20020424Application (Part 1).pdf

STOEL 101 S Capito!Boulevard.Suite 1900
R I VES Boise.Idaho 83702
main 208.389.9000
L I P fax [phone]
www.stoel.com
ATTORNEYS AT LAW
April 24,2002
MARY S.HOBSON
Direct Dial
[phone]
email [e-mail]
Ms.Jean Jewell,Secretary
Idaho Public Utilities Commission
472 W.Washington Street
Boise,Idaho 83720-0074
Re:Case No.
Applicationfor Certificate of Public Convenience and Necessity
and Title 62 Notice of Qwest Communications Corporation
Dear Ms.Jewell:
Enclosed for filing with this Commission is an original and seven (7)copies of the
Application for Certificate of Public Convenience and Necessity and Title 62 Notice of
Qwest Communications Corporation.
Thank you for your assistance in this matter.
Sincerely,
Mary S.Hobson
Enclosures
Oregon
Washington
California
Ut a h
Boise-140036.1 0029164-00066 i d a ho
Mary S.Hobson (ISB#2142)
Stoel Rives LLP
101 S.Capitol Blvd.,Suite 1900
Boise,ID 83702-5958
Telephone [phone]
Facsimile [phone]
Attorneys for Qwest Communications Corporation
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
APPLICATION FOR CERTIFICATE OF )
PUBLIC CONVENIENCE AND NECESSITY )
AND TITLE 62 NOTICE OF QWEST )
COMMUNICATIONS CORPORATION )CASE NO.f)O'/ff 'N /
APPLICATION OF QWEST COMMUNICATIONS CORPORATION
Qwest Communications Corporation (QCC),pursuant to Idaho Code §§61-526 through
61-528,requests that the Idaho Public Utilities Commission (Commission)issue a Certificate
of Public Convenience and Necessity (Certificate)for its operations as a local exchange carrier
within the state of Idaho.In addition,QCC,pursuant to Idaho Code §62-604,hereby
provides notice of its intention to operate as a Title 62 interexchange carrier.The facts
underlyingthis Application and Notice are as follows:
1.QCC is a duly formed and existing corporation organized under the laws of the
State of Delaware.A certified copy of its articles of incorporation is attached as Attachment
A.Qwest Corporation,a Colorado corporation,is the incumbent local exchange carrier now
serving a large number of customers in Idaho.QCC and Qwest Corporation are both wholly-
owned subsidiaries of Qwest Service Corporation,which is a wholly owned subsidiary of
APPLICATION OF QWEST COMMUNICATIONS CORPORATION -I
Boise-134355.1 0029164-00033
Qwest Communications International Inc,a Delaware corporation that is publicly traded on the
New York Stock Exchange.
2.QCC's principal business address is 1801 California,Denver,Colorado,80202
and its principal place of business within the state of Idaho is 999 Main,Boise,Idaho,83702.
A certificate of good standing of QCC issued by the Secretary of State for the State of Idaho is
attached hereto as Attachment B.QCC's registered agent for service in Idaho is CT
Corporation,300 N.6*Street,Boise,Idaho,83702.
3.Attached hereto as Attachment C is a schedule of QCC's officers and directors.
4.QCC intends to begin providing intra-and interLATA toll service to customers
located within Qwest Corporation's service territory in Idaho upon receipt of approval of the
Federal Communications Commission (FCC)for provision of interLATA service under 47
U.S.C.272.
5.QCC intends to provide local exchange service and vertical features to business
and residence customers in the service areas served by Qwest Corporation and Verizon
Northwest,Inc.within the State of Idaho using a combination of its own facilities and resold
services and/or unbundled network elements.The Commission may rely on the service area
maps of Qwest Corporation and Verizon Northwest,Inc.for the potential scope of QCC's
proposed service territory in Idaho.
6.QCC has not yet completed any interconnection negotiations or entered any
interconnection agreements with any carriers for the provision of its services within the State
of Idaho.
APPLICATION OF QWEST COMMUNICATIONS CORPORATION -2
Boise-134355.1 0029164-00033
7.Attached hereto as Attachment D are the two most recent annual reports,
including detailed balance sheets and profit and loss statements,of QCC's ultimate parent
corporation (Qwest Communications International Inc.).
8.QCC will file price lists for its toll services upon receipt of FCC approval for
the provision of interLATA toll services within the state of Idaho.QCC's proposed initial
tariff and price lists for its local exchange service will be filed with the Commission after QCC
has entered the toll market.Such filing will be made in advance of the provision of any local
exchange services in Idaho.
9.Attached hereto as Attachment E are QCC designated contacts for customer
inquiries and complaints.
10.QCC has reviewed all of the Commission's rules and agrees to comply with
them or,if necessary,to seek a waiver of any rules that prove to be inapplicable.
RESPECTFULLY SUBMITTED this N ay of April,2002.
STOEL RIVES LLP
Mary S.Hobson
Attorneys for
Qwest Communications Corporation
APPLICATION OF QWEST COMMUNICATIONS CORPORATION -3
Boise-134355.1 0029164-00033
ATTACHMENT A
PAGE 1
'The írst State
I,HARRIET SMITH WINDSOR,SECRETARY OF STATE OF THE STATE OF
DELAWARE,DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF INCORPORATION OF "EVERGREEN LEASING
CORPORATION",FILED IN THIS OFFICE ON THE TENTH DAY OF JUNE,
A.D.1966,AT 10 O'CLOCK A.M.
Harriet Smith Windsor,Secretary of State
0642301 8100 AUTHENTICATION:1661299
020149855 DATE:03-12-02
CERTIPICATE OF INCORPORATION
OF
EVEROREENLEASING CORPORATION
First:The name of the corporation is
EVERGREENLEASING CORPORATION
Second:Its principal office in the State of
Delaware is located at No.100 Rest Tenth Street,in the
City of Hilmington,Ccunty of New Castle.The name of its
resident agent in the State of Delaware is The Corporation
Trust Company;the address of said resident agent is
No.100 West Tenth Street,Wilmington,Delaware.
Third:The nature of the business and the objects
and purposes to be transacted,promoted vad carried on are:
1.To own,construct,buy,sell,assign,lease
(as either lessor or lessee),repair,equip,supply,maintain
and deal in railroad freight cars and other equipment and
vachinery of every kind and description,as well as devices
a.,d appliances of every kind and description which may be
used or useful in connection with any equipment or machinery.
2.To buy,sell,establish,maintain,operate or
develop systems,services,or procedures for heating.Cooling
storing,warehousing,or otherwise protecting,safeguarding
or caring for equipment,machinery,devices or property of
every kind and description including articles,supplies and
commodities which are being transported,loaded,unloaded,or
3.To engage in,promote,contribute to,or
arrange for,the conduct of research or development work re-
lating to or useful in connection with any business of this
corporation.
