property and equipment is stated at cost and depreciated over the following
estimated useful lives using the straight-line method:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Equipment.................................................... 5 years
Equipment under capital leases............................... 5 years
Computer software............................................ 3-5 years
Office furniture............................................. 7 years
Leasehold improvements....................................... 7 years
</TABLE>
Expenditures for maintenance, repairs and minor replacements are charged to
operations, and expenditures for major replacements and betterments are
capitalized.
Revenue Recognition
Dedicated service subscriptions are recognized ratably over the term of the
membership period. Other revenue is recognized as earned. As of June 30, 1997,
the Company recorded deferred revenue which represents funds collected during
the fiscal year that will be earned in subsequent years. Deferred revenue
consisted of dedicated service subscriptions, Internet information services
and dialin fees for services as of June 30, 1997.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
D-151
<PAGE>
SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
(3) DEFERRED TAXES
Under Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting For Income Taxes, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax assets
(liabilities) as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Bad debt allowance........................................ $ 30,338
Accrued vacation.......................................... 15,165
Accrued compensation...................................... 56,100
Other accrued costs....................................... 43,010
Accrued stock option plan costs........................... 1,438,014
-----------
Total deferred tax assets, current...................... 1,582,627
Less: valuation allowance............................... (1,257,965)
-----------
Net deferred tax assets................................. $ 324,662
===========
Deferred tax liability:
Accelerated depreciation.................................. (45,408)
-----------
Total deferred tax liability, non-current............... $ (45,408)
===========
</TABLE>
Management currently believes that it is more likely than not that the
Company will be unable to generate sufficient taxable income to realize the
entire tax benefit associated with future deductible temporary tax differences
prior to their expiration. This belief is based upon, among other factors,
historical operations, average taxable income since inception and industry
conditions. If the Company is unable to generate taxable income in the future,
increases in the valuation allowance may be required through a charge to
expense. However, if the Company achieves sufficient profitability in the
future to utilize a greater portion of the deferred tax asset, the valuation
allowance may be reduced through a credit to income.
D-152
<PAGE>
SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
(4) LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
(UNAUDITED)
<S> <C> <C>
Due in monthly installments of principal and interest
of $5,257 through July 1997, interest rate of 8.82%,
secured by equipment.................................. $ -- $ 5,213
Due in monthly installments of principal and interest
of $2,594 through July 1999, interest rate of 9.37%,
secured by equipment.................................. 52,245 58,702
Due in monthly installments of principal and interest
of $1,610 through January 1998, interest rate of
12.00%, secured by software........................... 6,282 10,832
Due in monthly installments of principal and interest
of $5,384 through January 1999, with a balloon payment
of $62,538 in February 1999, interest rate of 8.36%,
secured by equipment.................................. 137,816 151,015
Due in monthly installments of principal and interest
of $2,284 through February 1999, interest rate of
8.54%, secured by equipment........................... 36,711 42,613
Due in monthly installments of principal and interest
of $6,121 through April 1999, interest rate of 9.28%,
secured by equipment.................................. 112,166 127,906
Due in monthly installments of principal and interest
of $1,707 through May 2000, interest rate of 9.89%,
secured by equipment.................................. 47,825 51,697
Due in monthly installments of principal and interest
of $2,266 through January 2000, interest rate of
9.49%, secured by equipment........................... 56,711 62,077
Due in monthly installments of principal and interest
of $5,003 through August 1999, interest rate of 9.62%,
secured by equipment.................................. 104,711 117,005
Due in monthly installments of principal and interest
of $3,463 through June 2001, with a balloon payment of
$6,568 in July 2001, interest rate of 10.55%, secured
by equipment.......................................... 117,123 124,776
Due in monthly installments of principal and interest
of $951 through July 2000, interest rate of 9.60%,
secured by equipment.................................. 28,437 --
Due in monthly installments of principal and interest
of $484 through August 2000, interest rate of 9.75%,
secured by equipment.................................. 14,815 --
Due in monthly installments of principal and interest
of $1,494 through August 2000, interest rate of
10.65%, secured by equipment.......................... 45,176 --
-------- --------
Total obligations.................................... 760,018 751,836
Less current portion................................... 306,114 303,139
-------- --------
Total long-term obligations.......................... $453,904 $448,697
======== ========
</TABLE>
Future annual maturities of long-term obligations outstanding as of June 30,
1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
(UNAUDITED)
<S> <C> <C>
1998................................................... $244,821 $303,139
1999................................................... 360,754 331,185
2000................................................... 111,747 80,337
2001................................................... 42,696 37,175
-------- --------
Total obligations.................................... 760,018 751,836
Less current portion................................... 306,114 303,139
-------- --------
Total long-term portion.............................. $453,904 $448,697
======== ========
</TABLE>
D-153
<PAGE>
SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
(5) EQUIPMENT UNDER CAPITAL LEASES
Amounts under capital leases, which are included in property and equipment,
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
(UNAUDITED)
<S> <C> <C>
Equipment under capital leases..................... $1,158,119 $1,066,785
Less accumulated amortization...................... (382,828) (283,431)
---------- ----------
Net equipment under capital leases................. $ 775,291 $ 783,354
========== ==========
</TABLE>
Amortization expense related to the capital leases was $179,112, $99,397 and
$33,414 for the year ended June 30, 1997 and the three months ended September
30, 1997 and 1996, respectively, and is included in depreciation and
amortization expense.
