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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 as specified in its charter)
DELAWARE 84-1339282
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
1801 CALIFORNIA STREET, DENVER, COLORADO 80202
----------------------------------------------
(Address of principal executive offices and zip code)
TELEPHONE NUMBER (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 [ ]
At October 31, 2000, 1,656,097,575 shares of common stock were outstanding.
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Qwest Communications International Inc.
Form 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
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<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 2000 and 1999........................ 1
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999....................................... 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999.................................. 3
Notes to Condensed Consolidated Financial Statements........................... 4
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 13
3. Quantitative and Qualitative Disclosures About Market Risk.............................. 21
PART II - OTHER INFORMATION
1. Legal Proceedings....................................................................... 25
6. Exhibits and Reports on Form 8-K........................................................ 25
Signature page.......................................................................... 30
</TABLE>
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QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Commercial services ......................................... $ 2,421 $ 1,186 $ 4,880 $ 3,453
Consumer and small business services ........................ 1,694 1,409 4,666 4,130
Directory services .......................................... 351 336 1,029 981
Switched access services .................................... 299 365 1,017 1,127
-------- -------- -------- --------
Total revenues ........................................... 4,765 3,296 11,592 9,691
Operating expenses:
Cost of sales ............................................... 1,703 1,035 3,650 2,942
Selling, general and administrative ......................... 1,198 801 3,011 2,496
Depreciation ................................................ 727 588 1,913 1,763
Goodwill and other intangible amortization .................. 317 -- 317 --
Merger-related and other one-time charges ................... 1,030 -- 1,336 --
-------- -------- -------- --------
Total operating expenses ............................... 4,975 2,424 10,227 7,201
-------- -------- -------- --------
Operating income (loss) ........................................... (210) 872 1,365 2,490
Other expense (income):
Interest expense ............................................ 314 203 732 519
Decline (increase) in market value of
Global Crossing Ltd. financial instruments ............ (58) -- 710 --
Gain on sales of investments ................................ (252) -- (331) --
Loss on sale of fixed assets ................................ 39 -- 39 --
Terminated merger-related expenses .......................... -- 282 -- 282
Other expense (income) -net ................................. 5 (4) 19 10
-------- -------- -------- --------
Total other expense-net .................................. 48 481 1,169 811
-------- -------- -------- --------
Earnings (loss) before income taxes and cumulative effect of
change in accounting principle ................................. (258) 391 196 1,679
Provision (benefit) for income taxes .............................. (10) 255 160 743
-------- -------- -------- --------
Earnings (loss) before cumulative effect of change in
accounting principle ........................................... (248) 136 36 936
Cumulative effect of change in accounting principle ............... -- -- -- 240
-------- -------- -------- --------
Net earnings (loss) ............................................... ($ 248) $ 136 $ 36 $ 1,176
======== ======== ======== ========
Basic earnings (loss) per share ...................................... ($ 0.15) $ 0.16 $ 0.02 $ 1.35
======== ======== ======== ========
Basic average shares outstanding ..................................... 1,662 873 1,644 872
======== ======== ======== ========
Diluted earnings (loss) per share .................................... ($ 0.15) $ 0.15 $ 0.02 $ 1.34
======== ======== ======== ========
Diluted average shares outstanding ................................... 1,662 880 1,686 879
======== ======== ======== ========
Dividends per share .................................................. $ 0.00 $ 0.31 $ 0.31 $ 1.05
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................. $ 417 $ 78
Accounts receivable-net ............................................................... 4,236 2,455
Receivable from sale of Global Crossing Ltd. common stock ............................. -- 1,140
Inventories and supplies .............................................................. 252 272
Prepaid and other ..................................................................... 841 247
------- -------
Total current assets ..................................................................... 5,746 4,192
Property, plant and equipment-net ........................................................ 23,840 16,404
Goodwill and other intangible assets-net ................................................. 39,748 --
Other assets-net ......................................................................... 2,754 2,676
------- -------
Total assets ............................................................................. $72,088 $23,272
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ....................................................................... $ 2,795 $ 2,882
Accounts payable ...................................................................... 1,842 1,700
Accrued expenses and other current liabilities ........................................ 4,086 1,840
Advance billings and deposits ......................................................... 377 344
------- -------
Total current liabilities ................................................................ 9,100 6,766
Long-term debt ........................................................................... 15,560 10,189
Postretirement and other postemployment benefit obligations .............................. 2,668 2,890
Deferred income taxes .................................................................... 2,019 1,191
Deferred credits and other ............................................................... 1,449 981
Commitments and contingencies
Stockholders' equity:
Preferred stock-$0.01 par value, 200 million shares authorized, none issued and
outstanding ........................................................................ -- --
Common stock-$0.01 par value, 5 billion shares authorized, 1,667 million and
876 million issued, 1,667 million and 875 million outstanding ...................... 41,144 656
Retained earnings ..................................................................... 141 377
Accumulated other comprehensive income ................................................ 7 222
------- -------
Total stockholders' equity ............................................................... 41,292 1,255
------- -------
Total liabilities and stockholders' equity ............................................... $72,088 $23,272
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash provided by operating activities .............. $ 2,804 $ 2,952
-------- --------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment ..... (5,006) (2,681)
Proceeds from sale of equity securities ............ 1,838 --
Cash from acquisition .............................. 407 --
Investment in equity securities .................... (250) (2,464)
Other .............................................. (44) (41)
-------- --------
Cash used for investing activities ................. (3,055) (5,186)
-------- --------
FINANCING ACTIVITIES
Net proceeds from (payments on) short-term debt .... (3,134) 2,102
Proceeds from issuance of long-term debt ........... 4,267 1,302
Repayments of long-term debt ....................... (316) (307)
Proceeds from issuance of common stock ............. 315 60
Dividends paid on common stock ..................... (542) (917)
-------- --------
Cash provided by financing activities .............. 590 2,240
-------- --------
CASH AND CASH EQUIVALENTS
Increase ........................................... 339 6
Beginning balance .................................. 78 49
-------- --------
Ending balance ..................................... $ 417 $ 55
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing activities:
Acquisitions, net of cash acquired ................. $ 40,083 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated interim financial statements are unaudited.
We prepared these financial statements in accordance with the instructions for
Form 10-Q and therefore, did not include all information and footnotes required
by accounting principles generally accepted in the United States. In our
opinion, we made all the adjustments (consisting only of normal recurring
adjustments) necessary to fairly present our consolidated results of operations,
financial position and cash flows as of September 30, 2000 and for all periods
presented. A description of our accounting policies and other financial
information is included in the audited consolidated financial statements filed
with the Securities and Exchange Commission in U S WEST, Inc.'s ("U S WEST")
Annual Report on Form 10-K for the year ended December 31, 1999 (see Note 2).
The consolidated results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results expected for
the full year. We made certain reclassifications to prior balances to conform
with the current presentation.
NOTE 2: MERGER WITH U S WEST
On June 30, 2000, Qwest Communications International Inc. ("Qwest")
completed its acquisition of U S WEST (the "Merger"). Each outstanding share of
U S WEST common stock was converted into the right to receive 1.72932 shares of
Qwest common stock (and cash in lieu of fractional shares), resulting in the
issuance of approximately 882 million Qwest shares. In addition, all outstanding
U S WEST stock options were converted into options to acquire Qwest common
stock. Shares outstanding, average shares, dividends per share and earnings
(loss) per share have been restated to give retroactive effect to the exchange
ratio. The total value of the consideration was approximately $40 billion. The
Merger has been accounted for as a reverse acquisition under the purchase method
of accounting with U S WEST being deemed the accounting acquirer.
A preliminary allocation of the purchase price has been made to certain
identified tangible and intangible assets and liabilities of Qwest, based upon
information available to management at the date of the preparation of the
accompanying financial statements. The preliminary purchase price allocation was
as follows: (i) $2.6 billion to tangible assets and liabilities, net; (ii) $11.5
billion to identified intangibles, including product technology, customer lists,
tradenames, assembled workforce and the premium on our investment in KPNQwest
N.V.; and (iii) $27.9 billion to goodwill. The amounts allocated to identified
intangible assets and goodwill are being amortized over periods ranging from 3
to 40 years.
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The pro forma unaudited results of operations as though the Merger had
been completed as of the beginning of 1999 and 2000 are as follows (in millions,
except for per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues ......................................... $ 13,936 $ 12,027
Net earnings (loss) .............................. (363) 178
Diluted earnings (loss) per share ................ ($ 0.22) $ 0.20
</TABLE>
For the quarter ended September 30, 2000, we incurred merger-related
and other one-time charges totaling $1.0 billion. The charge includes $161
million of severance, $324 million of property, plant and equipment abandonments
and impairments, $465 million of other merger-related charges and $80 million of
litigation charges. We have identified a workforce reduction of 4,500 employees,
of which 1,078 have voluntarily separated without receiving benefit packages.
The remaining employees identified will receive a benefit package. The severance
charge covers a workforce reduction of 3,422 employees, primarily affecting
staff functions of the organization, of which 988 employees had been terminated
as of September 30, 2000.
For the nine months ended September 30, 2000, we incurred
merger-related and other one-time charges totaling $1.3 billion. The charge
includes $238 million of severance, $324 million of property, plant and
equipment asset abandonments and impairments, $694 million of other
merger-related charges and $80 million of litigation charges. The severance
charge covers a workforce reduction of 3,439 employees, primarily affecting
staff functions of the organization, of which 1,005 employees had been
terminated as of September 30, 2000.
In addition to being reflected in the condensed consolidated statements
of operations, the aforementioned charges are reflected in the pro forma,
unaudited results of operations.