4.In furtherance and not in limitation of any
powers conferred by the laws of the State of Delaware and
I
,of the objects and purposes referred to in the preceding
paragraphs of this Article Third:
(a)To purchase or otherwise acquire,own,
hold,develop,operate,mortgage,sell and convey,
or demise,lease,let and hire business and
residential procerties,aaricultural,timber,
mineral and other lands,mines,deposits,quarries,
ditches,water and water rights,and other real
property of every kind and description or estates
or interests therein;
(b)To purchase,manufacture,or otherwise
acquire,invest in,own,mortgage,pledge,sell,
assign and transfer,or otherwise dispose of,lease
let,hire,trade.deal in and deal with,goods,
wares and merchandise and personal property of
every kind and description;
(c)To purchace,lease,or otherwise acquire,
own,hold,control,operate and use franchises,
easements,grants,powers,permits,rights,
licenses,privileges and immunities,and other
property of every kind and description;
(d)To acquire,and pay for in cash,Stock or
bonds of this corporation er otherwise,the good
will,rights,assets and property,and to
undertake or assume the whole or any part of the
obligations or liabilities,of any person,firm,
association or corporation,and to carry on any
business or businesses so acquired and to do any
and all things necessary or proper in connection
therewith;
(e)To acquire by purchase,subscription or
otherwise,or to underwrite,and to receive,hold,
own,guarantee,sell,assign,e::change,transfer,
mortgage,pledge or otherwise dispose of or deal
I
I in and with any of the shares of the capital stock,
or any voting trust certificates in respect of the
shares of capital stock,cerip,varrants,righLs,
bonds,debentures,notes,trust receipts,.and other
securities,obligations,choses in action and
evidences of indebtedness or interest issued or
created by any corporations,joint stock companies,
syndicates,associations,firms,trusts or persons,
public or private,or by the goverm.:ent of the
United States of America,or by any foreign
government,or by any state,territor:y,province,
municipality or other political subdivision or by
any governmental agency,and as owner thereof to
possess and exercise all the rights,powers and
privileges of ownership,including the right to
execute consents and vote thereon,and to do any
and all acts and things necessary or advisable for
the preservation,protection,improvement and
enhancement in value thereof;
(f)To enter into,make and perform contracts
of every kind and description with any person,firm
association,corporation,municipality,county,
state,body politic or government or colony or
dependency thereof;
(g)To borrow or raise money for any of the
purposes of the corporation and,from time to time,
without limit as to amount,to draw,make,accept,
endorse,execute and issue promissory notes,drafts
bills of exchange,warrants,bonds,debentures,
conditional sale agreements,equipment trusts,
and other negotiable or non-negotiable instruments
and evidences of indebtedness,and to secure the
payment of any thereof and of the interest thereon
by mortgage upon or pledge,conveyance or assign-
ment in trust of the whole or any part of the
property of the corporation,whether at the time
owned or thereafter acquired,and to purchase,
hold,sell,pledge or otherwise dispose of such
bonds or other obligations of the corporûtion;
(h)To lend to any person,firm or corporation
any of its funds,either with or without security;
(i)To purchase,hold,sell and transfer the
shares of its own capital stock;provided it shall
not use its funds or property for the purchase of
its own shares of capital stock when such use would
causo any impairment of its capital except as other-
wise permitted by law,and provided further that
shares of its own capital stock belonging to it
shall not be voted upon directly or indirectly;
(j)To guarantee the payment of dividends upon
any capital stock or to endorse or otherwise
guarantee the principal or interest,or both,of
any bonds,debentures,notes,scrip,evidences of
indebtedness or other obligations or securities of,
or in the performance of any contract or obligation
of,or in any other manner to aid,any other
corporation or corporations,association or
associations,domestic or foreign,or any firm or
individual,in so far as the giving of such guarant
or aid may be permitted by law,
(k)To acquire,hold,use,sell,assign,lease
grant licenses in respeetaf,mortgage or otaerwise
dispose of letters patent of the United States or
any foreign country,patent rights,licenses and
privileges,inventions,improvements and processes,
copyrights,trade marks and trade names,relating
to or useful in connection with any business of
this corporation;
(1)To have one or more offices and to conduct
its business in any of the states,districts,
territories or colonies of the United States,and
in any and all foreign countries,sub.ject to the
laws thereof;
(m)In general,to carry on any other business
in connection with the foregoing,and to have and
exercise all of the powers now or hereafter conferr d
by the laws of the State of Delaware,and to do any
or all of the things herein sr.t forth to the Jame
extent as natural persons might or could do,
subject,however,to the provisions of this
Articlo Third.
Fourth:The total number of shares of stock which
the corporation shall have authority to issue is One Thousand
(1,000);all of such shares shall be without par value.
Fifth:The minimum amount of capital with which
the corporation shall commence business is One Thousand
Dollars ($1,000).
Sixth:The names and places of residence of each
of the incorporators are as follows:
Names Residences
B.J.Consono WiÌmington,Delaware
F.J.Obara,Jr.Wilmington,Delaware
A.D.Grier Wilmington,Delaware
Seventh:The corporation is to have perpetual
existence.
Eighth:The private property of the stockholders
shall not be subject to the payment of corporate debts to any
extent whatever.
Ninth:In furtherance,and not in limitation,of
the powers conferred by law,the Board of Directors is
expressly authorized:
I
To make,alter and repeal the by-laws of the cor-
poration,
To fix the consideration for which fully paid and
non-assessable shares of the common stock without par value
may be issued from time to time;
To authorize and cause to be executed mortgages
and liens upon the real and personal property of the
corporation;
-6-
To set apart out of any funds of the corporation
available for dividends,a reserve or reserves for any proper
purposes or to abolish any such reserve in the manner in which
it was created;
By resolution or resolutions passed by a majority
of the whole Board,to designate one or more comnittees,each
committee to consist of two or more of the directors of the
corporation,which,to the extent provided in said resolution
or resolutions,or in the by-laws of the corporation,shall
have and may exercise the powers of the Board of Directors in
the management of the business and affairs of the corporation,
and may haYe power to authorize the seal of the corporation
to be affixed to all papers which may reouire it (such
committee or committees to have such name or names as may be
stated in the by-laws of the corporation or as may be deter-
nined from time to time by resolution adopted by the Board of
Directors);
Tenth:Meetings of stockholders and directors may
be held without the State of Delaware if the by-laws so pro-
vide.The books of the corporation may be kept (subject to
emy provision contained in the statutes of the State of
Delaware)outside the State of Delaware at such place or
places as may be from time to time designated by the Board
of Directors or in the by-laws of the corporation.
Eleventh:At all elections of directors of this cor
poration each holder of record of stock possessing voting
power shall be entitled to as many votes as shall eo.ual the
number of shares of his stock multiplied by the number of
directors to be elected and he may cast all of such votes
for a single director or may distribute them among the
numeer to be voted for,or any two or more of them as he
may see fit.
Twelfth:Each director,officer or employee of the
corporation,whether or not in office,or any person who may
have served at its request as a director,officer or employee
of another corporation in which it owns shares of capital
stock or of which it is a creditor,or his personal represen-
tative,shall be indemnified by the corporation against claims
liabilities,expenses,and costs actually and necessarily
incurred by him or his estate in connection with,or arising
out of,any claim,action,or proceeding,civil,criminal or
administrative,in which he may become involved,as a party o
otherwise,by reason of his being,or having been,an officer
director or employee,or by reason of ar.y action alleged to
have been taken or omitted by him in any of such capacities,
except in relation to matters as to which he shall be adjudge
in any action or proceeding to be liable for actual negligenc
or misconduct in the performance of his duties as such direc-
tor,officer or employee.
The right of indemnification herein provided shall
also aoply in respect of any amount paid in compromise or
settlement of any such claim asserted against such director,
officer or employee,whether or not in connection with,or
arising out of,an action or proceeding and shall include
expenses and costs actually and necessarily incurred in
connection therewith.
Thirteenth:The corporation reserves the right to
amend,alter,change or repeal any provision contained in thi
certificate of incorporation,in the manner now or hereafter
prescribed by statute,and all rights conferred upon stock-
holders herein are granted subject to this reservation.
\
\
WE,the undersigned,being each of the incorporators
hereinbefore named for the purpose of forming a corporation
in pursuance of the General Corporation Law of the State of
Delaware,do make this certificate,hereby declaring and
certifying that the facts herein stated are true,and
accordingly have hereunto set our hands and seals this 9th
day of June ,1966.
(SFAL)
SFAL)
li
li
I
I -
STATE OF DELARARE
ss.
COUNTY OF NEW CASTLE
BE IT REMEMBERED,that on this 9th day ofJune ,
A.D.1966,personally come before me,A.Dana Atwell
a Notary Public for the State of Delaware,B.J.Consono,
F.J.Obara,Jr.andA.D.Grier
the parties to the foregoing Certificate of Incorporation,
known to me personally to be such,and severally acknowledged
the said certificate to be the act and deed of the signers
respectively and that the facts therein states are truly set
forth.
GIVEN under my hand a L seal of office the day and
year aforesaid.
Notary Public
-10-
PAGE 1
'The irst State
I,HARRIET SMITH WINDSOR,SECRETARY OF STATE OF THE STATE OF
DELAWARE,DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF EMENDMENT OF "EVERGREEN LEASING
CORPORATION",CHANGING ITS NAME FROM "EVERGREEN LEASING
CORPORATION"TO "SOUTHERN PACIFIC TELECOMMUNICATIONS COMPANY",
FILED IN THIS OFFICE ON THE TWENTIETH DAY OF MARCH,A.D.1989,
AT 10 O'CLOCK A.M.
Harriet Smith Windsor,Secretary of State
0642301 8100 AUTHENTICATION:1661301
020149855 DATE:03-12-02
CERTIFICATE OF AMENDKENT
OF
THE CERTIFICATE OF INOORPORATION .R 1
OF '
EVERGREEN LEASING CORPORATION
Evergreen Leasing Corporation,a corporation organized andexistingunderandbyvirtueoftheGeneralCorporationLawoftheStateofDelaware,does hereby certify that the followingamendmentstotheCertificateofIncorporationofsaidcorporationhavebeendulyadoptedinaccordancewithSection 242andSection228oftheGeneralCorporationLawofDelaware:
The Certificate of Incorporation of this Corporation isamendedbydeletingtheArticlethereofnumbered"First"in itsentirety,and by substituting therefor a new Article "First,"which shall read as follows:
"First:The name of the corporation is SOUTHERNPACIFTUTELECOMMUNICATIONSCOMPANY."
The Certificate of Incorporation of this Corporation isamendedbyrenumberingpresentParagraph"4"of Article Third asParagraph"5,"and inserting a new Paragraph "4,"which shallreadasfollows:
"4.To construct,acquire,own,lease,operate andmaintaintelecommunicationsfacilitiesandequipmentandtoengageinthebusinessofprovidingtelecommunicationsservices."
