===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER 000-22609
________________
QWEST COMMUNICATIONS INTERNATIONAL INC.
(Exact name of registrant specified in its charter)
________________
Delaware 84-1339282
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
----------------------
(Address of principal executive offices)
(303) 992-1400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares of Common Stock, $.01 par value, outstanding (the
only class of common stock of the Company outstanding) was approximately
745.7 million, as of August 9, 1999.
===============================================================================
QWEST COMMUNICATIONS INTERNATIONAL INC.
QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
----
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 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 and Six Months Ended
June 30, 1999 and 1998 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature Page 29
2
Part I. Financial Information
Item 1. Condensed Financial Statements
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Information)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
-------------- ------------ ------------- --------------
Revenue:
Communications services $ 790.4 $ 239.8 $ 1,527.6 $ 282.4
Construction services 83.3 153.9 224.5 288.4
-------------- ------------ ------------- --------------
Total revenue 873.7 393.7 1,752.1 570.8
-------------- ------------ ------------- --------------
Operating expenses:
Access and network operations 444.6 153.6 877.6 184.5
Construction services 19.6 108.1 96.3 205.6
Selling, general and administrative 222.6 107.9 436.0 152.1
Depreciation and amortization 92.9 32.0 188.8 40.1
Merger costs - 62.5 - 62.5
Provision for in-process research and development - 750.0 - 750.0
-------------- ------------ ------------- --------------
Total operating expenses 779.7 1,214.1 1,598.7 1,394.8
Operating income (loss) 94.0 (820.4) 153.4 (824.0)
Other (income) expense:
Interest expense, net 39.2 18.9 71.2 33.2
Other expense (income), net 6.9 (6.4) 9.8 (14.4)
-------------- ------------ ------------- --------------
Earnings (loss) before income taxes 47.9 (832.9) 72.4 (842.8)
Income tax expense (benefit) 29.4 (24.0) 49.2 (27.1)
-------------- ------------ ------------- --------------
Net earnings (loss) $ 18.5 $ (808.9) $ 23.2 $ (815.7)
============== ============ ============= ==============
Net earnings (loss) per share - basic $ 0.03 $ (1.67) $ 0.03 $ (1.82)
============== ============ ============= ==============
Net earnings (loss) per share - diluted $ 0.02 $ (1.67) $ 0.03 $ (1.82)
============== ============ ============= ==============
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)
June 30, December 31,
1999 1998
--------------- ---------------
ASSETS
Current assets:
Cash $ 1,437.4 $ 462.8
Trade accounts and notes receivable, net 663.6 628.1
Prepaid expenses and other 240.1 348.2
--------------- ---------------
Total current assets 2,341.1 1,439.1
Property and equipment, net 3,159.7 2,655.4
Excess of cost over net assets acquired, net 3,308.7 3,402.0
Other, net 1,190.2 571.1
--------------- ---------------
TOTAL ASSETS $ 9,999.7 $ 8,067.6
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 246.1 $ 205.1
Accrued facility costs 185.9 300.2
Accrued construction costs 141.6 145.9
Accrued expenses and other 369.8 586.3
--------------- ---------------
Total current liabilities 943.4 1,237.5
Debt and capital lease obligations, net of current portion 2,336.2 2,307.1
Other long-term liabilities 197.4 284.8
Minority interest 58.5 -
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; authorized 25.0 million
shares; no shares issued and outstanding - -
Common stock - $.01 par value; authorized 2.0 billion
shares; 745.1 million shares and 694.0 million shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively. 7.5 6.9
Paid-in capital 7,187.0 5,105.0
Accumulated other comprehensive income 122.3 2.2
Accumulated deficit (852.6) (875.9)
--------------- ---------------
Total stockholders' equity 6,464.2 4,238.2
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,999.7 $ 8,067.6
=============== ===============
See accompanying notes to condensed consolidated financial statements.
4
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
1999 1998
------------- -------------
Net cash (used in) provided by operating activities $ (109.3) $ 100.8
------------- -------------
Cash flows from investing activities:
Acquisitions and investments, net of cash acquired (149.1) (22.4)
Expenditures for property and equipment (764.3) (413.4)
------------- -------------
Net cash used in investing activities (913.4) (435.8)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt - 328.7
Repayments of long-term debt (2.6) (22.0)
Financing costs (5.3) (1.2)
Proceeds from issuance of common stock, net 1,923.1 -
Proceeds from employee stock transactions 82.1 17.5
Other - (1.8)
------------- -------------
Net cash provided by financing activities 1,997.3 321.2
------------- -------------
Net increase (decrease) in cash and cash equivalents 974.6 (13.8)
Cash and cash equivalents, beginning of period 462.8 379.8
------------- -------------
Cash and cash equivalents, end of period $ 1,437.4 $ 366.0
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest, net $ 59.5 $ 16.0
============= =============
Supplemental disclosure of significant non-cash investing and financing
activities:
Net assets, net of cash, contributed to KPNQwest $ 212.1 $ -
============= =============
Income tax benefit attributable to exercise of employee stock options $ 60.2 $ 7.1
============= =============
See accompanying notes to condensed consolidated financial statements.
5
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999 and 1998
(1) Business and Background
Qwest Communications International Inc. and subsidiaries ("Qwest" or the
"Company") is a leading Internet communications company engaged in two core
business segments: Communications Services and Construction Services.
Communications Services provides a full range of voice, data, video and
related services to business customers, governmental agencies and consumers. In
addition, it provides high-volume voice and conventional private line services
to other communications providers, Internet service providers ("ISPs") and other
data service companies.
Construction Services constructs and installs fiber optic systems for
other communications providers, as well as for the Company's own use.
(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, 1998. Certain prior year
balances have been reclassified to conform to the 1999 presentation.
(3) Comprehensive Income
The following table represents the calculation of comprehensive income
(loss) for the three and six months ended June 30, 1999 and 1998 (in millions):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------- ----------- ------------
Net income (loss) $ 18.5 $ (808.9) $ 23.2 $ (815.7)
------------ ------------- ----------- ------------
Other comprehensive income:
Net unrealized holding gains on securities 64.4 - 121.5 -
Foreign currency translation adjustments - - (1.4) -
------------ ------------- ----------- ------------
Total other comprehensive income 64.4 - 120.1 -
------------ ------------- ----------- ------------
Comprehensive income $ 82.9 $ (808.9) $ 143.3 $ (815.7)
------------ ------------- ----------- ------------
(4) Capital Stock
In May 1999, Qwest's stockholders approved an increase in the number of
authorized common shares from 600 million to 2 billion.