(6) BANK LINE OF CREDIT
On December 31, 1995, the Company entered into a Line of Credit Agreement
(the "Agreement") with a bank whereby the Company may borrow up to a maximum
principal amount of the lesser of $600,000 or 50% of eligible dialin accounts
receivable plus 80% of eligible dedicated accounts receivable plus 30% of the
net depreciated value of wholly owned computer equipment capped at no more
than 50% of the committed, revolving line of $600,000. As of June 30, 1997 and
September 30, 1997, the Company was eligible to borrow $600,000 under the
Agreement. Interest is payable monthly at a rate of prime plus 1.5%. In
addition, the terms of the Agreement provide for maintenance of certain
financial covenants. As of June 30, 1997 and September 30, 1997, the Company
was not in compliance with the majority of these financial ratio covenants.
The bank has not taken any action or requested any modification to present
terms as a result of these noncompliance conditions. The Agreement expired on
August 31, 1997, but has been extended through October 31, 1997, and is
secured by substantially all of the Company's assets.
(7) STOCK OPTION PLAN
The 1995 Performance Stock Option Plan (the "Plan") was approved and
ratified during the 1997 fiscal year. The Plan allows up to 30,000 stock
options to be issued to certain employees, officers, directors, and
consultants of the Company. The individuals to receive options, exercise price
of the options, and the vesting periods are determined by the Company's Board
of Directors.
Options under the Plan are subject to adjustment in the event of change in
capital structure of the Company. In the event that an acquisition occurs with
respect to the Company, the Company has the right to cancel the options
outstanding as of the effective date of the acquisition, whether or not such
options are exercisable, in return for payment to the option holders of the
difference between the net amount per share payable in the acquisition, less
the exercise price of the option. In the event of a change in control of the
Company, all then outstanding options shall immediately become exercisable.
