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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 September 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
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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 organization) (I.R.S. Employer Identification Number)
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
----------------------
(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 748.0
million, as of November 10, 1999.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
----
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 Nine Months Ended September 12
30, 1999 and 1998
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 27
z 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 Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
Revenue:
Communications services $1,018.1 $601.8 $2,545.7 $ 884.2
Construction services - 205.0 224.5 493.4
-------- ------ -------- --------
Total revenue 1,018.1 806.8 2,770.2 1,377.6
-------- ------ -------- --------
Operating expenses:
Access and network operations 556.3 371.6 1,433.8 556.1
Construction services - 128.2 96.4 333.8
Selling, general and administrative 271.3 189.4 707.2 341.5
Depreciation and amortization 101.7 79.9 290.5 120.0
Merger costs 25.0 - 25.0 62.5
Provision for in-process research and development - - - 750.0
-------- ------ -------- --------
Total operating expenses 954.3 769.1 2,552.9 2,163.9
Operating income (loss) 63.8 37.7 217.3 (786.3)
Other (income) expense:
Interest expense, net 42.5 29.0 113.6 62.3
Other expense (income), net (11.5) 2.9 (1.6) (11.6)
-------- ------ -------- --------
Earnings (loss) before income taxes 32.8 5.8 105.3 (837.0)
Income tax expense (benefit) 34.6 12.7 83.8 (14.4)
-------- ------ -------- --------
Net earnings (loss) $ (1.8) $ (6.9) $ 21.5 $ (822.6)
======== ====== ======== ========
Net earnings (loss) per share - basic $ - $(0.01) $ 0.03 $ (1.58)
======== ====== ======== ========
Net earnings (loss) per share - diluted $ - $(0.01) $ 0.03 $ (1.58)
======== ====== ======== ========
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)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash $ 859.9 $ 462.8
Trade accounts and notes receivable, net 801.1 628.1
Prepaid expenses and other 247.9 348.2
--------- --------
Total current assets 1,908.9 1,439.1
Property and equipment, net 3,545.3 2,655.4
Excess of cost over net assets acquired, net 3,282.0 3,402.0
Other, net 1,411.0 571.1
--------- --------
TOTAL ASSETS $10,147.2 $8,067.6
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 84.8 $ 205.1
Accrued facility costs 249.7 300.2
Accrued construction costs 95.9 145.9
Accrued expenses and other 525.1 586.3
--------- --------
Total current liabilities 955.5 1,237.5
Debt and capital lease obligations, net of current portion 2,352.0 2,307.1
Other long-term liabilities 326.7 284.8
Minority interest 56.1 -
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; authorized 200 million
shares; no shares issued and outstanding - -
Common stock - $.01 par value; authorized 5.0 billion
shares; 747.0 million shares and 694.0 million shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively. 7.5 6.9
Paid-in capital 7,225.8 5,105.0
Accumulated other comprehensive income 78.0 2.2
Accumulated deficit (854.4) (875.9)
--------- --------
Total stockholders' equity 6,456.9 4,238.2
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,147.2 $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)
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------- ------------
Net cash (used in) provided by operating activities $ (210.1) $ 106.3
--------- -------
Cash flows from investing activities:
Acquisitions and investments, net of cash acquired (235.9) (27.4)
Expenditures for property and equipment (1,187.3) (751.0)
--------- -------
Net cash used in investing activities (1,423.2) (778.4)
--------- -------
Cash flows from financing activities:
Proceeds from long-term debt - 300.0
Repayments of long-term debt (3.3) (25.8)
Net short-term debt borrowings - 151.9
Proceeds from issuance of common stock, net 1,923.1 -
Proceeds from employee stock transactions 116.0 96.4
Other (5.4) (4.8)
--------- -------
Net cash provided by financing activities 2,030.4 517.7
--------- -------
Net increase (decrease) in cash and cash equivalents 397.1 (154.4)
Cash and cash equivalents, beginning of period 462.8 379.8
--------- -------
Cash and cash equivalents, end of period $ 859.9 $ 225.4
========= =======
Supplemental disclosure of cash flow information:
Cash paid for interest, net $ 84.0 $ 21.8
========= =======
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 $ 70.2 $ 51.9
========= =======
Notes payable issued for investments $ 118.8 $ -
========= =======
See accompanying notes to condensed consolidated financial statements
5
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 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) 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 nor less than 1.72932 shares for each U S WEST share. The
transaction will be accounted for as a purchase with U S WEST deemed the
accounting acquiror and is structured to be tax-free to U S WEST shareowners to
the extent of the Qwest stock delivered in the transaction.