In April 1999, Qwest's board of directors approved a two-for-one stock
split in the form of a stock dividend for stockholders of record as of the close
of business on May 3, 1999. The new shares were distributed on May 24, 1999. All
share and per share information included in the condensed consolidated financial
statements and the notes hereto have been adjusted to give retroactive effect to
the change in capitalization.
6
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999 and 1998
In May 1999, Qwest issued approximately 40.7 million shares to BellSouth
Corporation (together with its subsidiaries, "BellSouth") in exchange for
approximately $1.9 billion in cash. Qwest's principal stockholder, Anschutz
Company, sold approximately 33.3 million existing shares to BellSouth for
approximately $1.6 billion. The investment by BellSouth represents an
approximate 10% equity stake in Qwest.
(5) Investments
In June 1999, Qwest and KPMG LLP, a leading professional services firm,
formed a joint venture called Qwest Cyber.Solutions LLC, to provide Internet-
based end-to-end application service provider, application hosting, and
application management services. Qwest contributed approximately $60.0 million
consisting of cash and other assets, and owns a 51% stake in the venture. The
financial position and results of operation of the venture have been
consolidated in the accompanying financial statements from the date of formation
and the minority interest represents KPMG's stake in the venture.
In June 1999, Qwest signed a definitive agreement to invest $90.0
million for an approximate 19% stake in Advanced Radio Telecom Corp. ("ART"), a
facilities-based, broadband ISP that provides a direct connection from customer
location to the Internet, to help support the construction of ART's fixed, high-
speed wireless networks. In connection with this transaction, a group of
investors also signed a definitive agreement to invest $161.0 million. The
companies expect to close the transaction in the third quarter of 1999, subject
to ART shareholder approval, regulatory approval, and other customary
conditions.
In April 1999, the Company and KPN Telecom B.V. ("KPN"), the Dutch
telecommunications company, formed a joint venture to create a pan-European IP-
based fiber optic network, linked to the Company's network in North America, for
data, video and voice services.
Qwest and KPN each own 50 percent of the venture which is governed by a
six-person supervisory board, to which Qwest and KPN have each named three
members. KPN contributed two partially completed bi-directional, self-healing
fiber optic rings (EuroRingsTM 1 and 2) and certain communications services
contracts to the joint venture. Qwest contributed Xlink Internet Service Gmbh
("Xlink"), the operating subsidiaries of EUnet International Limited
("EUnet") and cash. Also, Qwest and KPN have contributed transatlantic capacity
that connect EuroRingsTM with Qwest's network in North America, as well as
certain other assets. The net book value of total assets contributed by Qwest
totaled approximately $300.0 million. Qwest deconsolidated EUnet and Xlink in
April 1999. Qwest's investment in the joint venture is being accounted for under
the equity method.
(6) Construction Services
Costs and billings on uncompleted contracts included in the accompanying
condensed consolidated balance sheets were as follows (in millions):
June 30, December 31,
1999 1998
------------ ------------
Costs incurred on uncompleted contracts $ 994.6 $ 898.8
Estimated earnings 619.6 499.4
------------ ------------
1,614.2 1,398.2
Less: billings to date (1,490.8) (1,176.1)
------------ ------------
Costs and estimated earnings in excess
of billings, net $ 123.4 $ 222.1
============ ============
The Company has entered into various agreements to provide indefeasible
rights of use of multiple fibers along the network. Such agreements include
contracts with three major customers for an aggregate purchase price of
approximately $1.1 billion. Construction Services revenue relating to the
contracts with these major customers was approximately $21.3 million and $105.2
million for the three months ended June 30, 1999 and 1998, respectively, and
7
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999 and 1998
approximately $64.3 million and $211.7 million for the six months ended June 30,
1999 and 1998, respectively. Progress billings are made upon customers'
acceptance of performance milestones.
Although these construction agreements provide for certain penalties if
the Company does not complete construction within the time frames specified
within the agreements, management does not anticipate that the Company will
incur any substantial penalties under these provisions.
(7) Debt and Capital Lease Obligations
Debt and capital lease obligations consisted of the following (in
millions):
June 30, December 31,
1999 1998
---------- ------------
Fixed rate debt at interest rates ranging
from 7.25% to 10 7/8% $ 2,310.6 $ 2,279.5
Capital lease and other obligations 27.1 30.4
---------- ------------
Total debt and capital lease obligations 2,337.7 2,309.9
Less current portion (1.5) (2.8)
---------- ------------
Debt and capital lease obligations $ 2,336.2 $ 2,307.1
========== ============
The current portion of debt and capital lease obligations is included in
accrued expenses and other in the accompanying condensed consolidated balance
sheets.
In March 1999, the Company entered into a $1.0 billion credit agreement
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.
(8) Income Taxes
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
Statotory income tax expense (benefit) 35.0% (35.0%) 35.0% (35.0%)
State taxes, net of federal effect 7.7% - 5.1% -
R&D - 31.5% - 31.1%
Goodwill amortization 16.1% 0.3% 20.4% 0.4%
Foreign losses 3.3% - 6.4% -
Other, net (0.7%) 0.3% 1.1% 0.3%
------------ ------------ ----------- ------------
Total income tax expense (benefit) 61.4% (2.9%) 68.0% (3.2%)
============ ============ =========== ============
8
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999 and 1998
(9) Commitments and Contingencies
(a) DSL Services Commitments
In January 1999, Qwest made a $15.0 million equity investment in high-
speed, digital subscriber line ("DSL") local networks through an agreement with
Covad Communications Group, Inc. ("Covad"), a packet-based Competitive Local
Exchange Carrier ("CLEC"). The Company has committed to purchase DSL services
for approximately $20.0 million over a five-year term commencing on the date
that Covad's DSL services are commercially available in the 22 metropolitan
areas that Covad will serve, which is expected to occur by the end of 1999.
In April 1999, Qwest made an additional equity investment, totaling
$15.0 million in cash, in DSL local networks through an agreement with Rhythms
NetConnections Inc. ("Rhythms"), a packet-based CLEC that provides high-speed
networking solutions for remote access to private networks and the Internet. The
Company has committed to place a minimum number of orders for DSL service over a
seven-year term commencing on the date that Rhythms is operational in 29
metropolitan areas, which is expected to be in the first quarter of 2000. In the
event that the Company fails to meet the order target, the Company is committed
to pay Rhythms for the difference between the order target and the number of
actual orders placed.