During fiscal year 1997, the Company granted 28,000 options to certain
employees of the Company as full settlement of these employees' previously
issued stock appreciation rights. The following is a summary of stock option
activity pertaining to the Plan:
D-154
<PAGE>
SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
OPTION PRICE NUMBER
PER SHARE OF SHARES
------------- ---------
<S> <C> <C>
Balance as of July 1, 1996......................... 0
Granted.......................................... $.87 to $8.17 28,000
Exercised........................................ 0
Forfeited........................................ 0
------------- ------
Balance as of June 30, 1997 and September 30,
1997.............................................. $.87 to $8.17 28,000
============= ======
Vested and exercisable as of June 30, 1997 and
September 30, 1997.............................. $.87 to $8.17 24,665
============= ======
</TABLE>
Weighted-average ranges for exercise prices and weighted-average remaining
contractual life for all outstanding options as of June 30, 1997, were as
follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTION PRICE REMAINING NUMBER OF WEIGHTED-AVERAGE
PER SHARE CONTRACTUAL LIFE SHARES EXERCISE PRICE
----------------------------- ---------------- --------- ----------------
<S> <C> <C> <C>
$.87.......................... 9.5 years 14,666 $.87
$2.36 to $2.78................ 9.5 years 5,334 2.47
$3.42......................... 9.5 years 2,666 3.42
$6.08 to $8.17................ 9.5 years 5,334 7.91
</TABLE>
Compensation under the Plan is measured pursuant to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, based on the
estimated market price per share of common stock on the grant date in excess
of the exercise price of the option. Such compensation is amortized to expense
over the vesting period of the stock option. All of the options granted in
1997 were granted for an exercise price which was less than the indicated
value of the Company's stock. The Company's stock is not traded. The fair
value of options at the grant date was determined based upon the indicated
value of the Company's stock as of the date of grant. Total compensation cost
recognized for the stock option plan was $3,744,958, $95,580 and $0 for the
year ended June 30, 1997, and the three months ended September 30, 1997 and
1996, respectively.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. This new standard defines a fair
value based method of accounting for an employee stock option or similar
equity instrument. The Company intends to continue using the measurement
prescribed by APB No. 25, and accordingly, this pronouncement will not affect
the Company's financial position or results of operations. Had compensation
for the Company's Plan been determined based on SFAS No. 123, the Company's
net loss would have been substantially the same. Proforma determinations under
SFAS No. 123 are based upon a fair value of each option grant estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997: dividend yield of 0%; expected volatility
of 0%; risk-free interest rate of 5.12% and expected lives of two years from
grant.
(8) PENSION PLAN
Effective January 1, 1997, the Company became sponsor of a defined
contribution plan (the "Plan"), covering substantially all employees. Employer
contributions to the Plan are determined annually by the Board of Directors.
Employees may also contribute up to 15% of their salary annually. There were
no contributions to the Plan as of June 30, 1997 or during the three months
ended September 30, 1997 and 1996.
D-155
<PAGE>
SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
(9) ADVERTISING COSTS
The Company expenses the costs of advertising the first time the advertising
takes place. Advertising expense amounted to $127,605, $15,614 and $90,325 for
the year ended June 30, 1997, and the three months ended September 30, 1997
and 1996, respectively.
(10) COMMITMENTS
The Company has obligations under noncancelable operating lease commitments
for office space. Future scheduled rental payments for the operating leases in
excess of one year are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ----------
(UNAUDITED)
<S> <C> <C>
Year ended June 30,
1998.............................................. $ 290,613 $ 387,484
1999.............................................. 418,276 418,276
2000.............................................. 281,461 281,461
2001.............................................. 261,422 261,422
2002.............................................. 270,576 270,576
Thereafter........................................ 588,558 588,558
---------- ----------
$2,110,906 $2,207,777
========== ==========
</TABLE>
In addition to the minimum lease payments, the Company must pay its
proportionate share of the operating expenses incurred by the Landlord. Lease
expense amounted to $268,971, $97,200, and $51,018 for the year ended June 30,
1997 and the three months ended September 30, 1997, 1996, respectively.
(11) CONTINGENCIES
Claims of compensation discrimination have been alleged by two present
employees of the Company. Although the Company denies the allegations, the
Company made offers of settlement to those employees and has accrued a
liability on the financial statements in the amount of the proposed settlement
offers. The settlement offers expired, however, without response from either
employee. If formal administrative claims or litigation actions are filed, the
Company intends to vigorously defend the allegations. At this time, it is not
reasonably possible to determine if any additional liability should be accrued
by the Company.
(12) SUBSEQUENT EVENT
On August 25, 1997, NSN received a letter of intent to acquire 100% of the
Company's outstanding stock subject to certain terms and conditions. Under the
terms of the offer to purchase, the closing date for purchase of the stock
would be 45 days after execution of a definitive agreement. Under the
provisions of the Company's stock option plan, all currently granted options
will become exercisable if this change in ownership is concluded.
D-156
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer or director of such corporation or is or
was serving at the request of such corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such officer or director acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such officer's or director's conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify such officer or director against the expense which such officer or
director actually and reasonably incurred.