For the three and nine months ended September 30, 2000, the property,
plant and equipment charge includes $107 million of internal software projects
that were in progress that management has determined to no longer pursue. In
addition, management has evaluated its network and identified certain network
assets that are impaired based upon the criteria specified in Statements of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," resulting in an
impairment charge of $217 million. The other merger-related charges of $465
million and $694 million for the three and nine months ended September 30, 2000,
respectively, include employee retention payments, contracts to be terminated,
penalties for contract terminations, relocation costs, and merger integration
costs, offset by post-retirement benefit curtailment gains.
Management anticipates that the majority of the merger-related costs
will be paid out by September 30, 2001. We are continuing to review
merger-related activities which may result in additional merger-related charges
in future periods.
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The amounts accrued and charged against the established provisions
described above were as follows (in millions):
<TABLE>
<CAPTION>
BEGINNING CURRENT CURRENT ENDING
BALANCE PROVISION UTILIZATION BALANCE
--------- --------- ----------- -------
<S> <C> <C> <C> <C>
For the three months ended September 30, 2000
Employee termination ......................................... $ -- $ 161 $ 4 $ 157
Other merger-related costs and other one-time charges ........ -- 869 469 400
------ ------ ------ ------
$ -- $1,030 $ 473 $ 557
====== ====== ====== ======
For the nine months ended September 30, 2000
Employee termination ......................................... $ -- $ 238 $ 81 $ 157
Other merger-related costs and other one-time charges ........ -- 1,098 698 400
------ ------ ------ ------
$ -- $1,336 $ 779 $ 557
====== ====== ====== ======
</TABLE>
NOTE 3: WEIGHTED AVERAGE SHARES
The following table is a reconciliation of basic weighted average
shares to diluted weighted average shares (in millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding ........ 1,662 873 1,644 872
Dilutive effect of stock options ................. -- 7 42 7
----- ----- ----- -----
Diluted weighted average shares outstanding ...... 1,662 880 1,686 879
===== ===== ===== =====
</TABLE>
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Diluted weighted average shares outstanding for the three months ended
September 30, 2000 excludes 33 million incremental shares related to stock
options. These shares are excluded due to their anti-dilutive effect as a result
of our net loss for the three months ended September 30, 2000.
NOTE 4: SEGMENT INFORMATION
We operate in four segments: retail services, wholesale services,
network access and operations and directory services. The retail services
segment provides communications services, including Internet, wireless, data and
long-distance services to residential and business customers. The wholesale
services segment provides exchange access services that connect customers to the
facilities of interexchange carriers and interconnection to our
telecommunications network to competitive local exchange carriers. Our network
access and operations segment provides access to our telecommunications network,
including our information technologies, primarily to our retail and wholesale
services segments. The directory services segment publishes White and Yellow
Pages telephone directories and provides electronic directory and other
information services.
Following is a breakout of our segments. Because significant operating
expenses of the retail and wholesale services segments are not allocated to the
segments for decision-making purposes, management does not believe the segment
margins are representative of the actual operating results of the segments. The
margins for the retail and wholesale services segments exclude network and
corporate expenses. The margins for the network access and operations and
directory services segments exclude corporate expenses. The "other" category
includes our corporate expenses and intersegment eliminations.
<TABLE>
<CAPTION>
TOTAL
COMMUNICATIONS
NETWORK AND
RETAIL WHOLESALE ACCESS & RELATED DIRECTORY RECONCILING CONSOLIDATED
SERVICES SERVICES OPERATIONS SERVICES SERVICES OTHER ITEMS TOTAL
-------- --------- ---------- -------------- --------- -------- ---------- ------------
THREE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000
Revenues ............ $ 3,488 $ 849 $ 144 $ 4,481 $ 354 $ (70) $ -- $ 4,765
Earnings (loss) .... 2,108 716 (753) 2,071 201 (294) (2,236)(1) (258)
Assets .............. --(2) --(2) -- (2) --(2) 730 -- (2) 71,358 (2) 72,088
1999
Revenues ............ $ 2,270 $ 725 $ 63 $ 3,058 $ 338 $ (100) $ -- $ 3,296
Earnings (loss) .... 1,560 549 (699) 1,410 185 (34) (1,170)(1) 391
Assets .............. --(2) --(2) -- (2) --(2) 862 -- (2) 20,414 (2) 21,276
</TABLE>
----------
(1) Adjustments made to arrive at consolidated earnings (loss) before
income taxes and cumulative effect of change in accounting principle
include the following (in millions):
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------ ------
<S> <C> <C>
Costs excluded from segment data but included in the
consolidated total:
Taxes other than income taxes .............................. $ 114 $ 101
Depreciation and amortization .............................. 1,044 588
Merger-related and other one-time charges .................. 1,030 --
Other expense-net .......................................... 48 481
------ ------
$2,236 $1,170
====== ======
</TABLE>
(2) We do not provide a breakout of assets for all segments to our chief
operating decision-maker. The reconciling items column represents the
amount to reconcile to the consolidated total.
<TABLE>
<CAPTION>
TOTAL
COMMUNICATIONS
NETWORK AND
RETAIL WHOLESALE ACCESS & RELATED DIRECTORY RECONCILING CONSOLIDATED
SERVICES SERVICES OPERATIONS SERVICES SERVICES OTHER ITEMS TOTAL
-------- --------- ---------- -------------- --------- -------- ----------- ------------
NINE MONTHS ENDED SEPTEMBER 30, (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000
Revenues ................ $ 8,222 $ 2,414 $ 286 $10,922 $ 1,040 $ (370) $ -- $11,592
Earnings (loss) ......... 5,087 1,875 (2,086) 4,876 557 (176) (5,061)(1) 196
Assets .................. --(2) --(2) --(2) --(2) 730 --(2) 71,358(2) 72,088
1999
Revenues ................ $ 6,661 $ 2,135 $ 178 $ 8,974 $ 988 $ (271) $ -- $ 9,691
Earnings (loss) ......... 4,608 1,605 (2,083) 4,130 495 (72) (2,874)(1) 1,679
Assets .................. --(2) --(2) --(2) --(2) 862 --(2) 20,414(2) 21,276
</TABLE>
----------
(1) Adjustments made to arrive at consolidated earnings before income taxes
and cumulative effect of change in accounting principle include the
following (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------ ------
<S> <C> <C>
Costs excluded from segment data but included in the
consolidated total:
Taxes other than income taxes ................................... $ 326 $ 300
Depreciation and amortization ................................... 2,230 1,763
Merger-related and other one-time charges ....................... 1,336 --
Other expense-net ............................................... 1,169 811
------ ------
$5,061 $2,874
====== ======
</TABLE>
(2) We do not provide a breakout of assets for all segments to our chief
operating decision-maker. The reconciling items column represents the
consolidated total amount.
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NOTE 5: OTHER COMPREHENSIVE EARNINGS (LOSS)
Total comprehensive earnings (loss) for the three and nine months ended
September 30, 2000 and 1999 is as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) .............................. ($ 248) $ 136 $ 36 $ 1,176
Other comprehensive earnings (loss):
Net unrealized losses on available for
sale marketable securities ................. (72) (815) (132) (732)
Foreign currency translation ..................... (83) -- (83) --
------- ------- ------- -------
Comprehensive earnings (loss) .................... ($ 403) ($ 679) ($ 179) $ 444
======= ======= ======= =======
</TABLE>
Net unrealized losses for the quarters ended September 30, 2000 and
1999 were net of deferred tax benefits of $46 million and $522 million,
respectively. Net unrealized losses for the nine months ended September 30, 2000
and 1999 were net of deferred tax benefits of $86 million and $473 million,
respectively.
For the nine months ended September 30, 2000, unrealized losses on
marketable securities include reclassification adjustments of $319 million, net
of deferred taxes of $128 million, pertaining to an other than temporary
impairment of our investment in Global Crossing common stock, offset by realized
gains from the sale of securities. These reclassification adjustments have now
been realized through the Condensed Consolidated Statement of Operations.
NOTE 6: COMMITMENTS AND CONTINGENCIES
COMMITMENTS
In March 2000, Qwest and IBM Global Services ("IBM") formed a strategic
business alliance to deliver next-generation e-business services and
applications through the construction and activation of new Qwest CyberCentersSM
throughout North America. IBM, as contractor, will build and provide operational
support for 28 CyberCenters for Qwest. IBM will lease hosting space in these
CyberCenters and will purchase telecommunications services from Qwest, with the
total revenue expected to be approximately $2.5 billion over the seven-year term
of the agreement. Under this alliance, Qwest agreed to purchase equipment and
services from IBM, as contractor, over a seven-year period, which combined with
the construction services, is expected to be approximately $2.5 billion. We have
not purchased any of these services as of September 30, 2000.
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CONTINGENCIES
In 1999, twelve complaints were filed against us and the former U S
WEST directors in the following jurisdictions: California Superior Court, Los
Angeles County (1); New York Supreme Court, New York County (1); Colorado
District Court, City and County of Denver (2); Delaware Court of Chancery (8).
These actions are purported class actions brought on behalf of all persons,
other than the defendants, who own our common stock, against us and the
directors. Each of the complaints makes substantially similar allegations that
the defendants breached their fiduciary duties to the class members by refusing
to seek all bona fide offers for U S WEST and refusing to consider the Qwest
proposal, resulting in the stockholders being prevented from maximizing the
value of their common stock. The complaints seek various injunctive and monetary
relief, including orders: (a) requiring defendants to act in accordance with
their fiduciary duties by considering any bona fide proposal which would
maximize stockholder value; (b) requiring the directors to undertake an
evaluation of U S WEST as a merger acquisition candidate and take steps to
enhance that value and create an active auction for U S WEST; (c) preventing
defendants from using a stockholder rights plan to impede any bona fide offer
for U S WEST; (d) enjoining the consummation of the proposed Global Crossing-U S
WEST merger until all alternatives are explored; (e) requiring defendants to
account for all damages suffered by plaintiffs as a result of defendants'
actions with respect to the tender offer for the shares of Global Crossing
common stock and the proposed Global Crossing-U S WEST merger; and (f) requiring
defendants to pay damages to plaintiffs.