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 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 merger. The merger is subject to federal and state
regulatory approvals and other customary closing conditions. Closing of the
merger is expected by mid-2000.
6
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1999 and 1998
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.
(4) Comprehensive Income
The following table represents the calculation of comprehensive income
(loss) for the three and nine months ended September 30, 1999 and 1998 (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
Net earnings (loss) $ (1.8) $ (6.9) $ 21.5 $ (822.6)
------------- ------------- -------------- -------------
Other comprehensive income, net of tax:
Net unrealized holding gains (losses)
on securities (36.5) - 77.2 -
Foreign currency translation adjustments - - (1.4) -
------------- ------------- -------------- -------------
Total other comprehensive income (loss) (36.5) - 75.8 -
------------- ------------- -------------- -------------
Comprehensive income (loss) $ (38.3) $ (6.9) $ 97.3 $ (822.6)
============= ============= ============== =============
(5) Capital Stock
In November 1999, Qwest's stockholders approved an increase in the number
of authorized common shares from 2 billion to 5 billion, and an increase in the
number of authorized preferred shares from 25 million to 200 million.
In May 1999, Qwest distributed a two-for-one stock split in the form of a
stock dividend. 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.
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.
(6) Investments
In September 1999, Qwest and Anschutz Digital Media, Inc. ("ADMI"), an
affiliate of Anschutz Company, entered into an agreement to form a joint venture
called Slingshot Networks LLC to provide advanced digital production, post-
production and transmission facilities, digital media storage and distribution
services, telephony-based data storage and enhanced services, access and routing
services. Qwest and ADMI each own 50% of the joint venture. Qwest contributed
approximately $84.8 million consisting of a promissory note payable over nine
years at an annual interest rate of 6%. Qwest's investment in the joint venture
is accounted for under the equity method. The agreement between Qwest and ADMI
also provided that Qwest would purchase certain telephony-related assets and all
7
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1999 and 1998
of the stock of Precision Systems, Inc., a telecommunications solutions
provider, from ADMI in exchange for a promissory note in the amount of $34
million. The promissory note is payable over nine years and bears interest at an
annual rate of 6%.
In June 1999, Qwest and KPMG LLP ("KPMG"), 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 currently 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 September 1999, Qwest invested $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 separate group of investors also invested
$161.0 million.
In April 1999, Qwest and KPN Telecom B.V. ("KPN"), the Dutch
telecommunications company, formed a joint venture ("KPNQwest") to create a
pan-European IP-based fiber optic network, linked to Qwest's network in North
America, for data, video and voice services. Qwest and KPN each initially
owned 50 percent of KPNQwest. On November 12, 1999 KPNQwest consummated an
initial public offering which has resulted in approximately 11% of KPNQwest's
shares being owned by the public and approximately 44% of KPNQwest's shares
being owned by each of Qwest and KPN. KPNQwest was initially governed by a
six person supervisory board to which Qwest and KPN had each named three
members. As a result of the consummation of the initial public offering, two
outside directors will be added to the supervisory board. Upon formation of
KPNQwest, KPN contributed two partially completed bi-directional, self-healing
fiber optic rings (EuroRings 1 and 2) and certain communications services
contracts to KPNQwest. Qwest contributed Xlink Internet Service Gmbh ("Xlink"),
the operating subsidiaries of EUnet International Limited ("Eunet") and cash.
Also, Qwest and KPN contributed transatlantic capacity that connects KPNQwest's
European network with Qwest's network in North America, and also contributed
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 KPNQwest is accounted for under the equity
method.