The Certificate of Incorporation of the Corporation isfurtheramendedbyaddinganewParagraph"6"to Article Thirdwhichshallreadasfollows:
"6.To engage in any lawful act or activity forwhichcorporationsmaybeorganizedundertheGeneralCorporationLawofDelaware."
IN ¶ITNESS THEREOF,Evergreen Leasing Corporation herebycausedthiscertificatetobesignedattestedbyitsdulyauthorizedofficersthis16thdayofMarch,1989.
EVERGREEN LEASING CORPORATION
ATTEST:
Secretary
PAGE 1
'The irst State
I,HARRIET SMITH WINDSOR,SECRETARY OF STATE OF THE STATE OF
DELAWARE,DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "SOUTHERN PACIFIC
TELECOMMUNICATIONS COMPANY",CHANGING ITS NAME FROM "SOUTHERN
PACIFIC TELECOMMUNICATIONS COMPANY"TO "QWEST COMMUNICATIONS
CORPORATION",FILED IN THIS OFFICE ON THE SIXTH DAY OF APRIL,
A.D.1995,AT 2:01 O'CLOCK P.M.
Harriet Smith Windsor,Secretary of State
0642301 8100 AUTHENTICATION:1661303
020149855 DATE:03-12-02
STATE OF DELAIJARE
SECRETARY OF STATEDIVISIONOFCORPORATIONSFILED02:01 PM 04/06/1995CERTIFICATEOFAMENDWOD76813-642301
OF
RESTATED CERTIFICATE OF INCORPORATION
SOUTHERN PACIFIC TELECOMMUNICATIONSCOMPANY (the "Corpora-
tion"),a corporation organized and existing under and by virtue of the General Corporation
Izw of the State of Delaware (the "CodeN),does hereby certify.
FIRST:The Board of Directors of the Corporation,by unanimous written
consent,has filed with the minutes of the board a duly adopted resolution proposing and
declaring advisable the following amendment to the Restated Certificate of Incorporation
of the Corporation:
"RESOLVED,that the Board of Directors of the Corporation bereby
authorizes and approves that the Corporation change its name from Southern
Pacific Telecommunications Company to Owest Communications Corporation
by striking out Article 1.of the Corporation's Restated Certificate of
Incorporation and substituting in lieu thereof the following new Article:
1.The name of the corporation is QWEST COMMUNICATIONS
CORPORATIOK"
SECOND:The Board of Directors of the Corporation,by unanimous written
consent,has directed that the foregoing amendment to the Restated Certificate of
Incorporation of the Corporation be presented to the stockholders of the Corporationfor
their consideration.
THlRD:The stockholders of the Corporation have given their unanimous
written consent to the aforesaid amendment to the Restated Certificate of Incorporation in
accordance with the provisions of Section 228 of the Code.
FOURTH:That said amendment was duly adopted in accordance with the
provisions of Section 242 of the Code.
IN WITNESS WHEREOF,Soutbem Pacific Telecommunications Company has
caused this certificate to be signed by Dexx;1as H.Hansen ¡y
Mai t ,and attested to by A.E.Whitslaw III ,its Assistant
,this _
6th day of April,1995.
Southern Pacif°Telecommunications Company
[SEAL]
By:
Name:Douglas H.amson
Presicient
ATTEST:
By:
Name:A.K.Whitelaw III
Title:Msistant Secretary
ens.:-2-
ATTACHMENT B
State of Idaho
Office of the Secretary of State
CERTIFICATE OF EXISTENCE
OF
QWEST COMMUNICATIONS CORPORATION
File Number C 142530
l,PETE T.CENARRUSA,Secretary of State of the State of Idaho,hereby certify
that I am the custodian of the corporation records of this State.
I FURTHER CERTIFY That the record of this office show that the above-ndmed
corporationwas incorporated under the laws of DELAWARE and filed to transact
business in Idaho on February 11,2002.
I FURTHER CERTIFY That the corporation is in goodstandingon the records of
this office.
Dated:February 28,2002
SECRETARY OF STATE
i r
ATTACHMENT C
4/17/02
QWEST COMMUNICATIONS CORPORATION
Officers
Joseph P.Nacchio Chairman,Chief Executive Officer and President
Robin R.Szeliga Executive Vice President and Chief Financial Officer
Drake S.Tempest Executive Vice President,General Counsel,Chief Administrative Officer
and Secretary
Richard N.Baer Senior Vice President,Deputy General Counsel and Assistant Secretary
Scott Berman Senior Vice President and Treasurer
R.Steven Davis Senior Vice President,Deputy General Counsel and Assistant Secretary
Richard Weston Senior Vice President -Internet Solutions
Kelly Carter Vice President and Assistant Treasurer
Yash A.Rana Vice President,Senior Associate General Counsel and Assistant Secretary
William Bryant Assistant Treasurer
Directors
Robin R.Szeliga
Drake S.Tempest
ATTACHMENT D
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,D.C.20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,2001
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)
DELAWARE 84-1339282
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization)Identification No.)
1801 CALIFORNIA STREET,DENVER,COLORADO 80202
TELEPHONE NUMBER [phone]
SECURITIES REGISTERED PURSUANTTO SECTION 12(B)OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCRANGE ON WHICH REGISTERED
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G)OF THE ACT:
NONE
masa EDGARpro ©2002.EDGAR Online,Inc.
On March 22,2002,1,674,855,973 shares .Qwest common stock were outstanding.The assegate market value of the Qwest voting
stock held by non-affiliates on such date was approximately $11,669,917,777.
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 ltem 405 of Regulation S-K is not contained herein,and will not
be contained,to the best of registrant's knowledge,in definitiveproxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [X].
This document contains statements about expected future events and financial results that are forward-lookingand subject to risks and
uncertainties.Please refer to page 49 of Form 10-K for a discussion of factors that could cause actual results to differ from
expectations.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Proxy Statement for Qwest's 2002 Annual Meeting of Part III,Items 10,11,12 and 13
Stockholders
to be held June 4,2002
TABLEOFCONTENTS
ITEM DESCRIPTION PAGE
PART I
1.Business.................................2
2.Properties............................10
3.Legal Proceedings.........................................10
4.Submission of Matters to a Vote of Security Holders.........12
PART II
5.Market for Registrant's Common Equity and Related
Stockholder Matters.........................12
6.Selected Financial Data..................................13
7.Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................15
7A.Quantitative and Qualitative Disclosures about Market
Risk.....................................................52
8.Qwest Consolidated Financial Statements and Supplementary
Data.......................................................53
8A.KPNQwest Consolidated Financial Statements and Supplementary
Data.....................................................103
9.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................104
PART III
10.Directors and Executive Officers of the Registrant..........104
11.Executive Compensation.....................................104
12.Security Ownership of Certain Beneficial Owners and
Management................................................104
13.Certain Relationships and Related Transactions..............104
PART IV
14.Financial Statement Schedules,Reports on Form 8-K and
Exhibits................................................104
thya EDGARpro ©2002.EDGAR Online,Inc.
l
PART I
ITEM 1.BUSINESS
Qwest Communications International Inc.("Qwest"or the "Company")provides local telecommunications and related services,
wireless services and directory services in the 14-state local service area of Arizona,Colorado,Idaho,Iowa,Minnesota,Montana,
Nebraska,New Mexico,North Dakota,Oregon,South Dakota,Utah,Washington and Wyoming ("local service area").The Company
provides reliable,scalable and secure broadband data,voice and image communications globally.Qwest serves global and national
business and government customers,and residential and small business customers primarily in the local service area.
Qwest is incorporated under the laws of the State of Delaware and its principal executive offices are located at 1801 CaliforniaStreet,
Denver,Colorado 80202,telephone number [phone].Qwest was a wholly-owned subsidiary of the Anschutz Company until
the Company issued common stock in an initial public offeringon June 23,1997.
For a discussion of certain risks applicable to Qwest's business,financial condition and results of operations,see the risk factors
described in "Special Note Regarding Forward-LookingStatements"in Part Il,Item 7 below.
OPERATIONS
Qwest has been managing its operations on the basis of its products and services in four segments:(1)retail services,(2)wholesale
services,(3)network services and (4)directory services.The Company intends to change its segment reporting beginning in 2002,
however,to reflect the way in which Qwest is managing its operations in 2002.The new segments will be:(l)business services,(2)
consumer services,(3)wholesale services,(4)directory services and (5)network services.You can find additional financial
informationon Qwest's segments in Note 12 to the consolidated financial statements.The segment revenue percentages contained in
this section of the Form 10-K are based upon financial results prepared in accordance with generally accepted accounting principles in
the United States ("GAAP").
RETAIL SERVICES
Qwest offers a wide variety of retail products and services in a varietyof categories that help people and businesses communicate via
multiple electronic mediums.Qwest sells these products and services directly to residential users,businesses,educational institutions
and governmental agencies.Qwest also sells these products and services to other telecommunications companies and Internet service
providers ("ISPs"),for resale to a varietyof end users.These companies may also use Qwest's products and services with respect to the
transport of their customers'telecommunications.The following reflects the key categories of Qwest's retail products and services.
