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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 000-22609
QWEST COMMUNICATIONS INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-1339282
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1801 CALIFORNIA STREET, DENVER, COLORADO 80202
TELEPHONE NUMBER (303) 992-1400
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Qwest Common Stock New York Stock Exchange
($0.01 per share, par value)
Qwest Capital Funding, Inc. New York Stock Exchange
($500,000,000 6.125% Notes due July 15, 2002)
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Securities registered Pursuant to Section 12(g) of the Act:
NONE
At March 5, 2001, 1,649,490,762 shares of Qwest common stock were
outstanding. At March 5, 2001, the aggregate market value of the Qwest voting
stock held by non-affiliates was approximately $45,900,367,222.
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
This document contains statements about expected future events and financial
results that are forward-looking and subject to risks and uncertainties. Please
refer to page 3 of Form 10-K for a discussion of factors that could cause actual
results to differ from expectations.
DOCUMENTS INCORPORATED BY REFERENCE
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<Caption>
DOCUMENT WHERE INCORPORATED
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Annual Report for the year ended December 31, 2000 Part II, Items 5, 7A, and 8
Proxy Statement for Qwest's 2001 Annual Meeting Part III, Items 10, 11, 12 and 13
of Stockholders
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TABLE OF CONTENTS
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ITEM DESCRIPTION PAGE
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PART I
1. Business.................................................... 3
2. Properties.................................................. 7
3. Legal Proceedings........................................... 7
4. Submission of Matters to a Vote of Security Holders......... 8
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
6. Selected Financial Data..................................... 9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
8. Consolidated Financial Statements and Supplementary Data.... 20
9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 20
PART III
10. Directors and Executive Officers of the Registrant.......... 20
11. Executive Compensation...................................... 20
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
13. Certain Relationships and Related Transactions.............. 20
PART IV
14. Financial Statement Schedules, Reports on Form 8-K and
Exhibits.................................................... 21
Signature Page.............................................. 26
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FORM 10-K/A
QWEST COMMUNICATIONS INTERNATIONAL INC.
This amended Annual Report on Form 10-K/A amends and restates in its
entirety Qwest's Annual Report on Form 10-K for the fiscal year ended December
31, 2000 as of the date of filing the original Form 10-K, March 16, 2001. The
only change was to conform its disclosure regarding pension credits and charges
for the periods presented in the original Annual Report on Form 10-K to the
disclosure regarding those matters in Qwest's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001. The changed disclosure is contained in Part II,
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations. In addition, we have moved the Selected Financial Data out of
Exhibit 13 and included it in Part II, Item 6 of this amended Form 10-K and
refiled Exhibit 13 to reflect the elimination of the Selected Financial Data and
Management's Discussion and Analysis from such exhibit. This amended Annual
Report on Form 10-K/A speaks as of the end of the fiscal year 2000 as required
by Form 10-K or as of the date of filing the original Annual Report on Form
10-K. It does not update any of the statements contained therein. This Form 10-K
as amended, contains forward looking statements which were made at the time the
original Form 10-K was filed on March 16, 2001 and is subject to the factors
described in the special note below and must be considered in light of any
subsequent statements, including forward looking statements, in any written
statement subsequent to the filing of the original Form 10-K, including
statements made in filings on Reports on Forms 8-K and 10-Q.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains or incorporates by reference "forward-looking
statements," as that term is used in federal securities laws, about Qwest
Communications International Inc.'s ("Qwest" or "us" or "we" or "our") financial
condition, results of operations and business. These statements include, among
others:
- statements concerning the benefits that we expect will result from our
business activities and certain transactions we have completed, such as
increased revenues, decreased expenses and avoided expenses and
expenditures, and
- statements of our 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 we will file 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 our actual results to be materially different
from any future results expressed or implied by us in those statements.
The most important factors that could prevent us from achieving our stated
goals include, but are not limited to, the following:
- intense competition in the markets in which we conduct our business;
- changes in demand for our products and services;
- dependence on new product development and acceleration of the deployment
of advanced new services, such as broadband data, wireless and video
services, which could require substantial expenditure of financial and
other resources in excess of contemplated levels;
- rapid and significant changes in technology and markets;
- higher than anticipated employee levels, capital expenditures and
operating expenses;
- adverse changes in the regulatory or legislative environment impacting
the competitive environment and service pricing in the local exchange
market and affecting our business, and delays in the ability to begin
interLATA (local access transport area) long-distance services in our
14-state region;
- failure to maintain the necessary rights-of-way;
- failure to achieve the projected synergies and financial results expected
to result from the merger of U S WEST, Inc. ("U S WEST"), with and into
Qwest on June 30, 2000 (the "Merger"), and difficulties in combining the
operations of Qwest and U S WEST, which could affect our revenues, levels
of expenses and operating results.
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Because these statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. We caution you not to place undue reliance on the
statements, which speak only as of the date of this report.
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. We do not
undertake any obligation to review or confirm analyst's expectations or
estimates or to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this report or to reflect
the occurrence of unanticipated events.
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PART I
ITEM 1. BUSINESS
We are a leading broadband Internet communications company that provides
advanced communication services, data, multimedia and Internet-based services on
a national and global basis; and wireless services, local telecommunications and
related services and directory services in the 14-state local service area. A
Fortune 100 company, we principally serve large and mid-size business and
government customers on a national and international basis, as well as
residential and small business customers primarily in the 14-state local service
area.
We are incorporated under the laws of the State of Delaware and have our
principal executive offices at 1801 California Street, Denver, Colorado 80202,
telephone number (303) 992-1400.
OPERATIONS
We are organized on the basis of our products and services and operate in
four segments: (1) retail services, (2) wholesale services, (3) network services
and (4) directory services. For further financial information on our segments,
you should refer to Management's Discussion and Analysis of Financial Condition
and Results of Operations and Note 10 to the consolidated financial statements.
Retail Services
The principal types of retail services we offer are: (1) advanced
communication services and data, multimedia and Internet-based services; (2)
wireless services; (3) interLATA (local access transport area) long-distance
services; (4) intraLATA long-distance services within our 14-state local service
area and (5) local exchange telephone services.
Advanced Communication Services and Data, Multimedia and Internet-based
Services. Advanced communication services, data, multimedia and Internet-based
services include Internet Protocol ("IP")-enabled services such as dedicated and
dial-up Internet access, Web hosting, co-location access, voice over IP,
application hosting, mass storage services, and broadband local access,
including digital subscriber line ("DSL"). We also provide high-speed data
communications and network services, including Internet access, hosting, DSL,
virtual private networks, frame relay service, transparent local area network
("LAN") service, asynchronous transfer mode ("ATM") service, network integration
solutions, application services and other data-related services to business
customers.
During 2000, we opened seven more CyberCenters, bringing the total number
of centers to 14 by the end of the year. These centers offer business customers
a variety of Web hosting and application services including our e-solutions, a
suite of Web hosting, application service provider and professional consulting
services. The buildings are directly connected to our network and each is
equipped with a maximum-security environment to safeguard the customers' hosting
operations. We plan to construct and operate another 10 centers within the
United States in 2001.
Wireless Services. We hold 10 MHz licenses to provide digital personal
communications services in most markets in our 14-state local service area.
Wireless services are being offered in 20 of these markets, and enable customers
to use the same telephone number for their wireless phone as for their home or
business phone. We also serve five markets in our 14-state local service area
through a joint venture with Touch America, Inc.
InterLATA Long-Distance Services. We provide interLATA long-distance voice
and data services to business and residential customers outside of our 14-state
local service area. We intend to begin offering interLATA long-distance services
within our 14-state local service area pursuant to the Telecommunications Act of
1996 (the "Telecommunications Act" or the "Act") upon satisfaction of certain
regulatory conditions primarily related to local exchange telephone competition.
IntraLATA Long-Distance Services Within our Region. We provide intraLATA
long-distance services within our 14-state local service area. These services
include intraLATA service beyond the local calling area, wide area
telecommunications service or "800" services for customers with highly
concentrated demand, and special services, such as transport of data, radio and
video.
Local Exchange Telephone Services. Local exchange telephone services
provide lines from telephone exchange offices to customers' premises in order to
originate and terminate voice and data telecommunications.
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These services include basic local exchange services provided through our
switched network, dedicated private line facilities for voice and special
services as well as data transport services. Other local exchange revenue is
derived from directory assistance and public telephone service.
We also provide other products and services, such as customer premises
equipment and enhanced services, (including voice mail) to residents, business
customers and governmental agencies.
For the year ended December 31, 2000, revenue from retail services
accounted for approximately 70% of our total revenue.
Wholesale Services
We provide network transport services nationally, on a wholesale basis,
primarily to telecommunications companies and Internet service providers
("ISPs"). We also provide network transport, switching and billing services to
competitive local exchange carriers ("CLECs"), interexchange carriers ("IXCs")
and wireless carriers in our 14-state local service area. CLECs are
communications companies, certified by a state Public Utility Commission
("PUC"), that provide local exchange service within a Qwest-associated local
calling area. IXCs provide transitional long-distance services to end-users by
handling calls that are made from a phone exchange in one LATA to an exchange in
another LATA. We also provide wholesale products such as optical broadband
capacity, conventional private line services to other communications providers,
as well as to ISPs and other data service companies, and high-volume voice
services. For the year ended December 31, 2000, revenue from wholesale services
accounted for approximately 19% of our total revenue.
Network Services
Our network services segment provides access to our telecommunications
network, including our information technologies supporting the network,
primarily to customers of our retail services and wholesale services segments.
For the year ended December 31, 2000, revenue from network services accounted
for approximately 2% of our total revenue.
Directory Services
Through Qwest Dex, Inc. ("Qwest Dex"), we publish White and Yellow Pages
directories in the 14-state local service area. Qwest Dex's business includes
all facets of directory-related publishing. Qwest Dex's customers include
businesses that purchase advertising in its directories and other related
products. Qwest Dex also provides directory publishing services to other
telephone companies on a contract basis and electronic directory services. Qwest
Dex has expanded its directories business onto the Internet. For the year ended
December 31, 2000, the revenue from directory services accounted for
approximately 9% of our total revenue in 2000.
OUR NETWORK
Our principal asset is our telecommunications network, which uses both
traditional telephone communications technology and Internet communications
technology.
In addition to the traditional telephone network in the 14-state local
service area, we continue to expand our high-capacity fiber optic network. The
network reaches over 25,500 miles in North America, and is designed to allow
customers to seamlessly exchange multimedia content-images, data and voice over
the public circuit-switched telephone network. The technologically advanced
fiber optic network is designed to instantaneously re-route traffic in the event
of a fiber cut to prevent interruption in service to our customers. This is
accomplished by automatically re-routing traffic in the opposite direction
around the SONET ring. The network is equipped with state-of-the-art
transmission electronics. Our network is designed to support IP, traditional
circuit-switched services and alternative information transfer standards used
for data transmission.