In accordance with Section 102(b)(7) of the DGCL, the Amended and Restated
Certificate of Incorporation of Qwest, as amended (the "Qwest Certificate of
Incorporation"), provides that directors shall not be personally liable for
monetary damages for breaches of their fiduciary duty as directors except for
(i) breaches of their duty of loyalty to Qwest or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or
knowing violations of law, (iii) certain transactions under Section 174 of the
DGCL (unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) transactions from which a director derives an improper
personal benefit. The effect of this provision is to eliminate the personal
liability of directors for monetary damages for actions involving a breach of
their fiduciary duty of care, including any actions involving gross
negligence.
The Qwest Certificate of Incorporation and the Bylaws of Qwest (the "Qwest
Bylaws") provide for indemnification of Qwest's officers and directors to the
fullest extent permitted by applicable law, except that the Qwest Bylaws
provide that Qwest is required to indemnify an officer or director in
connection with a proceeding initiated by such person only if the proceeding
was authorized by the Board of Directors of Qwest. In addition, Qwest
maintains insurance policies which provide coverage for its officers and
directors in certain situations where Qwest cannot directly indemnify such
officers or directors.
Pursuant to Section 145 of the DGCL and the Qwest Certificate of
Incorporation and the Qwest Bylaws, Qwest maintains directors' and officers'
liability insurance coverage.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this Registration Statement:
DESCRIPTION
EXHIBIT NO.
3.1**Amended and Restated Certificate of Incorporation of Qwest.
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Qwest (incorporated by reference to the exhibit of
the same number to Qwest's Registration Statement on Form S-3 (File
No. 333-58617) filed July 7, 1998).
3.3
Bylaws of Qwest (incorporated by reference to exhibit 3 in Qwest's
Form 10-Q for the quarter ended September 30, 1997 (File No. 000-
22609)).
II-1
<PAGE>
DESCRIPTION
EXHIBIT NO.
4.1(a)***
Indenture dated as of October 15, 1997 with Bankers Trust Company
(including form of Qwest's 9.47% Senior Discount Notes due 2007 and
9.47% Series B Senior Discount Notes due 2007 as an exhibit
thereto).
4.1(b)****
Indenture dated as of August 28, 1997 with Bankers Trust Company
(including form of Qwest's 10 7/8% Series B Senior Notes due 2007 as
an exhibit thereto).
4.1(c)****
Indenture dated as of January 29, 1998 with Bankers Trust Company
(including form of Qwest's 8.29% Senior Discount Notes due 2008 and
8.29% Series B Senior Discount Notes due 2008 as an exhibit
thereto).
4.2****
Registration Agreement dated January 29, 1998 with Salomon Brothers
Inc relating to Qwest's 8.29% Senior Discount Notes due 2008.
4.3 Third Amended and Restated Credit Agreement, dated as of September
5, 1997, by and among LCI International Inc., First Union National
Bank, Nationsbank of Texas, N.A., and the Bank of New York
(incorporated by reference to exhibit 4(c)(xv) in LCI's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
4.4 Indenture dated as of June 23, 1997 between LCI International, Inc.,
and First Trust National Association, as trustee, Providing for the
Issuance of Senior Debt Securities, including Resolutions of the
Pricing Committee of the Board of Directors establishing the terms
of the 7.25% Senior Notes due June 15, 2007 (incorporated by
reference to exhibit 4(c) in LCI's Current Report on Form 8-K dated
June 23, 1997).
5.1
Opinion of O'Melveny & Myers LLP with respect to the legality of the
Qwest Common Stock being registered (filed previously).
8.1
Opinion of Parker Chapin Flattan & Klimpl, LLP with respect to
certain tax matters (filed previously).
10.1**Growth Share Plan, as amended, effective October 1, 1996.
10.2**Employment Agreement dated December 21, 1996 with Joseph P. Nacchio.
10.3**Promissory Note dated November 20, 1996 and Severance Agreement
dated December 1, 1996 with Robert S. Woodruff.
10.4****
Equity Compensation Plan for Non-Employee Directors.
10.5**+
IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
10.6**+
IRU Agreement dated as of February 26, 1996 with WorldCom Network
Services, Inc.
10.7**+
IRU Agreement dated as of May 2, 1997 with GTE.
10.8**Equity Incentive Plan.
10.9****
Employment Agreement dated March 7, 1997 with Stephen M. Jacobsen.
