UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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QWEST COMMUNICATIONS INTERNATIONAL INC.
(Exact name of registrant specified in its charter)
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Delaware 84-1339282
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(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
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(Address of principal executive offices)
(303) 992-1400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the Company outstanding) was approximately 754.5
million, as of May 9, 2000.
QWEST COMMUNICATIONS INTERNATIONAL INC.
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page
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PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three Months Ended 11
March 31, 2000 and 1999
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 26
2
Part I. Financial Information
Item 1. Financial Statements
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Information)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2000 1999
------------- -------------
Revenue:
Communications services $ 1,216.8 $ 737.2
Construction services - 141.2
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Total revenue 1,216.8 878.4
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Operating expenses:
Access and network operations 677.9 432.9
Construction services - 76.8
Selling, general and administrative 302.9 213.3
Depreciation and amortization 118.1 95.9
Merger costs 21.2 -
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Total operating expenses 1,120.1 818.9
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Earnings from operations 96.7 59.5
Other expense (income):
Interest expense, net 37.6 32.0
Other expense (income), net (0.5) 2.9
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Total other expense 37.1 34.9
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Earnings before income taxes 59.6 24.6
Income tax expense 47.0 19.8
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Net earnings $ 12.6 $ 4.8
============= =============
Net earnings per share - basic and diluted $ 0.02 $ 0.01
============= =============
See accompanying notes to condensed consolidated financial statements
3
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Information)
(Unaudited)
March 31, December 31,
2000 1999
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 40.6 $ 349.2
Trade accounts and notes receivable, net 1,360.0 1,136.7
Prepaid expenses and other 355.7 299.3
---------------- ----------------
Total current assets 1,756.3 1,785.2
Property and equipment, net 4,934.2 4,108.7
Excess of cost over net assets acquired, net 3,263.0 3,290.1
Investment in KPNQwest 571.9 645.8
Other, net 1,449.8 1,228.3
---------------- ----------------
TOTAL ASSETS $ 11,975.2 $ 11,058.1
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 241.4 $ 209.9
Facility costs accrued and payable 276.8 275.4
Debt and capital lease obligations 547.4 1.4
Accrued expenses and other 897.9 751.7
---------------- ----------------
Total current liabilities 1,963.5 1,238.4
Debt and capital lease obligations, net of current portion 2,390.7 2,368.3
Other long-term liabilities 496.8 394.9
Minority interest 49.2 55.2
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; authorized 200.0 million
shares; no shares issued and outstanding - -
Common stock - $.01 par value; authorized 5.0 billion
shares; 753.7 million shares and 750.0 million shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively. 7.5 7.5
Paid-in capital 7,370.5 7,278.3
Accumulated other comprehensive income 101.8 132.9
Accumulated deficit (404.8) (417.4)
---------------- ----------------
Total stockholders' equity 7,075.0 7,001.3
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,975.2 $ 11,058.1
================ ================
See accompanying notes to condensed consolidated financial statements
4
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2000 1999
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Net cash provided by (used in) operating activities $ 22.9 $ (79.6)
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Cash flows from investing activities:
Acquisitions and investments, net of cash acquired (14.6) (15.3)
Expenditures for property and equipment (910.6) (299.8)
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Net cash used in investing activities (925.2) (315.1)
------------- ------------
Cash flows from financing activities:
Repayments of long-term debt (1.6) (1.8)
Net borrowings under revolving credit facilities 544.3 -
Proceeds from employee stock transactions 51.0 58.0
Other - (5.3)
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Net cash provided by financing activities 593.7 50.9
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Net decrease in cash and cash equivalents (308.6) (343.8)
Cash and cash equivalents, beginning of period 349.2 462.8
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Cash and cash equivalents, end of period $ 40.6 $ 119.0
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest, net $ 8.1 $ 5.3
============= ============
Supplemental disclosure of significant non-cash investing and financing
activities:
Income tax benefit attributable to exercise of employee stock options $ 41.2 $ 29.2
============= ============
Unrealized gain on marketable equity securities, net of tax $ 33.8 $ 57.2
============= ============
See accompanying notes to condensed consolidated financial statements
5
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
(1) Business and Background
Qwest Communications International Inc. ("Qwest") is a leading
broadband Internet communications company. Qwest's services include Internet,
multimedia, data and voice services that are sold to business, consumer and
government customers. Internet and multimedia services include Internet Protocol
("IP") enabled services such as dedicated and dial up Internet access, web
hosting, co-location access, voice over IP, application hosting and mass storage
services. Qwest also provides high-volume voice and conventional private line
services to other communications providers, as well as to Internet service
providers ("ISPs"), and other data service companies. Internet and multimedia
services are being developed in partnership with leading information technology
companies to align Qwest with existing and anticipated market demand.
(2) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
condensed consolidated financial statements include all adjustments, consisting
of normal recurring items, necessary to fairly present the results of
operations, financial position and cash flows for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K (as incorporated by reference from its annual report
to shareholders) for the year ended December 31, 1999. Certain prior year
balances have been reclassified to conform to the current year presentation.
(3) U S WEST Merger Agreement
In July 1999, Qwest entered into a definitive merger agreement with U S
WEST, Inc. ("U S WEST"). Under terms of the merger agreement, Qwest will issue
shares of its common stock having a value of $69.00 for each share of U S WEST
common stock, subject to a "collar" on Qwest's average stock price between
$28.26 and $39.90 per share. The number of Qwest shares to be issued for each U
S WEST share will be determined by dividing $69.00 by the average of the daily
volume weighted average prices of Qwest common stock for 15 randomly selected
trading days over a 30-day measurement period ending three days before the
closing of the transaction, provided that Qwest will not issue more than 2.44161
shares for each U S WEST share or less than 1.72932 shares for each U S WEST
share. The transaction will be accounted for as a purchase.
If Qwest's average stock price is below $38.70 per share, the
obligation under the "collar" for the amount which the price is below $38.70 per
share may be satisfied in whole or in part with cash. In determining the cash
amount for the collar, Qwest and U S WEST will consider Qwest's desire to reduce
dilution to its stockholders, U S WEST's potential desire to provide a cash
element to its stockholders and both companies' desire to maintain the combined
company's strong financial condition. If the companies decide to provide cash as
part of the collar consideration, the minimum exchange ratio would be 1.783.
U S WEST may terminate the merger agreement if the closing price of
Qwest's shares is below $22.00 for 20 consecutive trading days before the
closing, or if the average Qwest share price during the measurement period is
less than $22.00. The Boards of Directors and stockholders of both Qwest and U S
WEST have approved the proposed transaction. As of March 31, 2000, the merger
had received required approval from the Federal Communications Commission
("FCC"), pending approval of divestiture of the long distance business in the U
S WEST territory, as well as approval from the regulators in the states of
Colorado, Iowa and Montana. Approval from regulators in Arizona, Minnesota,
Washington, Wyoming and Utah is pending. The merger is expected to close by
mid-summer 2000.