Our network connects approximately 150 metropolitan areas coast to coast.
We were the first network service provider to complete a transcontinental fiber
network when we activated our network from Los Angeles to San Francisco to New
York in April 1998. We are expanding our worldwide broadband services portfolio
to
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include end-to-end connectivity for our local Internet services to large and
multi-location enterprises and carriers in key United States metropolitan
markets. We are leveraging the many completed metropolitan area fiber rings and
right-of-ways that were built as part of the nationwide backbone construction.
We completed construction of extensive fiber and DSL networks in 12 major cities
in 2000 and we expect to complete 14 additional major cities by the end of 2001.
We have also built a 1,400 route-mile network in Mexico, and are part of a
consortium of communications companies that is building a 13,125-mile underwater
cable network connecting the United States to Japan.
KPNQwest, N.V. ("KPNQwest"), a European communications company in which we
and KPN, the Dutch telephone company, each own a 44% equity interest, is
building and operating a high-capacity, pan-European fiber optic, Internet-based
network that is currently expected to connect over 50 cities throughout Europe
when it is completed by the end of 2001.
In June 1999, our subsidiary, Qwest Corporation, entered into a series of
definitive agreements to sell local exchange telephone properties serving
approximately 570,000 access lines in nine states for approximately $1.8 billion
in cash, subject to adjustment. The pending sales are subject to regulatory
approvals and other customary closing conditions. The transfer of ownership,
which will occur on a state-by-state basis, is expected to be completed by the
end of the first quarter in 2002. In addition, on February 26, 2001, we
announced that we do not have plans to sell a significant number of additional
access lines at the present time.
STRATEGIC RELATIONSHIPS
We are developing Internet and multimedia services in alignment with
existing and anticipated market demand in partnership with leading information
technology companies, including the following:
- Microsoft Corporation for business applications and service;
- IBM Corporation for the construction and management of CyberCenters;
- SAP America, Inc., Oracle Corporation and Siebel Systems, Inc. for
application hosting services;
- Hewlett-Packard Company for high-end data storage, hosting and systems
management services; and
- BellSouth Corporation for coordinated marketing and product development
in the southeastern United States.
We also continue to evaluate opportunities to enter into other
relationships with leading information technology companies that would allow us
to improve and expand services, compete more effectively and create new
opportunities for growth.
COMPETITION
During 2000, we faced a constantly changing competitive environment. The
early part of the year saw significant consolidation in the telecommunications
industry followed later in the year by a number of companies experiencing
financial difficulties. We expect that rapid restructuring in the
telecommunications industry will continue in the future.
We still face intense competition in almost every area of our business,
primarily from other communications companies. Some of our existing and
potential competitors, particularly in the communications services markets, have
more financial, personnel, marketing resources as well as certain competitive
advantages. As a result of these competitors' efforts, we continue to experience
an erosion of our market share in certain markets, as well as pressure on profit
margins, particularly in the intraLATA long-distance market and business portion
of the local service market.
We have taken several steps to combat the impacts of competition on our
operating results. First, we continue to expand and upgrade our network
facilities and CyberCenters to accommodate the increasing customer demands for
faster and greater amounts of data, as well as Internet based services. Our
national fiber optic network provides us with the ability to meet many of these
demands today and into the immediate future. This network also lowers our cost
structure, allowing us to maintain profit margins relative to our competitors.
Second,
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we have successfully deployed bundled products and service offerings to our
customers in response to competition in the small business and residential
sectors. This allows us to provide a comprehensive package at a competitive
price. Third, we are committed to significantly improving the service provided
to our customers. Substantial amounts of time, effort and financial resources
have been, and will continue to be, focused on this area. Fourth, we are
diligently working with various state PUCs and the Federal Communications
Commission ("FCC") to meet the requirements necessary for us to be able to enter
the interLATA long-distance market within our Region. We continue to work with
the appropriate regulatory bodies to achieve increased pricing flexibility for
products and services. We have been successful in gaining price cap regulation
in several jurisdictions. Finally, we remain focused on providing new and
improved products and services in the data, IP, and wireless arenas where demand
continues to accelerate. Based upon these factors, we believe we are well
positioned to compete with other companies in providing products and services to
current and potential customers.
REGULATION
As a general matter, we are subject to substantial regulation, including
requirements and restrictions arising under the Telecommunications Act and state
utility laws, and the rules and policies of the FCC, state PUCs and other
governmental entities. This regulation, among other matters, currently prohibits
us (with certain exceptions) from providing retail or wholesale interLATA
telecommunications services within the Region, and governs the terms and
conditions under which we provide services to our customers (including competing
CLECs and IXCs in our Region).
Interconnection. The FCC is continuing to interpret the obligations of
incumbent local exchange carriers ("ILECs") under the Telecommunications Act to
interconnect their networks with, and make unbundled network elements available
to, CLECs. These decisions establish our obligations in the Region, and our
rights when we compete for certain services outside of our Region. In addition,
the United States Supreme Court is now considering an appeal from a ruling of
the Eighth Circuit Court of Appeals that the FCC's rules for the pricing of
interconnection and unbundled network elements by ILECs unlawfully preclude
ILECs from recovering their actual costs as required by the Act.
Access Pricing. The FCC has initiated a number of proceeding which
directly affect the rates and charges for access services sold or purchased by
Qwest. It is expected that these proceedings and related implementation of
resulting FCC decisions will continue through 2002.
On May 31, 2000, the FCC adopted the access reform and universal service
plan developed by the Coalition for Affordable Local and Long-Distance Service
("CALLS"). The adoption of the CALLS proposal resolved many outstanding issues
before the FCC including: the court remand of the 6.5% productivity factor, the
treatment of implicit universal service support; the treatment of low-volume
long-distance users and the next scheduled price cap review. The CALLS plan has
a five-year life and provides for the following: elimination of the residential
presubscribed interexchange carrier charge ("PICC"); increases in subscriber
line charges; reductions in switched access usage rates; the removal of certain
implicit universal service support from access charges and direct recovery from
end-users; and commitments from participating IXCs to pass through access charge
reductions to end-users. We have opted into the five-year CALLS plan.
Advanced Telecommunications Services. On two separate occasions, the FCC
has ruled that advanced services provided by an ILEC are covered by those
provisions of the Act that govern telephone exchange and exchange access
services. We have challenged this finding, contending that advanced services fit
within neither category and are not properly treated as exchange services. This
case is now before the Court of Appeals.
InterLATA Long-Distance Entry. Several Regional Bell Operating Companies
("RBOC") have filed for entry into the interLATA long-distance business.
Although many of these applications have been supported by state PUCs, the FCC
had rejected all applications until December 1999. As of this date,
long-distance authority has been granted in the states of New York, Kansas,
Oklahoma, and Texas.
We filed applications with all in-region state PUCs for support of our
planned applications to the FCC for authority to enter the interLATA
long-distance business. Workshops and related proceedings are underway at the
state level to evaluate the Company's satisfaction of requirements under the
Telecommunications Act that must be
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met in order for an RBOC to obtain long-distance authority. We have agreed to
test operational support systems on a regional basis in 13 states, and testing
of those systems is scheduled to begin in March 2001. Testing in Arizona is
being conducted separately, and began in February 2001. We expect to file FCC
applications in many of our states by the end of 2001.
Long-Term Number Portability Tariffs. In July 1999, the FCC issued an
order on our local number portability ("LNP") tariff that was originally
effective in February 1999. The FCC's order approved a monthly cost recovery
surcharge of $0.43 per access line. We estimate the surcharge will facilitate
the recovery of approximately $407 million of LNP implementation costs over five
years. We have successfully defended our tariffs against AT&T's objections.
EMPLOYEES
As of December 31, 2000, we employed approximately 67,000 employees.
Approximately 38,000 were represented by collective bargaining agreements. We
believe that our relations with our employees are good.
ITEM 2. PROPERTIES
Our network and its component assets are the principal properties we own.
Our installed fiber optic cable is laid under the various rights of way held by
us. Other fixed assets are located at various locations in geographic areas that
we serve.
Our tangible assets include a significant investment in telecommunications
equipment. We own substantially all of our telecommunications equipment required
for our business. Total investment in plant, property and equipment was
approximately $48.3 billion and $38.1 billion at December 31, 2000 and 1999,
respectively, including the effect of retirements, but before deducting
accumulated depreciation.
We lease sales offices for our communications services business unit in
major metropolitan locations both in the United States and internationally. Our
network management centers are located primarily in owned buildings situated on
land owned in fee at various locations in geographic areas that we serve.
Our local services network is predominately located within the Region,
which includes Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New
Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Our
network provides the capabilities to furnish advanced data transmission and
information management services.
ITEM 3. LEGAL PROCEEDINGS
In January 2001, an amended purported class action complaint was filed
against Qwest and certain current and former officers and directors on behalf of
stockholders of U S WEST. The complaint alleges that Qwest has a duty to pay a
quarterly dividend to U S WEST stockholders of record as of June 30, 2000.
Plaintiffs further claim that the defendants' efforts to close the Merger in
advance of the record date and the defendants' failure to pay the dividend
breaches fiduciary duties owed to stockholders of U S WEST. Qwest has filed a
motion to dismiss the complaint, which is pending.
Through December 2000, seven purported class action complaints have been
filed in various state courts against Qwest and U S WEST on behalf of customers
in the states of Arizona, Colorado, Minnesota, New Mexico, Oregon, Utah and
Washington. The complaints allege, among other things, that from 1993 to the
present, U S WEST, in violation of alleged statutory and common law obligations,
willfully delayed the provision of local telephone service to the purported
class members. In addition, the complaints allege that U S WEST misrepresented
the date on which such local telephone service was to be provided to the
purported class members. The complaints seek compensatory damages for purported
class members, disgorgement of profits and punitive damages. As of November 11,
2000, the parties have signed agreements to settle the complaints. The
agreements are subject to a variety of conditions, including court approval.
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In April 1999, CSX Transportation, Inc. filed a complaint in federal
district court in Jacksonville, Florida against Qwest claiming breach of a 1995
contract. Discovery in the case is ongoing and the trial is scheduled to
commence in October 2001.
Through December 2000, several purported class actions have been filed in
various state courts against Qwest on behalf of landowners in Georgia, Indiana,
Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas. The complaints
challenge Qwest's right to install its fiber optic cable network in railroad
rights-of-way. The complaints allege that the railroads own a limited property
right-of-way that did not include the right to permit Qwest to install its fiber
optic cable network on the plaintiffs' property. The Indiana action purports to
be on behalf of a national class of landowners adjacent to railroad
rights-of-way over which the Qwest network passes; the Georgia, Kansas,
Louisiana, Missouri, Oregon, Tennessee and Texas actions purport to be on behalf
of a class of such landowners in Georgia, Kansas, Louisiana, Missouri, Oregon,
Tennessee and Texas, respectively. The complaints seek damages on theories of
trespass and unjust enrichment, as well as punitive damages. The Company
received, and may in the future receive, additional claims and demands that may
be based on similar or different legal theories.