(b) Network and Communications Capacity Exchanges
From time to time, the Company enters into agreements to acquire long-
term telecommunications capacity rights from unrelated third parties in exchange
for long-term telecommunications capacity rights along segments of the network
under construction. The exchange agreements provide for liquidated damages to be
levied against the Company in the event the Company fails to deliver the
telecommunications capacity, in accordance with the agreed-upon timetables.
(c) Vendor Agreements
The Company has agreements with certain telecommunications inter-
exchange carriers and third party vendors that require the Company to maintain
minimum monthly and/or annual usage. The Company has historically met all
minimum usage requirements and believes the minimum usage commitments will
continue to be met.
(d) Japan-U.S. Cable Consortium Commitment
The Company is participating in a consortium of communications
companies that is building a submarine cable system connecting the United States
to Japan. In connection with this transaction, the Company is committed to
purchase approximately $56.0 million of fiber optic cable and other network
assets of the 13,125-route-mile, four-fiber pair cable system to the Pacific
Rim. The Company has purchased $9.7 million of assets as of June 30, 1999.
(e) Legal Matters
The Company has been named as a defendant in various litigation
matters. Management intends to vigorously defend these outstanding claims. The
Company believes it has adequate accrued loss contingencies and that, although
the ultimate outcome of these claims cannot be ascertained at this time, current
pending or threatened litigation matters are not expected to have a material
adverse impact on the Company's results of operations or financial position.
(10) Weighted Average Shares Outstanding
For the three months ended June 30, 1999, the weighted average number of
shares used for computing basic earnings per share was 718.5 million, and the
weighted average number of shares used for computing diluted earnings per share
was 757.5 million (including 39.0 million incremental common shares attributable
to dilutive securities
9
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999 and 1998
related to warrants, options and growth shares). For the six months ended June
30, 1999, the weighted average number of shares used for computing basic
earnings per share was 708.4 million, and the weighted average number of shares
used for computing diluted earnings per share was 747.3 million (including 38.9
million incremental common shares attributable to dilutive securities related to
warrants, options and growth shares). The weighted average number of shares used
for computing basic and diluted loss per share for the three and six months
ended June 30, 1998 was 484.8 million and 449.1 million, respectively. Because
the Company had a net loss in 1998, the effect on loss per share of all options
and warrants was anti-dilutive.
(11) Business Segment Information
The Company's two business segments are 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 provides multimedia communications services to retail
and wholesale customers. Construction Services constructs and installs fiber
optic systems for other communications entities, as well as for the Company's
own use.
The Company evaluates the performance of its business segments based on
their respective earnings (loss) from operations, before interest and other
(income) expense and income taxes. The following table presents summarized
financial information related to the business segments for the three and six
months ended June 30, 1999 and 1998 (in millions):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
Communications services $ 790.4 $ 239.8 $ 1,527.6 $ 282.4
Construction services 83.3 153.9 224.5 288.4
---------- ---------- ---------- ----------
Total revenue $ 873.7 $ 393.7 $ 1,752.1 $ 570.8
========== ========== ========== ==========
Earnings (loss) from operations:
Communications services $ 70.1 $ (35.0) $ 104.4 $ (65.5)
Construction services 45.3 33.1 92.4 61.6
Merger costs - (812.5) - (812.5)
Depreciation and amortization - corporate (21.4) (6.0) (43.4) (7.6)
---------- ---------- ---------- ----------
Earnings (loss) from operations $ 94.0 $ (820.4) $ 153.4 $ (824.0)
========== ========== ========== ==========
Unallocated other (income) expense:
Interest expense, net $ 39.2 $ 18.9 $ 71.2 $ 33.2
Other (income) expense, net 6.9 (6.4) 9.8 (14.4)
---------- ---------- ---------- ----------
Earnings (loss) before income taxes $ 47.9 $ (832.9) $ 72.4 $ (842.8)
========== ========== ========== ==========
During the three and six months ended June 30, 1999, no single customer
accounted for 10% or more of the Company's total revenue. During the three
months ended June 30, 1998, Frontier and GTE accounted for 10.9% and 12.7%,
respectively, of the Company's total revenue and are included in the
Construction Services segment. During the six months ended June 30, 1998,
Frontier and GTE accounted for 15.8% and 17.3%, respectively, of the Company's
total revenue and are included in the Construction Services segment.
10
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 1999 and 1998
(12) Subsequent Event
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 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 nor less than 1.72932 shares for each U S WEST share. The
transaction will be accounted for as a purchase and is structured to be tax-free
to U S WEST shareowners to the extent of the Qwest stock delivered in the
transaction.
The obligation, if necessary, under the "collar" may be satisfied in
whole or in part with cash if Qwest's average stock price is below $38.70 per
share. 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 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 of both Qwest and U S WEST have unanimously
approved the proposed merger. The merger is subject to approval by the
stockholders of both companies, federal and state regulatory approvals and other
customary closing conditions. Anschutz Company, the beneficial owner of
approximately 39 percent of the outstanding shares of Qwest, has agreed to vote
its shares in favor of the merger. Closing of the merger is expected by mid-
2000.
In connection with the termination of the U S WEST and Global Crossing
merger agreement, U S WEST paid Global Crossing a break-up fee of $140.0 million
in cash and agreed to return $140.0 million in Global Crossing shares, valued at
$62.75 per share, purchased by U S WEST in connection with its agreement with
Global Crossing. Qwest advanced to U S WEST the $140.0 million cash payment and
agreed to purchase $140.0 million in services from Global Crossing over four
years at the best commercially available prices.
11
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,
. Qwest's plans to complete its communications network, and
. other 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 those
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:
. Qwest's failure to construct its communications network on schedule and
on budget;
. 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;
. Qwest's ability to achieve year 2000 compliance;
. 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 timely or at all, and
difficulties in combining operations of Qwest and U S WEST and in
realizing synergies expected from the merger.
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 report or, in the case of
documents incorporated by reference, the date of the document.
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
12
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" or the "Company") is a
leading Internet communications company engaged in two core businesses:
Communications Services and Construction Services.
Communications Services includes Internet and Multimedia Services,
Business Services, Consumer Services and Wholesale Services. Internet and
Multimedia Services provides Internet Protocol ("IP") - enabled services such as
Internet access, web hosting, co-location and remote access. Internet and
Multimedia Services are being developed according to market demand in
partnership with leading information technology companies, including the
following:
. Microsoft Corporation for business applications and service;
. 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") 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
. Siebel Systems, Inc. for comprehensive application hosting services for
Siebel Systems' applications.
Business Services and Consumer Services provide a full range of voice,
data, video and related services to business customers, governmental agencies
and consumers. Wholesale Services 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.
