TO ALL:
Release of results:
<<<Level 3 Communications Reports Second Quarter 1998 Results
PR Newswire, Wednesday, August 12, 1998 at 07:52
Results Reflect R&D Write-Off for XCOM Technologies Acquisition
Construction of IP Network Underway;
Company to Begin Offering Services Using Leased Capacity in Third Quarter
OMAHA, Neb., Aug. 12 /PRNewswire/ -- Level 3 Communications, Inc.
(NASDAQ:LVLT) today reported second quarter 1998 revenue of $103 million from
its information services, communications and coal mining businesses. The
company took a one-time in process research and development (R&D) write-off of
$115 million in conjunction with the acquisition of XCOM Technologies, Inc.,
which closed during the quarter. The net loss for the quarter was $116
million, or $0.39 per share. Excluding the merger related charges, the net
loss for the quarter was $1 million, or $0.01 per share. The per share
calculations are determined giving effect to a 2 for 1 stock split, which was
effective on August 10, 1998.
"The second quarter of 1998 was very positive for the company. We have
made progress on a number of fronts and remain firmly on track with our
business plan," said Jim Crowe, president and chief executive officer of
Level 3. "We have begun construction of our U.S. network -- both the local
and intercity, successfully negotiated strategic rights of way agreements,
made some key acquisitions, and signed an important agreement that will enable
us to share some of the cost of building the network. We are now poised to
begin offering service to customers in the third quarter."
Since the company's current business plan represents a significant change
to the previous business direction, current financials and year over year
comparisons to previous quarters may not serve as a meaningful indication of
the company's results or future financial performance.
Second Quarter Financial Highlights
Communications and Information Services Revenue: Communications and
information services revenue was $36 million, an increase of 50 percent from
1997 second quarter revenue of $24 million. The year over year change is due
to growth in both the computer outsourcing and systems integration businesses
of PKS Information Services, and the inclusion of two months of revenue from
XCOM Technologies.
The XCOM revenue is primarily reciprocal compensation from its managed
modem business. Reciprocal compensation is the fee a regional bell operating
company pays to a competitive local exchange carrier (CLEC) whenever a local
call is terminated on the CLEC's network.
Other Revenue: Other revenue of $67 million includes $62 million from coal
mining, a 15 percent increase from $54 million for second quarter 1997. The
year over year change was primarily the result of increased shipments of
alternate source coal. 1998 annual coal mining revenue is anticipated to
approximate 1997 revenue.
R&D Write-Off for XCOM Technologies Acquisition: On April 23, 1998, the
company completed the acquisition of XCOM Technologies, Inc. Under the terms
of the agreement, approximately 2.6 million shares of Level 3 common stock
were exchanged for all of the outstanding common and preferred stock of XCOM.
The results for the quarter reflect a one-time charge of $115 million related
to in process R&D from the acquisition. The transaction, which was accounted
for using purchase accounting, resulted in $30 million in goodwill.
Employee Related Expenses: Results for the second quarter include
approximately $33 million in general and administrative (G&A) expenses
associated with the expansion of the communications business. The company
added 245 employees during the second quarter, bringing the total number of
employees to 1,520. G&A expenses for the second quarter were $55 million, a
189 percent increase over 1997 second quarter G&A expenses of $19 million.
Included under G&A are approximately $9 million of stock based compensation
expense accounted for in accordance with SFAS 123, "Accounting for Stock Based
Compensation."
INTERNEXT Cost Sharing Agreement: Subsequent to the close of the quarter,
Level 3 announced a $700 million cost sharing network construction agreement
with INTERNEXT, LLC. The agreement gives INTERNEXT the right to use 24 fibers
and exclusive use of an additional conduit along the entire route of the Level
3 intercity fiber optic network in the U.S. The company anticipates that the
proceeds of this agreement will offset the capital expenditures made by Level
3 for the intercity build. The funds will be paid to Level 3 as segments of
the intercity network are completed.
Mergers and Acquisitions
The company completed three acquisitions during the last few months. The
most significant was the acquisition of XCOM Technologies, Inc., a CLEC and
communications software developer headquartered in Cambridge, Massachusetts.
XCOM developed new technology that will provide key components necessary for
Level 3 to develop an interface, or "bridge", between its Internet Protocol
(IP) based network and the public telephone networks. The transaction was
completed on April 23, 1998.
Level 3 Communications' subsidiary, PKS Systems Integration LLC, acquired
Orygen Limited located in Dublin, Ireland on July 8, 1998. Orygen provides
critical capabilities in application development and experience in providing
solutions for the top financial institutions in Ireland. This acquisition
will further enhance PKS Systems Integration's business and expansion plans in
Europe.
The third acquisition was of UltraLine (Bermuda) Limited, a
telecommunications start up company in the process of developing high-speed
transatlantic services. Colin Williams, the company's founder, has joined
Level 3 to lead the company's international operations. "Having Colin
Williams assume leadership of the international operations is an important
development for the company. He built the international operations at MFS
from the ground up and then, as CEO of WorldCom's international operations,
integrated and grew the combined international businesses of MFS and WorldCom.