As a result of the transaction, Qwest will become subject to the
regulations applicable to U S WEST, a Regional Bell Operating Company ("RBOC").
Generally, effective as of the closing of the transaction, Qwest may not
6
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
provide inter-LATA transport services within U S WEST's 14-state region until it
receives approval to provide such services under Section 271 of the
Telecommunications Act of 1996. Therefore, Qwest filed a divestiture plan with
the FCC in April 2000. Under this plan, Qwest has agreed to sell its long
distance business in the U S WEST territory to Touch America, Inc., the
telecommunications subsidiary of The Montana Power Company. Approval of the
divestiture plan is expected by the end of June.
In connection with the termination of the U S WEST and Global Crossing
LTD. ("Global") merger agreement, U S WEST paid Global a break-up fee of $140.0
million in cash, which Qwest advanced to U S WEST. U S WEST also agreed to
return $140.0 million in Global shares, valued at $62.75 per share, purchased by
U S WEST in connection with its agreement with Global. In addition to the
break-up fee and returning of the Global shares, Qwest agreed to purchase $140.0
million in services from Global over four years at the best commercially
available prices.
(4) Comprehensive Income
The following table represents the calculation of comprehensive income
(loss) (in millions):
Three Months Ended
March 31,
------------------------
2000 1999
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Net earnings $ 12.6 $ 4.8
----------- ----------
Other comprehensive income:
Net unrealized holding gains on securities, net of
related taxes of $22.5 million and $31.1 million 33.8 57.2
Foreign currency translation adjustments (64.9) (1.4)
----------- ----------
Total other comprehensive income (loss) (31.1) 55.8
----------- ----------
Comprehensive income (loss) $ (18.5) $ 60.6
=========== ==========
(5) Investments
In February 2000, Qwest made an equity investment of approximately
$10.0 million in cash in high-speed, DSL local networks through an agreement
with Jato Communications Corp. ("Jato"), a packet-based Competitive Local
Exchange Carrier ("CLEC") that provides high-speed Internet access, network
connectivity and associated broadband applications and services to small and
medium-sized businesses. Under this agreement, Qwest will enhance its ability to
provide customers high-speed DSL connectivity by expanding the current areas
covered by separate agreements the Company has with Covad Communications Group
Inc. and Rhythms NetConnections Inc. Qwest's investment in Jato is accounted for
under the cost method.
7
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
(6) Debt and Capital Lease Obligations
Debt and capital lease obligations consisted of the following (in
millions):
March 31, December 31,
2000 1999
------------ ------------
Fixed rate debt at interest rates
ranging from 7.25% to 10 7/8% $ 2,361.4 $ 2,344.1
Revolving credit facilities 544.3 -
Capital lease and other obligations 32.4 25.6
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Subtotal 2,938.1 2,369.7
Less current portion (547.4) (1.4)
------------ ------------
Debt and capital lease obligations $ 2,390.7 $ 2,368.3
============ ============
Unamortized discounts on senior discount notes totaled $207.5 million
and $224.8 million as of March 31, 2000 and December 31, 1999, respectively.
In March 1999, the Company entered into a $1.0 billion credit agreement
"the Existing Facility" with a syndicate of banks. This credit agreement
provides for two five-year revolving credit facilities for a total of $500.0
million and one 364-day revolving credit facility in the amount of $500.0
million. The credit facilities bear interest at either the bank base rate of
interest or LIBOR, plus an applicable margin.
In March 2000, the Company amended the Existing Facility to extend the
term of the $500.0 million 364-day revolving credit facility and added an
additional $1.0 billion credit facility "the New Facility". As a result of the
extension of the Existing Facility and the addition of the New Facility, the
Company now has $2.0 billion in revolving credit facilities. The Existing
Facility contains a provision whereby all amounts outstanding under the
agreement must be repaid as a result of a "change of control" of the Company.
While the Company does not believe that a change of control will occur as a
result of the U S WEST merger, the Company negotiated an amendment to the
Existing Facility to specifically exclude the U S WEST merger from the "change
of control" provision.
(7) Income Taxes
Total income tax expense differed from the amounts computed by applying
the federal statutory income tax rate (35%) to earnings before income taxes as a
result of the following items:
Three Months Ended
March 31,
------------------------
2000 1999
----------- ----------
Statutory income tax expense 35.0% 35.0%
State taxes, net of federal effect 9.9% -
Goodwill amortization 12.8% 28.7%
Merger costs 12.4% -
Foreign losses 8.1% 12.5%
Other, net 0.7% 4.3%
----------- ----------
Total income tax expense 78.9% 80.5%
=========== ==========
8
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
(8) Commitments and Contingencies
(a) Capacity Purchase Commitment
In July 1999, Qwest and Global entered into a purchase agreement under
which Qwest agreed to purchase services from Global over a four-year period in a
total amount of $140.0 million. This agreement was entered into in connection
with Qwest's definitive merger agreement with US WEST and the termination of
the US WEST and Global merger agreement. At the end of the two year period
following the signing of the agreement, Qwest must pay Global an amount equal to
the difference between $140.0 million and the amount of the services purchased
under the agreement at that time. The amount of the differential payment will be
credited by Global against all purchases by Qwest of services from Global during
the remaining two years of the agreement. Under the agreement, Qwest is entitled
to purchase services on any of Global's network segments at the most favorable
commercially available prices offered by Global. As of March 31, 2000 the total
remaining commitment under this purchase agreement was approximately $48.0
million.
(b) CyberCenter Construction and Managed Operations Commitment
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
CyberCenters(sm) throughout North America. IBM will build and provide
operational support for 28 additional CyberCenters. IBM will lease hosting space
in these CyberCenters and will purchase telecommunications services from Qwest,
with the total revenue 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 over a seven-year period, which combined with the construction
services amounts to approximately $2.5 billion. The Company had not purchased
any of these services as of March 31, 2000.
(c) Legal Matters
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has adequate accrued loss contingencies and that, although the
ultimate outcome of these claims cannot be ascertained at this time, current
pending or threatened litigation matters are not expected to have a material
adverse impact on the Company's results of operations or financial position.
(9) Weighted Average Shares Outstanding
For the three months ended March 31, 2000 and 1999, the weighted average
number of shares used for computing basic earnings per share was 751.5 million
and 698.3 million, respectively. The weighted average number of shares used for
computing diluted earnings per share for the three months ended March 31, 2000
and 1999, was 789.4 million and 737.1 million, respectively (including
incremental common shares attributable to dilutive securities related to
options, warrants and growth shares of 37.9 million and 38.8 million,
respectively).
(10) Business Segment Information
Historically, the Company's two business segments were Communications
Services and Construction Services, each having a separate management team and
infrastructure, offering different products and services, and utilizing
different marketing strategies to target different types of customers.