10.10****
Employment Agreement dated October 8, 1997 with Lewis O. Wilks.
10.11****
Employment Agreement dated September 26, 1997 with Brij Khandelwal.
10.12****
Employment Agreement dated September 19, 1997 with Larry Seese.
10.13****
Growth Share Plan Agreement with Joseph P. Nacchio, effective
January 1, 1997, and Amendment thereto.
10.14****
Non-Qualified Stock Option Agreement with Joseph P. Nacchio,
effective June 1997.
10.15
Employment Agreement, dated as of October 18, 1993, between LCI
International Management Services, Inc. and Joseph A. Lawrence
(incorporated by reference to LCI's Annual Report on Form 10-K for
the year ended December 31, 1994).*
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
10.16 LCI International, Inc. 1992 Stock Option Plan (incorporated by
reference to LCI's Registration Statement No. 33-60558).*
10.17 LiTel Communications, Inc. 1993 Stock Option Plan (incorporated by
reference to LCI's Registration Statement No. 33-60558).*
10.18 LCI International, Inc. 1994/1995 Stock Option Plan (incorporated by
reference to LCI's Annual Report on Form 10-K for the year ended
December 31, 1993).*
10.19 LCI International, Inc. and Subsidiaries Nonqualified Stock Option
Plan for Directors (incorporated by reference to LCI's Registration
Statement No. 33-67368).*
10.20 LCI International, Inc. 1995/1996 Stock Option (incorporated by
reference to LCI's Proxy Statement for the 1995 Annual Meeting of
Shareowners).*
10.21 Employment Agreement, dated as of March 20, 1994, between LCI
International, Inc. and H. Brian Thompson (incorporated by reference
to LCI's Annual Report on Form 10-K for the year ended December 31,
1994).*
10.22 LCI International Management Services, Inc. Supplemental Executive
Retirement Plan (incorporated by reference to LCI's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995).*
10.23 Employment Agreement, dated as of October 1, 1995 between LCI
International Management Services, Inc., and Larry Bouman
(incorporated by reference to exhibit 10(1)(xviii) in LCI's Annual
Report on Form 10-K for the year ended December 31, 1995).*
10.24 1997/1998 LCI International, Inc. Stock Option Plan (incorporated by
reference to exhibit 10(1)(xxi) in LCI's Annual Report on Form 10-K
for the year ended December 31, 1996).*
10.25 LCI International, Inc. and Subsidiaries Executive Incentive
Compensation Plan (incorporated by reference to exhibit 10(1)(xxii)
in LCI's Annual Report on Form 10-K for the year ended December 31,
1996).*
10.26 Contractor Agreement dated January 18, 1993 by and between LCI
International Telecom Corp. and American Communications Network,
Inc. (incorporated by reference to LCI's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995). Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment.*
10.27 Transfer and Administrative Agreement among Enterprise Funding
Corporation, LCI SPC I, Inc., LCI International Telecom Corp.,
NationsBank, N.A. and certain other parties thereto, dated August
29, 1996 (incorporated by reference to exhibit 10(r)(i) in LCI's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996).
10.28 Receivables Purchase Agreement dated August 29, 1996, among LCI
International Telecom Corp. and LCI SPC I, Inc. (incorporated by
reference to exhibit 10(r)(ii) in LCI's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1996).
10.29 Subordinated Intercompany Revolving Note, dated August 29, 1996,
issued to LCI International Telecom Corp. by LCI SPC I, Inc.
(incorporated by reference to exhibit 10(r)(iii) in LCI's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
10.30
Support Agreement, dated August 29, 1996, by LCI International, Inc.
in favor of LCI SPC I, Inc. (incorporated by reference to exhibit
10(r)(iv) in LCI's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996).