From March 2, 2000 to March 9, 2000, five purported class action complaints
were filed against Qwest in state court in Delaware on behalf of Qwest
stockholders. The complaints allege that Qwest and its directors breached their
fiduciary duty by entering into the Merger and by agreeing not to solicit
alternative transactions. Since the filing of the complaints, there has been no
discovery or other activity in the cases.
On March 17, 2000, and March 20, 2000, two class action complaints were
filed in federal district court in Delaware against Qwest and Joseph Nacchio on
behalf of U S WEST stockholders. The complaints allege, among other things, that
Qwest and Mr. Nacchio made material false statements regarding Qwest's intent to
solicit an alternative transaction to the Merger. Since the filing of the
complaints, there has been no discovery or other activity in the cases.
In 1999, twelve purported class action complaints were filed against U S
WEST and its directors on behalf of U S WEST stockholders. Each of the
complaints allege that the defendants breached their fiduciary duties to the
class members by refusing to seek all bona fide offers for U S WEST and refusing
to consider the Qwest proposal. Since the filing of the complaints, there has
been no discovery or other activity in the cases.
Various other litigation matters have been filed against us. We intend to
vigorously defend these outstanding claims.
We have provided for these matters in our financial statements as of
December 31, 2000. We do not expect any material adverse impacts in excess of
these reserves as a result of the ultimate resolution of these matters.
From time to time, we receive complaints and become subject to
investigations regarding tariffs, "slamming" (the practice of changing
long-distance carriers without the customer's consent) and other matters. In
2000, the California Public Utilities Commission opened an investigation
relating to certain slamming complaints. A purported class action complaint was
filed in federal court in Connecticut containing slamming allegations. The
Attorney General of Connecticut has also filed a similar complaint in state
court in Connecticut. We may receive complaints or become subject to
investigations in the future. Such complaints or investigations could result in
the imposition of certain fines and other penalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Market for the Registrant's Common
Equity and Related Stockholder Matters" on page 68 of Qwest's 2000 Annual Report
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The merger between Qwest Communications International Inc. ("Qwest" or the
"Company") and U S WEST, Inc. ("U S WEST") (the "Merger") was effective June 30,
2000. Amounts reflected below for the years ended December 31, 1996, 1997, 1998
and 1999 represent the results of operations for U S WEST only (the accounting
acquirer). For the year ended December 31, 2000, the amounts reflect the results
of operations for (i) U S WEST from January 1, 2000 through June 29, 2000 and
(ii) the merged Qwest entity from June 30, 2000 through the end of the year.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
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2000 1999 1998 1997 1996
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(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues............................... $ 16,610 $ 13,182 $ 12,395 $ 11,521 $ 11,168
Operating expenses..................... 14,787 9,845 9,346 8,745 8,356
Operating income....................... 1,823 3,337 3,049 2,776 2,812
(Loss) income before extraordinary item
and cumulative effect of change in
accounting principle................. (81) 1,102 1,508 1,527 1,501
Net (loss) income(1)(2)................ (81) 1,342 1,508 1,524 1,535
(Loss) earnings per share:(3)
Basic................................ (0.06) 1.54 1.76 1.83 1.86
Diluted.............................. (0.06) 1.52 1.75 1.79 1.82
Average common shares outstanding
(thousands):(3)
Basic................................ 1,272,088 872,309 854,967 834,831 825,835
Diluted.............................. 1,272,088 880,753 862,581 849,497 844,930
Dividends per common share............. $ 0.31 $ 1.36 $ 1.24 $ 1.24 $ 1.24
EBITDA(4).............................. 6,917 5,704 5,248 4,939 4,970
Total assets........................... 73,501 23,272 18,407 17,667 17,279
Total debt............................. 19,066 13,071 9,919 5,715 6,545
Debt to total capital ratio............ 31.6% 91.2% 92.9% 56.7% 61.6%
Capital expenditures................... $ 6,968 $ 4,218 $ 2,905 $ 2,672 $ 2,831
</Table>
- ---------------
(1) 2000 net loss includes a charge of $1.096 billion ($0.86 per diluted share)
of Merger-related costs, a charge of $560 million ($0.44 per diluted share)
on the decline in the market value of certain financial instruments and a
net gain of $182 million ($0.14 per diluted share) on the sales of
investments. 1999 net income includes expenses of $282 million ($0.32 per
diluted share) related to a terminated merger, a loss of $225 million ($0.26
per diluted share) on the sale of common stock and a charge of $34 million
($0.04 per diluted share) on the decline in the market value of derivative
financial instruments. 1998 net income includes expenses of $68 million
($0.08 per diluted share) associated with the June 12, 1998 separation of U
S WEST's former parent company into two independent companies (the
"Separation") and an asset impairment charge of $21 million ($0.02 per
diluted share). 1997 net income includes a $152 million regulatory charge
($0.18 per diluted share) related primarily to the 1997 Washington State
Supreme Court ruling that upheld a Washington rate order, a gain of $32
million ($0.04 per diluted share) on the sale of U S WEST's one-seventh
interest in Bell Communications Research, Inc. and a gain of $48 million
($0.06 per diluted share) on the sales of local telephone exchanges. 1996
net income includes a gain of $36 million ($0.04 per diluted share) on the
sale of local telephone exchanges and the current effect of $15 million
($0.02 per diluted share) from adopting Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." As described in note 3
below, the per share amounts assume the conversion of U S WEST common stock
into Qwest common stock for all periods presented.
(2) 1999 net income includes $240 million ($0.27 per diluted share) for the
cumulative effect of a change in accounting principle related to recognizing
directory publishing revenues and expenses on the "point of publication"
method. 1997 net income was reduced by an extraordinary charge of $3 million
($0.00 per diluted share) for the early extinguishment of debt. 1996 net
income includes a gain of $34 million ($0.04 per diluted share) for the
cumulative effect of the adoption of SFAS No. 121.
(3) In connection with the Merger, each outstanding share of U S WEST common
stock was converted into the right to receive 1.72932 shares of Qwest common
stock (and cash in lieu of fractional shares). The average common shares
outstanding assume the 1-for-1.72932 conversion of U S WEST shares for Qwest
shares for all periods presented. In addition, average common shares
outstanding also assume a one-for-one conversion of U S WEST Communications
Group ("Communications Group") common shares outstanding into shares of U S
WEST as of the Separation date. The 1998 average common shares outstanding
include the issuance of approximately 28,786,000 shares of common stock
attributable to the contribution to U S WEST by its former parent company
("Parent") of the businesses of the Communications Group and the domestic
directories business of U S WEST Dex, Inc. ("Dex").
(4) Earnings before interest, income taxes, depreciation and amortization
("EBITDA") does not include non-recurring and non-operating items such as
Merger costs, asset write-offs and impairments, gains/losses on the sale of
investments and fixed assets, changes in the market values of investments,
one-time legal charges, in-region long-distance activity, Qwest construction
activity, Separation charges, regulatory accruals and sales of local
telephone exchanges. EBITDA does not represent cash flow for the periods
presented and should not be considered as an alternative to net earnings
(loss) as an indicator of the Company's operating performance or as an
alternative to cash flows as a source of liquidity, and may not be
comparable with EBITDA as defined by other companies.
9
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("Reform Act"). See "Special Note Regarding
Forward-Looking Statements" on page 1 of this Form 10-K/A for additional factors
relating to such statements.
RESULTS OF OPERATIONS
2000 Compared with 1999
The Merger has been accounted for as a reverse acquisition under the
purchase method of accounting with U S WEST being deemed the accounting acquirer
and Qwest the acquired entity. As U S WEST was deemed the accounting acquirer,
its historical financial statements have been carried forward as those of the
newly combined company. In connection with the Merger, each outstanding share of
U S WEST common stock was converted into the right to receive 1.72932 shares of
Qwest common stock. In addition, all outstanding U S WEST stock options were
converted into options to acquire Qwest common stock. All share and per share
amounts have been restated to give retroactive effect to the exchange ratio.
10
13
The results of operations for Qwest (the acquired entity for accounting
purposes) prior to the Merger with U S WEST on June 30, 2000, are not reflected
in the accompanying consolidated statements of operations. However, the
following unaudited consolidated pro forma results of operations are presented
assuming the Merger had been completed on January 1, 1999 and have been adjusted
to eliminate the impacts of non-recurring items such as Merger costs, asset
write-offs and impairments, gains/losses on the sale of investments and fixed
assets, changes in the market values of investments, one-time legal charges,
in-region long-distance activity and Qwest construction activity.
<Table>
<Caption>
ACTUAL
YEAR ENDED PRO FORMA YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------
----------------- INCREASE %
2000 1999 2000 1999 (DECREASE) CHANGE
------- ------- ------- ------- ---------- -------
(DOLLARS IN MILLIONS)
Revenues:
Commercial services............... $ 7,424 $ 4,689 $ 9,425 $ 7,388 $2,037 27.6%
Consumer and small business
services....................... 6,372 5,571 6,715 6,284 431 6.9
Directory services................ 1,530 1,436 1,530 1,436 94 6.6
Switched access services.......... 1,284 1,486 1,284 1,486 (202) (13.6)
------- ------- ------- ------- ------ -------
Total revenues............ 16,610 13,182 18,954 16,594 2,360 14.2
------- ------- ------- ------- ------ -------
Operating expenses:
Cost of services.................. 5,433 3,990 6,757 5,906 851 14.4
Selling, general and
administrative................. 4,260 3,488 4,829 4,406 423 9.6
------- ------- ------- ------- ------ -------
EBITDA............................ 6,917 5,704 7,368 6,282 1,086 17.3
------- ------- ------- ------- ------ -------
Depreciation...................... 2,617 2,348 2,706 2,520 186 7.4
Amortization...................... 725 19 1,359 1,287 72 5.6
Merger-related and other
charges........................ 1,752 -- -- -- -- --
------- ------- ------- ------- ------ -------
Total operating
expenses................ 14,787 9,845 15,651 14,119 1,532 10.9
------- ------- ------- ------- ------ -------
Operating income.................... 1,823 3,337 3,303 2,475 828 33.5
Other expense (income):
Interest expense -- net........... 1,041 736 1,116 887 229 25.8
Decline in market value of
financial instruments.......... 917 56 -- -- -- --
Expenses related to terminated
merger......................... -- 282 -- -- -- --
(Gain) loss on sale of
investments.................... (327) 367 -- -- -- --
Other expense (income) -- net..... 66 (6) 43 (3) 46 1,533.3
------- ------- ------- ------- ------ -------
Total other
expense -- net.......... 1,697 1,435 1,159 884 275 31.1
------- ------- ------- ------- ------ -------
Income before income taxes and
cumulative effect of change in
accounting principle.............. 126 1,902 2,144 1,591 553 34.8
Provision for income taxes.......... 207 800 1,149 943 206 21.9
------- ------- ------- ------- ------ -------
(Loss) income before cumulative
effect of change in accounting
principle......................... (81) 1,102 995 648 347 53.6
Cumulative effect of change in
accounting principle -- net of
tax............................... -- 240 -- -- -- --
------- ------- ------- ------- ------ -------
Net (loss) income................... $ (81) $ 1,342 $ 995 $ 648 $ 347 53.6%
======= ======= ======= ======= ====== =======
</Table>
Because of the significance of the Merger, the comparison of 2000 results
to 1999 results will be based upon the above pro forma results except for
goodwill and other intangible amortization expense, Merger-related and other
charges and net (loss) income.