(7) Construction Services
Revenue from construction services generally is recognized under the
percentage of completion method as performance milestones relating to the
contract are satisfactorily completed. Progress billings are made upon
customers' acceptance of performance milestones. Costs and estimated earnings
in excess of billings, net on uncompleted contracts included in the accompanying
condensed consolidated balance sheets were $134.6 million and $222.1 million at
September 30, 1999 and December 31, 1998, respectively.
(8) Debt and Capital Lease Obligations
Debt and capital lease obligations consisted of the following (in
millions):
September 30, December 31,
1999 1998
------------------ -------------------
Fixed rate debt at interest rates ranging
from 7.25% to 10 7/8% $ 2,327.2 $ 2,279.5
Capital lease and other obligations 26.3 30.4
------------------ -------------------
Total debt and capital lease obligations 2,353.5 2,309.9
Less current portion (1.5) (2.8)
------------------ -------------------
Debt and capital lease obligations $ 2,352.0 $ 2,307.1
================== ===================
8
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1999 and 1998
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. As of September 30, 1999, there were no borrowings
outstanding under the credit agreement.
(9) 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 Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- ---------------- ---------------- ---------------
Statutory income tax expense (benefit) 35.0% 35.0% 35.0% (35.0%)
State taxes, net of federal effect 13.2% 5.0% 7.6% (5.0%)
R&D - - - 35.8%
Goodwill amortization 26.0% 179.0% 22.2% 2.0%
Merger costs 17.6% - 5.5% -
Foreign losses 11.4% - 8.0% -
Other, net 2.3% - 1.3% 0.5%
------------- -------------- -------------- -------------
Total income tax expense (benefit) 105.5% 219.0% 79.6% (1.7%)
============= ============== ============== =============
(10) 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 Data Local Exchange Carrier
("DLEC"). 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 DLEC 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) 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
9
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1999 and 1998
purchase approximately $56.0 million of fiber optic cable and other network
assets on the 13,125-route-mile, four-fiber pair cable system to the Pacific
Rim. The Company has purchased $11.6 million of assets as of September 30, 1999.
(c) Capacity Purchase Commitment
In July 1999, Qwest and Global Crossing Ltd. ("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 U S
WEST and the termination of the U S 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.
(d) 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.
(11) Weighted Average Shares Outstanding
For the three months ended September 30, 1999, the weighted average number
of shares used for computing basic and diluted loss per share was 745.9 million.
Because the Company reported a net loss for the three months ended September 30,
1999, the effect on loss per share of all options, warrants and growth shares
(31.9 million incremental common shares) was anti-dilutive, and therefore not
considered. For the Nine months ended September 30, 1999, the weighted average
number of shares used for computing basic earnings per share was 720.9 million,
and the weighted average number of shares used for computing diluted earnings
per share was 757.5 million (including 36.6 million incremental common shares
attributable to dilutive securities related to options, warrants and growth
shares). The weighted average number of shares used for computing basic and
diluted loss per share was 661.5 million and 519.9 million for the three and
nine months ended September 30, 1998 respectively. Because the Company
reported a net loss for the three and nine months ended September 30, 1998, the
effect on loss per share of all options, warrants and growth shares (30.7
million and 28.0 million incremental common shares for the three and nine months
ended September 30, 1998, respectively) was anti-dilutive, and therefore not
considered.
(12) 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. With the substantial completion of the Company's network during 1999,
Construction Services has become incidental to the Company's business.