II-3
<PAGE>
EXHIBIT NO. DESCRIPTION
10.31 Participation Agreement dated as of November 1996 among LCI
International, Inc., as the Construction Agent and as the Lessee,
First Security Bank, National Association, as the Owner Trustee
under the Stuart Park Trust the various banks and lending
institutions which are parties thereto from time to time as the
Holders, the various banks and lending institutions which are
parties thereto from time to time as the Lenders and NationsBank of
Texas, N.A., as the Agent for the Lenders (incorporated by reference
to exhibit 10(s)(i) in LCI's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.32 Unconditional Guaranty Agreement dated as of November 15, 1996 made
by LCI International, Inc., as Guarantor in favor of NationsBank of
Texas, N.A., as Agent for the ratable benefit of the Tranche A
Lenders (incorporated by reference to exhibit 10(s)(ii) in LCI's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.33 Agency Agreement between LCI International, Inc., as the
Construction Agent and First Security Bank, National Association, as
the Owner Trustee under the Stuart Park Trust as the Lessor dated as
of November 15, 1996 (incorporated by reference to exhibit
10(s)(iii) in LCI's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.34 Deed of Lease Agreement dated as of November 15, 1996 between First
Security Bank, National Association as the Owner Trustee under the
Stuart Park Trust, as Lessor and LCI International, Inc. as Lessee
(incorporated by reference to exhibit 10(s)(iv) in LCI's Annual
Report on Form 10-K for the year ended December 31, 1996).
21.1
Subsidiaries of the Registrant (filed previously).
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Grant Thornton LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Ernst & Young LLP.
23.6 Consent of Dollinger, Smith & Co.
23.7 Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1).
23.8 Consent of Parker Chapin Flattan & Klimpl, LLP (contained in Exhibit
8.1).
24.1
Power of Attorney (filed previously).
99.1 Form of Proxy.
99.2 Consent of Donaldson, Lufkin & Jenrette Securities Corporation.
- --------
*Indicates executive compensation plans and arrangements.
** Incorporated by reference to the exhibit of the same number in Form S-1
as declared effective on June 23, 1997 (File No. 333-25391).
*** Incorporated by reference to exhibit 4.1 in Form S-4 as declared
effective on January 5, 1998 (File No. 333-42847).
**** Incorporated by reference to the exhibit of the same number in Qwest's
Form 10-K for the year ended December 31, 1997.
+ Portions have been omitted pursuant to a request for confidential
treatment.
II-4
<PAGE>
(ii) Financial Statement Schedules. The following is a complete list of
Financial Statement Schedules filed as part of this Registration Statement:
Schedule II-A
Qwest Communications International Inc. Valuation and Qualifying
Accounts.
Schedule II-B
LCI International, Inc. Valuation and Qualifying Accounts.
Schedule II-C
Icon CMT Corporation Valuation and Qualifying Accounts.
II-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Qwest Communications International Inc.
Under date of February 24, 1998, except as to note 22, which is as of March
8, 1998, we reported on the consolidated balance sheets of Qwest
Communications International Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997 which are included in the Joint Proxy Statement/Prospectus.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule included in the Registration Statement. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Denver, Colorado
February 24, 1998
II-6
<PAGE>
SCHEDULE II-A
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
BALANCE AT ------------------------- ----------------- BALANCE AT
BEGINNING OF CHARGED TO WRITE-OFFS, END OF
DESCRIPTION PERIOD PROFIT AND LOSS OTHER (1) NET OF RECOVERIES PERIOD
----------- ------------ --------------- --------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Allowance for doubtful
receivables--trade... $3,669 7,768 75 (6,901) $4,611
Year ended December 31,
1996:
Allowance for doubtful
receivables--trade... $2,621 2,841 -- (1,793) $3,669
Year ended December 31,
1995:
Allowance for doubtful
receivables--trade... $1,253 1,758 646 (1,036) $2,621
</TABLE>
- --------
(1) Represents additions resulting from acquisitions.
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of LCI International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in LCI International, Inc.'s
annual report to shareowners included in this registration statement, and have
issued our report thereon dated February 16, 1998. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule included in this registration statement is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 16, 1998
II-8
<PAGE>
SCHEDULE II-B
LCI INTERNATIONAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------
ADDITIONS
-------------------------
(2)
(1) CHARGED TO
BALANCE AT CHARGED TO OTHER ACCOUNTS DEDUCTIONS-- BALANCE AT
BEGINNING OF COSTS AND --DESCRIBE DESCRIBE END OF
DESCRIPTION PERIOD EXPENSES (A) (B) PERIOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reflected as reductions
to the related assets:
Allowance for doubtful
accounts (deductions
from trade accounts
receivable)
Year ended December 31,
1995................... 7,496 15,178 37,235 (48,294) 11,615
Year ended December 31,
1996................... 11,615 24,208 67,380 (72,805) 30,398
Year ended December 31,
1997................... 30,398 50,955 94,390 (123,742) 52,001
</TABLE>
- --------
(a) Represents reduction of revenue from accrued credits, which is consistent
with industry practice.