11
14
REVENUES
The Company's revenues are generated from a variety of services and
products. Commercial, consumer and small business services revenues are derived
from retail and wholesale services such as Internet and data products and
services, including Web hosting and Internet access, frame relay and digital
subscriber line ("DSL"). Also included in this category are voice services such
as basic monthly fees for telephone service, wireless services, fees for calling
services such as voice messaging and caller identification, special access and
private line revenues from end-users buying local exchange capacity to support
their private networks and inter- and intraLATA (local access and transport
area) long-distance services. To a lesser extent, the Company sells capacity
under indefeasible rights of use contracts. Revenues from these contracts are
included in commercial services and were not significant in either fiscal 2000
or 1999. Directory services revenues are generated primarily from selling
advertising in the Company's published directories. Switched access services
revenue is derived principally from charges to interexchange carriers ("IXCs")
for use of the Company's local network to connect customers to their
long-distance networks.
Total pro forma revenues for 2000 grew by 14.2 percent as compared to 1999,
due to increases in commercial revenue driven by Internet Protocol ("IP") and
data including sales of Internet access, frame relay and virtual private network
services. Data and IP revenues represented over 22 percent of total pro forma
revenues for 2000 up from 16 percent in 1999 as this segment of the business
grew by more than 60 percent in 2000. The Company expects the data services
business to become a greater portion of overall Company revenues in the future.
Also contributing to the increase was residential wireless and DSL growth.
Wireless revenues grew by 110 percent in 2000 over 1999 and DSL revenues grew by
over 150 percent during the same period, primarily due to an increase in
customers.
Local voice revenues grew despite the fact that access line growth slowed
to approximately 2 percent year-over-year. Total access lines increased by
341,000 with business lines comprising the majority of the change. The decline
in access line growth was partially attributable to businesses converting single
access lines to a lower number of high-speed, high-capacity lines allowing for
transport of data at higher rates of speed. On a voice-grade equivalent basis,
the Company's business access lines grew by 30.5 percent as compared to 1999.
Directory services revenues for 2000 increased by almost $100 million due
principally to higher advertising rates, an increase in the number of
directories published and an increase in the number of premium quality
advertisements.
Partially offsetting the increase in total revenues was the decline in
switched access revenue, primarily due to rate reductions mandated by the
Federal Communications Commission ("FCC") as part of access reform, as well as
rate reductions mandated by state public utility commissions ("PUCs").
IntraLATA and consumer long-distance service voice revenues also declined
due to price cuts caused by regulatory rate reductions, a de-emphasis of
out-of-region consumer services and greater competition. The Company believes it
will continue to experience further declines in intraLATA long-distance revenues
as competition increases.
To compete more effectively and provide better value, Qwest continued to
sell bundled products and services at prices lower than they could be sold
individually in exchange for longer-term customer commitments and higher overall
per customer revenue. As a result, Qwest has added 730,000 subscribers to its
CustomChoice(SM) package (which includes a home phone line and the choice of 20
calling features) in 2000, with total subscribers exceeding 2,000,000 as of year
end. Total subscribers to the Company's other significant bundled offering,
Total Package(SM) (bundled wireless, wireline and Internet services package),
exceeded 121,000 at December 31, 2000.
During 1999 and 2000, the Company committed to sell approximately 800,000
access lines within the 14-state local service area. In 1999, definitive sales
agreements were reached for the sale of 570,000 lines for approximately $1.8
billion in cash, subject to adjustment. In 2000, the sale of 20,000 access lines
in North Dakota and South Dakota were consummated resulting in proceeds of $19
million and gains of $11 million. The transfer of ownership of the remaining
access lines, which will occur on a state-by-state basis, is expected to be
completed by the first quarter of 2002. The pending sales are subject to
regulatory approvals and other customary closing conditions. In addition, on
February 26, 2001, the Company announced that it does not have plans to sell
12
15
a significant number of additional access lines at the present time. Sales of
these rural access lines will exert downward pressure on revenue growth as these
sales are finalized.
EXPENSES
Cost of services. Cost of services includes the following costs directly
attributable to a product or service: salaries and wages, materials and
supplies, contracted engineering services, network access costs, computer
systems support, and the cost of products sold.
Cost of services as a percent of revenue was 35.6 percent on a pro forma
basis for both 2000 and 1999. Higher sales of early life cycle data products,
increased competition and mandatory regulatory rate reductions on access
products all impacted the gross margin. Although the gross margin remained flat
year-over-year, total cost of services rose in 2000. Continued investments in
early life cycle Web hosting, wireless and local broadband access products and
customer service increased costs. These increases in costs were offset by
network efficiencies gained through the elimination of redundant capacity and
workforce and an increase in capitalized salaries and wages associated with
higher capital investment. In addition, cost of services was also impacted by a
reduction in the other post-retirement benefit costs and an increase in the
pension credit in 2000 (which resulted primarily from higher than expected
returns on plan assets).
On January 5, 2001, Qwest announced an agreement with its major unions, the
Communications Workers of America and the International Brotherhood of
Electrical Workers, to extend the existing union contracts for another two
years, through August of 2003. The extensions include a 3.5 percent wage
increase in 2001, a 5 percent wage increase in 2002, a 6 percent pension
increase in 2002, and a 10 percent pension increase in 2003. Excluding
anticipated future cost synergies, these scheduled changes will increase cost of
services in future years.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses include salaries and wages not directly
attributable to a product or service, sales commissions, bad debt charges, rent
for administrative space, advertising, professional service fees and taxes other
than income taxes.
Pro forma SG&A, as a percentage of revenue, improved to 25.5 percent in
2000 compared to 26.6 percent in 1999. SG&A expenses decreased as a percentage
of revenues because of Merger-related reductions in staff resulting from the
separation of more than 4,500 employees, other post-employment expense
reductions, and an increase in the pension credit. These decreases were
partially offset by increases in bad debts and property taxes.
Excluding a one-time gain on curtailment of retiree medical benefits in
2000, Qwest recorded a pension credit, net of post-retirement costs, of $299
million ($182 million after-tax or $0.14 per diluted share). In 1999, Qwest
recorded a pension expense, net of post-retirement costs, of $8 million ($5
million after-tax or $0.01 per diluted share). See Note 6 of Qwest's
consolidated financial statements for additional information.
Decisions on pension assumptions and the resulting pension impact for all
periods prior to January 2001, were made by the management of U S WEST prior to
its acquisition by Qwest on June 30, 2000.
EBITDA. Because of the factors described above, pro forma EBITDA improved
from 37.9 percent of revenues in 1999 to 38.9 percent in 2000.
Depreciation expense. Depreciation expense increased 7.4 percent as
compared to 1999 primarily due to higher overall property, plant and equipment
resulting from continued investment in the Company's network to meet service
demands. In addition, Qwest continues to invest in growth areas such as Internet
and data services, Web hosting, wireless, and broadband access. Additional
capital investments were also made to improve customer service levels.
Goodwill and other intangible amortization expense. Substantially all of
the goodwill and other intangible amortization resulted from the Merger. The
preliminary purchase price allocation to these assets was $4.1 billion to
identified intangibles and $27.9 billion to goodwill. The amounts allocated to
tradenames and goodwill are being amortized over 40 years. The remaining
intangible assets are being amortized over periods ranging from 3 to 10 years.
The allocation of purchase price is preliminary and may change upon completion
of an appraisal currently being performed on the acquired assets and liabilities
of Qwest (the acquired entity for accounting purposes). The effect of any such
change is not expected to be material.
13
16
Merger-related and other charges. Qwest incurred Merger-related and other
charges totaling $1.752 billion. A breakdown of these costs is as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2000
-----------------
(DOLLARS IN
MILLIONS)
Contractual settlements and terminations........... $ 654
Merger bonuses and severance costs................. 443
Write-off of access lines.......................... 226
Termination of software development projects....... 114
Post-retirement benefit plan curtailment gain...... (106)
Other Merger-related costs and charges............. 421
------
Total Merger-related and other charges... $1,752
======
</Table>
Contractual settlements and termination losses of $654 million represents
the costs incurred to cancel various commitments no longer deemed necessary as a
result of the Merger and to settle various claims related to the Merger.
In connection with the Merger, management identified a workforce reduction
of over 4,500 employees primarily to eliminate duplicate functions. These
employees were terminated prior to December 31, 2000. Of these, 1,078 employees
voluntarily separated without receiving benefit packages. A severance charge of
$341 million relates to employees involuntarily separated during fiscal 2000.
Merger bonuses of $102 million represents bonus payments triggered by the
successful completion of the Merger.
The Company leases dedicated special-purpose access lines to Competitive
Local Exchange Carriers ("CLECs"). Given current industry conditions and
regulatory changes affecting CLECs, the Company evaluated those leased assets
for impairment. The Company concluded that the fair value of those assets was
minimal and took a $226 million charge. The assets are operated by the Company's
wholesale services segment.
Following the Merger, management reviewed all internal software projects in
process, and determined that certain projects should no longer be pursued.
Because the projects were incomplete and abandoned, the fair value of such
incomplete software was determined to be zero and $114 million of capitalized
software costs were written off. The abandoned projects included a significant
billing system replacement and a customer database system.
Other costs of $421 million include legal charges related to the Merger,
professional fees, re-branding costs, relocation costs and other costs related
to the integration of the two companies.
Offsetting the Merger-related costs was a $106 million post-retirement
benefit plan curtailment gain. This gain resulted from the post-Merger
termination of retiree medical benefits for all former U S WEST employees who
did not have 20 years of service by December 31, 2000 or would not be service
pension eligible by December 31, 2003.