Through November 11, 2000, Qwest has been served with seven class
action complaints purportedly on behalf of customers in the states of Colorado,
Arizona, Oregon, Utah, Minnesota, Washington and New Mexico. The complaints
allege, inter alia, that from 1993 to the present, U S WEST, in violation of
alleged statutory and common law obligations, willfully delayed the provision of
local telephone service to the purported class members. In addition, the
complaints allege that U S WEST misrepresented the date on which such local
telephone service was to be provided to the purported class members. The
complaints seek compensatory damages for purported class members, disgorgement
of profits and punitive damages. As of November 11, 2000, the complaints have
been settled, subject to court approval.
In April 1999, CSX Transportation, Inc. filed a complaint in federal
district court in Jacksonville, Florida against us claiming breach of a 1995
contact. We have filed a motion to dismiss the case, which is pending. Trial is
scheduled to commence in June 2001.
Through September 2000, Qwest has been named as a defendant in several
purported class actions, filed in Texas, Indiana, Tennessee, Missouri, Kansas,
Georgia, Louisiana and Oregon which involve our right to install our fiber optic
cable network in easements and right-of-ways crossing the plaintiffs' land. In
general, we obtained the rights to construct our network from railroads,
utilities, and others, and installed our network along the rights of way so
granted. Plaintiffs in the purported class actions assert that they are the
owners of lands over which our
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fiber optic cable network passes, and that the railroads, utilities, and others
who granted to us the right to construct and maintain our network did not have
the legal ability to do so. The Indiana and Texas actions purport to be on
behalf of a national class of owners of land over which our network passes; the
Georgia, Louisiana, Oregon, Kansas, Tennessee and Missouri actions purport to be
on behalf of a class of such owners in Georgia, Louisiana, Oregon, Kansas,
Tennessee and Missouri. The complaints seek damages on theories of trespass and
unjust enrichment, and punitive damages as well. We have received, and may in
the future receive, claims and demands related to rights of way issues similar
to the issues in these cases that may be based on similar or different legal
theories.
From March 2, 2000 to March 6, 2000, five class action complaints were
filed in the Delaware Court of Chancery against Qwest and its directors. A sixth
class action complaint was brought against the same defendants in state court in
New York on March 9, 2000. The actions have been brought on behalf of a
purported class of Qwest stockholders claiming that Qwest and its directors
breached their fiduciary duty by entering into the U S WEST merger and by
agreeing not to solicit alternative transactions without fully informing
themselves about the availability of alternative transactions and without fully
informing themselves as to Qwest's value. Plaintiffs seek, among other things,
injunctive relief against the consummation of the U S WEST merger and ordering
Qwest to explore alternative transactions, including alternative transactions
involving Deutsche Telekom AG. On March 21, 2000, the Delaware actions were
consolidated into one action and the plaintiffs were ordered to file a
consolidated amended complaint as soon as practicable. On May 16, 2000, the
defendants moved to dismiss, or in the alternative stay, the New York action. By
order of the Court, the return date of that motion has been extended.
On March 17, 2000, and March 20, 2000, two class action complaints were
filed in federal district court in Delaware against Qwest and Joseph P. Nacchio,
our Chairman and Chief Executive Officer. The actions have been brought on
behalf of two purported classes of U S WEST stockholders and allege, among other
things, that Qwest and Mr. Nacchio made material false statements in violation
of Section 14(a) of the Securities Exchange Act of 1934. Plaintiffs claim we
represented in the U S WEST merger agreement and in the joint proxy statement
that Qwest would not take action to solicit or encourage an alternative
acquisition transaction, when Qwest and Mr. Nacchio always intended to entertain
third party bids for Qwest, even after stockholder approval for the U S WEST
merger had been obtained. Plaintiffs seek, among other things, damages sustained
by U S WEST stockholders, and particularly arbitrageurs who held long positions
in U S WEST, when U S WEST's stock price declined on March 1 in response to
reports that Qwest and Mr. Nacchio were negotiating with Deutsche Telekom AG.
In June 2000, a proposed class action complaint was filed against U S
WEST claiming breach of fiduciary duty of loyalty and breach of contract. The
plaintiff claims that the defendants were under a duty to assure that Qwest pays
the dividend declared for shareholders of record as of June 30, 2000 if the
merger closed between July 1 and July 20, 2000. Plaintiffs
11
<PAGE> 14
demand that the change of the record date for payment of the declared dividend
from June 30, 2000 to July 10, 2000 was made in breach of the fiduciary duties
and contractual obligations of the defendants and is therefore unlawful and
unenforceable.
We have provided for these matters in our financial statements as of
September 30, 2000. We do not expect any additional material adverse impacts as
a result of these matters.
We have been named as a defendant in various other litigation matters.
Management intends to vigorously defend these outstanding claims. Management
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 our consolidated results of operations or financial position.
We frequently receive offers to take licenses for patent and other
intellectual rights, including rights held by competitors in the
telecommunications industry, in exchange for royalties or other substantial
consideration. We also regularly receive allegations that our products or
services infringe upon various intellectual property rights, together with
demands that we discontinue the alleged infringement. We normally investigate
such offers and allegations and respond appropriately including defending
ourselves vigorously when appropriate. There can be no assurance that, if one or
more of these allegations proved to have merit and involved significant rights
or royalties, it would not have a material adverse effect on Qwest.
In connection with the Merger, we were required to divest transport
services between local access and transport areas ("LATAs") within U S WEST's
14-state region. In June 2000, we sold our interLATA customer base, along with
other assets. Under the terms of the agreement, the purchase price paid is
subject to adjustment for revenue fluctuations during the 90 days subsequent to
the agreement date. Depending on certain circumstances, the revenue adjustment
may not be settled until the end of the first quarter 2001. We do not expect the
adjustment, if any, to have a material adverse impact on our consolidated
results of operations or financial position.
NOTE 7: CHANGE IN ACCOUNTING METHOD
Prior to 1999, our directory business ("Dex") recognized revenues and
expenses related to publishing directories using the "deferral method," under
which revenues and expenses were recognized over the lives of the directories,
generally one year. Effective the fourth quarter of 1999, Dex changed to the
"point of publication" method of accounting, which recognizes revenues and
expenses at the time the related directory is published and distributed. The
change in methodology was made to align our revenue and expense policy with the
earnings process and to better reflect the operating activity of the business.
The accounting change resulted in a one-time increase in 1999 in net income of
$240 million (net of income tax of $153 million), or $0.27 per diluted share,
which was reported as a cumulative effect (as of January 1, 1999) of a change in
accounting principle. We restated our three and nine months ended September 30,
1999 results of operations to give effect to the point of publication method
which decreased net income by $3 million ($0.00 per diluted share) and $21
million ($0.02 per diluted share) as compared to results that would have been
reported under the deferral method.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements," as that term is
used in federal securities laws, about Qwest Communications International Inc.'s
("Qwest") financial condition, results of operations and business. These
statements include, among others:
- statements concerning the benefits that Qwest expects will
result from its business activities and certain transactions
Qwest has completed, such as increased revenues, decreased
expenses and avoided expenses and expenditures; and
- statements of Qwest's expectations, beliefs, future plans and
strategies, anticipated developments and other matters that
are not historical facts.
These statements may be made expressly in this Form 10-Q. You can find
many of these statements by looking for words such as "believes," "expects,"
"anticipates," "estimates," or similar expressions used in this Form 10-Q.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties that may cause Qwest's actual results to be materially
different from any future results expressed or implied by Qwest in those
statements.
The most important facts that could prevent Qwest from achieving its
stated goals include, but are not limited to, the following:
- intense competition in the local exchange, intraLATA (Local
Access and Transport Areas) toll, wireless and data markets;
- changes in demand for our products and services;
- dependence on new product development and acceleration of the
deployment of advanced new services, such as broadband data,
wireless and video services, which could require substantial
expenditure of financial and other resources in excess of
contemplated levels;
- rapid and significant changes in technology and markets;
- higher than anticipated employee levels, capital expenditures
and operating expenses;
- adverse changes in the regulatory or legislative environment
impacting the competitive environment and service pricing in
the local exchange market and affecting our business and
delays in the ability to begin interLATA long-distance
services in our 14 state region;
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<PAGE> 16
- failure to achieve the projected synergies and financial
results expected to result from the merger of U S WEST, Inc.,
our former parent corporation ("U S WEST"), with and into
Qwest on June 30, 2000 (the "Merger"), on a timely basis or at
all, and difficulties in combining the operations of Qwest and
U S WEST, which could affect our revenues, levels of expenses
and operating results.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. Qwest cautions you not to place undue reliance on
the statements, which speak only as of the date of this Form 10-Q.
The cautionary statements contained or referred to in this section
should be considered in connection with any subsequent written or oral
forward-looking statements that Qwest or persons acting on its behalf may issue.
Qwest does not undertake any obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this Form 10-Q or to reflect the occurrence of unanticipated events.