Communications Services include Internet, multimedia, data and voice services
that are sold to business, consumer and government customers. Construction
Services constructed and installed fiber optic systems for other communications
entities, as well as for the Company's own use. With the completion of the
Company's network, Construction Services is no longer evaluated as a separate
segment by the Company's chief operating decision-maker.
9
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
The following table presents summarized financial information related to
business segments (in millions):
Communications Construction Corporate/ Consolidated
Services Services Unallocated Total
-------------- -------------- ------------- --------------
Three Months Ended March 31, 2000
Revenue $ 1,216.8 $ - $ - $ 1,216.8
Earnings (loss) from operations $ 236.0 $ - $ (139.3) $ 96.7
Three Months Ended March 31, 1999
Revenue $ 737.2 $ 141.2 $ - $ 878.4
Earnings (loss) from operations $ 100.7 $ 54.7 $ (95.9) $ 59.5
Corporate/unallocated operating expenses consist of the following:
Three Months Ended
March 31,
---------------------------------
2000 1999
------------- -------------
Depreciation and amortization $ 118.1 $ 95.9
Merger costs $ 21.2 $ -
The Company's areas of operations are principally in the United States
and Europe, and the Company is developing network assets in Mexico and Canada.
No single European country or geographic area is significant to the Company's
consolidated operations. The Company has a significant investment in
Amsterdam-based KPNQwest. As of March 31, 2000 the carrying value of Qwest's
investment in KPNQwest, a European joint venture, was $571.9 million.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information Regarding Forward-Looking Statements
This report contains or incorporates by reference "forward-looking
statements", as that term is used in federal securities laws, about Qwest's
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 document, or may be
incorporated by reference to other documents Qwest has filed with the Securities
and Exchange Commission ("SEC"). You can find many of these statements by
looking for words such as "believes", "expects", "anticipates", "estimates", or
similar expressions used in this report or incorporated by reference in this
report.
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 these
statements. The risks and uncertainties include those risks, uncertainties and
risk factors identified, among other places, under "Risk Factors" in Qwest's
registration statement on Form S-4, SEC file number 333-81149.
The most important factors that could prevent Qwest from achieving its
stated goals include, but are not limited to, the following:
. operating and financial risks related to managing rapid growth,
integrating acquired businesses and sustaining operating cash flow to
meet Qwest's debt service requirements, make capital expenditures and
fund operations;
. potential fluctuation in quarterly results;
. volatility of stock price;
. intense competition in the communications services market;
. dependence on new product development;
. rapid and significant changes in technology and markets;
. adverse changes in the regulatory or legislative environment affecting
Qwest's business;
. failure to maintain necessary rights of way; and
. failure to complete the merger with U S WEST or achieve the projected
synergies and financial results timely or at all and difficulties in
combining the operations of Qwest and U S WEST.
Qwest cautions you not to place undue reliance on the statements, which
speak only as of the date of this report or, in the case of documents
incorporated by reference, the date of the document.
11
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 undertakes no obligation to review or confirm analysts' expectations or
estimates or to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this report or to reflect
the occurrence of unanticipated events.
Overview
Qwest Communications International Inc. ("Qwest") is a leading
broadband Internet communications company. Qwest's services include Internet,
multimedia, data and voice services that are sold to business, consumer and
government customers. Internet and multimedia services include Internet Protocol
("IP") enabled services such as dedicated and dial up Internet access, web
hosting, co-location access, voice over IP, application hosting and mass storage
services. Qwest also provides high-volume voice and conventional private line
services to other communications providers, as well as to Internet service
providers ("ISPs"), and other data service companies. Internet and multimedia
services are being developed in alignment with existing and anticipated market
demand in partnership with leading information technology companies, including
the following:
. Microsoft Corporation for business applications and service;
. IBM Global Services to build and provide operational support for the
deployment of CyberCenters(sm);
. KPMG LLP (through the Qwest Cyber.Solutions joint venture) for
application service provider, application hosting and application
management services;
. SAP America, Inc. and Hewlett Packard Company for hosting and systems
management services;
. Covad Communications Group, Inc. ("Covad"), Jato Communications Corp.
("Jato") and Rhythms NetConnections Inc. ("Rhythms") for digital
subscriber line ("DSL") technology for high-speed local network
connectivity;
. Oracle Corporation and Siebel Systems, Inc. for application hosting
services; and
. Hewlett Packard Company for high-end data storage.
Central to Qwest's strategy is the Qwest Macro Capacity(SM) Fiber
Network, a high-capacity IP-based fiber optic network designed to allow
customers to seamlessly exchange multimedia content -- images, data and voice.
The technologically advanced network spans over 25,500 route-miles in North
America. The network employs a self-healing SONET ring architecture. It is
equipped with advanced fiber and state-of-the-art transmission electronics.
Qwest's network architecture supports IP, Asynchronous Transfer Mode ("ATM") and
frame relay services, as well as circuit switched services.
The Company announced in late 1999 that it would be the first company
in the year 2000 to build a nationwide Internet Protocol OC-192 link carrying
commercial traffic at 10 gigabits-per-second with the reliability of SONET
architecture. Qwest also will be the first company in 2000 to introduce an all-
optical Internet network coast-to-coast with maximum reliability. In addition,
Qwest's European joint venture, KPNQwest, is building and will operate an
11,800-mile network spanning 46 business markets in Europe.
Qwest is also expanding its network to carry international data and
voice traffic to Canada, Mexico and the Far East. In December 1999, the Company
completed a 4,300 route-mile network in Canada. In addition, the 1,400
route-mile Mexico network is complete. The Company is participating in a
consortium of communications companies that is building an underwater cable
system connecting the United States to Japan. Scheduled for completion by the
fourth quarter of 2000, the 13,125-mile four-fiber pair cable will ultimately be
capable of transmitting information at the rate of 640 gigabits per second.
12
In addition to significant advantages in speed, reliability,
scalability, and security, the Qwest network's advanced technologies should also
provide a cost advantage over older fiber systems generally in commercial use
today. Qwest received an additional cost benefit from the sale of dark fiber
along the network, which reduced its net cost in the network retained for its
own use.
Mergers and Acquisitions
Qwest continually evaluates opportunities to become a stronger
competitor and to accelerate the growth of its business. A key strategy has been
to add strength through investments in or acquisitions of businesses, facilities
or other assets that build on Qwest's service and technology base.
In July 1999, Qwest entered into a definitive merger agreement with U S
WEST, Inc. Under terms of the merger agreement, Qwest will issue shares of its
common stock having a value of $69.00 for each share of U S WEST common stock,
subject to a "collar" on Qwest's average stock price between $28.26 and $39.90
per share. The number of Qwest shares to be issued for each USWEST share will be
determined by dividing $69.00 by the average of the daily volume weighted
average prices of Qwest common stock for 15 randomly selected trading days over
a 30-day measurement period ending three days before the closing of the
transaction, provided that Qwest will not issue more than 2.44161 shares for
each U S WEST share or less than 1.72932 shares for each U S WEST share. The
transaction will be accounted for as a purchase.