Other expense -- net. Interest expense on a pro forma basis was $1.116
billion for 2000, compared to $887 million for 1999. Increased interest expense
resulted from higher debt levels [incurred as a result of increased capital
expenditures and the acquisition of 39 million shares of Global Crossing Ltd.
("Global Crossing") common stock in June 1999] and overall higher interest rates
on commercial paper borrowings. Partially offsetting the increase in interest
expense was an increase in pro forma capitalized interest in 2000 to $155
million from $83 million in 1999. The increase in capitalized interest was due
to an increase in construction projects.
During 1999, U S WEST acquired approximately 39 million shares in Global
Crossing at a per share price of $62.75 in connection with the proposed merger
of U S WEST and Global Crossing. Later that year, U S WEST and Qwest announced
plans for the Merger thereby terminating the U S WEST -- Global Crossing
combination. Upon termination of the merger in 1999, U S WEST incurred a
one-time charge of $282 million to dissolve the proposed merger with Global
Crossing. The charge included a cash payment of $140 million to
14
17
Global Crossing, the transfer to Global Crossing of $140 million of Global
Crossing common stock previously purchased by the Company and $2 million of
miscellaneous costs.
In late 1999, U S WEST incurred a $367 million loss on the sale of 24
million shares of Global Crossing common stock. In connection with that sale, U
S WEST entered into an equity return swap that expires in 2001. The swap is
reflected at market value in the accompanying consolidated financial statements.
The market value of the swap declined by $470 million and $56 million in 2000
and 1999, respectively. The Company also recorded a loss of $447 million in the
second quarter of 2000, when it determined the decline in its remaining
investment in Global Crossing common stock was other than temporary. The Company
disposed of its remaining investment in the third quarter of 2000, recognizing a
gain of $50 million.
In 2000, Qwest sold the majority of its non-strategic equity investments
resulting in a net gain of $277 million. There were no such dispositions in
1999. Qwest also completed the sale of 20,000 access lines in North Dakota and
South Dakota generating proceeds of $19 million and gains of approximately $11
million. These gains were reduced by a net loss on the sale of fixed assets of
$39 million.
Provision for income taxes. The effective tax rate for 2000 decreased to
53.6 percent on a pro forma basis compared to 59.3 percent in 1999. The decrease
in 2000 from the 1999 effective tax rate resulted primarily from fixed,
non-deductible goodwill charges being amortized over pro forma pre-tax income of
$2.144 billion in 2000 versus pro forma pre-tax income of $1.591 billion in
1999.
Net income (loss). Income before the cumulative effect of the change in
accounting for directory revenues in 1999 decreased from $1.102 billion in 1999
to a net loss of $81 million in 2000 principally because of Merger-related
charges of $1.752 billion. On a pro forma basis, net income increased from 3.9
percent of revenues to 5.2 percent of revenues in 2000 because of the effect of
the items described above.
15
18
1999 Compared with 1998
In connection with the Merger, U S WEST was deemed the accounting acquirer
and its historical results for fiscal 1999 and 1998 have been carried forward as
those of the newly combined company. Following are the historical results of U S
WEST for fiscal 1999 and 1998.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
----------------- INCREASE %
1999 1998 (DECREASE) CHANGE
------- ------- ----------- --------
(DOLLARS IN MILLIONS)
Revenues:
Commercial services................................. $ 4,689 $ 4,390 $ 299 6.8
Consumer and small business services................ 5,571 5,146 425 8.3
Directory services.................................. 1,436 1,318 118 9.0
Switched access services............................ 1,486 1,541 (55) (3.6)
------- ------- ----- --------
Total revenues.............................. 13,182 12,395 787 6.3
------- ------- ----- --------
Operating expenses:
Cost of services.................................... 3,990 3,564 426 12.0
Selling, general and administrative expenses........ 3,488 3,583 (95) (2.7)
------- ------- ----- --------
EBITDA.............................................. 5,704 5,248 456 8.7
------- ------- ----- --------
Depreciation........................................ 2,348 2,198 150 6.8
Amortization........................................ 19 1 18 1,800.0
------- ------- ----- --------
Total operating expenses.................... 9,845 9,346 499 5.3
------- ------- ----- --------
Operating income...................................... 3,337 3,049 288 9.4
------- ------- ----- --------
Other expense (income):
Interest expense -- net............................. 736 543 193 35.5
Decline in market value of financial instruments.... 56 -- 56 --
Expenses related to terminated merger............... 282 -- 282 --
Loss on sale of investments......................... 367 -- 367 --
Other (income) expense -- net....................... (6) 87 (93) (106.9)
------- ------- ----- --------
Total other expense -- net.................. 1,435 630 805 127.8
------- ------- ----- --------
Income before income taxes and cumulative effect of
change in accounting principle...................... 1,902 2,419 (517) (21.4)
Provision for income taxes............................ 800 911 (111) (12.2)
------- ------- ----- --------
Income before cumulative effect of change in
accounting principle................................ 1,102 1,508 (406) (26.9)
Cumulative effect of change in accounting
principle -- net of tax............................. 240 -- 240 --
------- ------- ----- --------
Net income............................................ $ 1,342 $ 1,508 $(166) (11.0)
======= ======= ===== ========
</Table>
REVENUES
Total revenues for 1999 increased by 6.3 percent as a result of growing
demand for data services which increased private line and special access
services revenues, greater sales of residential wireless, an increase in sales
of vertical features, growth in inside wire maintenance plans, local number
portability charges, interconnection charges, subscriber line charges and
increases in the subscriber base of the Company's DSL data services.
Also contributing to the growth in revenue were increased sales of
Qwest.net(R), the national expansion of the Company's data business and
increased sales of customer equipment. In addition, revenues derived from the
directory publishing business increased by $118 million primarily as a result of
growing sales of premium advertisements, price changes and the impact of a
change in accounting principle. Effective in 1999, Qwest Dex, Inc. ("Qwest Dex")
changed to the "point of publication method" of accounting, under which the
Company
16
19
recognizes revenues and expenses at the time the related directory is published.
Previously, revenues and expenses were recognized under the "deferral method"
under which revenues and expenses were recognized over the lives of the
directories, generally one year. The methodology was changed to align Qwest
Dex's revenue and expense policy with the earnings process and to better reflect
the operating activity of the business. Directory services for 1998 do not
include the effect of the directory publishing change in accounting principle.
Adjusting 1998 revenues for the effects of the change in accounting principle,
directory services revenues increased by $87 million, or 6.4 percent.
Other areas of revenue growth include increased consumer and carrier access
charges. At December 31, 1999, the Company had added 408,000 residential and
business access lines, an increase of 2.5 percent over the end of 1998. Of this
increase, residential second line installations accounted for 187,000 lines, an
increase of 11.8 percent as compared with 1998. Second line additions by
residential and small business customers increased primarily as a result of the
growing demand for Internet access and data transport capabilities. Increasing
demand to use the Company's networks by IXCs drove access minutes of use up by 5
percent during 1999.
Partially offsetting the revenue increases were decreases in long-distance
services and mandated rate reductions. The Company's long-distance services
declined by $211 million. Increased competition, strategic price reductions, and
expansion in the number and size of extended service areas accounted for the
majority of the decrease. Also contributing to the decline were mandatory rate
reductions of $40 million in 1999. As of December 31, 1999, customers in all 14
states in which the Company provides local service were able to choose an
alternative provider for intraLATA calls without dialing a special access code
when placing a call.
Federal and state mandated rate changes also offset a portion of the
revenue increase. Excluding the long-distance rate changes discussed above, the
remaining rate changes totaled $180 million. Most of these rate reductions were
directly attributable to the implementation of the FCC's access reform order
relating to the Telecommunications Act of 1996 dealing with interstate access
pricing.
Although Qwest's revenues continued to grow in 1999, some areas of service
experienced a decline in growth rates from 1998, particularly retail and
wholesale basic monthly services and calling services. The drop in the growth
rate was primarily attributable to increased competition as well as the
Company's customer retention strategy of offering bundles of services to
customers at lower prices in return for entering into longer-term contracts.
During 1999, the Company committed to sell approximately 800,000 access
lines within the 14-state local service area. In 1999, definitive sales
agreements were reached for the sale of 570,000 lines for approximately $1.8
billion in cash, subject to adjustment. The transfer of ownership of the access
lines, which will occur on a state-by-state basis, is expected to be completed
by the first quarter of 2002. The pending sales are subject to regulatory
approvals and other customary closing conditions. In addition, on February 26,
2001, the Company announced that it does not have plans to sell a significant
number of additional lines at the present time.
EXPENSES
Cost of services. The cost of services increase year-over-year was
attributable to several items. First, growing sales in the Company's wireless,
data and directory businesses contributed to the increased costs of product
sales. Second, the Company experienced higher access and interconnection
expenses resulting from regulatory rulings that require Qwest to pay access
charges to carriers for calls that originate on the Company's network and
terminate on other carriers' networks. Part of the access expense increase was
offset by reductions in access expense due to end-users dialing toll calls
directly to IXCs and bypassing the Company's network. Third, labor costs grew
due to an increase in the number of employees as the result of a concerted
effort by the Company to improve customer service. Finally, directory publishing
costs were greater as a result of the directory publishing change in accounting
principle. The effects of the change in accounting principle were not reflected
in 1998 results.
Partially offsetting some of these increases was the impact of net pension
credits. In addition, cost of sales was further reduced by the 1999
capitalization of certain costs associated with developing internal use software
due to the adoption of the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-
17
20
1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." In accordance with the SOP, $188 million of costs formerly
expensed were capitalized in 1999.
Selling, general and administrative expenses. Included in 1998 were $129
million of Separation costs and asset impairment charges. Additionally, 1998
results did not include the effects of the directory publishing change in
accounting principle. Including the effects of the change in accounting
principle in 1998 and excluding the Separation costs and asset impairment
charges, SG&A expenses increased $27 million or 0.8 percent in 1999 over 1998.
Offsetting increases in SG&A expenses was the effect of capitalizing $226
million of software costs in 1999 primarily associated with developing internal
use software in accordance with SOP 98-1.
Qwest recorded a pension expense, net of post-retirement costs, of $8
million ($5 million after-tax or $0.01 per diluted share) in 1999 and $66
million ($40 million after-tax or $0.05 per diluted share) for the year ended
December 31, 1998. See Note 6 of Qwest's consolidated financial statements for
additional information.
EBITDA. The EBITDA margin increased from 42.3 percent of revenues in 1998
to 43.3 percent in 1999 because of the effects of the items discussed above.
Depreciation expense. Depreciation expense increased 6.8 percent primarily
due to higher overall property, plant and equipment balances resulting from
continued investment in the Company's network. Additionally, the Company
incurred amortization costs related to the capitalization of internal use
software in accordance with SOP 98-1 and reduced the useful lives of certain
assets due to changes in technology, both of which caused greater depreciation
expense. Partially offsetting the increases was the cessation of depreciation
associated with access lines that the Company plans to sell.