MERGER WITH U S WEST
On June 30, 2000, Qwest completed its acquisition of U S WEST. Each
outstanding share of U S WEST common stock was converted into the right to
receive 1.72932 shares of Qwest common stock (and cash in lieu of fractional
shares), resulting in the issuance of approximately 882 million Qwest shares. In
addition, all outstanding U S WEST stock options were converted into options to
acquire Qwest common stock. Shares outstanding, average shares, dividends per
share and earnings (loss) per share have been restated to give retroactive
effect to the exchange ratio. The total value of the consideration was
approximately $40 billion. The Merger has been accounted for as a reverse
acquisition under the purchase method of accounting with U S WEST being deemed
the accounting acquirer.
A preliminary allocation of the purchase price has been made to certain
identified tangible and intangible assets and liabilities of Qwest, based upon
information available to management at the date of the preparation of the
accompanying financial statements. The preliminary purchase price allocation was
as follows: (i) $2.6 billion to tangible assets and liabilities, net; (ii) $11.5
billion to identified intangibles, including product technology, customer lists,
tradenames, assembled workforce and the premium on our investment in KPNQwest
N.V.; and (iii) $27.9 billion to goodwill. The amounts allocated to identified
intangible assets and goodwill are being amortized over periods ranging from 3
to 40 years.
14
<PAGE> 17
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 Compared with 1999
Several non-recurring items impacted net earnings (loss) for the three
and nine months ended September 30, 2000 and 1999. Results of operations,
normalized to exclude the effects of such items, are as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings (loss) ......................... $ (248) $ 136 $ 36 $ 1,176
Non-recurring items ......................... 479(1) 282(2) 1,088(3) 42(4)
--------- --------- --------- ---------
Normalized net earnings ..................... $ 231 $ 418 $ 1,124 $ 1,218
========= ========= ========= =========
Diluted earnings (loss) per share ........... $ (0.15) $ 0.15 $ 0.02 $ 1.34
Non-recurring items ......................... $ 0.29(1) $ 0.32(2) $ 0.64(3) $ 0.05(4)
--------- --------- --------- ---------
Normalized diluted earnings per share ....... $ 0.14 $ 0.48(5) $ 0.66 $ 1.39
========= ========= ========= =========
</TABLE>
(1) Reflects an after-tax charge of $644 million or $0.39 per diluted share
for merger-related and other one-time costs, an after-tax benefit of
$153 million or $0.09 per diluted share for the gain on sales of
investments, an after-tax benefit of $36 million or $0.02 per diluted
share for the increase in the market value of Global Crossing Ltd.
("Global Crossing") financial instruments and an after-tax charge of
$24 million or $0.01 per diluted share for a loss on the sale of fixed
assets.
(2) Reflects an after-tax charge of $282 million or $0.32 per diluted share
for Global Crossing terminated merger-related expenses.
(3) Reflects an after-tax charge of $832 million or $0.49 per diluted share
for merger-related and other one-time costs, an after-tax charge of
$433 million or $0.26 per diluted share for the decline in the market
value of Global Crossing financial instruments, an after-tax benefit of
$201 million or $0.12 per diluted share for the gain on sales of
investments and an after-tax charge of $24 million or $0.01 per diluted
share for a loss on the sale of fixed assets.
(4) Reflects an after-tax charge of $282 million or $0.32 per diluted share
for Global Crossing terminated merger-related expenses, and an
after-tax benefit of $240 million, or $0.27 per diluted share, for the
change in the method to account for directory publishing revenue and
expense.
(5) Individual components do not sum to total due to rounding.
In addition, the Merger significantly impacts the comparison of the
results of operations for the three and nine months ended September 30, 2000 to
September 30, 1999.
The following sections provide a more detailed discussion of the
changes in revenues and expenses.
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<PAGE> 18
REVENUES (IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- INCREASE / ------------------- INCREASE /
2000 1999 (DECREASE) 2000 1999 (DECREASE)
------- ------- --------------------- ------- ------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial services .......... $ 2,421 $ 1,186 $ 1,235 104.1% $ 4,880 $ 3,453 $ 1,427 41.3%
Consumer and small
business services ......... 1,694 1,409 285 20.2% 4,666 4,130 536 13.0%
Directory services ........... 351 336 15 4.5% 1,029 981 48 4.9%
Switched access services .....
299 365 (66) (18.1)% 1,017 1,127 (110) (9.8)%
</TABLE>
COMMERCIAL SERVICES. Commercial services revenues are derived from
Internet, data, voice and wireless products and services to both retail and
wholesale business customers. The increases in commercial services revenues for
the three and nine months ended September 30, 2000 were primarily attributable
to the Merger. Also contributing to the increases, were growth in sales of data
products and services. We believe revenues from data products and services will
account for an increasingly larger portion of commercial services revenues in
future periods. See "Special Note Regarding Forward-Looking Statements" on page
13.
CONSUMER AND SMALL BUSINESS SERVICES. Consumer and small business
services revenues are derived from Internet, data, voice and wireless products
and services to the consumer and small business markets. The increases in
consumer and small business services revenues for the three and nine months
ended September 30, 2000 were primarily attributable to the Merger. Revenues
from the sale of wireless products and services accounted for $56 million and
$180 million of the increases for the three and nine months ended September 30,
2000, respectively. The majority of the remaining increase is primarily
attributable to data services revenue, for both the three and nine month periods
ended September 30, 2000.
DIRECTORY SERVICES. Directory services revenues are derived primarily
from selling advertising in our published directories. The increases in
directory services revenues for the three and nine months ended September 30,
2000 were primarily attributable to price increases.
SWITCHED ACCESS SERVICES. Switched access services revenues are
derived from inter- and intrastate switched access from interexchange carriers.
The decreases in switched access services revenues for the three and nine months
ended September 30, 2000 were primarily attributable to federal access reform
which reduced the rates we are able to collect for the switched access services,
partially offset by increased demand. We believe revenues from switched access
services will continue to be negatively impacted by federal access reform. See
"Special Note Regarding Forward-Looking Statements" on page 13.
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<PAGE> 19
OPERATING EXPENSES (IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- INCREASE / ------------------- INCREASE /
2000 1999 (DECREASE) 2000 1999 (DECREASE)
------- ------- ----------------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of sales ..................... $ 1,703 $ 1,035 $ 668 64.5% $ 3,650 $ 2,942 $ 708 24.1%
Selling, general and
administrative ................. 1,198 801 397 49.6% 3,011 2,496 515 20.6%
Depreciation ...................... 727 588 139 23.6% 1,913 1,763 150 8.5%
Goodwill and other
intangible amortization ........ 317 -- 317 100.0% 317 -- 317 100.0%
Merger-related and other
one-time charges ............... 1,030 -- 1,030 100.0% 1,336 -- 1,336 100.0%
Other expense-net ................. 48 481 (433) (90.0)% 1,169 811 358 44.1%
Provision (benefit) for
income taxes ................... (10) 255 (265) (103.9)% 160 743 (583) (78.5)%
</TABLE>
COST OF SALES. The increases in cost of sales for the three and nine
months ended September 30, 2000 were primarily attributable to an increase in
sales resulting from the Merger. Cost of sales, as a percent of revenues,
increased from 31.4% for the three months ended September 30, 1999 to 35.7% for
the three months ended September 30, 2000. Cost of sales, as a percent of
revenues, increased from 30.4% for the nine months ended September 30, 1999 to
31.5% for the nine months ended September 30, 2000. The percentage increases
were attributable to the change in product mix caused by the Merger.
Additionally, higher operating costs were incurred to enhance customer service.
SELLING, GENERAL AND ADMINISTRATIVE. The increases in selling, general
and administrative expenses for the three and nine months ended September 30,
2000 were primarily attributable to the Merger. Selling, general and
administrative expenses, as a percentage of revenues, increased from 24.3% for
the three months ended September 30, 1999, to 25.1% for the three months ended
September 30, 2000. Selling, general and administrative expenses, as a
percentage of revenues, increased from 25.8% for the nine months ended September
30, 1999, to 26.0% for the nine months ended September 30, 2000. The percentage
increases were primarily attributable to increased employee costs due to higher
headcount.
DEPRECIATION. The increases in depreciation expense were primarily
attributable to higher overall property, plant and equipment balances resulting
from the Merger and our continued investment in our network. Partially
offsetting the increase to depreciation expense for the nine months ended
September 30, 2000 was the cessation of depreciation, beginning in April 1999,
associated with access lines that were approved to be sold in 1999.
GOODWILL AND OTHER INTANGIBLE AMORTIZATION. Goodwill and other
intangible amortization is a result of the Merger. The preliminary purchase
price allocation associated with intangibles is as follows: $11.5 billion to
identified intangibles, including product technology, customer lists,
tradenames, assembled workforce and the premium on our investment in KPNQwest
N.V., and $27.9 billion of goodwill. The amounts allocated to identified
intangible assets and goodwill are being amortized over periods ranging from 3
to 40 years.
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<PAGE> 20
MERGER-RELATED AND OTHER ONE-TIME CHARGES. For the quarter ended
September 30, 2000, we incurred merger-related and other one-time charges
totaling $1.0 billion. The charge includes $161 million of severance, $324
million of property, plant and equipment abandonments and impairments, $465
million of other merger-related charges and $80 million of litigation charges.
We have identified a workforce reduction of 4,500 employees, of which 1,078 have
voluntarily separated without receiving benefit packages. The remaining
employees identified will receive a benefit package. The severance charge covers
a workforce reduction of 3,422 employees, primarily affecting staff functions of
the organization, of which 988 employees had been terminated as of September 30,
2000.
For the nine months ended September 30, 2000, we incurred
merger-related and other one-time charges totaling $1.3 billion. The charge
includes $238 million of severance, $324 million of property, plant and
equipment asset abandonments and impairments, $694 million of other
merger-related charges and $80 million of litigation charges. The severance
charge covers a workforce reduction of 3,439 employees, primarily affecting
staff functions of the organization, of which 1,005 employees had been
terminated as of September 30, 2000.