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 nine
months ended September 30, 1999 and 1998 (in millions):
10
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1999 and 1998
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
Revenue:
Communications services $ 1,018.1 $ 601.8 $ 2,545.7 $ 884.2
Construction services - 205.0 224.5 493.4
------------- ------------- ------------- --------------
Total revenue $ 1,018.1 $ 806.8 $ 2,770.2 $ 1,377.6
============= ============= ============= ==============
Earnings (loss) from operations:
Communications services $ 112.2 $ (6.9) $ 225.0 $ (71.8)
Construction services - 59.7 84.2 120.8
Merger costs (25.0) - (25.0) (812.5)
Depreciation and amortization - corporate (23.4) (15.1) (66.9) (22.8)
------------- ------------- ------------- --------------
Earnings (loss) from operations 63.8 37.7 217.3 (786.3)
Unallocated other (income) expense:
Interest expense, net 42.5 29.0 113.6 62.3
Other (income) expense, net (11.5) 2.9 (1.6) (11.6)
------------- ------------- ------------- --------------
Earnings (loss) before income taxes $ 32.8 $ 5.8 $ 105.3 $ (837.0)
============= ============= ============= ==============
During the three and nine months ended September 30, 1999, no single
customer accounted for 10% or more of the Company's total revenue. During the
three months ended September 30, 1998, no single customer accounted for 10% or
more of the Company's total revenue. During the nine months ended September 30,
1998, one customer accounted for 10.3% of the Company's total revenue and is
included in the Construction Services segment.
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, 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 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:
. 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 or achieve the projected
synergies and financial results timely or at all and difficulties in
combining the operations of Qwest and U S WEST.
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
. Hewlett Packard Company for high-end data storage
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 with U S WEST deemed the
accounting acquiror and is structured to be tax-free to U S WEST shareowners to
the extent of the Qwest stock delivered in the transaction.
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 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 merger. The merger is subject to federal and state
regulatory approvals and other customary closing conditions. 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 Slingshot Networks LLC/ Purchase of Certain Assets of ADMI.
In September 1999, Qwest and Anschutz Digital Media, Inc. ("ADMI"), an affiliate
of Anschutz Company, entered into an agreement to form a joint venture called
Slingshot Networks LLC to provide advanced digital production, post-production
and transmission facilities, digital media storage and distribution services,
telephony-based data storage and enhanced services, access and routing services.
Qwest and ADMI each own 50% of the joint venture. Qwest contributed
approximately $84.8 million consisting of a promissory payable over nine years
at an annual interest rate of 6%. Qwest's investment in the joint venture is
accounted for under the equity method. The agreement between Qwest and ADMI
also provided that Qwest would purchase certain telephony-related assets and all
of the stock of Precision Systems, Inc., a telecommunications solutions
provider, from ADMI in exchange for a promissory note in the amount of $34
million. The promissory note is payable over nine years and bears interest at an
annual rate of 6%.
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
14
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, and
technologically advanced Cybercenters. 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.
Investment in Advanced Radio Telecom Corp. In September 1999, Qwest
invested $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 separate group of investors also invested $161.0 million.
Strategic 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"),
the Dutch telecommunications company, formed a joint venture ("KPNQwest") to
create a pan-European IP-based fiber optic network, linked to Qwest's network in
North America, for data, video and voice services.
KPNQwest offers managed broadband services, IP transit, Internet
connectivity and value-added IP services, including consulting, hosting, and the
broadcasting of live events over the Internet. KPNQwest also sells dark fiber
along its network. Customers of KPNQwest include Internet services 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 initially owned 50 percent of KPNQwest. On November
12, 1999 KPNQwest consummated an initial public offering which has resulted in
approximately 11% of KPNQwest's shares being owned by the public and
approximately 44% of KPNQwest's shares being owned by each of Qwest and KPN.
KPNQwest was initially governed by a six-person supervisory board, to which
Qwest and KPN had each named three members. As a result of the initial public
offering, two outside directors will be added to the supervisory board. Upon
formation of KPNQwest, KPN contributed two partially completed bi-directional,
self-healing fiber optic rings (EuroRings(TM) 1 and 2) and certain
communications services contracts to KPNQwest. Qwest contributed Xlink Internet
Service Gmbh ("Xlink"), the operating subsidiaries of EUnet International
Limited ("EUnet") and cash. Also, Qwest and KPN contributed transatlantic
capacity that connects KPNQwest's European network with Qwest's network in North
America, and also contributed certain other assets. The net book of total assets
contributed by Qwest totaled approximately $300.0 million. Qwest deconsolidated
EUnet and Xlink in April 1999. Qwest's investment in KPNQwest is 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.