Other expense -- net. Interest expense was $736 million for 1999 compared
to $543 million for 1998. The increase in interest expense in 1999 was primarily
attributable to debt incurred to acquire 39 million shares of Global Crossing
common stock and the $3.9 billion in debt assumed in the Separation.
The Company incurred a one-time charge in 1999 of $282 million to dissolve
the proposed merger of U S WEST with Global Crossing. The charge included a cash
payment of $140 million to Global Crossing, the transfer to Global Crossing of
$140 million of Global Crossing common stock previously purchased by U S WEST
and $2 million of miscellaneous costs.
The Company incurred a $367 million loss in 1999 on the sale of 24 million
shares of Global Crossing common stock. In connection with this transaction,
Qwest entered into an equity return swap that is reflected at market value in
the accompanying consolidated financial statements. In 1999, the market value of
the swap declined by $56 million.
Also included in other expense-net was other income of $6 million in 1999,
compared to other expense of $87 million in 1998. The decrease in other
expense-net was due to a reduction in regulatory interest expense, a reduction
in interest expense on a federal income tax audit, gains on sales of real
estate, net gains on sales of marketable securities, reduced contributions to an
affiliated foundation and interest earned on a gross receipts tax settlement.
Provision for income taxes. The effective tax rate in 1999 was 42.1
percent compared to 37.7 percent in 1998. The increase in the effective tax rate
in 1999 was primarily attributable to the exclusion of the tax benefit for
terminated merger-related expenses. Excluding the effects of terminated
merger-related expenses, the effective tax rate in 1999 was 36.6 percent
compared to 37.7 percent in 1998. The decrease from the 1998 effective tax rate
resulted primarily from certain non-deductible Separation costs in 1998 and the
increase in tax-exempt dividend income in 1999.
Net income. Income before the cumulative effect of the change in
accounting principle decreased from 12.2 percent of revenues in 1998 to 8.4
percent in 1999 because of the effect of the items discussed above.
Prior to 1999, Qwest Dex recognized revenues and expenses related to
publishing directories using the "deferral method," under which revenues and
expenses were recognized over the lives of the directories, generally one year.
Effective in the fourth quarter of 1999, Qwest Dex changed to the "point of
publication method" of accounting, which recognizes revenues and expenses at the
time the directory is published. This change in methodology was made to better
align Qwest Dex's revenue and expense recognition with the earnings process and
to better reflect the operating activity of the business. The accounting change
resulted in a one-time increase in net income of $240 million (net of income tax
of $153 million), or $0.27 per diluted share, which is reported as the
cumulative effect (as of January 1, 1999) of a change in accounting principle.
The Company
18
21
restated its 1999 quarterly results of operations to give effect to the point of
publication method which increased net income by $13 million, or $0.01 per
diluted share. On a restated basis, use of the point of publication method would
have increased 1998 net income by $12 million, or $0.01 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash provided by operations was $3.681 billion,
$4.546 billion and $3.927 billion in 2000, 1999 and 1998, respectively. The
decrease in operating cash flow in 2000 was primarily caused by Merger-related
costs of $995 million. Merger-related costs of $523 million remained accrued at
December 31, 2000. The majority of these costs are expected to be paid in the
first two quarters of fiscal 2001. Accounts receivable increased as a result of
higher sales, the customer profile of accounts receivable at year end reflecting
the combined entity and an increase in days outstanding from 58 in 1999 to 74 in
2000. Increases in other working capital also reduced cash flows from
operations.
Investing Activities. Capital expenditures were $6.597 billion, $3.944
billion and $2.672 billion, in 2000, 1999 and 1998, respectively. Capital
expenditures have been focused on modernization and expansion of the
telecommunications network, expansion of the wireless, local broadband and the
data communications networks, as well as construction of CyberCenters(SM) in
major markets.
The Company plans to invest $9.5 billion in capital expenditures in the
same areas during 2001. The Company expects that cash needs will be funded
through operations and additional borrowings.
In January 2001, Qwest re-acquired 22.22 million shares of its common stock
from BellSouth Corporation ("BellSouth") for $1.0 billion in cash. The
repurchased shares will be available to satisfy the Company's obligations under
its employee benefits and options programs. As part of the transaction,
BellSouth agreed to purchase $250 million in services from Qwest over the next
five years. BellSouth will pay for these services with shares of Qwest common
stock.
Financing Activities. Cash provided by financing activities was $1.189
billion and $1.945 billion in 2000 and 1999, respectively. Cash used for
financing activities was $1.136 billion in 1998. Net borrowings of approximately
$1.4 billion were incurred in 2000 principally to fund the Company's
construction activities described above. The net proceeds from short-term and
long-term borrowings in 1999 of approximately $3.3 billion were, in part,
utilized to finance the Global Crossing tender offer. In 1998, net borrowings
increased by $4.2 billion to $9.9 billion at December 31, 1998, of which
approximately $3.9 billion was attributable to the debt assumed at the
Separation date.
The Company paid dividends on its common shares totaling $542 million,
$1.187 billion and $1.056 billion in 2000, 1999 and 1998, respectively. The
decrease in 2000 was due to a change in the Company's dividend policy after the
Merger. The Company currently anticipates annual dividends of approximately
$0.05 per common share.
Qwest maintains commercial paper programs to finance purchases of
telecommunications equipment. As of December 31, 2000, the Company had a
syndicated credit facility with a total borrowing capacity of $4.0 billion.
In March 2001, the Company completed a cash tender for certain outstanding
debt. The Company repurchased all but approximately $40 million of the $1.2
billion in principal subject to the tender. The tender offers were conducted to
retire the bonds because of their high coupon rates and to reduce interest cost
to the Company. In connection with these tender offers, the indentures were
amended to remove restrictive covenants and certain default provisions.
Also in February 2001, the Company issued $2.25 billion of notes due in
2011 at 7.25 percent per annum, and $1.0 billion of notes due in 2031 at 7.75
percent per annum. The proceeds of these notes were used to repay outstanding
commercial paper.
19
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Quantitative and Qualitative Disclosures
About Market Risk" on page 38 of Qwest's 2000 Annual Report is incorporated
herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Qwest's Consolidated Financial Statements and related Notes thereto and the
Independent Auditors' Report on pages 42-68 of Qwest's 2000 Annual Report, as
well as the unaudited information set forth in Note 11 -- Selected Consolidated
Quarterly Financial Data on page 67 of Qwest's 2000 Annual Report, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have nothing to report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10, 11, 12 and 13 of Part III of this
annual report on Form 10-K is incorporated by reference from and will be
contained in Qwest's definitive proxy statement for its annual meeting of
stockholders to be filed with the SEC by April 30, 2001.
20
23
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS
(a) Documents filed as part of the report:
<Table>
<Caption>
PAGE
----
(1) Report of Independent Auditors.......................... *
Financial Statements covered by Report of Independent
Auditors:
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................... *
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... *
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................... *
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998........... *
Notes to the Consolidated Financial Statements............ *
</Table>
* Incorporated herein by reference to the appropriate portions of the
registrant's annual report to shareowners for the fiscal year ended
December 31, 2000. (See Part II.)
(b) Reports on Form 8-K:
Qwest filed the following reports on Form 8-K during the fourth
quarter of 2000:
(1) On September 8, 2000, Qwest filed a report on Form 8-K
regarding certain expected financial results for 2000 and 2001.
(2) On September 13, 2000, Qwest filed a report on Form 8-K
regarding capital projects provided at an analyst conference on
September 11, 2000.
(3) On October 25, 2000, Qwest filed a report on Form 8-K regarding
its third quarter 2000 results of operations.
(4) On November 3, 2000, Qwest filed a report on Form 8-K regarding
an analyst meeting held October 31, 2000 in New York.
(5) On December 21, 2000, Qwest filed a report on Form 8-K
regarding a conference call with investors.
(c) Exhibits:
Exhibits identified in parentheses below are on file with the Commission
and are incorporated herein by reference. All other exhibits are provided as
part of this electronic submission.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(2.1) -- Separation Agreement, dated June 5, 1998, between U S
WEST, Inc. (renamed "MediaOne Group, Inc.") ("MediaOne
Group") and USW-C, Inc (renamed U S WEST, Inc.) ("U S
WEST"), (incorporated by reference to U S WEST's Current
Report on Form 8-K/A dated June 26, 1998, File No.
1-14087).
(2.2) -- Amendment to the Separation Agreement between MediaOne
Group and U S WEST dated June 12, 1998 (incorporated by
reference to U S WEST's Annual Report on Form 10-K/A for
the year ended December 31, 1998, File No. 1-14087).
(3.1) -- Amended and Restated Certificate of Incorporation of
Qwest (incorporated by reference to Qwest's Registration
Statement on Form S-4/A, File No. 333-81149, filed
September 17, 1999).
</Table>
21
24
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(3.2) -- Amended and Restated Bylaws of Qwest (incorporated
by reference to Qwest's Annual Report on Form 10-K,
filed March 16, 2001, for the year ended December 31,
2000).
(4.1)*** -- Indenture, dated as of October 15, 1997, with Bankers
Trust Company (including form of Qwest's 9.47% Senior
Discount Notes due 2007 and 9.47% Series B Senior
Discount Notes due 2007 as an exhibit thereto).
(4.2)**** -- Indenture, dated as of August 28, 1997, with Bankers
Trust Company (including form of Qwest's 10 7/8% Series B
Senior Discount Notes due 2007 as an exhibit thereto).
(4.3)**** -- Indenture dated as of January 29, 1998 with Bankers Trust
Company (including form of Qwest's 8.29% Senior Discount
Notes due 2008 and 8.29% Series B Senior Discount Notes
due 2008 as an exhibit thereto).
(4.4) -- Indenture, dated as of November 4, 1998, with Bankers
Trust Company (including form of Qwest's 7.50% Senior
Discount Notes due 2008 and 7.50% Series B Senior
Discount Notes due 2008 as an exhibit thereto)
(incorporated by reference to Qwest's Registration
Statement on Form S-4, File No. 333-71603, filed
February 2, 1999).
(4.5) -- Indenture, dated as of November 27, 1998, with Bankers
Trust Company (including form of Qwest's 7.25% Senior
Discount Notes due 2008 and 7.25% Series B Senior
Discount Notes due 2008 as an exhibit thereto)
(incorporated by reference to Qwest's Registration
Statement on Form S-4, File No. 333-71603, filed February
2, 1999).
(4.6) -- Registration Agreement, dated November 27, 1998, with
Salomon Brothers Inc. relating to Qwest's 7.25% Senior
Discount Notes due 2008 (incorporated by reference to
Qwest's Registration Statement on Form S-4, File No.