VOICE COMMUNICATIONS.Qwest offers voice communications that include basic local exchange telephone service and Centrex
services.
-Local exchange telephone services.Qwest operates its local exchange telephone service in its local service area.The local exchange
telephone service connects its customer's home or office to Qwest's telephone network in order to originate and terminate voice and
data telecommunications.Qwest also offers additional voice products such as Private Branch Exchange ("PBX")and Direct Inward
Dial ("DID").PBX allows the customer to have multiple telephone numbers carried on one large trunk between the customer premise
and the telephone exchange.DID allows the client to dial others within the company using only an extension.In addition to these local
telephone services,Qwest provides a number of enhanced service features,such as Caller ID,Call Waiting,3-Way Calling,and Voice
Mail.Qwest retail services segment also derives revenue from directory assistance and public telephone service.
-Centrex services.Qwest's Centrex product is offeredpredominantly to small businesses and government customers with needs in
voice communications.The Centrex product offers the customer all of
2
the advantages of a personal telephone system without the expense of owning the equipment.The central officeprovides all of the
features directly to the business.
ADVANCED DATA AND IP PRODUCTS.Qwest offers a broad range of products and services to transport voice,data and video
telecommunications that use evolvingtransport methods that optimize Qwest's existing network and incorporate Internet protocol
("IP")technology.This technology lowers costs and increases transmission speeds.Qwest believes that these services and products
will be a key component of its overall growth.Qwest views these products and services as follows:
©2002.EDGAR Online,Inc.
-Data;
-IP-enabled products and services;and
-Web hosting.
Data.Qwest's data products include a number of products offered primarilyto businesses,telecommunications companies,government
agencies and ISPs.These products and services are used by businesses to facilitate a variety of their internal and external data
transmissions,such as transferring files from one location to another.Qwest's telecommunications and ISP customers use these
products and services primarily to enable their customers to transmit large amounts of data,very quickly,over broadband
infrastructure.Some of these products include:
-Asynchronous Transfer Mode ("ATM"),which is a broadband,network transport service that provides a fast,efficient way to
electronically move large quantities of informationover a highly reliable,scalable,secure fiber optic network.
-Frame Relay,which is a fast packet switching technology that allows data to travel in individualpackets of variable length.The key
advantage to this approach is that a frame relay network can accommodate data packets of various sizes associated with virtually any
data protocol.
-Private Lines,which are direct circuits or channels that are specifically dedicated to the use of an end-user organization for the
purpose of directly connecting two or more sites in a multi-site enterprise.Private lines offer a cost effective solution for frequent
communication of large amounts of data between sites.
-Integrated Services Digital Network ("ISDN"),which is a comprehensive digital network architecture allowingusers to transmit
voice,data,videoand image --separately or simultaneously --over standard telephone lines or fiber optics.
-Customer Premises Equipment ("CPE"),which Qwest resells and leases from leading equipment manufacturers,includes equipment
such as phones,modems,routers and switches.Qwest provides services related to the CPE for a wide variety of customer network
needs.
IP.IP-enabled products assist in the transmission of voice,data and video using Qwest's fiber optic broadband network.These
products include the following:
-Dedicated Internet Access ("DIA"),which offers customers always-on Internet access ranging from 64 Kilobits to 10 Gigabits per
second,which are the highest rates currently available in the industry.
-Virtual Private Network ("VPN"),which allows businesses with multiple office locations to create a private network managed by
Qwest that connects only their various offices.VPN allows for both voice and data communications and provides businesses with a
secure alternative to meet their offices'communication needs.
-Internet Dial Access,which provides ISP customers with a comprehensive,reliable,cost-effective dial-up network infrastructure.The
Company's dial products are primarily designed for established ISPs with strong networking capabilities looking to expand their
existing dial networks,as well as smaller ISPs desiring to increase their dial-up Internet access coverage.
3
-Digital Subscriber Line products ("DSL"),which provideresidential and business customers a digital modem technology that
converts their existing telephone lines into higher bandwidth facilities for video and high-speed data communications to the Internet or
private networks.
Web Hosting.Qwest offers its customers both shared and dedicated hosting on its servers.Alternatively,Qwest offers co-located
hosting services for customers who preferto use their own servers but locate them at a Qwest Web hosting center.Additionally,Qwest
offers each of its Web hosting customers application hosting services to help design and manage the customer's website and their
hosted applications.
During 2001,Qwest operated 16 Web hosting centers ("CyberCenters(SM)"),offeringbusiness customers a variety of Web hosting
and application services including Qwest's e-solutions,a suite of Web hosting,application service provider,and professional
consulting services.The CyberCenters are directly connected to Qwest's fiber optic broadband network and each operates in a high-
security environment to safeguard the customer's hosting operations.As a result of the slowing economy and the current excess
capacity for Web hosting,the Company has suspended its plans to build CyberCenters where construction had not begun and has
halted further construction on those currently under construction.You can find additional information on restructuring charges
associated with the CyberCenters in Note 13 to the consolidated financial statements.
Earnia EDGARpro ©2002.EDGAR Online,Inc.
WIRELESS SERVICES AND PRODUCTS.Qwest holds 10 MHz licenses to providePersonal Communications Service ("PCS")in
most markets in its local service area.Qwest offers wireless services in 28 of these markets.Qwest's integrated service enables its
customers to use the same telephone number for their wireless phone as for their home or business phone.Qwest also serves wireless
customers in 20 smaller markets in its local service area through a joint venture with Touch America,Inc.Qwest provides digital
services in the 1900 MHz band.Qwest's PCS licenses were issued in 1997 with 10-year terms and are renewable for successive 10-
year terms within Federal Communications Commission ("FCC")regulations.
LONG-DISTANCESERVICES.Qwest provides two types of long-distance communications services to residential and business
customers.
-Qwest provides intraLATA long-distance service to its customers nationwide including within its local service area.IntraLATA long-
distance service refers to services that cross local exchange area boundaries but originate and terminate within the same geographic
local access and transport area,or LATA.There are 27 LATAs throughout Qwest's local service area.These services include calls that
terminate outside a caller's local calling area but within their LATA,wide area telecommunications service or "800"services for
customers with highly concentrated demand and special services,such as transport of data,radio and video.
-Qwest also provides interLATA long-distance services to customers outside of its local service area.These services include
originating long distance services for communications that cross LATA boundaries,and "800"services where calls terminate outside
the Qwest local service area.Qwest intends to begin offeringinterLATA services within its local service area in 2002.Qwest currently
plans to have filed for interLATA long-distance approval with the FCC for all states in its local service area by mid-2002 and expects
to receive approval of the applications within 90 days of each filing.
Qwest sells its retail products and services through a variety of channels including direct-sales marketing,telemarketing and
arrangements with third-party agents.
OPTICAL CAPACITY ASSET SALES.The Company sells optical capacity on its network primarily to other telecommunications
service providersin the form of sales of specific channels on Qwest's "lit"network or sales of specific dark fiber strands.These
arrangements have typically been structured as indefeasible rights of use,or IRUs,which are the exclusive right to use a specified
amount of capacity or fiber for a specified period of time,usually 20 years or more.In some cases,Qwest enters into two transactions
that occur at the same time:
one to sell IRUs to companies and a second to acquire optical capacity from such companies.These arrangements are referred to as
"contemporaneous transactions."These purchases allow the Company to expand its fiberoptic network both domestically and
internationally.Based on a number of factors impacting
4
demand for optical asset sales reflecting customers'desires currently to satisfy their needs on a short term basis,the Company does not
anticipate entering into IRU transactions but may enter into short term operating leases for fiber or capacity.Qwest will not enter into
such leases involvingroutes with an end-point in a state in Qwest's local service area until Qwest has obtained permission to offer
interLATA services in that state.
For the years ended December 31,2001,2000 and 1999,revenue from retail services accounted for approximately 76%,71%and
66%,respectively,of Qwest's total revenue.
WHOLESALE SERVICES
Qwest provides network transport,switching and billing services in its local service area to competitive local exchange carriers
("CLECs"),interexchange carriers ("IXCs")and wireless carriers.CLECs are communications companies certified by a state Public
Utility Commission or similar agency ("PUC")that providelocal exchange service within a LATA,including LATAs within the local
service area.IXCs providelong-distance services to end-users by handling calls that are made from a phone exchange in one LATA to
an exchange in another LATA.Competitive communications companies often operate as both CLECs and IXCs.Qwest also provides
wholesale products such as conventional private line services to other communications providers,ISPs and other data service
companies and high-volume voice services.Qwest will be allowed to providewholesale interLATA network transport services within
its local service area followingFCC approval of the interLATA applications as discussed under "Regulation"below.
Qwest sells these services (1)by means of interconnection agreements approved by PUCs,(2)by reference to its filed Statement of
Generally AvailableTerms and Conditions,(3)through its tariffs and contracts and (4)through advertising on its website.