Very few executives have Colin's level of experience and expertise in building
advanced telecommunication systems across Europe and Asia," said Crowe.
Operational Highlights for the Quarter
During the second quarter, Level 3 announced an agreement with Burlington
Northern and Santa Fe Railway Company. This agreement, along with an earlier
agreement with the Union Pacific Railroad Company, grants Level 3 rights of
way to construct more than 9,000 miles west of the Mississippi, connecting as
many as 26 major U.S. cities with the planned IP-based national network.
Also during the quarter, Level 3 announced the formation of a new
technical advisory council (TAC) with a charter to develop a set of technical
standards to provide a bridge between current circuit-based public telephone
networks and emerging IP-based networks.
The TAC brings together leading communications hardware and software
companies from across the industry. Founding members of the TAC include 3Com
Corporation, Alcatel Telecom, Ascend Communications, Cisco Systems, Ericsson,
Level 3 Communications, Lucent Technologies, Nortel (Northern Telecom),
Selsius Systems, Stratus Computer, Tekelec, and Vertical Networks.
In less than 60 days, the TAC developed new protocols and submitted them
to the appropriate standards bodies. The new protocols are currently under
review for both national and international approval. "The proposed standards
are intended to allow seamless integration of the traditional telephone
networks and the new IP networks," said Crowe. "Such integration will enable
customers to benefit from the lower cost of IP network services, including
voice and fax, without modifying existing telephone and fax equipment or
dialing access codes."
Construction Commences on Both Intercity and Local Networks
As announced during the quarter, construction of the 15,000 mile intercity
or long distance portion of the network is being managed by Peter Kiewit
Sons', Inc. Construction of the intercity network began upon signing of the
contract. Construction has also begun on local intracity networks in the U.S.
According to Level 3's strategic plan, construction of the network is
divided into five phases. Each phase is designed to be fully operable and
able to generate positive free cash flow on its own. The company is currently
pre-funded for the first two phases. Phases 1 and 2 include the completion of
local networks in 25 U.S. cities, 9,000 miles of intercity network in the
U.S., six European cities and 2,000 Pan European miles. The cost sharing
agreement with INTERNEXT will provide a substantial portion of the funding
required to finish the construction of the entire 15,000 mile U.S. intercity
network, which was previously included in Phase 3.
Performance Metrics Defined
In order to monitor the progress of the network build-out, Level 3 has
developed operating and construction metrics. These benchmarks will be
reported every quarter to help Level 3 stockholders and the investment
community monitor the company's performance and anticipate future progress. A
chart defining the metrics and an incremental construction rollout schedule is
attached to this release. This first set of benchmarks is for Phases 1 and 2
of the U.S. local build and through completion of the intercity build. The
company is in the process of developing comparable metrics for the
international portion of the network and anticipates providing them once
construction has begun in Europe.
Communications Products To Be Offered By End of Third Quarter
Level 3 plans to begin offering advanced IP-based services at the end of
the third quarter. As previously announced, the company has agreements to
lease capacity over 8,300 miles of Frontier Corporation's national network.
Leasing capacity allows Level 3 to begin to offer services, build a customer
base and move the traffic over to its own networks as they are built. The
company expects to have a sales force in 10 U.S. cities by the end of the
third quarter and in an additional five U.S. cities by the end of the year.
Outlook
"During the quarter we have seen an increasing number of major
communications companies announce plans to rebuild their networks based on
packet switching technologies. This underscores our firmly held view that the
industry is undergoing a fundamental change from 100 year old circuit
switching to newer packet switching -- a superior technology. The shift is
being driven by simple economics," said Crowe. "Our plan is aimed squarely at
the opportunity that is being created by this shift to the newer packet
switching technology."
The statements contained in this release that are not historical facts are
"forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Management wishes to caution the
reader that these forward-looking statements, regarding matters that are not
historical facts, are only predications and are subject to risks and
uncertainties. No assurance can be given that the future results will be
achieved. Such risks are identified in the company's filings with the
Securities and Exchange Commission and include, but are not limited to,
failure by Level 3 to (i) achieve and sustain profitability based on the
creation and implementation of its end-to-end IP based Network, (ii) overcome
significant early operating losses, (iii) produce sufficient capital to fund
its business plan, (iv) develop financial and management controls, as well as
additional controls of operating expenses as well as other costs, and (v)
develop and implement effective internal processes and systems for processing
customer orders and provisioning. For a more detailed description of these
and other factors, please see Level 3's filings with the Securities and
Exchange Commission. Level 3 disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
About Level 3 Communications
Level 3 is a communications and information services company that is
building the first international network optimized for Internet technology.
The Level 3 Network will combine both local and long distance networks,
connecting customers end-to-end across the U.S. and Europe. The company
expects to complete the U.S. intercity portion of the network by the first
quarter of 2001. In the interim, Level 3 has signed an agreement to lease a
national network over which it will be able to begin offering services in the
third quarter of 1998. Level 3 will provide a full range of communications
services - including local, long distance, international and Internet
services. Level 3's common stock is traded on The Nasdaq National Market
under the symbol LVLT. Its World Wide Web address is www.Level3.com.