Construction Services constructs and installs fiber optic systems for
other communications providers, as well as for the Company's own use. The
Company began operations in 1988 constructing fiber optic conduit systems
primarily for major long distance carriers in exchange for cash and capacity
rights. The Company entered into major construction contracts for the sale of
dark fiber to Frontier, MCI WorldCom and GTE whereby the Company has agreed to
install and provide dark fiber to each along portions of the Company's network.
In addition to these contracts, the Company has signed agreements with other
communications providers and government agencies for the sale of dark fiber
along the Company's network. Revenue from Construction Services generally is
recognized under the percentage of completion method as performance milestones
relating to the contract are satisfactorily completed.
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 approximately 18,500 route-miles with
an additional 300 route-mile segment scheduled for completion by the end of
1999. 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.
In 1998, Qwest became the first network service provider to complete a
transcontinental IP-based fiber optic network when it activated its network from
Los Angeles to San Francisco to New York. The Company also activated the
nation's first OC-48 native IP network along certain routes of the Company's
network. Along this OC-48 network, the Company offers high-speed dedicated
Internet access, web hosting, IP-based virtual private network services and
expanded availability of voice over IP long distance services. Additionally,
the Company's European joint venture, KPNQwest, provides a pan-European IP-based
fiber optic network. The services offered allow customers in Europe to
broadcast video, data and voice globally. (See further discussion of the
KPNQwest joint venture below.)
13
Qwest is also expanding its network to carry international data and
voice traffic to Mexico and the Far East. The 1,400 route-mile Mexico network is
complete. The Company is also participating in a consortium of communications
companies that is building a submarine cable system connecting the United States
to Japan. Scheduled for completion by the second quarter of 2000, the 13,125-
mile four-fiber pair cable will ultimately be capable of transmitting
information at the rate of 640 gigabits per second.
U S WEST Merger Agreement
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 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 and is structured to be tax-free
to U S WEST shareowners to the extent of the Qwest stock delivered in the
transaction.
The obligation, if necessary, under the "collar" may be satisfied in
whole or in part with cash if Qwest's average stock price is below $38.70 per
share. 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 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 of both Qwest and U S WEST have unanimously
approved the proposed merger. The merger is subject to approval by the
stockholders of both companies, federal and state regulatory approvals and other
customary closing conditions. Anschtuz Company, the beneficial owner of
approximately 39 percent of the outstanding shares of Qwest, has agreed to vote
its shares in favor of the merger. Closing of the merger is expected by mid-
2000.
In connection with the termination of the U S WEST and Global Crossing
merger agreement, U S WEST paid Global Crossing a break-up fee of $140.0 million
in cash and agreed to return $140.0 million in Global Crossing shares, valued at
$62.75 per share, purchased by U S WEST in connection with its agreement with
Global Crossing. Qwest advanced to U S WEST the $140.0 million cash payment and
agreed to purchase $140.0 million in services from Global Crossing over four
years at the best commercially available prices.
Strategic Investments and Other Alliances
Investment in Qwest Cyber.Solutions LLC. In June 1999, Qwest and KPMG
LLP, a leading professional services firm, formed a joint venture called Qwest
Cyber.Solutions LLC, to provide Internet-based end-to-end application service
provider, application hosting, and application management services. The venture
will offer customers a broad set of vendor products available for Enterprise
Resource Planning ("ERP"), Customer Relationship Management ("CRM") and Back
Office solutions, a state-of-the-art Internet Protocol ("IP") broadband network,
technologically advanced Cybercenters and a starting skill base of more than 450
certified application specialists. Qwest contributed approximately $60.0 million
consisting of cash and other assets, and owns a 51% stake in the venture. The
financial position and results of operation of the venture have been
consolidated in the accompanying financial statements from the date of formation
and the minority interest represents KPMG's stake in the venture.
14
Investment in Advanced Radio Telecom Corp. In June 1999, Qwest signed a
definitive agreement to invest $90.0 million for an approximate 19% stake in
Advanced Radio Telecom Corp. ("ART"), a facilities-based, broadband ISP that
provides a direct connection from customer location to the Internet, to help
support the construction of ART's fixed, high-speed wireless networks. In
connection with this transaction, a group of high-tech investment funds also
signed a definitive agreement to invest $161.0 million. The companies expect to
close the transaction in the third quarter of 1999, subject to ART shareholder
approval, regulatory approval, consents to certain material amendments and other
customary conditions.
Relationship With BellSouth. In April 1999, BellSouth Corporation
(together with its subsidiaries, "BellSouth") and Qwest announced a strategic
relationship whereby BellSouth invested approximately $3.5 billion for an
approximate 10% equity stake in Qwest. Qwest issued approximately 40.7 million
shares to BellSouth in exchange for approximately $1.9 billion in cash. Qwest's
principal stockholder, Anschutz Company, sold approximately 33.3 million
existing shares to BellSouth for approximately $1.6 billion. At the same time, a
BellSouth affiliate and Qwest entered into a commercial arrangement for
provisioning of a full range of integrated digital data, image and voice
communications services for customers. These services will include Qwest's
portfolio of data networking, Internet and voice services and BellSouth's local
networking services. Once BellSouth is allowed to enter the long distance
market, the companies will jointly develop and deliver a comprehensive set of
end-to-end, high-speed data, image and voice communications services to business
customers, with an emphasis on broadband and Internet-based data services.
KPNQwest Joint Venture. In April 1999, Qwest and KPN Telecom B.V.
("KPN") formed a joint venture to create a pan-European IP-based fiber optic
network, linked to the Company's network in North America, for data, video and
voice services.
The venture initially will offer managed broadband services, IP transit,
Internet connectivity and value-added IP services, including consulting,
hosting, and the broadcasting of live events over the Internet. The venture also
plans to selectively sell dark fiber along its network. Customers of the
venture will include Internet service and content providers, multinational firms
in Europe and North America, as well as telecommunications carriers, operators
and others who want to purchase wholesale or retail network capacity, fiber or
services.
Qwest and KPN each own 50 percent of the venture. The venture is
governed by a six-person supervisory board, to which Qwest and KPN have each
named three members. KPN contributed two partially completed bi-directional,
self-healing fiber optic rings (EuroRingsTM 1 and 2) and certain communications
services contracts to the joint venture. Qwest contributed Xlink Internet
Service Gmbh ("Xlink"), the operating subsidiaries of EUnet International
Limited ("EUnet") and cash. Also, Qwest and KPN have contributed transatlantic
capacity that connects EuroRingsTM with Qwest's network in North America, as
well as certain other assets. The net book value of total assets contributed by
Qwest totaled approximately $300.0 million. Qwest deconsolidated EUnet and Xlink
in April 1999. Qwest's investment in the joint venture is being accounted for
under the equity method.