If Qwest's average stock price is below $38.70 per share, the
obligation under the "collar" for the amount which the price is below $38.70 per
share may be satisfied in whole or in part with cash. In determining the cash
amount for the collar, Qwest and U S WEST will consider Qwest's desire to reduce
dilution to its stockholders, U S WEST's potential desire to provide a cash
element to its stockholders and both companies' desire to maintain the combined
company's strong financial condition. If the companies decide to provide cash as
part of the collar consideration, the minimum exchange ratio would be 1.783.
U S WEST may terminate the merger agreement if the closing price of
Qwest's shares is below $22.00 for 20 consecutive trading days before the
closing, or if the average Qwest share price during the measurement period is
less than $22.00. The Boards of Directors and stockholders of both Qwest and U S
WEST have approved the proposed transaction. As of March 31, 2000, the merger
had received required approval from the Federal Communications Commission
("FCC"), pending approval of divestiture of the long distance business in the
U S WEST territory, as well as approval from the regulators in the states of
Colorado, Iowa and Montana. Approval from regulators in Arizona, Minnesota,
Washington, Wyoming and Utah is pending. The merger is expected to close by
mid-summer 2000.
As a result of the transaction, Qwest will become subject to the
regulations applicable to U S WEST, a Regional Bell Operating Company ("RBOC").
Generally, effective as of the closing of the transaction, Qwest may not provide
inter-LATA transport services within U S WEST's 14-state region until it
receives approval to provide such services under Section 271 of the
Telecommunications Act of 1996. Therefore, Qwest filed a divestiture plan with
the FCC in April 2000. Under this plan, Qwest has agreed to sell its long
distance business in the U S WEST territory to Touch America, Inc., the
telecommunications subsidiary of The Montana Power Company. Approval of the
divestiture plan is expected by the end of June.
In connection with the termination of the U S WEST and Global Crossing
LTD. ("Global") merger agreement, U S WEST paid Global a break-up fee of $140.0
million in cash, which Qwest advanced to U S WEST. U S WEST also agreed to
return $140.0 million in Global shares, valued at $62.75 per share, purchased by
U S WEST in connection with its agreement with Global. In addition to the
break-up fee and returning of the Global shares, Qwest agreed to purchase $140.0
million in services from Global over four years at the best commercially
available prices.
Strategic Investments and Other Alliances
Investment in Jato Communications Corp. In February 2000, Qwest made an equity
investment of approximately $10.0 million in cash in high-speed, DSL local
networks through an agreement with Jato Communications Corp. ("Jato"), a
13
packet-based Competitive Local Exchange Carrier ("CLEC") that provides
high-speed Internet access, network connectivity and associated broadband
applications and services to small and medium-sized businesses. Under this
agreement, Qwest will further enhance its ability to provide customers
high-speed DSL connectivity by expanding the current areas covered by separate
agreements the Company has with Covad Communications Group Inc. and Rhythms
NetConnections Inc. Qwest's investment in Jato is accounted for under the cost
method.
Strategic Relationship IBM Global Services. 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 CyberCenters(sm) throughout North America. IBM will build and provide
operational support for 28 additional CyberCenters. IBM will lease hosting space
in these CyberCenters and will purchase telecommunications services from Qwest,
with the total revenue 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 over a seven-year period, which combined with the construction
services amounts to approximately $2.5 billion. The Company had not purchased
any of these services as of March 31, 2000.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
The Company reported net earnings of $12.6 million for the three months
March 31, 2000, compared to net earnings of $4.8 million for the same period of
the prior year. Excluding merger costs related to the Company's pending merger
with U S WEST and the non-recurring gain on the sale of certain equity
investments of the Company, net earnings for the three months ended March 31,
2000 would have been $30.0 million, compared to net earnings of $4.8 million,
for the three months ended March 31, 1999. The results of operations for the
three months ended March 31, 2000 exclude the operating results of EUnet
International Limited ("EUnet") which was contributed to the KPNQwest joint
venture on April 1, 1999.
Revenue. Components of revenue for the three months ended
March 31, 2000 and 1999 were as follows (in millions):
Three Months Ended
March 31,
------------------ Increase
2000 1999 (Decrease)
--------- -------- ----------
Communications services $ 1,216.8 $ 737.2 $ 479.6
Construction services - 141.2 (141.2)
--------- -------- ----------
Total revenue $ 1,216.8 $ 878.4 $ 338.4
========= ======== ==========
During the three months ended March 31, 2000, as compared to the same
period of the prior year, Communications Services revenue increased due to the
growth in Internet, multimedia, data and voice services sold to business,
government and wholesale customers. With the completion of the Company's
network, Construction Services no longer generates revenue from network
construction.
14
Operating Expenses. Components of operating expenses for the three
months ended March 31, 2000 and 1999 were as follows (in millions):
Three Months Ended
March 31,
------------------ Increase
2000 1999 (Decrease)
--------- -------- ----------
Access and network operations $ 677.9 $ 432.9 $ 245.0
Construction services - 76.8 (76.8)
Selling, general and administrative 302.9 213.3 89.6
Depreciation and amortization 118.1 95.9 22.2
Merger related costs 21.2 - 21.2
--------- -------- ----------
Total operating expenses $ 1,120.1 $ 818.9 $ 301.2
========= ======== ==========
Expenses for access and network operations primarily consist of the cost
of operating the Company's network, Local Exchange Carrier ("LEC") access
charges and the cost of leased capacity. The increase in access and network
operations for the three months ended March 31, 2000 over the same period of the
prior year was primarily attributable to internally generated growth in
Communications Services revenue. Expressed as a percentage of Communications
Services revenue, access and network operations expenses were 55.7% and 58.7%
for the three months ended March 31, 2000 and 1999, respectively. As a result of
the completion of the network in 1999, the Company was able to serve more
customer needs over its own network, thereby reducing leased capacity costs as a
percentage of revenue.
Expenses for Construction Services consist primarily of costs to
construct the Company's network, including conduit, fiber, cable, construction
crews and rights of way. Costs attributable to the construction of the network
for the Company's own use are capitalized. The construction of the network is
now complete.
Selling, general and administrative ("SG&A") expense includes the cost
of salaries, benefits, occupancy costs, commissions, sales and marketing
expenses and administrative expenses. The increase in SG&A for the three months
ended March 31, 2000 as compared to the same period of the prior year, was due
primarily to the following: increased sales and marketing efforts; additional
bad debt expense related to the increase in Communications Services revenues;
increased payroll-related costs from the recruiting and hiring of additional
sales and administrative personnel; increased commissions expense related to the
growth in Communications Services revenue; additional building rent expense
related to increased space obtained in response to the Company's infrastructure
growth; and increased property taxes and maintenance costs related to the
expansion of the Company's network. Expressed as a percentage of total revenue,
SG&A expense was 24.9% and 24.3% for the three months ended March 31, 2000 and
1999, respectively. SG&A is expected to increase as revenues continue to grow,
and the Company continues to intensify brand advertising, as data product and
service offerings are expanded and as additional capacity is lit on the
Company's network.