For the three and nine months ended September 30, 2000, the property,
plant and equipment charge includes $107 million of internal software projects
that were in progress that management has determined to no longer pursue. In
addition, management has evaluated its network and identified certain network
assets that are impaired based upon the criteria specified in Statements of
Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of," resulting in an
impairment charge of $217 million. The other merger-related charges of $465
million and $694 million for the three and the nine months ended September 30,
2000, respectively, include employee retention payments, contracts to be
terminated, penalties for contract terminations, relocation costs, and merger
integration costs, offset by post-retirement benefit curtailment gains.
We anticipate additional merger-related expenses will be incurred as we
continue merger integration efforts. See "Special Note Regarding Forward-Looking
Statements" on page 13.
OTHER EXPENSE-NET. Interest expense was $314 million for the third
quarter of 2000 compared to $203 million for the third quarter of 1999 and $732
million for the nine months ended September 30, 2000, compared to $519 million
for the nine months ended September 30, 1999. The increases in interest expense
were primarily attributable to the Merger. In addition, for the nine months
ended September 30, 2000, interest expense increased due to debt U S WEST
incurred to acquire 39 million shares of Global Crossing common stock in
connection with U S WEST's proposed merger with Global Crossing and general
corporate borrowings.
In December 1999, we entered into equity swaps on 24 million shares of
Global Crossing common stock. The market value of the swaps increased by $58
million for the three months ended September 30, 2000 and declined by $263
million for the nine months ended September 30, 2000. Additionally, in the
second quarter of 2000, we determined the decline in the market value of our
remaining investment in Global Crossing stock was other than temporary. We
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<PAGE> 21
reduced the cost basis of our investment to reflect the decline in its market
value and recognized a loss of $447 million.
For the three and nine months ended September 30, 2000, we sold various
marketable equity securities resulting in gains of $252 million and $331
million, respectively. We also incurred a loss of $39 million on the sale of
fixed assets for the three and nine months ended September 30, 2000.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for the
three months ended September 30, 2000 was 3.9% compared to the 1999 rate of
65.2%. The effective tax rate was 81.6% for the nine months ended September 30,
2000 compared to the 1999 rate of 44.3%. The disproportionate tax rates for 2000
were caused by the goodwill amortization being considered a permanent
difference. The disproportionate tax rates for 1999 were caused by the costs
incurred to terminate the Global Crossing merger not being treated as tax
deductible for accounting purposes.
SEGMENT RESULTS. Segment results represent margins which, for segment
reporting purposes, exclude certain costs and expenses, including depreciation
and amortization. See Note 4 to the condensed consolidated financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- INCREASE / -------------------- INCREASE /
(in millions) 2000 1999 (DECREASE) 2000 1999 (DECREASE)
------- ------- -------------------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Segment results:
Retail services ...... $ 2,108 $ 1,560 $ 548 35.1% $ 5,087 $ 4,608 $ 479 10.4%
Wholesale services ... 716 549 167 30.4% 1,875 1,605 270 16.8%
Network and access
operations ........... (753) (699) (54) (7.7)% (2,086) (2,083) (3) (0.1)%
Directory services ... 201 185 16 8.6% 557 495 62 12.5%
</TABLE>
Margins from the retail services segment increased due to revenue
growth. Revenues from the retail services segment increased 54% and 23% for the
three and nine months ended September 30, 2000, respectively over the comparable
1999 periods. The revenue increases were partially offset by higher operating
expenses driven by growth initiatives. Margins from the wholesale services
segment increased as a result of greater demand for access and interconnection
services, partially offset by price reductions as mandated by both federal and
state regulatory authorities and higher operating costs associated with access
charge expenses. Margins from the network and access operations segment
decreased due to higher operating expenses associated with enhancing customer
service. Margins from the directory services segment increased due to price
increases, increased sales of directory-related Internet products and increased
efforts to control costs.
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<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Cash provided by operations declined to $2.8
billion for the nine months ended September 30, 2000 from $ 3.0 billion for the
prior comparable period. The decrease was primarily related to a reduction in
working capital.
INVESTING ACTIVITIES. Total capital expenditures were $5.0 billion for
the nine months ended September 30, 2000 and $2.7 billion for the nine months
ended September 30, 1999. On a pro forma basis, assuming the Merger had been
consummated at the beginning of the year, total capital expenditures are
anticipated to be $9 billion for 2000. Capital expenditures have primarily been
and continue to be focused on the modernization and expansion of our network and
meeting the requirements of the Telecommunications Act of 1996 (the "Act"),
including interconnection services such as local number portability ("LNP"),
operational support systems, collocation and trunking. We are also continuing to
invest in the construction of CyberCenters(SM) and the expansion of our
CLEC/DLEC business outside our 14-state local service territory. See "Special
Note Regarding Forward-Looking Statements" on page 13.
Future cash needs could increase with the pursuit of new business
opportunities, including the acceleration of the deployment of additional and/or
advanced new services to customers, such as broadband data, wireless and video
services, and may additionally be impacted by continued implementation of the
requirements of the Act. The acceleration of such additional and/or advanced new
services is not expected to have a material adverse impact on our financial
condition or results of operations. Interconnection, LNP, universal service and
access charge reform will negatively impact cash flows to the extent recovery
mechanisms provided by the Federal Communications Commission ("FCC") and states
are inadequate. We would expect that such cash needs, if any, will be funded
through operations, the sale of assets and, when necessary, the issuance of
securities. See "Special Note Regarding Forward-Looking Statements" on page 13.
Partially offsetting these capital expenditures was the receipt of $1.8
billion from the sale of marketable equity securities in 2000. In the third
quarter of 1999, we invested $2.5 billion to purchase approximately 39 million
shares of Global Crossing common stock in a tender offer.
FINANCING ACTIVITIES. Cash provided by financing activities was $590
million and $2.2 billion for the nine months ended September 30, 2000 and 1999,
respectively. In 1999, we increased borrowings to finance the Global Crossing
tender offer, with no comparable requirement in 2000. During the nine months
ended September 30, 2000, we issued long-term debt of $4.3 billion to refinance
existing debt obligations. Dividends paid on common stock declined to $542
million in 2000 compared to $917 million in 1999. The decline was due to a
change in the dividend policy resulting from the Merger. Additionally, we
generated $315 million from the exercise of stock options in 2000 compared to
$60 million in 1999. The increase resulted from employees exercising options due
to the Merger.
We maintain commercial paper programs to finance short-term cash flow
requirements, as well as to maintain a presence in the short-term debt market.
As of September 30, 2000, we had lines of credit with a total unused borrowing
capacity of $4 billion.
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<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Over time, we are exposed to market risks arising from changes in
interest rates. The objective of our interest rate risk management program is to
manage the level and volatility of our interest expense. We may employ
derivative financial instruments to manage our interest rate risk exposure. We
have also employed financial derivatives to hedge interest rate and foreign
currency exposures associated with particular debt issues to synthetically
obtain below market interest rates and have employed derivatives to hedge our
risk associated with some equity instruments.
As of September 30, 2000 and December 31, 1999, approximately $1.4
billion and $2.3 billion, respectively, of floating-rate debt was exposed to
changes in interest rates. This exposure is linked to commercial paper and LIBOR
rates. A hypothetical increase of one-percentage point in commercial paper and
LIBOR rates would increase annual pre-tax interest expense by $14 million. As of
September 30, 2000 and December 31, 1999, we also had $1.5 billion and $522
million, respectively, of long-term fixed rate debt obligations maturing in the
following 12 months. Any new debt obtained to refinance this debt would be
exposed to changes in interest rates. A hypothetical 10% change in the interest
rates on this debt would not have had a material effect on our earnings.
As of September 30, 2000 and December 31, 1999, we had entered into
cross-currency swaps with notional amounts of $133 million. The cross-currency
swaps synthetically transform $87 million and $94 million of Swiss Franc
borrowings at September 30, 2000 and December 31, 1999, respectively, into U.S.
dollar obligations. Any gains (losses) on the cross-currency swaps would be
offset by losses (gains) on the Swiss Franc debt obligations.
As of September 30, 2000 and December 31, 1999, we had entered into
equity swaps with notional amounts of $1.0 billion and $1.1 billion relating to
the sale of 24 million shares of Global Crossing common stock. In connection
with the equity swaps, we entered into several equity collars on certain shares.
The equity collars restrict the magnitude of any gains or losses generated by
the equity swaps. A hypothetical 10% reduction in the market price of Global
Crossing common shares, based upon a market price of $31.00 at September 30,
2000, would decrease the market value of our net position by $42 million. A
hypothetical increase of one-percentage point in interest rates would decrease
the market value of our net position by $6 million.
At September 30, 2000 and December 31, 1999, we held marketable equity
investments recorded at fair values of $363 million and $1.2 billion,
respectively, which included net unrealized gains of $90 million and $222
million, respectively. The investments have exposure to price risk. The
estimated potential loss in fair value resulting from a hypothetical 10%
decrease in prices quoted by stock exchanges would decrease the fair value of
our equity investments by $36 million.
RECENT REGULATORY DEVELOPMENTS
ACCESS REFORM. In May 2000, the FCC adopted the access reform and
universal service proposal developed by the Coalition for Affordable Local and
Long Distance Service ("CALLS plan"). The five year plan significantly reduces
switched access rates, eliminates the presubscribed interexchange carrier charge
while raising current subscriber line charge caps, and establishes a new $650
million universal service fund to replace implicit subsidies in interstate
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<PAGE> 24
access charges. The CALLS plan is mandatory for the 2000-01 annual price cap
tariff filing. We have appealed the order and asked for a stay of certain
provisions. The FCC denied the request for stay.