LEVEL 3 COMMUNICATIONS, INC.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in millions,
except per share data) 1998 1997 1998 1997
Revenue
Communications &
Information Services $36 $24 $65 $40
Other 67 57 125 121
Total Revenue 103 81 190 161
Costs and Expenses
Operating Expenses 49 41 91 80
Depreciation and
Amortization 7 5 13 10
General and
Administrative 55 19 103 35
Write off In Process Research
and Development 115 -- 115 --
Total Costs and
Expenses 226 65 322 125
Income (Loss) from
Operations (123) 16 (132) 36
Other Income, net 5 1 5 2
Income (Loss) before Income
Taxes and Discontinued
Operations (118) 17 (127) 38
Income Tax (Provision)
Benefit 2 (5) 5 (10)
Income (Loss) from
Continuing Operations (116) 12 (122) 28
Discontinued Operations
Gain on Separation of
Construction Operations -- -- 608 --
Energy, net of
income taxes -- 9 324 13
Discontinued Construction
Operations -- 35 -- 50
Income from Discontinued
Operations -- 44 932 63
Net Earnings (Loss)
Level 3 Communications,
Inc. (116) 21 810 41
Discontinued Construction
Operations -- 35 -- 50
Total Net Earnings
(Loss) $(116) $56 $810 $91
Earnings (Loss) per Share
Continuing Operations
Basic $(0.39) $ 0.06 $(0.41) $ 0.12
Diluted $(0.39) $ 0.06 $(0.41) $ 0.12
Net Earnings (Loss)
Basic $(0.39) $ 0.09 $ 2.73 $ 0.17
Diluted $(0.39) $ 0.09 $ 2.73 $ 0.17
Net Earnings (Loss)
excluding gain on
separation
Construction Operations
Basic $(0.39) $ 0.09 $ 0.68 $ 0.17
Diluted $(0.39) $ 0.09 $ 0.68 $ 0.17
Weighted Average Shares
Outstanding
(in thousands)
Basic 301,786 245,123 296,986 244,765
Diluted 301,786 245,663 296,986 245,305
Performance Metrics
In order to monitor the progress of the network build-out, Level 3 has
developed operating and construction metrics. These benchmarks will be
reported every quarter to help Level 3 stockholders and the investment
community monitor the company's performance and anticipate future progress.
This set of benchmarks is for Phases 1 and 2 of the U.S. local build and
through completion of the intercity build.
Definitions:
* Markets in Service -- the number of local markets where Level 3 has a
salesforce offering products over leased or owned facilities. Phases 1 and 2
include the completion of 25 U.S. networks. Level 3 plans to have operations
in approximately 50 U.S. cities overall.
* Markets with Fiber Networks -- number of local markets where Level 3 is
able to offer services over owned or leased networks.
* Intercity Rights of Way Miles -- number of intercity miles where rights
of way agreements are secured. Rights of way agreements are required for
Level 3 to build the intercity network. A total of 15,000 intercity miles are
currently planned.
* Intercity Route Miles Under Construction -- number of intercity miles
being constructed. A segment is considered to be "under construction" when
the contractor is mobilized.
* Intercity Route Miles Completed -- number of intercity route miles
completed.
Construction Rollout Schedule
1998
Metric 2nd Quarter 3rd Quarter 4th Quarter
Actuals Est. Est.
Markets In Service 0 10 15
Markets with Fiber Networks 0 0 0
Intercity Rights of Way Miles 9,000 10,500 11,500
Intercity Route Miles
Under Construction 0 0 500
Intercity Route Miles Complete 0 0 100
Construction Rollout Schedule
1999
Metric 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Est. Est. Est. Est.
Markets In Service 17 21 25 25
Markets with Fiber Networks 3 8 15 20
Intercity Rights of
Way Miles 15,000 15,000 15,000 15,000
Intercity Route Miles
Under Construction 3,000 7,000 10,500 10,500
Intercity Route
Miles Complete 350 600 1,100 4,000
Construction Rollout Schedule 2000
Metric 1st Half Year End
Est. Est.
Markets In Service 25 25
Markets with Fiber Networks 23 25
Intercity Rights of Way Miles 15,000 15,000
Intercity Route Miles 7,000 2,000
Under Construction
Intercity Route Miles
Complete 8,500 12,500
Construction Rollout Schedule 2001
Metric 1st Quarter
Est.
Markets In Service 25
Markets with Fiber Networks 25
Intercity Rights of Way Miles 15,000
Intercity Route Miles
Under Construction 0
Intercity Route Miles Complete 15,000
SOURCE Level 3 Communications, Inc.
-0- 08/11/98
/CONTACT: News Media: Josh Howell, 402-943-1309, or Steve Ingish,
402-943-1337, or Investors: Julie Stangl, 402-943-1310, all of Level 3
Communications/
/Web site: level3.com;
Steve
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