The Company's depreciation and amortization expense increased due
primarily to activating segments of the Company's network, as well as purchases
of assets to accommodate the Company's growth. The Company expects that
depreciation expense will continue to increase in subsequent periods as the
Company continues to activate additional capacity on its network, and continues
the build-out of local networks and CyberCenters.
During the three months ended March 31, 2000, the Company recorded $21.2
million in merger-related costs. These merger-related costs were incurred in
conjunction with the pending merger with U S WEST and are comprised of direct,
incremental costs.
15
Other Expense (Income). Components of other expense (income) for the
three months ended March 31, 2000 and 1999, were as follows (in millions):
Three Months Ended
March 31,
------------------ Increase
2000 1999 (Decrease)
--------- -------- ----------
Interest expense, net $ 37.6 $ 32.0 $ 5.6
Other expense (income), net (0.5) 2.9 (3.4)
--------- -------- ----------
Total other expense (income) $ 37.1 $ 34.9 $ 2.2
========= ======== ==========
The increase in interest expense, net during the three months ended
March 31, 2000 and 1999, as compared to the same period of the prior year,
resulted from the increase in the Company's borrowings on credit facilities
during the first quarter. The change in other expense (income), net for the
three months ended March 31, 2000 as compared to the same period of the prior
year is primarily attributable the gain on the sale of certain investments of
the Company in 2000, partially offset by a decrease in interest income due to
lower average cash balances, and losses on equity investments (principally
Qwest's proportionate share of KPNQwest losses).
Income Taxes. The Company's effective tax rate for the three months
ended March 31, 2000 differed from the statutory income tax rate primarily as a
result of state income taxes, the non-deductibility of acquisition-related
goodwill, merger costs, and foreign losses. The effective tax rate for the first
quarter of 1999 differed from the statutory rate primarily as a result of the
non-deductibility of acquisition-related goodwill and foreign losses.
Liquidity and Capital Resources
During the three months ended March 31, 2000, cash provided by
operations was $22.9 million; cash used in investing activities was $925.2
million, including $910.6 million of capital expenditures; and cash provided by
financing activities was $593.7 million. Cash provided by financing activities
includes approximately $544.3 million in borrowings on the Company's credit
facilities, and employee stock transactions of $51.0 million.
The Company believes that its available cash and cash equivalent
balances at March 31, 2000, cash flow from operations, its available credit
agreement (described below) and possible bank or debt financing activities will
satisfy its currently anticipated cash requirements for at least the next 12
months. The Company anticipates capital expenditures during the remainder of
2000 to support its growth in Communications Services, including continued
expansion of data products and services, activation of additional capacity along
the Company's network, new CyberCenter deployments and local access initiatives
to be approximately $2.4 billion.
In March 1999, the Company entered into a $1.0 billion credit agreement
"the Existing Facility" with a syndicate of banks. This credit agreement
provides for two five-year revolving credit facilities for a total of $500.0
million and one 364-day revolving credit facility in the amount of $500.0
million. The credit facilities bear interest at either the bank base rate of
interest or LIBOR, plus an applicable margin.
In March 2000, the Company amended the Existing Facility to extend the
term of the $500.0 million 364-day revolving credit facility and added an
additional $1.0 billion credit facility "the New Facility". As a result of the
extension of the Existing Facility and the addition of the New Facility, the
Company now has $2.0 billion in revolving credit facilities. The Existing
Facility contains a provision whereby all amounts outstanding under the
agreement must be repaid as a result of a "change of control" of the Company.
While the Company does not believe that a change of control will occur as a
result of the U S WEST merger, the Company negotiated an amendment to the
Existing Facility to specifically exclude the U S WEST merger from the "change
of control" provision.
16
Regulatory Matters --Recent Developments
Access Charge Reform. Qwest's costs of providing long distance services
could be affected by changes in the rules controlling the form and amount of
"access charges" local exchange carriers ("LECs") are permitted to impose on
interexchange carriers ("IXCs") to originate and terminate long distance calls
over local networks. During the first quarter of 2000, there has been
significant activity at the FCC with respect to a comprehensive access charge
reform proposal submitted by a group of six carriers (incumbent LECs and IXCs)
called the Coalition for Affordable Local and Long Distance Service ("CALLS").
According to the members of CALLS, the proposed reform of the federal price cap
access charge regime would reduce per-minute access charges by over $2 billion
annually and also would combine the existing Subscriber Line Charge ("SLC") and
Presubscribed Interexchange Carrier Charge ("PICC") into a single monthly
federal end user charge. The proposal, if adopted by the FCC, could result in a
significant reduction in Qwest's access charge liability. However, the proposal
would also add an additional $650 million per year to the federal Universal
Service Fund, which may increase Qwest's USF support liability. The FCC has
received public comment on the CALLS proposal and is expected to take final
action with respect to the proposal in the second quarter of 2000. Qwest cannot
predict the outcome of the FCC's proceeding on the CALLS proposal nor its
precise impact on Qwest, either before or after its planned merger with U S WEST
(an incumbent LEC that receives access payments). In a related development, the
US Court of Appeals for the District of Columbia Circuit extended until June 30,
2000, its stay of its 1999 order remanding the FCC price cap formula for
"further explanation" of the method for calculating a key price cap productivity
factor.
Universal Service. Qwest also incurs costs through its payments to
state and federal universal service funds. Qwest's payments to the state funds
are based on revenues from intrastate services, while the federal fund bases all
contributions on revenues from interstate and international telecommunications
services. As discussed above under Access Charge Reform, the CALLS proposal
currently before the FCC, if adopted, would add an additional $650 million per
year to the federal Universal Service Fund. This may increase Qwest's USF
support liability. On April 13, 2000, the FCC announced that the third year of
the Schools and Libraries Program ("E-Rate"), which subsidizes
telecommunications and Internet connections for qualified schools and libraries,
would be funded at $2.25 billion, the same level of funding provided in the
second year.
Local Exchange Carrier Applications to Provide Long Distance Service.
On December 22, 1999, the FCC granted Bell Atlantic's application to begin
offering long distance service in New York based on its findings that Bell
Atlantic had complied with the statutory requirements for offering long distance
service in that state. This FCC order has been appealed but is still in effect.