(b) Represents amounts written off as collectible, credits issued and
collection fees, net of recoveries of amounts previously written off and
balances recorded from acquisitions.
II-9
<PAGE>
SCHEDULE II-C
ICON CMT CORP.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Year ended December
31, 1995............. 112 225 -- (2) 335
Year ended December
31, 1996............. 335 109 -- (2) 442
Year ended December
31, 1997............. 442 13 -- -- 445
Valuation reserve--de-
ferred tax assets
Year ended December
31, 1995............. -- -- -- -- --
Year ended December
31, 1996............. -- 3,296 -- -- 3,296
Year ended December
31, 1997............. 3,296 5,482 -- -- 8,778
</TABLE>
II-10
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment, all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-11
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED QWEST
COMMUNICATIONS INTERNATIONAL INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN
THE CITY OF DENVER, STATE OF COLORADO, ON DECEMBER 10, 1998.
Qwest Communications International
Inc.
/s/ Robert S. Woodruff
By: _________________________________
NAME: ROBERT S. WOODRUFF
TITLE: Executive Vice President--
Finance
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS, ROBERT W. WOODRUFF, HIS ATTORNEY-IN-FACT, WITH
THE POWER OF SUBSTITUTION, FOR HIM IN ANY AND ALL CAPACITIES, TO SIGN ANY AND
ALL AMENDMENTS TO THIS REGISTRATION STATEMENT (INCLUDING POST-EFFECTIVE
AMENDMENTS), AND TO FILE THE SAME, WITH EXHIBITS THERETO AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT, OR HIS SUBSTITUTE OR
SUBSTITUTES, MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE
/s/ Philip F. Anschutz* Chairman of the
- ------------------------------------- Board December 10,
PHILIP F. ANSCHUTZ 1998
/s/ H. Brian Thompson* Vice Chairman of the
- ------------------------------------- Board December 10,
H. BRIAN THOMPSON 1998
/s/ Joseph P. Nacchio* Director, President
- ------------------------------------- and Chief Executive December 10,
JOSEPH P. NACCHIO Officer (Principal 1998
Executive Officer)
Director and
/s/ Robert S. Woodruff Executive Vice December 10,
- ------------------------------------- President--Finance 1998
ROBERT S. WOODRUFF and Chief Financial
Officer (Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Cannon Y. Harvey* Director
- ------------------------------------- December 10,
CANNON Y. HARVEY 1998
II-12
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Grant Thornton LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Ernst & Young LLP.
23.6 Consent of Dollinger, Smith & Co.
99.1 Form of Proxy.
99.2 Consent of Donaldson, Lufkin & Jenrette Securities Corporation.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Qwest Communications International Inc.:
We consent to the use of our report, dated February 24, 1998, except as to
note 22, which is as of March 8, 1998, relating to the consolidated balance
sheets of Qwest Communications International Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, included herein, and of our report,
dated February 24, 1998, pertaining to the related consolidated financial
statement schedule included herein, and to the reference to our firm under the
heading "EXPERTS" in the Registration Statement.
KPMG Peat Marwick LLP
Denver, Colorado
December 4, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, included in this registration statement, dated February 16, 1998
(except with respect to the matter discussed in Note 15, as to which the date
is March 16, 1998) included in Qwest Communications International Inc's
Amendment No. 1 to Form S-4 Registration Statement and to all references to
our Firm included in this registration statement.
Arthur Andersen LLP
Washington, D.C.
December 3, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 19, 1998, accompanying the
consolidated financial statements of Phoenix Network, Inc. and subsidiaries as
of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997, appearing in the Registration Statement. We hereby
consent to the use of our report on the aforementioned consolidated financial
statements in the Registration Statement and to the use of our name as it
appears under the caption "EXPERTS."