Investment in Rhythms. In April 1999, Qwest made an equity investment,
totaling $15.0 million in cash, in DSL local networks through an agreement with
Rhythms NetConnections Inc. ("Rhythms"), a packet-based Competitive Local
Exchange Carrier ("CLEC") that provides high-speed networking solutions for
remote access to private networks and the Internet. Under this agreement, the
Company expects to have access to 29 metropolitan areas (10 of which are in
addition to the areas covered by an agreement that Qwest has with Covad
Communications Group Inc.) by the first quarter of 2000, while further enhancing
its ability to provide its customers with high-speed DSL connectivity to its
network. The Company has committed to place a minimum number of orders for DSL
service over a seven-year term commencing on the date that Rhythms is
operational in 29 metropolitan areas. In the event that the Company fails to
meet the order target, the Company is committed to pay Rhythms for the
difference between the order target and the number of actual orders placed.
Investment in Covad. In January 1999, Qwest made its first equity
investment, totaling $15.0 million in cash, in high-speed, DSL local networks
through an agreement with Covad Communications Group, Inc. ("Covad"), a packet-
based CLEC. Under this agreement, the Company expects to have access to 22
metropolitan areas by the end of 1999, while enhancing its ability to provide
its customers with high-speed DSL connectivity to its network. The Company has
15
committed to purchase DSL services for approximately $20.0 million over a five-
year term commencing on the date that Covad's DSL services are commercially
available in all 22 metropolitan areas.
Results of Operations
Three and Six Months Ended June 30, 1999 Compared to Three and Six Months Ended
June 30, 1998
The Company reported net earnings of $18.5 million in the second quarter
of 1999, compared to a net loss of $(808.9) million in the same quarter of the
prior year. During the first six months of 1999, the Company reported net
earnings of $23.2 million, compared to a net loss of $(815.7) million in the
same period of the prior year. The Company's results of operations include the
acquisitions of the following companies: Phoenix Network, Inc. from March 1998;
LCI International, Inc. from June 1998; and Icon CMT Corp. from December 1998.
After giving pro forma effect to these as if such acquisitions had occurred on
January 1, 1998, and excluding the effects of merger related costs and non-
recurring charges, the Company's reported net loss in the second quarter and
first six months of 1998 would have been $(27.0) million and $(41.1) million,
respectively. The results of operations for the second quarter of 1999 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 second quarter and first six
months of 1999 and 1998 were as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------- ------- ---------- --------- ------- ----------
Communications services $ 790.4 $ 239.8 $ 550.6 $ 1,527.6 $ 282.4 $ 1,245.2
Construction services 83.3 153.9 (70.6) 224.5 288.4 (63.9)
------- ------- -------- --------- ------- ----------
Total revenue $ 873.7 $ 393.7 $ 480.0 $ 1,752.1 $ 570.8 $ 1,181.3
======= ======= ======== ========= ======= ==========
During the second quarter and first six months of 1999, as compared to
the same periods of the prior year, Communications Services revenue increased
due to the addition of revenue from the acquisitions discussed above, and due to
growth in all aspects of Communications Services. Construction Services revenue
decreased during the second quarter and first six months of 1999, as compared to
the same periods of the prior year, primarily as a result of the completion of
the Company's network during the first six months of 1999. The Company expects
that revenue from Construction Services will be less than $20 million for the
remainder of 1999.
Operating Expenses. Components of operating expenses for the second
quarter and first six months of 1999 and 1998 were as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
----------------- --------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------- -------- ---------- --------- -------- ----------
Access and network
operations $ 444.6 $ 153.6 $ 291.0 $ 877.6 $ 184.5 $ 693.1
Construction services 19.6 108.1 (88.5) 96.3 205.6 (109.3)
Selling, general and
administrative 222.6 107.9 114.7 436.0 152.1 283.9
Depreciation and
amortization 92.9 32.0 60.9 188.8 40.1 148.7
Merger related costs - 812.5 (812.5) - 812.5 (812.5)
------- -------- -------- --------- -------- ----------
Total operating
expenses $ 779.7 $1,214.1 $ (434.4) $1,598.7 $1,394.8 $ 203.9
======= ======== ======== ========= ======== ==========
16
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 second quarter and first six months of 1999 over the same
period of the prior year was primarily attributable to growth in Communications
Services revenue. Expressed as a percentage of Communications Services revenue,
access and network operations expenses decreased from 64.1% in the second
quarter of 1998 to 56.3% in the second quarter of 1999, and from 65.3% in the
first six months of 1998 to 57.4% in the same period of the current year. As the
network is completed and activated, the Company expects it will be able to serve
more customer needs over its own network, thereby continuing to reduce such
costs as a percentage of revenue.
Expenses for Construction Services consist primarily of costs of sale on
network construction contracts, 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. Expenses for Construction Services
expressed as a percentage of construction revenue decreased from 70.2% in the
second quarter of 1998 to 23.5% in the second quarter of 1999, and from 71.3% in
the first six months of 1998 to 42.9% in the first six months of 1999.
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 in the second quarter
and first six months of 1999 as compared to the same periods of the prior year,
was due primarily to the following: additional expenses related to acquired
entities; 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; and additional building rent expense related to
increased space obtained in response to the Company's infrastructure growth.
Expressed as a percentage of total revenue, SG&A decreased from 27.4% in the
second quarter of 1998 to 25.5% in the second quarter of 1999, and from 26.6% in
the first six months of 1998 to 24.9% in the first six months of 1999. SG&A is
expected to increase as the Company continues to intensify brand advertising, as
services are expanded and as segments of the Company's network become
operational. In addition, the Company expects that SG&A as a percentage of total
revenue will increase as construction revenue decreases and as the Company
continues its investment in data product and service offerings.
The Company's depreciation and amortization expense increased due
primarily to activating segments of the Company's network, purchases of assets
to accommodate the Company's growth and depreciation and amortization of assets
and goodwill related to the Company's acquisitions. The Company expects that
depreciation expense will continue to increase in subsequent periods as the
Company continues to activate additional segments of its network.