In January 2000, Southwestern Bell Telephone Company ("Southwestern Bell") filed
an application with the FCC for authority to provide long distance services in
Texas. On April 6, 2000, the FCC re-started its 90-day review of Southwestern
Bell's application at Southwestern Bell's request. The FCC must issue a decision
on Southwestern Bell's application by early June 2000. Now that Bell Atlantic
has been granted authority to provide long distance service in New York, it is
expected to gain significant market share relatively quickly, which could
negatively affect Qwest's long distance business in New York. The same will be
true in Texas if the FCC grants Southwestern Bell approval to provide long
distance service in that state. Other state commissions are currently
determining whether the Regional Bell Operating Companies in their states have
complied with the statutory requirements for offering in-region long distance
services, but no additional applications have been filed with the FCC.
Implementation of the Telecommunications Act of 1996. In recent months,
the FCC has been considering a final rule regarding unbundled enhanced extended
links ("EELs"), which are combinations of loops and transport elements of the
ILEC network. Under cost-based pricing of unbundled network elements ("UNEs"),
the cost of these element combinations is substantially less than the cost of
purchasing the same elements as functionally-equivalent special access services
under existing ILEC tariffs. A final rule is expected in the second or third
quarter of 2000. The FCC's September 1999 Order establishing a new list of UNEs
which incumbent local exchange carriers ("ILECs") must provide to competitors
generally prohibited the conversion of special access services to unbundled
EELs, except in circumstances where the competitor provides or procures its own
entrance facilities from its point of presence ("POP"), but relies on the
incumbent for the remaining access to the central office and the end user. In
November 1999, however, the FCC announced an interim rule which provides that
regardless of whether an IXC self-provides entrance facilities (or obtains them
from third parties), IXCs may convert special access services to EELs if the IXC
uses the EELs it so converts to provide a "significant" amount of local exchange
service, in addition to exchange access service,
17
to a particular customer. This interim rule will remain in effect until the FCC
establishes a final rule on this issue. To establish a final rule, the FCC has
asked for comment on a number of issues including whether there is any statutory
basis for limiting an ILEC's obligation to provide EELs as combinations of
network elements and whether the FCC's rules regarding EELs could "cause a
significant reduction of the ILECs' special access revenues prior to full
implementation of access charge and universal service reform."
"Slamming" - Unauthorized Changes of Consumers' Presubscribed Carriers.
On April 13, 2000, the FCC adopted an Order on Reconsideration regarding carrier
and customer liability when a customer alleges he or she has been slammed.
Slamming is the intentional, unauthorized switching of a customer's chosen local
or long distance carrier. Previously, the US Court of Appeals for the DC Circuit
had stayed effectiveness of the original liability rules promulgated in December
1998, pending reconsideration by the FCC. The text of the Reconsideration Order
has not been released. However, publicly available materials from the FCC
indicate that the Commission has rejected suggestions that an independent third
party administrator be created to resolve slamming disputes and administer the
liability rules. Instead, the FCC has accepted proposals from state regulatory
commissions that they be responsible for resolving slamming disputes. The new
rules, when they become effective, would absolve a consumer who has been slammed
of liability for service for up to thirty days. Where the slammed consumer has
already paid for service, the rules would require the slamming carrier to pay
the authorized carrier 150% of the charges paid by the consumer. The authorized
carrier would then reimburse the consumer 50% of the charges. Qwest also
recently entered into separate agreements with the Attorneys General of Arizona
and Oregon to conclude litigation involving alleged slamming violations.
Qwest/U S West Merger Applications. In connection with its proposed
merger, Qwest and U S WEST have filed applications with federal and state
agencies seeking approval for the merger and related transactions. Merger
applications have been filed at the FCC and with the Public Service Commissions
in the following nine states in the U S WEST region: Arizona, Colorado, New
Mexico, Utah, Washington, Montana, Wyoming, Minnesota, and Iowa. Applications
for merger approval were not required to be filed in the remaining five states
in the U S WEST region. Of the nine states in the U S WEST region in which
applications were filed, two states have approved the merger (Colorado and
Iowa), and one state has found it does not have jurisdiction to review the
merger (New Mexico). In addition, Qwest has filed applications in connection
with its merger in a number of other states outside the U S WEST service
territory. All of these applications are currently under review by the
appropriate federal and state government officials.
On March 10, 2000, the FCC issued an order approving the merger with
the condition that the FCC approve, prior to the closing of the merger, Qwest's
compliance with the requirement that it divest the inter-LATA services within
the U S WEST region that would be prohibited under Section 271 of the 1996
Telecommunications Act after the merger. Qwest filed its divestiture report at
the FCC on April 14, 2000, in which it described its divestiture of its
in-region inter-LATA activities to Touch America. The comment rounds are due to
be completed by May 12, 2000. The Commission stated that it would act on the
divestiture report within 45 days of the date on which it believes it has all
the information necessary to act on the report.
Advanced Telecommunications Services. On March 17, 2000, the US Court of
Appeals for the DC Circuit vacated and remanded portions of the FCC's March 1999
Order that had held that "an incumbent LEC may not refuse to permit collocation
of any equipment that is `used or useful' for either interconnection or access
to unbundled network elements, regardless of other functionalities inherent in
such equipment." The Court found this to be an impermissibly broad
interpretation of Section 251 (c)(6) of the Telecommunications Act of 1996,
which requires LECs to provide physical collocation of equipment "necessary for
interconnection or access to unbundled network elements at the premises of the
local exchange carrier." The court also vacated and remanded some FCC
requirements regarding the placement of collocated competitive carrier equipment
in central offices. Open issues also remain at the FCC regarding competitor
access to ILEC "remote terminals" to provide competitive xDSL services.
Line Sharing. In December 1999, the FCC issued an order requiring ILECs
to make the high frequency portion of the local loop ("line sharing") available
for local competitors as an unbundled network element at cost-based rates. This
line sharing requirement will permit competitive carriers to provide certain
high-speed (xDSL) services by sharing lines with the ILECs' voice services. The
FCC required ILECs to make line sharing available by June 6, 2000. The
18
FCC's order is effective even though some parties have challenged this order
both at the FCC and in the courts. A number of state commissions are in the
process of establishing the terms, conditions, and rates under which ILECs must
provide line sharing. An issue that has arisen in these proceedings is whether
ILECs must provide competitors with the functionalities and operational
procedures necessary to enable competitors to access and use the high frequency
portion of loops that competitors lease from ILECs in combination with other
unbundled network elements in a "UNE platform" arrangement.