The access reform order also continued to allow information service
providers to avoid access charges. This will continue to negatively impact
results of in-region local exchange operations as the volume of information
service-related usage continues to increase without an associated increase in
revenues.
In 2000, the incumbent local exchange carriers ("ILECs") and WorldCom
appealed the February 1999 FCC order declaring Internet traffic to be
interstate. The FCC order required current agreements to remain intact for
reciprocal compensation with competitive local exchange carriers ("CLECs") until
it rules on this matter. In March 2000, the U.S. Court of Appeals partially
vacated and remanded the order back to the FCC. Until this is resolved, there
will remain uncertainty regarding our local exchange business' payment
obligation for Internet traffic.
COURT REMAND OF 6.5% PRODUCTIVITY FACTOR. In 1999, the District of
Columbia U.S. Court of Appeals issued a ruling reversing and remanding back to
the FCC its order requiring ILECs to retroactively increase the productivity
offset to price caps to 6.5% in their annual price cap filings. The Court found
that the FCC's order did not justify the increase. In December 1999, the FCC
issued a notice of proposed rulemaking responding to the issues raised in the
Court's remand. As part of adopting CALLS, the FCC noted that the CALLS
participants have agreed to waive any right to recoupment they might be entitled
to seek if the FCC could not justify 6.5% productivity factor on remand. We are
reviewing this issue and considering our options.
ADVANCED TELECOMMUNICATIONS SERVICES. In March 2000, the District of
Columbia U.S. Court of Appeals partially vacated and remanded back to the FCC
its order establishing expanded collocation requirements for both conventional
voice and advanced services. We also appealed the December 1999 FCC order
requiring that line sharing be provided as an unbundled network element ("UNE").
Line sharing allows a CLEC to provide advanced services over the same loop that
the ILEC uses to provide analog voice service. Previously, CLECs purchased a
separate loop to provision advanced services. In March 2000, we and GTE appealed
the FCC's December 1999 order on remand concerning the application of the
unbundling requirement to the provision of advanced services.
IMPLEMENTATION OF THE 1996 TELECOMMUNICATIONS ACT. In July 2000, the
Eighth Circuit Court of Appeals affirmed in part and reversed in part the FCC's
UNE and resale pricing rules, vacating and remanding the rules to the FCC. The
Court also affirmed several of its previous rulings regarding other aspects of
the FCC's UNE rules. In June 2000, the FCC affirmed and extended its November
1999 interim constraint on conversion of special access services to unbundled
network element combination pricing and clarified what constitutes a
"significant amount of local exchange service" for determining when
loop-transport UNE combination is available.
INTERLATA LONG-DISTANCE ENTRY. We have proceedings requesting support
of Qwest to enter the interLATA long-distance business in 12 of the states in
the U S WEST region and continue to work with the
22
<PAGE> 25
state public utility commissions ("PUCs") in those states to gain approval. We
are addressing operational support system issues and have agreed to participate
in multistate testing where the states are agreeable. We intend to file entry
applications with our remaining state PUCs by the end of the first quarter of
2001, with FCC filings following favorable state action. See "Special Note
Regarding Forward-Looking Statements " on page 14.
In June 2000, the FCC approved SBC Communications, Inc.'s application
to provide long distance service in Texas. On August 1, 2000, the US Court of
Appeals for the DC Circuit upheld the FCC's December 1999 approval of Bell
Atlantic-New York's (now Verizon Communications) application to provide
interLATA service in New York. Bell Atlantic has already gained some long
distance market share in New York and SBC is expected to do the same in Texas
now that approval has been granted. This could negatively affect Qwest's long
distance business in those states.
NUMBER POOLING. In March 2000, the FCC issued an order substantially
changing the way telephone numbers are allocated among carriers in order to
avoid the premature exhaustion of telephone numbers in North America. This new
approach must be in place by mid-2001 in our region and will require significant
modifications to operational support systems and switch software with costs
exceeding $345 million. The FCC has issued a further notice of proposed
rulemaking to determine how ILECs may recover these costs in a competitively
neutral way.
CONTINGENCIES
We have certain pending regulatory actions. See Note 6 to the condensed
consolidated financial statements.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. FAS No. 133 requires, among other
things, that all derivative instruments be recognized at fair value as assets or
liabilities in the consolidated balance sheets and changes in fair value
generally be recognized currently in earnings unless specific hedge accounting
criteria are met. This standard is effective for our 2001 fiscal year, although
earlier adoption is permitted. Financial statement impacts of adopting the new
standard depend upon the amount and nature of the future use of derivative
instruments and their relative changes in valuation over time. Had we adopted
FAS No. 133 in 2000, its impact on the consolidated financial statements would
not have been material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (the "Bulletin"), "Revenue Recognition in Financial
Statements," which addresses revenue recognition issues. The Bulletin requires,
in certain cases, nonrefundable up-front fees for services to be deferred and
recognized over the expected period of performance. The Bulletin also allows
incremental direct costs incurred in obtaining the up-front fees to be deferred
and recognized over the same period as the up-front fees. The implementation of
the Bulletin has been delayed until the fourth quarter of 2000 for fiscal years
beginning after December 15, 1999. The
23
<PAGE> 26
application of the Bulletin will be retroactive to January 1, 2000. We are
assessing the types of transactions that may be impacted by this pronouncement.
The impact of the Bulletin on the consolidated financial statements is not
anticipated to be material.
24
<PAGE> 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our Company and its subsidiaries are subject to claims and proceedings
arising in the ordinary course of business. For a discussion of these actions,
see Note 6: "Commitments and Contingencies" - to the consolidated financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed for Qwest through the filing of this Form 10-Q.
(2.1) Separation Agreement, dated June 5, 1998, between U S WEST, Inc.
(renamed MediaOne Group, Inc.) ("MediaOne Group") and USW-C, Inc.
(renamed U S WEST, Inc.) ("U S WEST"), (incorporated by reference
to U S WEST's Current Report on Form 8-K/A dated June 26, 1998,
File No. 1-14087).
(2.2) Amendment to the Separation Agreement between MediaOne Group and
U S WEST, dated June 12, 1998 (incorporated by reference to
U S WEST's Annual Report on Form 10-K/A for the year ended
December 31, 1998, File No. 1-14087).
(3.1) Amended and Restated Certificate of Incorporation of Qwest,
(incorporated by reference to Qwest's Registration Statement on
Form S-4/A, File No. 333-81149, filed September 17, 1999).
(3.2) Amended and Restated Bylaws of Qwest (incorporated by reference
to Qwest's Registration Statement on Form S-4/A, File No.
333-81149, filed September 17, 1999).
(4.1)*** 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).
(4.2)**** 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).
(4.3)**** 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).
(4.4) Indenture dated as of November 4, 1998 with Bankers Trust Company
(including form of Qwest's 7.50% Senior Discount Notes due 2008
and 7.50% Series B Senior Discount Notes due 2008 as an exhibit
thereto) (incorporated by reference to Qwest's Registration
Statement on Form S-4, File No. 333-71603, filed February 2,
1999).
(4.5) Indenture dated as of November 27, 1998 with Bankers Trust
Company (including form of Qwest's 7.25% Senior Discount Notes
due 2008 and 7.25% Series B Senior Discount Notes due 2008 as
exhibit thereto) (incorporated by reference to Qwest's
Registration Statement on Form S-4, File No. 333-71603, filed
February 2, 1999).
(4.6) Registration Agreement dated November 27, 1998 with Salomon
Brothers Inc.
25
<PAGE> 28
relating to Qwest's 7.25% Senior Discount Notes due 2008
(incorporated by reference to Qwest's Registration Statement on
Form S-4, File No. 333-71603, filed February 2, 1999).
(4.7) 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).
(4.8) Registration Rights Agreement, dated August 20, 1999, between
U S WEST Capital Funding Inc., U S WEST, Inc., J.P. Morgan
Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated by reference to U S WEST's Form S-4
Registration Statement, File No. 333-92523, filed December 10,
1999).
(4.9) Indenture, dated as of June 29, 1998, by and among U S WEST
Capital Funding, Inc., U S WEST, Inc., and The First National
Bank of Chicago (now known as Bank One Trust Company, National
Association), as Trustee (incorporated by reference to U S WEST's
Current Report on Form 8-K, dated November 18, 1998, File No.
1-14087).
(4.10) First Supplemental Indenture, dated as of June 30, 2000, by and
among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest
Communications International Inc., and Bank One Trust Company, as
Trustee (incorporated by reference to Qwest's quarterly report on
Form 10-Q for the quarter ended June 30, 2000).
(10.1)** Growth Share Plan, as amended, effective October 1, 1996.*
(10.2)* Equity Incentive Plan, as amended (incorporated by reference from
Exhibit A to Qwest's definitive proxy statement on Schedule 14A,
filed March 17, 2000.
(10.3)* Qwest Communications International Inc. Employee Stock Purchase
Plan (incorporated by reference to Qwest's Preliminary Proxy
Statement for the Annual Meeting of Stockholders, filed February
26, 1999).
(10.4)* Qwest Communications International Inc. Deferred Compensation
Plan (incorporated by reference to Qwest's Annual Report on Form
10-K for the year ended December 31, 1998).
(10.5)**** Equity Compensation Plan for Non-Employee Directors.
(10.6)* Qwest Communications International Inc. 401-K Plan (incorporated
by reference to Qwest's Annual Report on Form 10-K for the year
ended December 31, 1998).
(10.7)** Employment Agreement dated December 21, 1996 with Joseph P.