For the years ended December 3l,2001,2000 and 1999,revenue from wholesale services accounted for approximately 15%,19%and
21%,respectively,of Qwest's total revenue.
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NETWORK SERVICES
Qwest's network services segment provides access to the Company's telecommunications network,including Qwest's information
technologies supporting the network,primarilyto customers of the Company's retail services and wholesale services segments.
For the years ended December 31,2001,2000 and 1999,revenue from network services accounted for approximately l%,1%and 2%,
respectively,of Qwest's total revenue.
DIRECTORY SERVICES
Qwest Dex,Inc.("Dex")is the largest telephone directory publisher in the local service area.Virtually all of Dex's revenues are
derived from the sale of advertising in its various directories.In 2001,Dex distributed approximately 45 million copies ofits
directories to businesses and residences in the local service area.Dex also provides ancillary directory-related services,including an
Internet-based directory and database marketing services.Dex distributes its published directories to residents in its local service area
through a third-party vendor.
For the years ended December 31,2001,2000 and 1999,revenue from directory services accounted for approximately 8%,9%and
11%,respectively,of Qwest's total revenue.
THE COMPANY'S NETWORK
Qwest's principal asset is its telecommunications network,which consists of both its traditional telephone communications network and
the Qwest Macro Capacity(R)Fiber Network,which is also referred to below as the "fiber optic broadband network."
Qwest provides traditional communications technology in its local service area through its traditional telephone network.The
traditional telephone network is defined as all equipment used in processing telecommunications transactions from end users through
to the equipment terminating or handing off the
5
transaction within the local service area.The Company provides this service through its public switched telephone network ("PSTN").
PSTN refers to the worldwidevoice telephone network that is accessible to every person with a telephone and a dial tone.Qwest's
traditional telephone network is made up of both copper cables and fiber optic broadband cables and serves approximately 25 million
customers in its local service area.Qwest invested nearly $3.7 billion to maintain and expand this network during 2001.
In addition to the traditional telephone network in its local service area,Qwest continued to expand its global fiber optic broadband
network in 2001.During the year,the Company added significant international capacity and now offers high-speed,high-capacity
connectivity to six continents with a total network footprintof more than 190,000 route-miles.The North American portion of the fiber
optic broadband network,including both in and out of the Company's local service area,reaches over 32,000 route-miles.The network
is equipped with state-of-the-art transmission electronics and is designed to support IP as well as other alternative informationtransfer
standards used for data and voice transmissions.
Qwest's fiberoptic broadband network connects over 195 major cities worldwide.Qwest continues to expand its global broadband
services portfolioto include end-to-end connectivity for the Company's broadband data services to large and multi-location enterprises
and other telecommunications carriers in key United States metropolitan markets.End-to-end connectivity provides customers with the
ability to transmit and receive informationat high speed through the entire connection path rather than be limited by dial-up connection
speeds.Qwest is using its completed metropolitan area network ("MAN")fiber rings that it built as part of the nationwide backbone
construction to expand the sales of its broadband data and voice products and services to businesses primarily outside of its local
service area.Qwest utilizes its existing MAN rings and in-buildingrights-of-wayto expand service to existing customers and provide
service to new customers who have locations on or near a ring or in a buildingwhere Qwest has a right-of-wayor a physical presence.
KPNQwest,N.V.,a European communications company in which Qwest owns a 47.5%equity interest ("KPNQwest"),built and
operates a high-capacity,pan-European fiber optic,IP-based network that connects 50 cities in 15 countries throughout Europe.In
March 2002,KPNQwest acquired certain assets of Global TeleSystems,Inc.("GTS").With the acquisition of GTS,KPNQwest's
network expanded to 15,600 route-miles of fiber optic cable and reaches over 60 cities.In addition,the GTS acquisition added nearly
48,000 European accounts and 17 hosting centers to KPNQwest's operations.Throughthe Company's relationship with KPNQwest,
which is discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations,Qwest is able to
provideend-to-end connectivity for customers with transmissions terminating on the KPNQwest network.
IMPORTANCE,DURATION AND EFFECT OF PATENTS,TRADEMARKS AND COPYRIGHTS
Qwest and its subsidiaries own or have licenses to various patents,trademarks,copyrights and other intellectual property necessary to
earnsa EOGARpro ©2002.EDGAR Online,Inc.
the conduct of its business.The Company -es not believe that the expiration of any of its imilectual property rights,or the non-
renewal of those rights,would have a material adverse effect on the Company's results of operations.
COMPETITION
RETAIL SERVICES
VOICE COMMUNICATIONS.In providinglocal exchange services,Qwest competes with CLECs,including some owned by
national carriers,and increasingly with wireless providers and cable companies.Competition is based primarily on price,services,
features,customer service,network access coverage,quality and reliability.
Qwest's existing infrastructure and long-standing customer relationships make it the market leader in providinglocal exchange services
in its local service area.However,technology substitution,such as wireless substitution of wireline,cable telephony substitution forwirelineandcablemodemsubstitutionofdial-up modem lines,has led to a decrease in total access lines.Access lines are telephone
lines reaching from a central office to the customer's premises.Qwest's competitive position will benefit from receiving FCC
6
approval to offer interLATA long-distance services within its local service area.This regulatory relief will allow the Company to
market long-distance services to its existing local customers.
ADVANCED DATA AND IP PRODUCTS.Business customers are the primary market for these network-related services.Inprovidingtheseservices,Qwest competes with national carriers,Regional Bell Operating Companies ("RBOCs")and CLECs.
Customers are particularly concerned with network reach,but are also sensitive to quality,reliability,customer service and price.
Outside of its local service area,Qwest's investment in improvingthe reach and quality of its network has helped its competitive
position.However,until Qwest obtains FCC approval to offer interLATA services within its local service area,it will be at a
competitive disadvantage in relation to the national carriers that do not need to use intermediaries when providingservice.
WIRELESS SERVICES AND PRODUCTS.Qwest provides mobile phone services in select·markets in its local service area,
including Denver,Seattle,Phoenix,Minneapolis,Portland,and Salt Lake City.The wireless industry continues to grow,but is highly
competitive.Qwest competes primarilywith national and regional wireless carriers.Competition in the wireless market is based
primarily on price,services,features,coverage area,technical quality and customer service.Increased competition combined with the
lack of national coverage has impeded the Company's growth.Qwest's future competitive position will depend on its ability to offer
new features and services,price competitively and respond to changing consumer preferences and demographics.In addition,the
Company hopes to improve its competitive position by bundling and integrating its wireless services with its wireline and other
communications services.
LONG-DISTANCESERVICES.Qwest markets intraLATA long-distance services throughout its local service area and intra-and
interLATA long-distance service outside of its local service area.National carriers as well as CLECs and other resellers compete both
inside and outside the local service area.RBOCs compete in the intraLATA market within their respective regions and in theinterLATAmarketnationallyand,as they gain FCC approval,will compete in the states in their respective regions.Wireless providers
also market long-distance services as a substitute to traditional wireline and fiber optic service.
Competition in the long-distance retail market is based primarily on price,services,features,customer service,network coverage,
quality and reliability.Qwest is the market share leader in providingintraLATA long-distance service within its local service area,but
faces increasing competition from national carriers,which have substantial financial and technical resources.Although the Company
has increased the reach and quality of its nationwide network,it continues to trail the large national carriers in providinglong-distance
services outside of its local service area.National carriers will continue to have a competitive advantage until Qwest gains FCC
approval to offer interLATA long-distance services in its local service area.Upon such approval,Qwest believes that its competitive
position will improvebased on its ability to market additional long-distance services to its existing customers.However,as the RBOCs
gain FCC approval to offerinterLATA long-distance within their respective regions,the Company expects to see a decline in its
market share of long-distance services in those regions.
WHOLESALE SERVICES
The Company primarily competes with smaller regional providers,including CLECs,competitive access providers and independent
telephone companies.Qwest competes in the local service area on network quality,customer service,product features,the speed with
which it can providea customer with requested services and,to a lesser extent than in the out-of-regionmarket,price.Although
Qwest's status as the incumbent local exchange carrier ("ILEC")helps make it the leader in providingwholesale services within its
local service area,increased competition has resulted in a reduction in billable access minutes of use.Qwest's competitive position
should improve as the FCC allows the Company to offer interLATA wholesale services in the states in the local service area.
warama EDGARpro 2 EDGAR Onl ine ,Inc .
DIRECTORY SERVICES
Although the directory business competes with many differentadvertising media,including newspapers,direct mail,billboards,
television,radio and the Internet,Dex principally competes with independent directory publishers,or publishers that are not affiliated
with a telephone company,and publishers that are owned by
7
CLECs.Generally,Dex does not compete in the local service area with the other RBOCs'directory publishing businesses,except in the
Seattle market.
Competition in the directory business is based primarily on price,advertisement features,brand name recognition,usage by customers
and breadth of distribution.