15
Investment in Covad. In January 1999, Qwest made an 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 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 Nine Months Ended September 30, 1999 Compared to Three and Nine Months
Ended September 30, 1998
The Company reported a net loss of $(1.8) million for the three months
ended September 30, 1999, compared to a net loss of $(6.9) million for the same
period of the prior year. For the nine months ended September 30, 1999, the
Company reported net earnings of $21.5 million, compared to a net loss of
$(822.6) million for the same period of the prior year. Excluding merger costs
related to the Company's pending merger with U S WEST, net earnings would have
been $19.8 million and $40.6 million, for the three and nine months ended
September 30, 1999, respectively. 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 for the nine months
ended September 30, 1998 would have been $(52.6) million. The results of
operations for periods beginning April 1, 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 three and nine months ended
September 30, 1999 and 1998 were as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------------ ----------- ----------- ----------- ----------- -----------
Communications services $ 1,018.1 $ 601.8 $ 416.3 $ 2,545.7 $ 884.2 $ 1,661.5
Construction services - 205.0 (205.0) 224.5 493.4 (268.9)
------------ ----------- ----------- ----------- ----------- -----------
Total revenue $ 1,018.1 $ 806.8 $ 211.3 $ 2,770.2 $ 1,377.6 $ 1,392.6
============ =========== =========== =========== =========== ===========
During the three and nine months ended September 30, 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 three and nine months ended September 30, 1999, as
compared to the same periods of the prior year, primarily as a result of the
substantial completion of the Company's network during the first nine months of
1999. The Company expects that revenue from Construction Services will be
incidental for the remainder of 1999.
16
Operating Expenses. Components of operating expenses for the three and nine
months ended September 30, 1999 and 1998 were as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------------ ----------- ------------ ----------- ------------ ------------
Access and network operations $ 556.3 $ 371.6 $ 184.7 $ 1,433.8 $ 556.1 $ 877.7
Construction services - 128.2 (128.2) 96.4 333.8 (237.4)
Selling, general and administrative 271.3 189.4 81.9 707.2 341.5 365.7
Depreciation and amortization 101.7 79.9 21.8 290.5 120.0 170.5
Merger related costs 25.0 - 25.0 25.0 812.5 (787.5)
------------ ----------- ------------ ----------- ------------ ------------
Total operating expenses $ 954.3 $ 769.1 $ 185.2 $ 2,552.9 $ 2,163.9 $ 389.0
============ =========== ============ =========== ============ ============
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 and nine months ended September 30, 1999 over the same periods 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 were 54.6% and 61.7% for the three months ended
September 30, 1999 and 1998, respectively. For the nine months ended September
30, 1999 and 1998, access and network operations expenses expressed as a
percentage of Communications services revenue were 56.3% and 62.9%,
respectively. As the network is 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. For the nine months ended September
30, 1999 and 1998, expenses for construction services expressed as a percentage
of construction revenue were 42.9% and 67.7%, respectively.
Selling, general and administrative ("SG&A") expense includes the cost of
salaries, benefits, occupancy costs, commissions, sales and marketing expenses
and administrative expenses. The increase in SG&A for the three and nine months
ended September 30, 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 expense was 26.6% and 23.5% for
the three months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999 and 1998, SG&A expense as a percentage of total
revenue was 25.5% and 24.8%, respectively. SG&A is expected to increase as the
Company continues to intensify brand advertising, as data product and service
offerings are expanded and as segments of the Company's network become
operational.
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
17
and Internet Protocol technologies; and (3) new operational systems and tools.
The Company believes development efforts through September 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.