The Company assessed and allocated values to in-process R&D projects
related to the acquisition of LCI in June 1998. The values assigned to these
assets were determined by identifying significant research projects for which
technological feasibility had not been established. These assets consisted of a
significant number of R&D projects grouped into three categories: (1) network
systems automation tools; (2) advanced data services, including frame relay and
Internet Protocol technologies; and (3) new operational systems and tools. Taken
together, these projects, if successful, will enable the Company to provide
advanced voice and data services as well as sophisticated network management and
administration functions. The Company believes development efforts through June
30, 1999 have proceeded according to expectations.
Remaining R&D efforts for these projects include various phases of
technology design, development and testing. Anticipated completion dates for the
remaining projects in progress will occur in phases through 1999, at which point
the Company expects to begin generating the economic benefits from the
technologies. Costs incurred in connection with these R&D efforts are expensed
as incurred.
The Company expects to continue its support of these efforts and the
Company believes it has a reasonable chance of successfully completing the R&D
programs. However, risk is associated with the completion of the projects, and
the Company cannot assure that the projects will meet with either technological
or commercial success.
17
If none of these projects is successfully developed, the sales and
profitability of the Company may be adversely affected in future periods. The
failure of any particular individual in-process project would not materially
impact the Company's financial condition or results of operations. Operating
results are subject to uncertain market events and risks, which are beyond the
Company's control, such as trends in technology, government regulations, market
size and growth, and product introduction or other actions by competitors.
Other Expense (Income). Components of other expense (income) for the
second quarter and first six months of 1999 and 1998, were as follows (in
millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 Increase 1999 1998 Increase
------- --------- -------- ------- ------- --------
Interest expense, net $ 39.2 $ 18.9 $ 20.3 $ 71.2 $ 33.2 $ 38.0
Other expense (income), net 6.9 (6.4) 13.3 9.8 (14.4) 24.2
------- --------- -------- ------- ------- --------
Total other expense (income) $ 46.1 $ 12.5 $ 33.6 $ 81.0 $ 18.8 $ 62.2
======= ========= ======== ======= ======= ========
The increase in interest expense, net during the second quarter and
first six months of 1999, as compared to the same periods of the prior year,
resulted from an increase in long-term indebtedness, (see "Liquidity and Capital
Resources" below), partially offset by an increase in capitalized interest
resulting from construction of the Company's network. As the network is
completed, interest expense, net will increase as the amount of capitalized
interest decreases. Other expense (income), net, increased due primarily to
losses on equity investments (including Qwest's proportionate share of KPNQwest
losses).
Income Taxes. The Company's effective tax rate for the second quarter
and first six months of 1999 differed from the statutory income tax rate
primarily as a result of the non-deductibility of acquisition-related goodwill,
state income taxes and foreign losses. The effective tax rate for the second
quarter and first six months of 1998 differed from the statutory rate primarily
as a result of the non-deductibility of acquisition-related in-process research
and development.
Liquidity and Capital Resources
During the first six months of 1999, cash used in operations was $109.3
million; cash used in investing activities was $913.4 million, including $764.3
million of capital expenditures; and cash provided by financing activities was
$1,997.3 million. Cash provided by financing activities includes an approximate
$1.9 billion equity investment by BellSouth and employee stock transactions of
$82.1 million.
The Company estimates the total cost to construct and activate its
network and complete construction of dark fiber sold to third parties will be
approximately $2.3 billion, of which the Company had already expended
approximately $2.2 billion as of June 30, 1999.
The Company is participating in a consortium of communications companies
that is building a submarine cable system connecting the United States to Japan.
In connection with this transaction, the Company is committed to purchase
approximately $56.0 million of fiber optic cable and other network assets of the
13,125-route-mile, four-fiber pair cable system to the Pacific Rim. The Company
has purchased $9.7 million of assets as of June 30, 1999.
The Company believes that its available cash and cash equivalent
balances at June 30, 1999, cash flow from operations and its available credit
agreement (described below) will satisfy its currently anticipated cash
requirements for at least the next 12 months. The Company anticipates capital
expenditures during the remainder of 1999 to support its growth in
Communications Services, including continued expansion of data products and
services, and to complete
18
construction and activate additional capacity along the Company's network to be
approximately $800 million to $900 million.
In March 1999, the Company entered into a $1.0 billion credit agreement
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. As of June 30, 1999, there were no borrowings outstanding
under the credit agreement.
Year 2000
Many existing computer systems, including hardware and software, use
only the last two digits to identify a year. Consequently, as the year 2000
approaches, such systems will not recognize the difference in a year that begins
with "20" rather than "19". As a result of the date change in the year 2000, if
any of the Company's computer systems use only two digits to define the year,
these defective systems may cause disruptions in its network operations through
which the Company provides communications services to its customers and in its
internal operations. Additionally, the Company is dependent upon outside sources
to provide communications services to its customers and to bill its customers
for such services. The greatest risk to the Company's ability to provide
communications services is the failure of third-party service providers to be
year 2000 compliant, especially those third-party service providers that provide
local access and certain of the billing systems upon which the provision of long
distance telecommunications service relies.
The Company has established a year 2000 compliance group. The objective
of the year 2000 compliance group is to minimize disruptions as a result of the
date change in the year 2000. The compliance group has developed a five-step
plan to identify and repair year 2000 affected systems: (i) identify potentially
date-sensitive systems, including third-party products; (ii) assess such systems
for year 2000 compliance; (iii) modify, upgrade or replace non-compliant
systems; (iv) test the corrected systems; and (v) deploy the corrected systems.
The year 2000 compliance group has focused mainly on the Company's
domestic operations and, to a lesser extent, on its international operations.
In addition to reviewing its own systems, the year 2000 compliance group
is submitting requests to third-party service providers to obtain information as
to their compliance efforts.
The five step process has been virtually completed for Qwest's mission
critical, internally developed software applications, mission critical data
center hardware and software and mission critical voice and data network
elements. Remediation and deployment of desktop computers will continue during
the third quarter of 1999. Additional testing is expected to occur throughout
1999. To the extent issues are discovered as a result of such additional
testing, remediation and re-deployment of corrected systems will be scheduled as
necessary.
The Company's overall efforts to integrate the operations of recently
acquired businesses and various other factors, including the compliance efforts
of third-parties, over which the Company has no control, may affect these target
dates.
The Company will develop contingency plans as needed. The high level
contingency plans are virtually complete; while implementation and testing is
expected to be completed by September 30, 1999.
During the first six months of 1999, the Company incurred approximately
$6.5 million for year 2000 compliance costs, included in SG&A expense. The
Company expects to incur approximately $3.0 million to $5.0 million in
additional SG&A expense during the remainder of 1999 to implement its year 2000
plan. The Company currently estimates capital expenditures for new systems to
replace non-year 2000 compliant systems will total approximately $10.0 million
(having incurred approximately $6.5 million through June 30, 1999).