333-71603, filed February 2, 1999).
(4.7) -- Indenture, dated as of June 23, 1997, between LCI
International, Inc. and First Trust National Association,
as trustee, providing for the issuance of Senior Debt
Securities, including Resolutions of the Pricing
Committee of the Board of Directors establishing the
terms of the 7.25% Senior Notes due June 15, 2007
(incorporated by reference to Exhibit 4(c) in LCI's
Current Report on Form 8-K, dated June 23, 1997).
(4.8) -- Registration Rights Agreement, dated August 20, 1999,
between U S WEST Capital Funding, Inc., U S WEST, Inc.,
J.P. Morgan Securities, Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
U S WEST's Form S-4 Registration Statement, File No.
333-92523, filed December 10, 1999).
(4.9) -- Indenture, dated as of June 29, 1998, by and among U S
WEST Capital Funding, Inc., U S WEST, Inc., and The First
National Bank of Chicago (now known as Bank One Trust
Company, National Association), as Trustee (incorporated
by reference to U S WEST's Current Report on Form 8-K,
dated November 18, 1998, File No. 1-14087).
(4.10) -- First Supplemental Indenture, dated as of June 30, 2000,
by and among U S WEST Capital Funding, Inc., U S WEST,
Inc., Qwest Communications International Inc., and Bank
One Trust Company, as Trustee (incorporated by reference
to Qwest's quarterly report on Form 10-Q for the quarter
ended June 30, 2000).
(10.1)** -- Growth Share Plan, as amended, effective October 1,
1996.*
</Table>
22
25
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(10.2) -- Equity Incentive Plan, as amended (incorporated by
reference from Exhibit A to Qwest's definitive proxy
statement on Schedule 14A, filed March 17, 2000).*
(10.3) -- Qwest Communications International Inc. Employee Stock
Purchase Plan (incorporated by reference to Qwest's
Preliminary Proxy Statement for the Annual Meeting of
Stockholders filed February 26, 1999).*
(10.4) -- Qwest Communications International Inc. Deferred
Compensation Plan (incorporated by reference to Qwest's
Annual Report on Form 10-K for the year ended December
31, 1998).*
(10.5)**** -- Equity Compensation Plan for Non-Employee Directors.*
(10.6) -- Qwest Communications International Inc. 401-K Plan
(incorporated by reference to Qwest's Annual Report on
Form 10-K for the year ended December 31, 1998).*
(10.7)** -- Employment Agreement dated December 21, 1996 with Joseph
P. Nacchio.*
(10.8)**** -- Growth Share Plan Agreement with Joseph P. Nacchio,
effective January 1, 1997, and Amendment thereto.*
(10.9)**** -- Non-Qualified Stock Option Agreement with Joseph P.
Nacchio, effective June 23, 1997.*
(10.11) -- Employment Agreement dated October 6, 1998 with Drake S.
Tempest (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).*
(10.12) -- Employment Agreement dated October 18, 2000 with Stephen
M. Jacobsen (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).*
(10.13) -- Employment Agreement dated May 20, 1999 with Afshin
Mohebbi (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).*
(10.14)**** -- Employment Agreement dated October 8, 1997 with Lewis O.
Wilks.*
(10.15)**# -- IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
(10.16)**# -- IRU Agreement dated as of February 26, 1996 with WorldCom
Network Services, Inc.
(10.17)**# -- IRU Agreement dated as of May 2, 1997 with GTE.
(10.18) -- Common Stock Purchase Agreement, dated as of December 13,
1998, with Microsoft Corporation (incorporated by
reference to Qwest's Current Report on Form 8-K, filed
December 16, 1998).
(10.19) -- Registration Rights 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).
(10.20) -- 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).
(10.21) -- 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).
(10.22) -- 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).
(10.23) -- Securities Purchase Agreement dated January 16, 2001 with
BellSouth Corporation (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year ended
December 31, 2000).
</Table>
23
26
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(10.24) -- Purchase Agreement by and among Qwest, Slingshot
Networks, LLC and Anschutz Digital Media, Inc., dated
September 26, 1999 (incorporated by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended
September 30, 1999).
(10.25) -- Unit Purchase Agreement, dated June 21, 2000, by and
among U.S. Telesource, Inc. and Anschutz Digital Media,
Inc. (incorporated by reference to Qwest's quarterly
report on Form 10-Q for the quarter ended June 30, 2000).
(10.26) -- Second Amended and Restated Operating Agreement of
Slingshot Networks, LLC entered into as of June 21, 2000
between Anschutz Digital Media, Inc. and U.S. Telesource,
Inc. (incorporated by reference to Qwest's quarterly
report on Form 10-Q for the quarter ended June 30, 2000).
(10.27) -- Employee Matters Agreement between MediaOne Group and U S
WEST, dated June 5, 1998 (incorporated by reference to
U S WEST's Current Report on Form 8-K/A, dated June 26,
1998, File No. 1-14087).
(10.28) -- Tax Sharing Agreement between MediaOne Group and U S
WEST, dated June 5, 1998 (incorporated by reference to
U S WEST's Current Report on Form 8-K/A, dated June 26,
1998, File No. 1-14087).
(10.29) -- 360-Day $4.0 billion Credit Agreement, dated as of May 5,
2000, among U S WEST, Inc., U S WEST Capital Funding,
Inc., U S WEST Communications, Inc., the banks listed
therein, and Morgan Guaranty Trust Company of New York,
as administrative agent (incorporated by reference to U S
WEST's quarterly report on Form 10-Q for the quarter
ended March 31, 2000).
(10.30) -- Purchase Agreement, dated July 3, 2000, among Qwest
Capital Funding, Inc., Qwest Communications International
Inc. and Salomon Smith Barney Inc. (incorporated by
reference to Qwest's quarterly report on Form 10-Q for
the quarter ended June 30, 2000).
(10.31) -- Purchase Agreement, dated August 16, 2000, among Qwest
Capital Funding, Inc., Qwest Communications International
Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc.
as Representatives of the several initial purchasers
listed therein (incorporated by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended
September 30, 2000).
(10.32) -- Registration Rights Agreement, dated August 16, 2000,
among Qwest Capital Funding, Inc., Qwest Communications
International Inc., Salomon Smith Barney Inc. and Lehman
Brothers Inc. as Representatives of the several initial
purchasers listed therein (incorporated by reference to
Qwest's quarterly report on Form 10-Q for the quarter
ended September 30, 2000).
(10.33) -- Purchase Agreement, dated February 7, 2001, among Qwest
Capital Funding, Inc., Qwest Communications International
Inc., Banc of America Securities LLC and Chase Securities
Inc. as Representatives of the several initial purchasers
listed therein (incorporated by reference to Qwest's
Annual Report on Form 10-K, filed March 16, 2001, for the
year ended December 31, 2000).
(10.34) -- Registration Rights Agreement, dated February 14, 2001,
among Qwest Capital Funding, Inc., Qwest Communications
International Inc., Banc of America Securities LLC and
Chase Securities Inc. as Representatives of the several
initial purchasers listed therein (incorporated by
reference to Qwest's Annual Report on Form 10-K, filed
March 16, 2001, for the year ended December 31, 2000).
</Table>
24
27
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(10.35) -- Form of Agreement for Purchase and Sale of Telephone
Exchanges, dated as of June 16, 1999, between Citizens
Utilities Company and U S WEST Communications, Inc.
(incorporated by reference to U S WEST's Current Report
on Form 8-K, dated June 17, 1999).
(10.36) -- Qwest Communications International Inc., Deferred
Compensation Plan for Nonemployee Directors, effective as
of July 1, 2000 (incorporated by reference to Qwest's
Annual Report on Form 10-K, filed March 16, 2001, for the
year ended December 31, 2000).*
(10.37) -- Amended and Restated Qwest Digital Media, LLC Growth
Share Plan (as of June 1, 2000) (incorporated by
reference to Qwest's Annual Report on Form 10-K, filed
March 16, 2001, for the year ended December 31, 2000).*
(12) -- Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Qwest's Annual Report on
Form 10-K, filed March 16, 2001, for the year ended
December 31, 2000).
13 -- Portions of Qwest's Annual Report to shareowners for the
fiscal year ended December 31, 2000. Only the information
incorporated by reference into this Form 10-K/A is included
in the exhibit.
(21) -- Subsidiaries of the Registrant (incorporated by reference
to Qwest's Annual Report on Form 10-K, filed March 16, 2001,
for the year ended December 31, 2000).
23 -- Consent of Arthur Andersen LLP.
(99) -- Annual Report on Form 11-K for the U S WEST Savings
Plan/ESOP for the year ended December 31, 1999
(incorporated by reference to U S WEST's Annual Report on
Form 10-K, File No. 1-14087, Paper Copy (P)).
</Table>
- ---------------
( ) Previously filed.
* Executive Compensation Plans and Arrangements.
** Incorporated by reference in Form S-1 as declared effective on June 23,
1997 (File No. 333-25391).
*** Incorporated by reference to exhibit 4.1 in Form S-4 as declared effective
on January 5, 1998 (File No. 333-42847).
**** Incorporated by reference in Qwest's Form 10-K for the year ended December
31, 1997.
# Portions have been omitted pursuant to a request for confidential
treatment.
25
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado, on August 17, 2001.
Qwest Communications International
Inc.,
a Delaware corporation
By: /s/ ROBIN R. SZELIGA
----------------------------------
Robin R. Szeliga
Executive Vice
President -- Finance and
Chief Financial Officer
26
29
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(2.1) -- Separation Agreement, dated June 5, 1998, between U S
WEST, Inc. (renamed "MediaOne Group, Inc.") ("MediaOne
Group") and USW-C, Inc (renamed U S WEST, Inc.) ("U S
WEST"), (incorporated by reference to U S WEST's Current
Report on Form 8-K/A dated June 26, 1998, File No.
1-14087).
(2.2) -- Amendment to the Separation Agreement between MediaOne
Group and U S WEST dated June 12, 1998 (incorporated by
reference to U S WEST's Annual Report on Form 10-K/A for
the year ended December 31, 1998, File No. 1-14087).
(3.1) -- Amended and Restated Certificate of Incorporation of
Qwest (incorporated by reference to Qwest's Registration
Statement on Form S-4/A, File No. 333-81149, filed
September 17, 1999) (incorporated by reference to Qwest's
Annual Report on Form 10-k for the year ended December
31, 2000).
(3.2) -- Amended and Restated Bylaws of Qwest (incorporated by
reference to Qwest's Annual Report on Form 10-K, filed
March 16, 2001, for the year ended December 31, 2000).
(4.1)*** -- Indenture, dated as of October 15, 1997, with Bankers
Trust Company (including form of Qwest's 9.47% Senior
Discount Notes due 2007 and 9.47% Series B Senior
Discount Notes due 2007 as an exhibit thereto).