Reciprocal Compensation. The Telecommunications Act of 1996 requires
local exchange carriers to pay each other reciprocal compensation for
transporting and terminating each others' local calls. This affects competitive
local exchange carriers (CLECs), including Qwest to the extent it becomes a
CLEC. In February of 1999, the FCC ruled that calls to Internet service
providers are interstate calls, but stated that, in the absence of FCC rules
regarding inter-carrier compensation for such traffic, state commissions have
the authority to determine inter-carrier compensation for such traffic. Some
state commissions have concluded that reciprocal compensation must be paid for
calls to ISPs, while others (fewer in number) have concluded that reciprocal
compensation for such calls is not due. On March 24, 2000, the US Court of
Appeals for the DC Circuit vacated and remanded for further consideration the
FCC's ruling that calls to Internet service providers are interstate calls. The
Court noted that the FCC had applied traditional "end-to-end" jurisdictional
analysis without explaining why that analysis is "relevant to discerning whether
a call to an ISP should fit within the local call model of two collaborating
LECs or the long-distance model of a long-distance carrier collaborating with
two LECs." On March 30, 2000, the US Court of Appeals for the Fifth Circuit
upheld the Texas Public Utility Commission's finding that calls to ISPs, under
certain interconnection agreements in Texas, are subject to reciprocal
compensation.
Federal Tariff Requirements. On April 28, 2000, the Court of Appeals
for the District of Columbia Circuit upheld the FCC's decision to remove from
tariff regulation the domestic interstate interexchange offerings of
non-dominant carriers such as Qwest. Assuming no further judicial review takes
place, when the decision takes effect, Qwest and its competitors will no longer
have to file federal tariffs for such services. Tariffs still will be required
for international services provided by Qwest and other carriers.
Other Regulatory Obligations. After the planned Qwest/U S WEST merger is
consummated, Qwest (through its ownership of U S WEST's 14-state incumbent LEC
company) will be subject to additional regulatory requirements, both as an
incumbent local exchange telephone company and as a "Bell Operating Company."
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has $162.5 million of 10 7/8% Senior Notes, due 2007, $555.9
million of 9.47% Senior Discount Notes, due 2007, $450.5 million of 8.29% Senior
Discount Notes, due 2008, $750.0 million of 7.50% Senior Notes, due 2008, $350.0
million of 7.25% Notes due 2007 and $300.0 million of 7.25% Senior Notes, due
2008. In addition, the Company entered into a $1.0 billion credit facility with
a syndicate of banks in March 1999, which was amended to extend the borrowing
capacity to $2.0 billion in March 2000.
The Company's long-term debt obligations are principally fixed interest
rate and non-trading in nature, and as a result, the Company is less sensitive
to market rate fluctuations. The credit facility bears interest at either the
bank base rate of interest or LIBOR plus an applicable margin. As a result, the
Company is subject to interest rate fluctuations on the outstanding balances of
its credit facility. The Company currently does not use derivative financial
instruments to manage its interest rate risk and has no cash flow exposure due
to general interest rate changes for its fixed interest rate long-term debt. The
following table provides information about the Company's market risk exposure
associated with changing interest rates on its fixed rate debt and capital lease
and other obligations (dollars in millions):
Expected Maturity
---------------------------------------
Year Ended December 31,
--------------------------------------- Unamortized
2000 2001 2002 2003 2004 Thereafter Discount Total
---- ---- ---- ---- ---- ---------- ----------- --------
Long-term fixed
rate debt $ - $ - $ - $ - $ - $2,568.9 $ (207.5) $2,361.4
Capital lease and
other obligations $3.1 $4.7 $4.8 $3.9 $3.6 $ 12.3 $ - $ 32.4
Average interest
rate 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Collectively, the fixed rate debt, revolving credit facilities, capital
lease and other obligations, with a carrying value of $2,938.1 million, had an
estimated fair value of $2,888.3 million at March 31, 2000, based on current
interest rates offered for debt of similar terms and maturity.
The Company's European-country operations were not material to the
Company's consolidated financial position as of March 31, 2000, and results of
operations or cash flows for the first three months of 2000. As a result of
foreign currency fluctuations between the Euro and the U.S. dollar, the Company
recorded a currency translation adjustment of $64.9 million for the three months
ended March 31, 2000 relating to the Company's investment in KPNQwest. The
Company does not expect to be subject to material foreign currency exchange rate
risk from the effects of exchange rate movements of foreign currencies on the
costs or cash flows the Company would receive from its share of the KPNQwest
joint venture. To date, the Company has not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
20
Part II
Item 1. Legal Proceedings
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 shareholders 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 consummation of the U S West merger and ordering Qwest
to explore alternative transactions, including alternative transactions
involving Deutsche Telekom. On March 21, 2000, the Chancellor consolidated the
Delaware actions into one action captioned In re Qwest Communications
International, Inc. Shareholder Litigation and ordered the plaintiffs to file a
consolidated amended complaint as soon as practicable. Management believes that
the defendants have substantial defenses to the claims asserted in these
actions, and intends to defend them vigorously.
On March 17, 2000, and March 20, 2000, two class action complaints were
filed in federal district court in Delaware against Qwest and Joseph Nacchio
captioned Mizzaro v. Nacchio and Qwest Communications International, Inc., and
Brody v. Nacchio and Qwest Communications International, Inc. The actions have
been brought on behalf of two purported classes of U S West shareholders and
allege, among other things, that Qwest and Nacchio made material false
statements in violation of Section 14(a) of the Exchange Act by representing 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 Nacchio always intended to entertain third party bids for Qwest
even after shareholder approval for the U S West merger had been obtained.
Plaintiffs seek, among other things, damages sustained by U S West shareholders,
and particularly arbitrageurs who held long positions in U S West, when U S
West's stock price plummeted on March 1 in response to reports that Qwest and
Nacchio were negotiating with Deutsche Telekom AG. Management believes that the
defendants have substantial defenses to the claims asserted in these actions,
and intends to defend them vigorously.
Qwest has been named as a defendant in Drawhorn v. Qwest Communications
International Inc. et al., Hudson v. Qwest Communications International Inc.,
Hord v. Qwest Communications International Inc. et al., and Cirese Construction
v. Qwest Communications, et al. The cases are purported class actions, filed in
Texas, Indiana, Tennessee and Missouri, respectively, which involve the
Company's right to install its fiber optic cable network in easements and
right-of-ways crossing the plaintiff's land. In general, the Company obtained
the rights to construct its network from railroads, utilities, and others, and
installed its network along the rights of way so granted. Plaintiffs in the
purported class actions assert that they are the owners of lands over which
Qwest's fiber optic cable network passes, and that the railroads, utilities, and
others who granted to Qwest the right to construct and maintain its 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 Qwest's network
passes; the Tennessee and Missouri actions purport to be on behalf of a class of
such owners in Tennessee and Missouri. The complaints seek damages on theories
of trespass and unjust enrichment, and punitive damages as well. Qwest has
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. Management believes that the Company has substantial
defenses to the claims asserted in these actions, and intends to defend them
vigorously.
Qwest also has been named as a defendant in various other litigation
matters. Management intends to vigorously defend these outstanding claims. Qwest
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 Qwest's results of operations or financial position.
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
2.1 Agreement and Plan of Merger dated as of July 18, 1999 between U S WEST,
Inc. and Qwest (incorporated herein by reference to Qwest's Current Report
on Form 8-K dated July 20, 1999)
3.1** Amended and Restated Certificate of Incorporation of Qwest.