19
Regulatory Matters--Recent Developments
Access Charge Reform and Universal Service. Qwest's costs of providing long
distance services could be affected by changes in the "access charges" imposed
by local exchange carriers on interexchange carriers ("IXCs") to originate and
terminate calls over local networks and by changes in its contributions to the
universal service fund. In accordance with the schedule established in the
Federal Communications Commission's ("FCC's") access charge reform order, an
increase in the primary interexchange carrier charge ("PICC") became effective
July 1, 1999. The PICC is a flat-rate charge imposed on an IXC by the local
exchange carrier for each line that is presubscribed to an IXC. Corresponding
reductions were made in the per-minute access charges assessed on IXCs. On May
27, 1999, the FCC increased the funding for the second year of the federal
universal service support mechanism for schools, libraries, and rural health
care providers.
Supreme Court Decision on FCC Rules Implementing the Telecommunications
Act of 1996. On January 25, 1999, the U.S. Supreme Court issued a decision that
upheld many of the rules the FCC had created to implement the portions of the
Telecommunications Act of 1996 ("1996 Act") that are designed to bring
competition to local exchange markets. In the decision, the Supreme Court upheld
the FCC's authority to implement the 1996 Act through rules that are binding on
the states. The Supreme Court also upheld the FCC's regulations regarding state
review of interconnection agreements, the granting of certain exemptions to
rural incumbent local exchange carriers, and dialing parity. "Dialing parity"
means that consumers can use non-incumbent carriers by dialing as they normally
do, rather than having to dial special "access codes" to reach their preferred
carrier. The Supreme Court also upheld the FCC's decisions:
. that competitors need not own facilities in order to purchase network elements
from incumbent local exchange carriers;
. that incumbent local exchange carriers may not separate combinations of
network elements before providing them to nondominant carriers unless
requested to do so by a nondominant carrier;
20
. that network elements include the features, functions, and capabilities
provided by means of network equipment; and
. that non-incumbent carriers may adopt particular provisions of another
carrier's interconnection agreement without adopting the entire agreement.
The Supreme Court remanded to the FCC, however, the issue of what
network elements incumbent local exchange carriers must make available to non-
incumbent carriers. In April 1999, the FCC released proposed rules on this
subject. Qwest participated in this proceeding by filing comments and reply
comments on those proposed rules. The FCC is expected to complete this
proceeding later in 1999. In addition, a federal court will now need to decide
whether the method adopted by the FCC in 1996 for establishing prices for
network elements purchased from the incumbent local exchange carriers and for
interconnection with the incumbent local exchange carriers' networks is
permissible. Qwest is unable to predict what actions the FCC or a federal court
will take on these and other issues related to the Supreme Court's decision.
The Supreme Court's decision is likely to have an impact on other
matters as well, including interconnection agreements between non-incumbent
carriers and incumbent local exchange carriers, the rules the states have
adopted concerning local exchange competition, and the original local exchange
carriers' applications for long distance authority. Qwest is unable to predict,
however, how the decision will impact those matters or how the decision will
affect competition.
Truth-in-billing. In April 1999, the FCC adopted guidelines governing
the format and content of telephone bills. These guidelines, which are scheduled
to become effective in the late summer or early fall of 1999, will require
carriers to (1) clearly identify the service provider responsible for each
charge on the bill; (2) clarify when customers may withhold payment to dispute a
charge without risking the loss of their basic local service; (3) identify on
the bill the carrier to whom a customer should direct his or her complaint about
a particular charge; and (4) adopt uniform descriptions for line item charges
related to federal regulatory action. The adoption of these new rules will
impact the way Qwest presents its bills to customers. The FCC also sought public
comment on the text it should adopt for industry standardized descriptions for
line item charges related to regulatory action. Qwest participated in this
proceeding by filing reply comments.
1+ Dialing Parity. In many states, consumers wishing to use carriers
other than the incumbent local exchange carrier for long distance services
within the incumbent local exchange carrier's area have had to dial special
access codes to do so. The need to dial extra digits in these states has put
Qwest and other carriers at a competitive disadvantage compared with incumbent
local exchange carriers whose customers can make these calls simply by dialing
"1" plus the desired number. If a non-incumbent carrier's customer attempts to
make one of these calls by simply dialing "1" plus the desired number, the call
will automatically be routed to the incumbent local exchange carrier in those
states that have not required 1+ dialing parity. The Supreme Court's January 25,
1999 decision, which is discussed above, upholds the FCC's rule requiring that
incumbent local exchange carriers make it possible for consumers to make these
long distance calls on a 1+ basis, using Qwest or any other carrier the consumer
desires. Regulatory commissions in most states also have issued decisions
imposing similar requirements. Dialing parity is scheduled to be implemented in
all states by the late summer of 1999. Qwest expects to benefit from the
implementation of this 1+ calling capability.
21
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.
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 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
1999 2000 2001 2002 2003 Thereafter Discounted Total
----- ----- ----- ----- ----- ---------- ----------- ---------
Long-term fixed rate debt $ - $ - $ - $ - $ - $ 2,568.9 $ (258.2) $ 2,310.7
Capital lease and other obligations $ 1.5 $ 1.7 $ 2.1 $ 2.6 $ 3.0 $ 16.2 $ - $ 27.1
Average interest rate 8.1% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Collectively, the fixed rate debt, capital lease and other obligations,
with a carrying value of $2,337.8 million, had an estimated fair value of
$2,269.9 million at June 30, 1999, 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 June 30, 1999, and results of
operations or cash flows for the first six months of 1999. In addition, foreign
currency transaction gains and losses were not material to the Company's results
of operations for the six months ended June 30, 1999, and 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.
22
Part II
Item 1. Legal Proceedings
On April 3, 1998, in an action captioned Lionel Phillips v. LCI
International Inc. and H. Brian Thompson, the plaintiffs filed a putative class
action complaint in the United States District Court for the Eastern District of
Virginia against LCI and H. Brian Thompson, the Chairman and Chief Executive
Officer of LCI. The plaintiffs brought the action as a class action purportedly
on behalf of stockholders of LCI who sold LCI Common Stock between February 17,
1998 and March 9, 1998. The plaintiffs alleged, among other things, that the
defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by making materially false and misleading statements on February 17,
1997 that LCI was not for sale at a time when negotiations between Qwest and LCI
regarding a potential merger were allegedly ongoing. On June 25, 1998,
defendants moved to dismiss the complaint on the grounds that it failed to state
a claim against defendants. By Order dated July 20, 1998, the Court granted
defendants' motion to dismiss the complaint but granted the plaintiffs leave to
amend the complaint within fifteen days. On August 4, 1998, the plaintiffs
filed an amended complaint and Qwest again moved to dismiss the lawsuit. On
September 30, 1998, the Court granted the defendants' motion to dismiss the
complaint. On October 20, 1998, the plaintiffs appealed the Court's decision.