Nacchio.*
(10.8)**** Growth Share Plan Agreement with Joseph P. Nacchio, effective
January 1, 1997, and Amendment thereto.*
(10.9)**** Non-Qualified Stock Option Agreement with Joseph P. Nacchio,
effective June 23, 1997.*
(10.11)** Promissory Note dated November 20, 1996 and Severance Agreement
dated December 1, 1996 with Robert S. Woodruff.*
(10.12)**** Employment Agreement dated March 7, 1997 with Stephen M.
Jacobsen.*
(10.15)**** Employment Agreement dated October 8, 1997 with Lewis O. Wilks.*
(10.16)**+ IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
26
<PAGE> 29
(10.17)**+ IRU Agreement dated as of February 26, 1996 with WorldCom Network
Services, Inc.
(10.18)**+ IRU Agreement dated as of May 2, 1997 with GTE.
(10.31) Common Stock Purchase Agreement dated as of December 14, 1998
with Microsoft Corporation (incorporated by reference to Qwest's
Current Report on Form 8-K filed December 16, 1998).
(10.32) Registration Rights Agreement dated December 14, 1998 with
Microsoft Corporation (incorporated by reference to Qwest's
Current Report on Form 8-K filed December 16, 1998).
(10.33) Registration Rights Agreement dated as of April 18, 1999 with
Anschutz Company and Anschutz Family Investment Company LLC
(incorporated by reference to Qwest's Current Report on Form
8-K/A filed April 28, 1999).
(10.34) Common Stock Purchase Agreement dated as of April 19, 1999 with
BellSouth Enterprises, Inc. (incorporated by reference to Qwest's
Current Report on Form 8-K/A filed April 28, 1999).
(10.35) Registration Rights Agreement dated as of April 19, 1999 with
BellSouth Enterprises, Inc. (incorporated by reference to Qwest's
Current Report on Form 8-K/A filed April 28, 1999).
(10.36) Voting Agreement dated as of July 18, 1999 among each of the
shareholders listed on the signature page thereto and U S WEST,
Inc. (incorporated by reference to Qwest's Registration Statement
on Form S-4/A, File No. 333-81149, filed September 17, 1999).
(10.37) Purchase Agreement by and among Qwest, Slingshot Networks, LLC
and Anschutz Digital Media, Inc. dated September 26, 1999
(incorporated by reference to Qwest's quarterly report on Form
10-Q for the quarter ended September 30, 1999).
27
<PAGE> 30
(10.38) Unit Purchase Agreement dated June 21, 2000 by and among U.S.
Telesource, Inc. and Anschutz Digital Media, Inc. (incorporated
by reference to Qwest's quarterly report on Form 10-Q for the
quarter ended June 30, 2000).
(10.39) Second Amended and Restated Operating Agreement of Slingshot
Networks, LLC entered into as of June 21, 2000 between Anschutz
Digital Media, Inc. and U.S. Telesource, Inc. (incorporated by
reference to Qwest's quarterly report on Form 10-Q for the
quarter ended June 30, 2000).
(10.40) Employee Matters Agreement between MediaOne Group and U S WEST
dated June 5, 1998 (incorporated by reference to U S WEST's
Current Report on Form 8-K/A dated June 26, 1998, File No.
1-14087).
(10.41) Tax Sharing Agreement between MediaOne Group and U S WEST, dated
June 5, 1998 (incorporated by reference to U S WEST's Current
Report on Form 8-K/A dated June 26, 1998, File No. 1-14087).
(10.42) 364-Day $4.0 billion Credit Agreement, dated as of May 5, 2000,
among U S WEST, Inc., U S WEST Capital Funding, Inc., U S WEST
Communications, Inc., the banks listed therein, and Morgan
Guaranty Trust Company of New York, as administrative agent
(incorporated by reference to U S WEST's quarterly report on Form
10-Q for the quarter ended March 31, 2000).
(10.43) Purchase Agreement dated July 3, 2000 among Qwest Capital
Funding, Inc., Qwest Communications International Inc. and
Salomon Smith Barney Inc. (incorporated by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended June 30,
2000).
10.44 Purchase Agreement dated August 16, 2000 among Qwest Capital
Funding, Inc., Qwest Communications International Inc., Salomon
Smith Barney Inc. and Lehman Brothers Inc. as Representatives of
the several initial purchasers listed therein.
10.45 Registration Rights Agreement dated August 16, 2000 among Qwest
Capital Funding, Inc., Qwest Communications International Inc.,
Salomon Smith Barney Inc. and Lehman Brothers Inc. as
Representatives of the several initial purchasers listed therein.
(10.60) 1998 U S WEST Stock Plan (incorporated by reference to U S WEST's
Form S-4 Registration Statement, File No. 333-45765, filed
February 6, 1998, as amended).
(10.61)* U S WEST Executive Short-Term Incentive Plan (incorporated by
reference to U S WEST's Form S-4 Registration Statement, File No.
333-45765, filed February 6, 1998, as amended).
(10.62)* U S WEST 1998 Broad Based Stock Option Plan, dated June 12, 1998
(Exhibit 10(l) to Form 10-Q for the quarter ended September 30,
1998, File No. 1-14087).
(10.63)* U S WEST Deferred Compensation Plan, amended and restated
effective as of June 12, 1998 (Exhibit 10(m) to Form 10-Q for the
quarter ended September 30, 1998, File No. 1-14087).
(10.64)* U S WEST 1998 Stock Plan, as amended June 22, 1998 (Exhibit 10(n)
to Form 10-Q for the quarter ended September 30, 1998, File No.
1-14087).
(10.65)* 1998 U S WEST Stock Plan, as amended August 6, 1999 (Exhibit
10-O.1 to Form 10-Q for the quarter ended September 30, 1999,
File No. 1-14087).
(10.66)* 1999 U S WEST Stock Plan, as amended August 6, 1999 (Exhibit
10-O.2 to Form 10-Q for the quarter ended September 30, 1999,
File No. 1-14087).
(10.67) Form of Agreement for Purchase and Sale of Telephone Exchanges,
dated as of June 16, 1999, between Citizens Utilities Company and
U S WEST
28
<PAGE> 31
Communications, Inc. (Exhibit 99B to Form 8-K, dated June 17,
1999, File No. 1-14087).
27 Financial Data Schedule.
(99) Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for
the year ended December 31, 1999 (incorporated by reference to
U S WEST's Annual Report on Form 10-K, File No. 1-14087, Paper
Copy (P).
---------
( ) Previously filed.
* Executive Compensation Plans and Arrangements.
** Incorporated by reference 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 in Qwest's Form 10-K for the year ended
December 31, 1997.
+ Portions have been omitted pursuant to a request for confidential
treatment.
(b) Reports on Form 8-K:
(i) On July 3, 2000, Qwest filed a Current Report on Form 8-K announcing
the completion of the merger with U S WEST, Inc.
(ii) On July 7, 2000, Qwest filed a Current Report on Form 8-K regarding a
meeting with investors and financial analysts.
(iii) On August 14, 2000, Qwest filed a Current Report on Form 8-K announcing
its financial results for the second quarter of 2000.
(iv) On September 8, 2000, Qwest filed a Current Report on Form 8-K
regarding a meeting with financial analysts and members of the media
that took place on September 7, 2000. The meeting discussed expected
financial results for 2000 and 2001 as well as synergies expected from
its acquisition of U S WEST, Inc. on June 30, 2000.
(v) On September 13, 2000 Qwest filed a Current Report on Form 8-K
regarding a financial analyst conference held on September 11, 2000.
29
<PAGE> 32
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.
By: /s/ ROBERT S. WOODRUFF
----------------------------------------
Robert S. Woodruff
Executive Vice President - Finance and
Chief Financial Officer
November 14, 2000
30
<PAGE> 33
INDEX TO EXHIBITS
(a) Exhibits filed for Qwest through the filing of this Form 10-Q.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
(2.1) Separation Agreement, dated June 5, 1998, between U S WEST, Inc.
(renamed MediaOne Group, Inc.) ("MediaOne Group") and USW-C, Inc.
(renamed U S WEST, Inc.) ("U S WEST"), (incorporated by reference
to U S WEST's Current Report on Form 8-K/A dated June 26, 1998,
File No. 1-14087).
(2.2) Amendment to the Separation Agreement between MediaOne Group and
U S WEST, dated June 12, 1998 (incorporated by reference to
U S WEST's Annual Report on Form 10-K/A for the year ended
December 31, 1998, File No. 1-14087).
(3.1) Amended and Restated Certificate of Incorporation of Qwest,
(incorporated by reference to Qwest's Registration Statement on
Form S-4/A, File No. 333-81149, filed September 17, 1999).
(3.2) Amended and Restated Bylaws of Qwest (incorporated by reference
to Qwest's Registration Statement on Form S-4/A, File No.
333-81149, filed September 17, 1999).
(4.1)*** 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).
(4.2)**** 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).
(4.3)**** 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).
(4.4) Indenture dated as of November 4, 1998 with Bankers Trust Company
(including form of Qwest's 7.50% Senior Discount Notes due 2008
and 7.50% Series B Senior Discount Notes due 2008 as an exhibit
thereto) (incorporated by reference to Qwest's Registration
Statement on Form S-4, File No. 333-71603, filed February 2,
1999).
(4.5) Indenture dated as of November 27, 1998 with Bankers Trust
Company (including form of Qwest's 7.25% Senior Discount Notes
due 2008 and 7.25% Series B Senior Discount Notes due 2008 as
exhibit thereto) (incorporated by reference to Qwest's
Registration Statement on Form S-4, File No. 333-71603, filed
February 2, 1999).
(4.6) Registration Agreement dated November 27, 1998 with Salomon
Brothers Inc.