Grant Thornton LLP
Denver, Colorado
December 10, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of Qwest Communications
International, Inc. 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.,
which appears in such Proxy Statement/Prospectus. 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 under item 21(b) of this
Registration Statement when such schedule is read in conjunction with the
consolidated financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such Proxy
Statement/Prospectus.
PricewaterhouseCoopers LLP
Stamford, Connecticut
December 10, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 14, 1998 with respect to the financial
statements of Frontier Media Group, Inc. included in Amendment No. 1 to the
Registration Statement (Form S-4 No. 333-65095) and related Proxy
Statement/Prospectus of Qwest Communications International Inc., dated
December 10, 1998.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 10, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in the Registration Statement of Qwest
Communications International Inc. on Form S-4 of our report dated September
26, 1997 relating to the balance sheet of SuperNet, Inc. as of June 30, 1997
and the related statements of operations, changes in stockholder's equity and
cash flows for the year then ended. We also consent to the reference to us
under the heading "EXPERTS" in such Registration Statement.
Dollinger, Smith & Co.
Englewood, Colorado
December 10, 1998
<PAGE>
EXHIBIT 99.1
FORM OF PROXY
ICON CMT CORP.
----------------
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER , 1998
----------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Scott A. Baxter and David L. Goret, or
either of them, officers of Icon CMT Corp. (the "Company"), with full power of
substitution, his or her proxy to represent and vote, as designated below, all
shares of the Company registered in the name of the undersigned, with the
powers the undersigned would possess if personally present at the Company's
Special Meeting of Stockholders to be held at 8:00 a.m., local time, on
December 31, 1998 at Icon's headquarters, 1200 Harbour Boulevard, 8th Floor,
Weehawken, New Jersey 07087, and at any continuation or adjournment thereof,
hereby revoking all proxies previously given with respect to the Special
Meeting.
1. APPROVAL OF THE MERGER AND ADOPTION OF THE MERGER AGREEMENT
[_] FOR [_] AGAINST [_] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL
2. AUTHORIZE ICON TO ADJOURN THE SPECIAL MEETING TO SOLICIT ADDITIONAL
PROXIES IN THE EVENT THAT THE NUMBER OF PROXIES SUFFICIENT TO APPROVE THE
MERGER AND ADOPT THE MERGER AGREEMENT HAS NOT BEEN RECEIVED BY THE DATE
OF THE SPECIAL MEETING
[_] FOR [_] AGAINST [_] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED HEREIN, OR IF NO
DIRECTION IS GIVEN, WILL BE VOTED IN FAVOR OF THE PROPOSALS LISTED ABOVE.
Date: , 1998
-------------------------------------
SIGNATURE
-------------------------------------
SIGNATURE IF HELD JOINTLY
PLEASE DATE AND SIGN ABOVE exactly
as name(s) appear on your share
certificate, and return this proxy
promptly in the envelope provided.
Executors, administrators,
trustees, guardians, etc., should
indicate capacity when signing. For
stock held in joint tenancy, each
joint owner should sign.
[_] PLEASE CHECK IF YOU PLAN TO ATTEND THE MEETING
<PAGE>
EXHIBIT 99.2
LETTERHEAD OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
Board of Directors
Icon CMT Corp.
1200 Harbor Boulevard
Weehawken, New Jersey 07087
Members of the Board:
We hereby consent to the inclusion of our opinion letter, dated December 10,
1998, to the Board of Directors of Icon CMT Corp. ("Icon") as Annex B to the
Proxy Statement/Prospectus of Icon and Qwest Communication International Inc.
("Qwest") relating to the proposed merger transaction involving Icon and Qwest
and references thereto in such Proxy Statement/Prospectus under the captions
"SUMMARY--ICON SPECIAL MEETING--Opinion of Icon's Financial Advisor" and "PLAN
OF MERGER--Background of the Merger," "--Recommendation of the Icon Board;
Icon's Reasons for the Merger" and "--Opinion of Icon's Financial Advisor." In
giving such consent, we do not admit that we come within the category of
persons whose consent is required under, and we do not admit that we are
"experts" for purposes of, the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
Donaldson, Lufkin & Jenrette
Securities Corporation
/s/ Louis P. Friedman
By:__________________________________
Louis P. Friedman
Managing Director
New York, New York
December 10, 1998