On June 7, 1999, the appeal was argued before a panel of the United States Court
of Appeals for the Fourth Circuit. Qwest continues to await a disposition of
the appeal and intends to vigorously defend this action.
On September 15, 1998, in an action captioned Aaron Parnes v. Scott A.
Baxter, Wayne B. Weisman, Richard M. Brown, Scott Harmolin, Samuel A. Plum, Icon
CMT Corp. and Qwest Communications International Inc., the plaintiff filed a
putative class action complaint in the Court of Chancery of the State of
Delaware in and for New Castle County (the "Court") against Icon, its directors
and Qwest. In the suit, the plaintiff alleged that consummation of the Icon
merger will subject the Icon stockholders to the control of Mr. Anschutz, who
will continue to be the principal stockholder of Qwest after the consummation of
the merger. The plaintiff further alleged that the Icon merger constitutes a
change in control of Icon and imposes heightened fiduciary duties on the members
of the Icon board of directors to maximize stockholder value. The plaintiff also
alleged that the members of the Icon board of directors violated their fiduciary
duties by failing to auction Icon or to undertake an active "market check" for
other potential bidders. The plaintiff seeks, among other things, to have the
Court declare the suit a proper class action, enjoin the Icon merger and require
the members of the Icon board of directors to auction Icon and/or conduct a
"market check," and to award monetary damages, together with costs and
disbursements. The defendants consider the action to be without merit and intend
to vigorously defend the action. The defendants have filed answers denying the
allegations of the complaint.
Qwest has been named as a defendant in Drawhorn v. Qwest Communications
International Inc. et al., Hudson v. Qwest Communications International, Inc.,
and Hord v. Qwest Communications International Inc. et al. The cases are
purported class actions, filed in Indiana, Tennessee and Texas, 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 the 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 action purports to be
23
on behalf of a class of such owners in the State of Tennessee. 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 the Drawhorn, Hudson
and Hord litigations 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.
Item 2. Changes in Securities and Use of Proceeds
(c) Sale of unregistered securities: In May 1999, Qwest issued 40.7
million shares to BellSouth Corporation in exchange for approximately $1.9
billion in cash. These shares have not been registered with the Securities and
Exchange Commission in reliance on the exemption provided in Section 4(2) of the
Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
On May 5, 1999, the Company held its Annual Meeting of Stockholders.
There were 703,318,096 shares of Common Stock of the Company that could be voted
at the meeting, and 87%, or 612,645,838 shares, of Common Stock were represented
at the meeting, in person or by proxy, which constituted a quorum. The results
were as follows:
1. Election of 12 directors to serve for one-year terms until the 2000
Annual Meeting of Stockholders. All of management's nominees were
elected as directors of the Company to serve until the next annual
meeting of the stockholders and until their successors are elected and
qualified.
2. Approval of the Qwest Communications International Inc. Employee Stock
Purchase Plan:
For Against Abstain
--- ------- -------
610,600,708 1,600,754 444,376
3. Approval of amendment to Qwest's Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of the
Company's Common Stock:
For Against Abstain
--- ------- -------
573,172,632 38,989,424 483,782
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
period end March 31, 1999).
24
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 Credit Agreement, dated as of March 31, 1999, among Qwest
Communications International Inc., as Borrower, NationsBank,
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 to Qwest's quarterly report on Form 10-Q for the
period end March 31, 1999).*
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.*
25
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 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
26
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.
21.1 Subsidiaries of the Registrant (incorporated herein by
reference to Qwest's quarterly report on Form 10-Q for the
period end 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 June 30, 1999, Qwest filed the following
Current Reports on Form 8-K:
1. On April 27, 1999, Qwest filed a Current Report on Form 8-K
announcing its strategic relationship with BellSouth Corporation (together with
its subsidiaries, "BellSouth"), the investment by BellSouth in 40.7 million
shares of Qwest Common Stock at $47.25 per share, and the sale by Qwest's
principal shareholder of 33.3 million shares of Qwest Common Stock to BellSouth
at $47.25 per share. As a result of these two purchases, BellSouth owns
approximately 10% of the Company's issued and outstanding shares for a total
investment of approximately $3.5 billion.
2. On April 28, 1999, Qwest filed a Current Report on Form 8-K/A,
restating the Current Report on Form 8-K filed April 27, 1999 regarding the
relationship with BellSouth.
3. On June 14, 1999, Qwest filed a Current Report on Form 8-K announcing
is offer to acquire U S WEST, Inc., a Delaware corporation, and Frontier
Corporation, a New York corporation, in separate transactions.
4. On June 18, 1999, Qwest filed a Current Report on Form 8-K announcing
a change in auditors from KPMG LLP to Arthur Andersen LLP. This change in
auditors resulted from Qwest entering into a business venture with KPMG LLP that
effectively impaired KPMG's independence.
27
5. On June 21, 1999, Qwest filed a Current Report on Form 8-K
announcing a press release in connection with separate letters it delivered to
Mr. Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S
WEST, Inc., a Delaware corporation, and Mr. Joseph P. Clayton, Chief Executive
Officer of Frontier Corporation, a New York corporation, discussing Qwest's
offer to acquire the companies.
6. On June 22, 1999, Qwest filed a Current Report on Form 8-K
announcing a press release in connection with a letter it delivered to Mr.
Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S
WEST, Inc., a Delaware corporation, urging the U S West Board to enter into
discussions with Qwest regarding a business combination.
7. On June 23, 1999, Qwest filed a Current Report on Form 8-K
announcing a press release in connection with separate letters it delivered to
Mr. Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S
WEST, Inc., a Delaware corporation, and Mr. Joseph P. Clayton, Chief Executive
Officer of Frontier Corporation, a New York corporation. The letters contained
revisions to Qwest's previous offer to acquire the companies.
8. On June 29, 1999, Qwest filed a Current Report on Form 8-K
announcing a press release in connection with a letter it delivered to Mr.
Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S
WEST, Inc., a Delaware corporation, stating that Qwest does not expect to
encounter any difficulty in obtaining the necessary FCC regulatory approvals to
complete its proposed mergers with U S West, Inc. and Frontier Corporation.
28
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)
August 11, 1999
--
29