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 three
and nine months ended September 30, 1999 and 1998, were as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 Increase 1999 1998 Increase
---------- ---------- ----------- ---------- ---------- -----------
Interest expense, net $ 42.5 $ 29.0 $ 13.5 $ 113.6 $ 62.3 $ 51.3
Other expense (income), net (11.5) 2.9 (14.4) (1.6) (11.6) 10.0
---------- ---------- ----------- ---------- ---------- -----------
Total other expense (income) $ 31.0 $ 31.9 $ (0.9) $ 112.0 $ 50.7 $ 61.3
========== ========== =========== ========== ========== ===========
The increase in interest expense, net during the three and nine months
ended September 30, 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). As the network is completed, interest expense, net will
increase as the amount of capitalized interest decreases. The change in other
expense (income), net for the three months ended September 30, 1999 as compared
to the same period of the prior year is primarily attributable to an increase in
interest income due to higher average cash balances, partially offset by losses
on equity investments (principally Qwest's proportionate share of KPNQwest
losses). The change in other expense (income), net for the nine months ended
September 30, 1999 as compared to the same period of the prior year is primarily
attributable to losses on equity investments (including Qwest's proportionate
share of KPNQwest losses).
Income Taxes. The Company's effective tax rate for the three and nine
months ended September 30, 1999 differed from the statutory income tax rate
primarily as a result of the non-deductibility of acquisition-related goodwill,
merger costs, state income taxes and foreign losses. The effective tax rate for
the three and nine months ended September 30, 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 nine months ended September 30, 1999, cash used in operations
was $210.1 million; cash used in investing activities was $1,423.2 million,
including $1,187.3 million of capital expenditures; and cash provided by
financing activities was $2,030.4 million. Cash provided by financing activities
includes an approximate $1.9 billion equity investment by BellSouth and employee
stock transactions of $116.0 million.
18
The Company believes that its available cash and cash equivalent balances
at September 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, activation of additional capacity along the Company's network, new
CyberCenter deployments and local access initiatives to be approximately $600
million to $700 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 September 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 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 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 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 fourth 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 has completed preparation of high level and detailed level
contingency plans. Testing and preparation steps will continue through the end
of the year.
During the first nine months of 1999, the Company incurred approximately
$8.2 million for year 2000 compliance costs, included in SG&A expense. The
Company expects to incur approximately $1.0 million to $3.0 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.
19
Regulatory Matters --Recent Developments
Access Charge Reform. Qwest's costs of providing long distance services
could be affected by changes in the "access charges" that incumbent local
exchange carriers (ILECs) impose on interexchange carriers (IXCs) to originate
and terminate long distance calls over local networks. On August 27, 1999, the
FCC issued a decision that grants incumbent local exchange carriers access
charge pricing flexibility. This flexibility allows incumbent local exchange
carriers to charge access rates that more closely approximate the true cost of
providing access service in a given geographic area. The FCC decision also
allows ILECs to offer contract pricing for access services provided to
individual customers, including IXCs, if the ILEC can show that it faces certain
levels of competition in the local telecommunications market. The impact of
these new rules on Qwest may depend on the manner in which ILECs reconfigure
their existing access charge rate zones and when ILECs are able to obtain the
regulatory freedom to offer contract-based pricing to Qwest. Qwest cannot
predict the impact of these new access pricing schemes on the company at this
time.
Universal Service. All telecommunications carriers contribute a percentage
of their end user revenues to the federal Universal Service Fund, which is then
distributed to ILECs whose costs of providing local telephone service exceed a
certain threshhold in a given state. On October 21, 1999, the FCC issued a
decision that increased the size of the federal Universal Service Fund by $232
million annually for the largest ILECs. Because the universal service fund will
be larger, Qwest's payments into the fund may increase beginning on January 1,
2000, when the larger fund takes effect.
FCC Decision Regarding Local Competition Rules. The 1996 Telecommunications
Act required the FCC to identify individual "network elements" belonging to
ILECs that competitors could lease in order to provide competing local telephone
service. The FCC adopted rules requiring unbundling of those elements on August
8, 1996. On January 25, 1999, the Supreme Court invalidated the FCC's network
unbundling rules and directed the FCC to adopt new unbundling rules that were
consistent with the Court's opinion.