Qwest's long-standing customer relationships and established brand make Dex the largest directory publisher in the local service area.
However,customer usage of printed yellow pages directories has fallen consistently in the United States over the past five years,
principallyas a result of increasing customer usage of Internet directories.Although Dex competes in this market with its Internet-
based directory,qwestdex.com,a continued decline in printed directory usage could negatively impact printed directory advertising
pncmg.
REGULATION
As a general matter,Qwest is subject to substantial regulation,including requirements and restrictions arising under the 1996
Telecommunications Act (the "1996 Act"),state utility laws,and the rules and policies of the FCC,state PUCs and other governmental
entities.This regulation,among other matters,currently prohibits the Company (with certain exceptions)from providingretail or
wholesale interLATA telecommunications services within its local service area,and governs the terms and conditions under which
Qwest provides services to its customers (including competing CLECs,wireless service providers and IXCs in the Company's local
service area).
INTERCONNECTION.The FCC is continuing to interpret the obligations of ILECs under the 1996 Act to interconnect their networks
with,and make unbundled network elements available to,CLECs.These decisions establish Qwest's obligations in its local service
area,and the Company's rights when it competes outside of its local service area.In January 2002 the FCC initiated its Triennial
Review of Unbundled Network Elements in which it seeks to ensure that the framework established in the 1996 Act remains current
givenadvances in technology and developments in the markets for telecommunications services.The outcome of this proceeding may
affect Qwest's current obligations regarding sharing its network with its competitors.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 unlawfullypreclude ILECs from recovering their actual costs as required by the 1996 Act.
ACCESS PRICING.The FCC has initiated a number of proceedings that could affect the rates and charges for access services that the
Company sells or purchases.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 AffordableLocal and
Long-Distance Service ("CALLS").The adoption of the CALLS proposal resolved a number of outstanding issues before the FCC.
The CALLS plan has a five-yearlife and provides for the following:elimination of the residential presubscribed interexchange carrier
charge;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.Qwest has opted into the five-yearCALLS plan.
ADVANCED TELECOMMUNICATIONSSERVICES.The FCC has ruled that advanced services providedby an ILEC are covered
by those provisions of the 1996 Act that govern telephone exchange and exchange access services.Qwest challenged this finding,
contending that advanced services fit within neither category and are not properly treated as exchange services.On April 20,2001,the
Court of Appeals vacated and remanded to the FCC its classification of DSL-based advanced services.In January 2002 the FCC
released a Notice of Proposed Rulemaking regarding the Regulatory Requirements for ILEC Broadband Telecommunications Services.
In this proceeding the FCC seeks comment on what changes should be made in traditional regulatory requirements to reflect the
competitive market and create incentives for broadband services growth and investment.
INTERLATA LONG-DISTANCEENTRY.Several RBOCs have filed for entry into the interLATA long-distance business.Although
many of these applications have been supported by state PUCs,the FCC had
8
rejected all applications until December 1999.As of March 25,2002,the FCC has granted long-distance authority to RBOCs operating
©2002.EDGAR Online,Inc.
in the states of Arkansas,Connecticut,Kass,Massachusetts,Missouri,New York,Oklaho...a,Pennsylvania,Rhode Island and
Texas.Applications are pending that,if granted by the FCC,would permit the relevant RBOC to provideinterLATA services in the
states of Georgia,Louisiana,Maine,New Jersey and Vermont,and applications are expected to be filed with the FCC during 2002
coveringnumerous additional states.
Qwest has filed applications with all of its local service area state PUCs for support of its planned applications to the FCC for authority
to enter the interLATA long-distance business.Workshops and related proceedings are complete in twelve of Qwest's fourteen local
service area states,and hearings are underway in the remaining two Qwest local service area states.Qwest agreed to test operational
support systems ("OSS")on a regional basis in thirteen states,and testing of those systems began in March 2001.Testing in Arizona
was conducted separately,and began in February 2001.OSS testing is in its final stages and state proceedings on the Qwest
applications are in progress.Qwest currently plans to have filed for interLATA long-distance approval with the FCC for all states in its
local service area by mid-2002 and expects to receive approval of the applications within 90 days of each filing.However,there can be
no assurance that the Company will be in a position to make these applications to the FCC on its current schedule,or will obtain timely
FCC approval of these applications.
RECIPROCALCOMPENSATIONFOR ISPS.On April 27,2001,the FCC issued an Order with regard to intercarrier compensation
for ISP bound traffic.The Order required carriers serving ISP bound traffic to reduce reciprocal compensation rates over a 36-month
period beginning with an initial reduction to $0.0015 per minute of use and ending with a rate of $0.0007 per minute of use.In
addition,a cap was placed on the number of minutes of use on which the terminating carrier may charge such rates.This reduction will
lower costs that Qwest pays CLECs for deliveringsuch traffic to other carriers although Qwest does not expect that this will have a
material effect on its results of operations.
EMPLOYEES
As of December 3l,2001,Qwest employed approximately 61,000 employees.Approximately 35,000 were represented by collective
bargaining agreements.
During the fourth quarter of 2001,the Company approved a plan to reduce employee levels by a net of approximately l 1,000
employees (approximately 4,000 in the fourth quarter of 2001 and 7,000 in the first half of 2002).The Company expects the employee
separations to be completed by June 30,2002.You can find additional information regarding the restructuring in Note 13 to the
consolidated financial statements.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Qwest provides a variety of telecommunications services on a national and international basis to global and national business,small
business,government and residential customers.It is impractical for Qwest to providefinancial information about geographic areas.
9
ITEM 2.PROPERTIES
Qwest's principal properties do not lend themselves to simple description by character and location.The percentage allocation of the
Company's gross investment in plant,property and equipment consisted of the following:
DECEMBER 31,
2001 2000
Land and buildings..................9%7%
Communications network....................40%38%
Other network equipment.........................41%40%
General purpose computers and other.....................8%8%
Construction in progress...........................2%7%
100%100%
Land and buildingconsists of land,land improvements,central officeand certain administrative office buildings.Communications
network primarily consists of switches,routers and transmission electronics.Other network equipment primarily includes conduit and
©2002.EDGAR Online,Inc.
cable.General purpose computers and othe consists principally of computers,office equipi.-t,vehicles and other general support
equipment.The Company owns substantially all of its telecommunications equipment required for its business.Total investment in
plant,property and equipment was approximately $55.1 billion and $48.5 billion at December 31,2001 and 2000,respectively,
including the effect of retirements,but before deducting accumulated depreciation.
Qwest-installed fiber optic cable is laid under the various rights-of-way held by the Company.Qwest owns and leases sales offices in
major metropolitan locations both in the United States and internationally.Qwest's network management centers are located primarily
in owned buildings situated on land owned in fee at various locations in geographic areas that the Company serves.Substantially all of
the installations of central officeequipment for the Company's local service business are located in buildings and on land owned by
Qwest.
Qwest's public switched telephone network is predominately located within its local service area.
ITEM 3.LEGAL PROCEEDINGS
For a discussion of legal proceedings arising before December 31,2001,see Note ll to the consolidated financial statements.The
following describes matters since December 31,2001 with respect to certain legal proceedings.
On February 14,2002,the Minnesota Department of Commerce filed a formal complaint against Qwest with the Minnesota Public
Utilities Commission alleging that Qwest,in contravention of federal and state law,failed to file interconnection agreements with the
Minnesota PUC relating to certain of its wholesale customers,and thereby allegedly discriminating against other CLECs.The
complaint seeks civil penakies related to such alleged violations between $50 million and $200 million.This proceeding is at an early
stage.Other states in the local service area are looking into similar matters and furtherproceedings may ensue in those states.
On February 19 and February 25,2002,two purported class action complaints were filed in federal district court in Colorado against
Qwest,Joseph P.Nacchio and Robin R.Szeliga.These complaints purport to be filed on behalfof purchasers of Qwest's publicly
traded stock between April 19,2000 and February 13,2002.The complaints allege,among other things,that during the class period,
Qwest and the individualdefendants made material false statements regarding the results of operations in violationof sections 10(b)
and 20(a)of the Securities Exchange Act of 1934 (the "Exchange Act")and that Qwest's financial results during the class period and
statements regarding those results were false and misleading due to the alleged failure to disclose four transactions between Qwest and
KMC Telecom Holdings,Ince ("KMC").The complaints seek unspecified compensatory damages and other relief.On February 27,
2002,lead plaintiffs in
10
the consolidated securities action,which is described in Note 11 to the consolidated financial statements,moved to consolidate these
complaints with the consolidated securities action.