3.2***** Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Qwest.
3.3 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation, as amended (incorporated herein by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended March 31, 1999).
3.4 Amended and Restated Bylaws (incorporated by reference to Qwest's Annual
Report on Form 10-K for the year ended December 31, 1998).
4.1(a)*** Indenture dated as of October 15, 1997 with Bankers Trust Company
(including form of Qwest's 9.47% Senior Discount Notes due 2007 and 9.47%
Series B Senior Discount Notes due 2007 as an exhibit thereto).
4.1(b)**** Indenture dated as of August 28, 1997 with Bankers Trust Company
(including form of Qwest's 10 7/8% Series B Senior Notes due 2007 as an
exhibit thereto).
4.1(c)**** Indenture dated as of January 29, 1998 with Bankers Trust Company
(including form of Qwest's 8.29% Senior Discount Notes due 2008 and 8.29%
Series B Senior Discount Notes due 2008 as an exhibit thereto).
4.1(d) 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).
4.1(e) 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 an exhibit thereto) (incorporated by reference to
Qwest's Registration Statement on Form S-4 (File No. 333-71603) filed February
2, 1999).
4.2(b) Registration Agreement dated November 27, 1998 with Salomon Brothers Inc
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).
4.3 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).
4.4 First Amended and Restated Credit Agreement, dated as of March 9, 2000,
among Qwest Communications International Inc., as Borrower, Bank of
America, N.A., as Administrative Agent, and the Lenders party thereto.
4.5 Incremental Credit Agreement, dated as of March 9, 2000, among Qwest
Communications International Inc., as Borrower, Bank of America, N.A., as
Administrative Agent, and the Lenders party thereto.
10.1** Growth Share Plan, as amended, effective October 1, 1996.*
10.2 Equity Incentive Plan, as amended.* (incorporated herein by reference from Exhibit A to
Qwest's definitive proxy statement on Schedule 14A, filed March 17, 2000).
22
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.*
10.13**** Employment Agreement dated September 19, 1997 with Larry Seese.*
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.
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.
10.19 LCI International, Inc. 1992 Stock Option Plan (incorporated by reference
to LCI's Registration Statement No. 33-60558).*
10.20 LiTel Communications, Inc. 1993 Stock Option Plan (incorporated by
reference to LCI's Registration Statement No. 33-60558).*
10.21 LCI International, Inc. 1994/1995 Stock Option Plan (incorporated by
reference to LCI's Annual Report on Form 10-K for the year ended December
31, 1993).*
10.22 LCI International, Inc. 1995/1996 Stock Option (incorporated by reference
to LCI's Proxy Statement for the 1995 Annual Meeting of Shareowners).*
10.23 LCI International Management Services, Inc. Supplemental Executive
Retirement Plan (incorporated by reference to LCI's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995).*
10.24 1997/1998 LCI International, Inc. Stock Option Plan (incorporated by
reference to LCI's Annual Report on Form 10-K for the year ended December
31, 1996).*
10.25(a) 1995 Stock Option Plan of Icon CMT Corp. (incorporated by reference to
Icon CMT Corp.'s Registration Statement on Form S-1/A, No. 333-38339).*
10.25(b) Amendment to Amended and Restated 1995 Stock Option Plan of Icon CMT Corp.
(incorporated by reference to Qwest's Annual Report on Form 10-K for the
year ended December 31, 1998).*
10.26 U.S. Long Distance Corp. 1990 Employee Stock Option Plan (incorporated by
reference to Qwest's Annual Report on Form 10-K for the year ended
December 31, 1998).*
10.27+ Contractor Agreement dated January 18, 1993 by and between LCI
International Telecom Corp. and American Communications Network, Inc.
(incorporated by reference to LCI's Quarterly Report on Form 10-Q for the
23
quarter ended September 30, 1995).
10.28 Participation Agreement dated as of November 1996 among LCI International,
Inc., as the Construction Agent and as the Lessee, First Security Bank, National
Association, as the Owner Trustee under the Stuart Park Trust the various banks
and lending institutions which are parties thereto from time to time as the
Holders, the various banks and lending institutions which are parties thereto
from time to time as the Lenders and NationsBank of Texas, N.A., as the Agent
for the Lenders (incorporated by reference to LCI's Annual Report on Form
10-K for the year ended December 31, 1996).
10.29 Agency Agreement between LCI International, Inc., as the Construction
Agent and First Security Bank, National Association, as the Owner Trustee under
the Stuart Park Trust as the Lessor dated as of November 15, 1996 (incorporated by
reference to LCI's Annual Report on Form 10-K for the year ended December 31,
1996).
10.30 Deed of Lease Agreement dated as of November 15, 1996 between First Security
Bank, National Association as the Owner Trustee under the Stuart Park Trust, as
Lessor and LCI International, Inc. as Lessee (incorporated by reference to
LCI's Annual Report on Form 10-K for the year ended December 31, 1996).
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
herein by reference to Qwest's Current Report on Form 8-K dated July 20,
1999)
10.37 Agreement entered into as of July 18, 1999 between Qwest and Global
Crossing Ltd. (incorporated herein by reference to Qwest's Current Report
on Form 8-K dated July 20, 1999)
10.38 Agreement dated as of July 18, 1999 between Qwest and Global Crossing
Holdings Ltd. (incorporated by reference to Qwest's quarterly report on Form 10-Q
for the quarter ended June 30, 1999).
10.39 Purchase Agreement by and among Qwest, Slingshot Networks, LLC and
Anschutz Digital Media, Inc. dated September 26, 1999 (incorporated herein
by reference to Qwest's quarterly report on Form 10-Q for the quarter
ended September 30, 1999).
10.40 Amended and Restated Operating Agreement of Slingshot Networks, LLC dated October
22, 1999 (incorporated herein by reference to Qwest's quarterly report on
Form 10-Q for the quarter ended September 30, 1999).
21.1 Subsidiaries of the Registrant (incorporated herein by reference to
Qwest's
24
quarterly report on Form 10-Q for the quarter ended March 31, 1999).
27 Financial Data Schedule
* Indicates 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.
***** Incorporated by reference to the exhibit of the same number to Qwest's
Registration Statement on Form S-3 (File No. 333-58617) filed July 7,
1998.
+ Portions have been omitted pursuant to a request for confidential
treatment.
(b) Reports on Form 8-K:
During the quarter ended March 31, 2000, Qwest filed the following Current
Reports on Form 8-K:
1. On February 2, 2000, Qwest filed a Current Report on Form 8-K
announcing its fourth quarter 1999 results of operations.
2. On February 17, 2000, Qwest filed a Current Report on Form 8-K
regarding a financial analyst meeting held on February 16, 2000.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Qwest Communications International Inc.
a Delaware corporation
By: /s/ Robert S. Woodruff
--------------------------
ROBERT S. WOODRUFF
Executive Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
May 12, 2000
26