On September 15, 1999, the FCC issued those new rules. In that decision,
the FCC required ILECs to make available five basic network elements that had
been included in the 1996 list of network elements (local loops, network
interface devices, interoffice transmission facilities, signaling networks and
call-related databases, and operations support systems). The new rules include
elements not on the original list, specifically subloops, dark fiber loops, and
dark fiber transport. A sixth element on the original list, local circuit
switching, will be restricted when used to serve business customers with four or
more lines in the densest portions of the top 50 metropolitan statistical areas
(MSAs). The seventh original element, operator services and directory
assistance, is eliminated as a network element under the new rules.
The Commission generally declined to designate as network elements those
ILEC facilities used to provide data services, such as digital subscriber line
access multiplexers (DSLAMs) and packet switches. The FCC did require ILECs to
unbundle DSLAMs only when a requesting carrier is unable to install its DSLAM at
the ILEC's remote terminal and when the ILEC provides packet switching for its
own use. The unbundling rules adopted in the FCC's decision apply nationwide.
State commissions may require ILECs to unbundle additional elements as long as
the obligations are consistent with the requirements of Section 251 and the
national policy framework established by the Commission. Neither the FCC nor
state commissions can remove elements from the national list on a state-by-state
basis. The FCC will reevaluate the list of elements in three years. Qwest is
unable to predict how these new rules will affect its business. In addition,
these new rules may be appealed to federal court. Qwest cannot predict the
outcome of such a court challenge to the rules.
Bell Atlantic Long Distance Application. On September 29, 1999, Bell
Atlantic filed an application with the FCC seeking approval to begin offering
long distance service to customers in New York. The FCC must approve or reject
this application by December 28, 1999. The FCC is required to consult with the
New York Public Service Commission on whether to grant the application. The New
York Commission recently advised the FCC that it believes Bell Atlantic has
complied with the regulatory requirements for offering long distance service in
New York state. If Bell Atlantic enters the long distance market 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.
20
Slamming Allegations. On October 19, 1999, the FCC issued a Notice of
Apparent Liability in the amount of $2.0 million against Qwest for changing the
preferred long distance carriers of thirty consumers without their consent. The
FCC gave Qwest 30 days to pay this forfeiture or provide information why it
should not be subject to this forfeiture.
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. 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. In addition, Qwest has filed
applications in connection with its merger in certain 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.
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 Discount Total
------- ------- ------- ------- ------- ----------- ------------- -----------
Long-term fixed rate debt $ - $ - $ - $ - $ - $ 2,568.9 $ (241.7) $ 2,327.2
Capital lease and other obligations $ 1.5 $ 2.2 $ 2.1 $ 2.6 $ 3.0 $ 14.9 $ - $ 26.3
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 $2,353.5 million, had an estimated fair value of
$2,296.7 million at September 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 September 30, 1999, and results
of operations or cash flows for the first nine months of 1999. In addition,
foreign currency transaction gains and losses were not material to the Company's
results of operations for the nine months ended September 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.
21
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. The complaint was dismissed, an amended complaint
was filed and, on September 30, 1998, the District Court granted defendants'
motion to dismiss the amended complaint. In a decision dated September 15,
1999, the United States Court of Appeals for the Fourth Circuit affirmed the
lower court's dismissal of the amended complaint.
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 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 action purports to be 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.
22
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 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 (incorporated herein by reference to Qwest's quarterly report
on Form 10-Q for the quarter ended March 31, 1999).
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 quarter ended June 30, 1999)
23
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 quarter ended September 30, 1995).
24
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.
10.40 Amended and Restated Operating Agreement of Slingshot Networks, LLC dated October
22, 1999.
21.1 Subsidiaries of the Registrant (incorporated herein by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended March 31, 1999).
27 Financial Data Schedule
* Indicates executive compensation plans and arrangements.
25
** 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 September 30, 1999, Qwest filed the following
Current Reports on Form 8-K:
1. On July 18, 1999, Qwest filed a Current Report on Form 8-K
announcing that it had entered into an Agreement and Plan of Merger with
U S WEST, Inc., a Delaware corporation, providing for, among other
things, the merger of U S WEST with and into Qwest, with Qwest as the
surviving corporation.
26
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)
November 15, 1999
27