On March l 3,2002,a purported class action complaint was filed in federal district court in Colorado on behalfof purchasers of
Qwest's publiclytraded stock between April 19,2000 and February 13,2002.In addition to the defendants named in the actions filed
on February 19,2002 and February 25,2002,this complaint names as defendants Afshin Mohebbi and Robert S.Woodruff.The
complaint alleges generally the same facts as the two purported class actions filed on February 19 and 25,2002,and like those actions,
alleges that during the class period,Qwest and the individualdefendants made material false statements regarding the results of
operations in violationof sections 10(b)and 20(a)of the Exchange Act and that Qwest's financial results during the class period and
statements regarding those results were false and misleading due to the alleged failure to disclose four transactions between Qwest and
KMC.In addition,the complaint alleges that Qwest's financial results were misleading because of the alleged failure to disclose
unspecified transactions with Calpoint LLC ("Calpoint")that were similar in nature to the transactions alleged involvingKMC.The
complaint also alleges that Messrs.Nacchio and Woodruffand Ms.Szeliga sold shares of Qwest's common stock in violation of
section 10(b)of the Exchange Act.
In March 2002,lead plaintiffsin the consolidated securities action filed a motion for leave to file a Second Amended Consolidated
Complaint that seeks to:add new claims;extend the putative class period so that it begins on April 19,2000 and ends on February 14,
2002;and add Lewis O.Wilks,a former Qwest officer,and others as defendants.In March 2002,the defendants filed oppositions to
plaintiffs'motion for leave to file a Second Amended Consolidated Complaint.The court has not ruled on the motion.
In March 2002,three putative class action suits were filed in federal district court in Colorado on behalfof all participants and
beneficiaries of the Qwest Savings and Investment Plan (the "Plan")since March 7,1999,and name as defendants Qwest,Qwest's
directors and the administrators and directors of the Plan.The suits,which are brought under the Employee Retirement Income
Security Act and seek restitution and other relief,allege that the defendants breached fiduciaryduties to the Plan members due to the
percentage of the investment of the Plan's assets in Qwest stock and purportedly failing to provideaccurate informationabout the
Company's fmancial condition and the risks associated with investing in Qwest's stock.No other action has taken place with respect to
these suits.
MmmaEDGAnpro ©2002.EDGAR Online,Inc.
In March 2002,the Denver regional office of the Securities and Exchange Commission ("SEC")requested that Qwest voluntarily
produce documents relating to (1)sales of optical assets (lRUs),particularly with respect to contemporaneous transactions,(2)sales of
equipment to companies from which Qwest then bought Internet services or to which it contributed equity financing,including sales to
KMC and Calpoint,and (3)changes in the production schedules and lives of some of the Company's directories.The Company intends
to fully respond to this request.Although the Company cannot predict what policies,practices or procedures,if any,might be subject
to any disagreement with the SEC,it does not believe that if the SEC were to require Qwest to restate earnings for prior periods
(including 1999,2000 or 2001)it would have a material effect on the Company's previously stated revenues or adjusted EBITDA (as
defined below)on an As Reported (as defined below)or a pro forma normalized basis.However,if such a restatement were required,it
may have a material effect on Qwest's reported net income or earnings per share,on an As Reported or pro forma normalized basis,for
1999 through 2001.You can find additional information about this matter in Note 15 to the consolidated financial statements.
The Company understands that the SEC has been focusing on pro forma reporting presentations by public companies.With respect to
the Company,the staff of the SEC has conducted an investigation concerning its earnings release for the fourth quarter and full year
2000 issued on January 24,2001.The release providedpro forma normalized earnings information that excluded certain nonrecurring
expense and income items resulting primarily from Qwest's acquisition of US WEST,Inc.("US WEST").The staff has decided to
recommend that the SEC authorize an action against Qwest that would allege Qwest should also have included in the earnings release a
statement of Qwest's GAAP earnings.The Company believes that an action by the SEC would be without merit.
ll
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 of2001.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The United States market for trading in Qwest common stock is the New York Stock Exchange.As of March 22,2002,the Company's
common stock was held by approximately 438,000 stockholders of record.
MARKET PRICE
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW DIVIDENDS (1)
2001
First quarter.............................$47.5000 $33.2500 $--
Second quarter.............................40.9000 29.8200 0.0500
Third quarter...........................31.1500 16.5000 --
Fourth quarter.................................18.9000 11.5100 --
2000
First quarter.........................$64.0000 $37.0000 $--
Second quarter............................54.2500 39.5000 --
Third quarter.......................57.8750 43.5000 --
Fourth quarter..........................51.4375 32.3750 --
(l)US WEST paid a dividendof $0.54 per share in 2000.Qwest paid a cash dividendof $0.05 per share on its common stock in
2001.The Company has made no decision with respect to the payment of any cash dividends on its common stock in 2002.
12
ITEM 6.SELECTED FINANCIAL DATA
Qwest's acquisition of US WEST (the "Merger")was effectiveJune 30,2000.Qwest accounted for the Merger as a reverse acquisition
under the purchase method of accounting,with US WEST being deemed the accounting acquiror and Qwest the acquired entity.The
2001 amounts reflect actual results of operations for the merged Qwest entity.The selected financial data (other than adjusted
EBlTDA)in the table below is presented on an as reported basis in accordance with GAAP (referred to as "As Reported").For the
year ended December 31,2000,the amounts reflect the results of operations for (i)US WEST from January 1,2000 through June 30,
2000 and (ii)the combined US WEST and pre-Merger Qwest entity from July 1,2000 through the end of the year.Amounts reflected
Murma EDGARpro ©2002.EDGAR Online,Inc.
below for the years ended December 31,.3,1998 and 1997 represent the consolidated re ..is of operations for US WEST only.
You can refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations"and the notes to the
consolidated financial statements for informationregarding matters that might cause the financial data presented herein not to be
indicative of Qwest's future fmancial condition or results of operations.
YEAR ENDED DECEMBER 31,
2001 2000 1999 1998 1997
(DOLLARS IN MILLIONS,EXCEPT PER SHARE AMOUNTS)Operating revenues...................$19,695 $16,610 $13,182 $12,395 $11,521Operatingexpenses...................18,875 14,787 9,845 9,346 8,745Operatingincome.....................820 1,823 3,337 3,049 2,776
(Loss)income before extraordinary
item and cumulative effect ofchangeinaccountingprinciple.....(3,958)(81)1,102 1,508 1,527
Net (loss)income(1).................$(4,023)$(81)$1,342 $1,508 $1,524
(Loss)earnings per share:(2)Basic..............................$(2.42)$(0.06)$1.54 $1.76 $1.83
Diluted............................(2.42)(0.06)1.52 1.75 1.79Weightedaveragecommonsharesoutstanding(thousands):(2)
Basic..............................1,661,133 1,272,088 872,309 854,967 834,831Diluted..........................1,661,133 1,272,088 880,753 862,581 849,497
Dividends per common share...........$0.05 $0.31 $1.36 $1.24 $1.24
Adjusted EBITDA(3)...................$7,353 $6,917 $5,704 $5,248 $4,939
Balance sheet data:Total assets......................$73,781 $73,501 $23,272 $18,407 $17,667
Total debt(4).......................25,003 19,066 13,071 9,919 5,715
Debt to total capital ratio..........40.55%31.58%91.24%92.93%56.69%
Other data:
Net cash provided by operations......$4,034 $3,681 $4,546 $3,927 $4,191
Net cash used in investingactivities........................(8,623)(4,794)(6,462)(2,769)(2,087)
Net cash provided by (used for)
financing activities...............4,692 1,189 1,945 (1,136)(2,157)Capital expenditures.................8,543 6,597 3,944 2,905 2,672
Amounts in footnote (1)are on an after-tax basis.Also,as described in footnote (2)below,all share and per share amounts for the
periods 1997 through 2000 assume the conversion of US WEST common stock into Qwest common stock.
(l)2001.2001 net loss includes a charge of $459 million ($0.28 per diluted share)for restructuring and other charges,a charge of
$3.048 billion ($1.83 per diluted share)for the write-downof the Company's investment in KPNQwest,a charge of $275 million
($0.17 per diluted share)for Merger-related costs,a charge of $136 million ($0.08 per diluted share)for a depreciation adjustment on
access lines returned to service,a charge of $151 million ($0.09 per diluted share)for investment write-downs,a charge of
13
$65 million ($0.04 per diluted share)for the early retirement of debt,a gain of $3l million ($0.02 per diluted share)for the sale of
rural exchanges,a gain on the sale of investments of $16 million ($0.01 per diluted share),a charge of $l3 million ($0.01 per diluted
share)for restructuring charges associated with an equity investment and a $4 million charge (no impact on diluted loss per share)for
the decline in market value of certain financial instruments.
2000.2000 net loss includes a charge of $1.096 billion ($0.86 per diluted share)for Merger-related costs,a charge of $560 million
($0.44 per diluted share)for the decline in the market value of certain financial instruments and a net gain of $l82 million ($0.14 per
diluted share)on the sales of investments.
1999.1999 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 marketable securities,a charge of $34 million ($0.04 per diluted share)on the decline in
the market value of derivativefinancial instruments and $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.
urara EDGARpro ©2002.EDGAR Online,Inc.