(4.2)**** -- Indenture, dated as of August 28, 1997, with Bankers
Trust Company (including form of Qwest's 10 7/8% Series B
Senior Discount Notes due 2007 as an exhibit thereto).
(4.3)**** -- Indenture dated as of January 29, 1998 with Bankers Trust
Company (including form of Qwest's 8.29% Senior Discount
Notes due 2008 and 8.29% Series B Senior Discount Notes
due 2008 as an exhibit thereto).
(4.4) -- Indenture, dated as of November 4, 1998, with Bankers
Trust Company (including form of Qwest's 7.50% Senior
Discount Notes due 2008 and 7.50% Series B Senior
Discount Notes due 2008 as an exhibit thereto)
(incorporated by reference to Qwest's Registration
Statement on Form S-4, File No. 333-71603, filed
February 2, 1999).
(4.5) -- Indenture, dated as of November 27, 1998, with Bankers
Trust Company (including form of Qwest's 7.25% Senior
Discount Notes due 2008 and 7.25% Series B Senior
Discount Notes due 2008 as an exhibit thereto)
(incorporated by reference to Qwest's Registration
Statement on Form S-4, File No. 333-71603, filed February
2, 1999).
(4.6) -- Registration Agreement, dated November 27, 1998, with
Salomon Brothers Inc. relating to Qwest's 7.25% Senior
Discount Notes due 2008 (incorporated by reference to
Qwest's Registration Statement on Form S-4, File No.
333-71603, filed February 2, 1999).
(4.7) -- Indenture, dated as of June 23, 1997, between LCI
International, Inc. and First Trust National Association,
as trustee, providing for the issuance of Senior Debt
Securities, including Resolutions of the Pricing
Committee of the Board of Directors establishing the
terms of the 7.25% Senior Notes due June 15, 2007
(incorporated by reference to Exhibit 4(c) in LCI's
Current Report on Form 8-K, dated June 23, 1997).
</Table>
30
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(4.8) -- Registration Rights Agreement, dated August 20, 1999,
between U S WEST Capital Funding, Inc., U S WEST, Inc.,
J.P. Morgan Securities, Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
U S WEST's Form S-4 Registration Statement, File No.
333-92523, filed December 10, 1999).
(4.9) -- Indenture, dated as of June 29, 1998, by and among U S
WEST Capital Funding, Inc., U S WEST, Inc., and The First
National Bank of Chicago (now known as Bank One Trust
Company, National Association), as Trustee (incorporated
by reference to U S WEST's Current Report on Form 8-K,
dated November 18, 1998, File No. 1-14087).
(4.10) -- First Supplemental Indenture, dated as of June 30, 2000,
by and among U S WEST Capital Funding, Inc., U S WEST,
Inc., Qwest Communications International Inc., and Bank
One Trust Company, as Trustee (incorporated by reference
to Qwest's quarterly report on Form 10-Q for the quarter
ended June 30, 2000).
(10.1)** -- Growth Share Plan, as amended, effective October 1,
1996.*
(10.2) -- Equity Incentive Plan, as amended (incorporated by
reference from Exhibit A to Qwest's definitive proxy
statement on Schedule 14A, filed March 17, 2000).*
(10.3) -- Qwest Communications International Inc. Employee Stock
Purchase Plan (incorporated by reference to Qwest's
Preliminary Proxy Statement for the Annual Meeting of
Stockholders filed February 26, 1999).*
(10.4) -- Qwest Communications International Inc. Deferred
Compensation Plan (incorporated by reference to Qwest's
Annual Report on Form 10-K for the year ended December
31, 1998).*
(10.5)**** -- Equity Compensation Plan for Non-Employee Directors.*
(10.6) -- Qwest Communications International Inc. 401-K Plan
(incorporated by reference to Qwest's Annual Report on
Form 10-K for the year ended December 31, 1998).*
(10.7)** -- Employment Agreement dated December 21, 1996 with Joseph
P. Nacchio.*
(10.8)**** -- Growth Share Plan Agreement with Joseph P. Nacchio,
effective January 1, 1997, and Amendment thereto.*
(10.9)**** -- Non-Qualified Stock Option Agreement with Joseph P.
Nacchio, effective June 23, 1997.*
(10.11) -- Employment Agreement dated October 6, 1998 with Drake S.
Tempest (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).*
(10.12) -- Employment Agreement dated October 18, 2000 with Stephen
M. Jacobsen (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).*
(10.13) -- Employment Agreement dated May 20, 1999 with Afshin
Mohebbi (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).*
(10.14)**** -- Employment Agreement dated October 8, 1997 with Lewis O.
Wilks.*
(10.15)**# -- IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
(10.16)**# -- IRU Agreement dated as of February 26, 1996 with WorldCom
Network Services, Inc.
(10.17)**# -- IRU Agreement dated as of May 2, 1997 with GTE.
(10.18) -- Common Stock Purchase Agreement, dated as of December 13,
1998, with Microsoft Corporation (incorporated by
reference to Qwest's Current Report on Form 8-K, filed
December 16, 1998).
</Table>
31
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(10.19) -- Registration Rights 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).
(10.20) -- 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).
(10.21) -- 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).
(10.22) -- 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).
(10.23) -- Securities Purchase Agreement dated January 16, 2001 with
BellSouth Corporation (incorporated by reference to Qwest's
Annual Report on Form 10-K, filed March 16, 2001, for the year
ended December 31, 2000).
(10.24) -- Purchase Agreement by and among Qwest, Slingshot
Networks, LLC and Anschutz Digital Media, Inc., dated
September 26, 1999 (incorporated by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended
September 30, 1999).
(10.25) -- Unit Purchase Agreement, dated June 21, 2000, by and
among U.S. Telesource, Inc. and Anschutz Digital Media,
Inc. (incorporated by reference to Qwest's quarterly
report on Form 10-Q for the quarter ended June 30, 2000).
(10.26) -- Second Amended and Restated Operating Agreement of
Slingshot Networks, LLC entered into as of June 21, 2000
between Anschutz Digital Media, Inc. and U.S. Telesource,
Inc. (incorporated by reference to Qwest's quarterly
report on Form 10-Q for the quarter ended June 30, 2000).
(10.27) -- Employee Matters Agreement between MediaOne Group and U S
WEST, dated June 5, 1998 (incorporated by reference to
U S WEST's Current Report on Form 8-K/A, dated June 26,
1998, File No. 1-14087).
(10.28) -- Tax Sharing Agreement between MediaOne Group and U S
WEST, dated June 5, 1998 (incorporated by reference to
U S WEST's Current Report on Form 8-K/A, dated June 26,
1998, File No. 1-14087).
(10.29) -- 360-Day $4.0 billion Credit Agreement, dated as of May 5,
2000, among U S WEST, Inc., U S WEST Capital Funding,
Inc., U S WEST Communications, Inc., the banks listed
therein, and Morgan Guaranty Trust Company of New York,
as administrative agent (incorporated by reference to U S
WEST's quarterly report on Form 10-Q for the quarter
ended March 31, 2000).
(10.30) -- Purchase Agreement, dated July 3, 2000, among Qwest
Capital Funding, Inc., Qwest Communications International
Inc. and Salomon Smith Barney Inc. (incorporated by
reference to Qwest's quarterly report on Form 10-Q for
the quarter ended June 30, 2000).
(10.31) -- Purchase Agreement, dated August 16, 2000, among Qwest
Capital Funding, Inc., Qwest Communications International
Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc.
as Representatives of the several initial purchasers
listed therein (incorporated by reference to Qwest's
quarterly report on Form 10-Q for the quarter ended
September 30, 2000).
</Table>
32
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(10.32) -- Registration Rights Agreement, dated August 16, 2000,
among Qwest Capital Funding, Inc., Qwest Communications
International Inc., Salomon Smith Barney Inc. and Lehman
Brothers Inc. as Representatives of the several initial
purchasers listed therein (incorporated by reference to
Qwest's quarterly report on Form 10-Q for the quarter
ended September 30, 2000).
(10.33) -- Purchase Agreement, dated February 7, 2001, among Qwest
Capital Funding, Inc., Qwest Communications International
Inc., Banc of America Securities LLC and Chase Securities
Inc. as Representatives of the several initial purchasers
listed therein (incorporated by reference to Qwest's Annual
Report on Form 10-K for the year ended December 31, 2000).
(10.34) -- Registration Rights Agreement, dated February 14, 2001,
among Qwest Capital Funding, Inc., Qwest Communications
International Inc., Banc of America Securities LLC and
Chase Securities Inc. as Representatives of the several
initial purchasers listed therein (incorporated by
reference to Qwest's Annual Report on Form 10-K for the
year ended December 31, 2000).
(10.35) -- Form of Agreement for Purchase and Sale of Telephone
Exchanges, dated as of June 16, 1999, between Citizens
Utilities Company and U S WEST Communications, Inc.
(incorporated by reference to U S WEST's Current Report
on Form 8-K, dated June 17, 1999).
(10.36) -- Qwest Communications International Inc., Deferred
Compensation Plan for Nonemployee Directors, effective as
of July 1, 2000 (incorporated by reference to Qwest's Annual
Report on Form 10-K, filed March 16, 2001, for the year ended
December 31, 2000).*
(10.37) -- Amended and Restated Qwest Digital Media, LLC Growth
Share Plan (as of June 1, 2000) (incorporated by
reference to Qwest's Annual Report on Form 10-K, filed
March 16, 2001, for the year ended December 31, 2000).*
(12) -- Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to Qwest's Annual Report
on Form 10-K, filed March 16, 2001, for the year ended
December 31, 2000).
13 -- Portions of Qwest's Annual Report to shareowners for the
fiscal year ended December 31, 2000. Only the information
incorporated by reference into this Form 10-K/A is included
in the exhibit.
(21) -- Subsidiaries of the Registrant (incorporated by reference
to Qwest's Annual Report on Form 10-K, filed March 16, 2001,
for the year ended December 31, 2000).
23 -- Consent of Arthur Andersen LLP.
(99) -- Annual Report on Form 11-K for the U S WEST Savings
Plan/ESOP for the year ended December 31, 1999
(incorporated by reference to U S WEST's Annual Report on
Form 10-K, File No. 1-14087, Paper Copy (P)).
</Table>
- ---------------
( ) Previously filed.
* Executive Compensation Plans and Arrangements.
** Incorporated by reference in Form S-1 as declared effective on June 23,
1997 (File No. 333-25391).
*** Incorporated by reference to exhibit 4.1 in Form S-4 as declared effective
on January 5, 1998 (File No. 333-42847).
**** Incorporated by reference in Qwest's Form 10-K for the year ended December
31, 1997.
# Portions have been omitted pursuant to a request for confidential
treatment.