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
relating to Qwest's 7.25% Senior Discount Notes due 2008
(incorporated by reference to Qwest's Registration Statement on
Form S-4, File No. 333-71603, filed February 2, 1999).
(4.7) 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).
(4.8) Registration Rights Agreement, dated August 20, 1999, between
U S WEST Capital Funding Inc., U S WEST, Inc., J.P. Morgan
Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated by reference to U S WEST's Form S-4
Registration Statement, File No. 333-92523, filed December 10,
1999).
(4.9) Indenture, dated as of June 29, 1998, by and among U S WEST
Capital Funding, Inc., U S WEST, Inc., and The First National
Bank of Chicago (now known as Bank One Trust Company, National
Association), as Trustee (incorporated by reference to U S WEST's
Current Report on Form 8-K, dated November 18, 1998, File No.
1-14087).
(4.10) First Supplemental Indenture, dated as of June 30, 2000, by and
among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest
Communications International Inc., and Bank One Trust Company, as
Trustee (incorporated by reference to Qwest's quarterly report on
Form 10-Q for the quarter ended June 30, 2000).
(10.1)** Growth Share Plan, as amended, effective October 1, 1996.*
(10.2)* Equity Incentive Plan, as amended (incorporated by reference from
Exhibit A to Qwest's definitive proxy statement on Schedule 14A,
filed March 17, 2000.
(10.3)* Qwest Communications International Inc. Employee Stock Purchase
Plan (incorporated by reference to Qwest's Preliminary Proxy
Statement for the Annual Meeting of Stockholders, filed February
26, 1999).
(10.4)* Qwest Communications International Inc. Deferred Compensation
Plan (incorporated by reference to Qwest's Annual Report on Form
10-K for the year ended December 31, 1998).
(10.5)**** Equity Compensation Plan for Non-Employee Directors.
(10.6)* Qwest Communications International Inc. 401-K Plan (incorporated
by reference to Qwest's Annual Report on Form 10-K for the year
ended December 31, 1998).
(10.7)** Employment Agreement dated December 21, 1996 with Joseph P.
Nacchio.*
(10.8)**** Growth Share Plan Agreement with Joseph P. Nacchio, effective
January 1, 1997, and Amendment thereto.*
(10.9)**** Non-Qualified Stock Option Agreement with Joseph P. Nacchio,
effective June 23, 1997.*
(10.11)** Promissory Note dated November 20, 1996 and Severance Agreement
dated December 1, 1996 with Robert S. Woodruff.*
(10.12)**** Employment Agreement dated March 7, 1997 with Stephen M.
Jacobsen.*
(10.15)**** Employment Agreement dated October 8, 1997 with Lewis O. Wilks.*
(10.16)**+ IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
(10.17)**+ IRU Agreement dated as of February 26, 1996 with WorldCom Network
Services, Inc.
(10.18)**+ IRU Agreement dated as of May 2, 1997 with GTE.
(10.31) Common Stock Purchase Agreement dated as of December 14, 1998
with Microsoft Corporation (incorporated by reference to Qwest's
Current Report on Form 8-K filed December 16, 1998).
(10.32) Registration Rights Agreement dated December 14, 1998 with
Microsoft Corporation (incorporated by reference to Qwest's
Current Report on Form 8-K filed December 16, 1998).
(10.33) Registration Rights Agreement dated as of April 18, 1999 with
Anschutz Company and Anschutz Family Investment Company LLC
(incorporated by reference to Qwest's Current Report on Form
8-K/A filed April 28, 1999).
(10.34) Common Stock Purchase Agreement dated as of April 19, 1999 with
BellSouth Enterprises, Inc. (incorporated by reference to Qwest's
Current Report on Form 8-K/A filed April 28, 1999).
(10.35) Registration Rights Agreement dated as of April 19, 1999 with
BellSouth Enterprises, Inc. (incorporated by reference to Qwest's
Current Report on Form 8-K/A filed April 28, 1999).
(10.36) Voting Agreement dated as of July 18, 1999 among each of the
shareholders listed on the signature page thereto and U S WEST,
Inc. (incorporated by reference to Qwest's Registration Statement
on Form S-4/A, File No. 333-81149, filed September 17, 1999).
(10.37) Purchase Agreement by and among Qwest, Slingshot Networks, LLC
and Anschutz Digital Media, Inc. dated September 26, 1999
(incorporated by reference to Qwest's quarterly report on Form
10-Q for the quarter ended September 30, 1999).
</TABLE>
<PAGE> 36
<TABLE>
<S> <C>
(10.38) Unit Purchase Agreement dated June 21, 2000 by and among U.S.
Telesource, Inc. and Anschutz Digital Media, Inc. (incorporated
by reference to Qwest's quarterly report on Form 10-Q for the
quarter ended June 30, 2000).
(10.39) Second Amended and Restated Operating Agreement of Slingshot
Networks, LLC entered into as of June 21, 2000 between Anschutz
Digital Media, Inc. and U.S. Telesource, Inc. (incorporated by
reference to Qwest's quarterly report on Form 10-Q for the
quarter ended June 30, 2000).
(10.40) Employee Matters Agreement between MediaOne Group and U S WEST
dated June 5, 1998 (incorporated by reference to U S WEST's
Current Report on Form 8-K/A dated June 26, 1998, File No.
1-14087).
(10.41) Tax Sharing Agreement between MediaOne Group and U S WEST, dated
June 5, 1998 (incorporated by reference to U S WEST's Current
Report on Form 8-K/A dated June 26, 1998, File No. 1-14087).
(10.42) 364-Day $4.0 billion Credit Agreement, dated as of May 5, 2000,
among U S WEST, Inc., U S WEST Capital Funding, Inc., U S WEST
Communications, Inc., the banks listed therein, and Morgan
Guaranty Trust Company of New York, as administrative agent
(incorporated by reference to U S WEST's quarterly report on Form
10-Q for the quarter ended March 31, 2000).
(10.43) Purchase Agreement dated July 3, 2000 among Qwest Capital
Funding, Inc., and Qwest Communications International Inc. and
Salomon Smith Barney Inc. (incorporated by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended June 30, 2000).
10.44 Purchase Agreement dated August 16, 2000 among Qwest Capital
Funding, Inc., Qwest Communications International Inc., Salomon
Smith Barney Inc. and Lehman Brothers Inc. as Representatives of
the several initial purchasers listed therein.
10.45 Registration Rights Agreement dated August 16, 2000 among Qwest
Capital Funding, Inc., Qwest Communications International Inc.,
Salomon Smith Barney Inc. and Lehman Brothers Inc. as
Representatives of the several initial purchasers listed therein.
(10.60) 1998 U S WEST Stock Plan (incorporated by reference to U S WEST's
Form S-4 Registration Statement, File No. 333-45765, filed
February 6, 1998, as amended).
(10.61)* U S WEST Executive Short-Term Incentive Plan (incorporated by
reference to U S WEST's Form S-4 Registration Statement, File No.
333-45765, filed February 6, 1998, as amended).
(10.62)* U S WEST 1998 Broad Based Stock Option Plan, dated June 12, 1998
(Exhibit 10(l) to Form 10-Q for the quarter ended September 30,
1998, File No. 1-14087).
(10.63)* U S WEST Deferred Compensation Plan, amended and restated
effective as of June 12, 1998 (Exhibit 10(m) to Form 10-Q for the
quarter ended September 30, 1998, File No. 1-14087).
(10.64)* U S WEST 1998 Stock Plan, as amended June 22, 1998 (Exhibit 10(n)
to Form 10-Q for the quarter ended September 30, 1998, File No.
1-14087).
(10.65)* 1998 U S WEST Stock Plan, as amended August 6, 1999 (Exhibit
10-O.1 to Form 10-Q for the quarter ended September 30, 1999,
File No. 1-14087).
(10.66)* 1999 U S WEST Stock Plan, as amended August 6, 1999 (Exhibit
10-O.2 to Form 10-Q for the quarter ended September 30, 1999,
File No. 1-14087).
(10.67) Form of Agreement for Purchase and Sale of Telephone Exchanges,
dated as of June 16, 1999, between Citizens Utilities Company and
U S WEST
</TABLE>
<PAGE> 37
<TABLE>
<S> <C>
Communications, Inc. (Exhibit 99B to Form 8-K, dated June 17,
1999, File No. 1-14087).
27 Financial Data Schedule.
(99) Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for
the year ended December 31, 1999 (incorporated by reference to
U S WEST's Annual Report on Form 10-K, File No. 1-14087, Paper Copy
(P).
</TABLE>
-------------------
( ) Previously filed.
* Executive Compensation Plans and Arrangements.
** Incorporated by reference 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 in Qwest's Form 10-K for the year ended
December 31, 1997.
+ Portions have been omitted pursuant to a request for confidential
treatment.
(b) Reports on Form 8-K:
(i) On July 3, 2000, Qwest filed a Current Report on Form 8-K announcing
the completion of the merger with U S WEST, Inc.
(ii) On July 7, 2000, Qwest filed a Current Report on Form 8-K regarding a
meeting with investors and financial analysts.
(iii) On August 14, 2000, Qwest filed a Current Report on Form 8-K announcing
its financial results for the second quarter of 2000.
(iv) On September 8, 2000, Qwest filed a Current Report on Form 8-K
regarding a meeting with financial analysts and members of the media
that took place on September 7, 2000. The meeting discussed expected
financial results for 2000 and 2001 as well as synergies expected from
its acquisition of U S WEST, Inc. on June 30, 2000.
(v) On September 13, 2000 Qwest filed a Current Report on Form 8-K
regarding a financial analyst conference held on September 11, 2000.