1998.1998 net income includes expenses of $68 million ($0.08 per diluted share)associated with the June 12,1998 separation of US
WEST's former parent company into two independent companies (the "Separation")and an asset impairment charge of $2l million
($0.02 per diluted share).
1997.1997 net income includes a $152 million regulatory charge ($0.18 per diluted share)related primarilyto 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 US
WEST's one-seventh interest in Bell Communications Research,Inc.,a gain of $48 million ($0.06 per diluted share)on the sales of
local telephone exchanges and an extraordinary charge of $3 million ($0.00 per diluted share)for the early extinguishment of debt.
(2)In connection with the Merger,each outstanding share of US 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 weighted-average common shares outstanding
assume the l-for-1.72932conversion ofUS WEST shares for Qwest shares for all periods presented.In addition,weighted-average
common shares outstanding also assume a one-for-one conversion of US WEST Communications Group ("Communications Group")
common shares outstanding into shares of US WEST as of the Separation date.The 1998 weighted-average common shares
outstanding include the issuance of approximately 28,786,000 shares of common stock attributable to the contribution to US WEST
by its former parent company of the businesses of the Communications Group and the domestic directories business of US WEST
Dex,Inc.
(3)Adjusted earnings before interest,taxes,depreciation and amortization ("adjusted EBITDA")does not include non-recurring and
non-operating items,which for the relevant periods includes restructuring charges,Merger-related and other charges,asset write-offs
and impairments,gains/losses on the sale of investments and fixed assets,gains/losses on sales of rural exchanges,changes in the
market values of investments,certain legal charges,Separation charges and certain regulatory rate refunds.The Company uses adjusted
EBITDA as a measure of its operating performance.The Company believes that adjusted EBITDA is important to investors in the
Company's debt and equity securities and to analysts that cover these securities because it is one measure of the income generated that
is available to service debt.Adjusted EBITDA does not represent cash flow for the periods presented and should not be considered as
an alternative to cash flows as a source of liquidity.Moreover,the items excluded from the calculation of adjusted EBITDA are
significant components in understanding and assessing the Company's financial performance Qwest's definitionof adjusted EBITDA
is not necessarily comparable with EBITDA (earnings before interest,taxes,depreciation and amortization)or adjusted EBITDA as
used by other companies or with similar concepts used in Qwest's debt instruments.Adjusted EBITDA is reported as a complement to
the financial results in accordance with GAAP and is presented to provideinvestors additional information concerning the Company's
operations.You can fmd a reconciliation of adjusted EBITDA to pretax income in Note 12 to the consolidated financial statements.
(4)Amounts include outstanding commercial paper borrowings of $3.165 billion,$2.106 billion,$1.265 billion,$951 million and $62
million for 2001,2000,1999,1998 and 1997,respectively,and exclude unconditional purchase obligations,operating leases,letters of
credit and guarantees.At December 31,2001,the amount of those unconditional purchase obligations,operating leases,letters of
credit and guarantees was approximately $6.5 billion.
14
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements set forthbelow under this caption constitute "forward-lookingstatements"within the meaning of the Private
Securities Litigation Reform Act of 1995.See "Special Note Regarding Forward-LookingStatements"at the end of this Item 7 for
additional factors relating to such statements as well as for a discussion of certain risk factors applicable to Qwest's business,financial
condition and results of operations.
RESULTS OF OPERATIONS
OVERVIEW
As a result of the consummation of the Merger on June 30,2000,the discussion and analysis of the results of operations for the three
years in the period ended December 31,2001 addresses the transition that is taking place.This transition spans the period from July
1999,when the agreement to merge was reached,through 2001,when the integration was substantially complete.The Company
anticipates the transition will be complete with the culmination of the combination of the operations in the second half of 2002,when
the Company expects to re-enter the interLATA long-distance business within its local service area.
The analysis is organized in a way that provides the informationrequired,while highlightingthe information that the Company
believes identifies the relevant trends going forward.In addition to the discussion of the historical information that tracks the current
reporting presentation of the Qwest fmancial statements,an overviewof the segment results and a pro forma presentation is provided
that tracks the way the Company reports its financial results to the investment community.Unless otherwise indicated,all information
umsm EDGARpro ©2002.EDGAR Online,Inc.
is presented on an "As Reported"basis in scordance with GAAP.
Qwest accounted forthe Merger as a reverse acquisition under the purchase method of accounting.For accounting purposes,US
WEST was deemed the accounting acquirer and its historical financial statements have been carried forwardas those of the combined
company.In connection with the Merger,each outstanding share of US WEST common stock was converted into the right to receive
1.72932 shares of Qwest common stock (and cash in lieu of fractional shares).In addition,all outstanding US 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.
Informationpresented for 1999 and the first six months of 2000 represents the local telecommunications services,wireless services and
directory services of US WEST,primarily in the local service area.US WEST was organized in this period and operated in four
segments:(1)retail services,(2)wholesale services,(3)network services and (4)directory services.At the time of the Merger,pre-
Merger Qwest was transitioning from operating in two segments,communications services and construction services,to three segments
based on its customers:business,consumer and wholesale.Informationfor the last six months of 2000 and all of 200l represents the
combined US WEST and pre-MergerQwest businesses.As a result of the Merger and the time required to combine reporting systems,
the Company retained the organization and reporting segment structure of US WEST for the transition period through the year ended
December 31,2001.
Since the systems and operations have been integrated,Qwest has organized,and will report going forward,on the basis of the
Company's customers,products and services.As a result,the Company intends to change its segments beginning in 2002 to the
following:(l)business services,(2)consumer services,(3)wholesale services,(4)directory services and (5)network services.The
new segments will reflect the operational management of the Company that goes forwardfollowing the completion of the transition
described above.
15
2001 COMPARED WITH 2000 AS REPORTED RESULTS
The Merger significantly impacts the comparison of the results of operations between 2001 atid 2000.The analysis that follows is
based on the As Reported results and is organized by statement of operations line item.
YEAR ENDED
DECEMBER 31,
2001 2000 INCREASE (DECREASE)
(DOLLARS IN MILLIONS,EXCEPT PER SHARE AMOUNTS)
Operating revenues:Commercial services.........................$11,118 $8,436 $2,682 31.8%
Consumer services...........................5,900 5,360 540 10.1%
Directory services..........................1,604 1,530 74 4.8%
Switched access services....................1,073 1,284 (211)(16.4%)
Total operating revenues ............19,695 16,610 3,085 18 .6%
Operating expenses:
Cost of sales.............................7,111 4,923 2,188 44.4%
Selling,general and administrative.........5,231 4,770 461 9.7%
Depreciation................................3,994 2,706 1,288 47.6%
Goodwill and other intangible
amortization...........................1,341 636 705 110.8%
Restructuring,Merger-related and othercharges................................1,198 1,752 (554)(31.6%)
Total operating expenses............18,875 14,787 4,088 27.6%
Operating income..................)(55.0%)
Other expense (income):
Interest expense --net.....................1,442 1,041 401 38.5%
Investment write-downs......................3,294 447 2,847 636.9%
Decline in market value of financialinstruments.............................7 470 (463)(98.5%)
(Gain)loss on sales of rural exchanges and
fixed assets.............................(51)28 (79)(282.1%)
Gain on sale of investments.................(26)(327)301 92.0%
Other expense --net........................112 Š8 74 194.7%
©2002.EDGAR Online,Inc.
Total other expense net..........4,778 1,69 3,081 181.6%
(Loss)income before income taxes andextraordinaryitem..........................(3,958)126 (4,084)(3,241.3%)
Provision for income taxes....................--207 (207)(100.0%)
Loss before extraordinary item................(3,958)(81)(3,877)4,786.4%
Extraordinary item --early retirement of
debt,net of tax.........................(65)--(65)
Net loss...................$(4,023)$(81)$(3,942)4,866.7%
Diluted loss per share...................$(2.42)$(0.06)$(2.36)3,933.3%
Non-GAAP financial information:Adjusted EBITDA(1)...................$7,353 $6,917 $436 6.3%
(1)See footnote (3)to Selected Financial Data for the definitionof adjusted EBITDA and for a discussion of certain limitations in
considering this measure of the Company's operating performance.
16
REVENUES
Total revenues.The Company's revenues are generated from a variety of services and products.Commercial and consumer services
revenues are derived principally from voice services such as basic monthly fees for telephone service,fees for calling services such as
voice messaging and Caller ID,special access revenues from end-users buying local exchange capacity to support their private
networks and inter-and intraLATA long-distance services.Also included in commercial and consumer revenues are retail and
wholesale services such as Internet protocol ("IP")(which includes,among other things,digital subscriber line ("DSL"),dedicated
Internet access ("DIA"),virtual privatenetworks ("VPN"),dial Internet access,professional services and Web hosting),other data
services (including,among other things,traditional privatelines,frame relay,integrated services digital network ("ISDN")and
asynchronous transfer mode ("ATM")),optical capacity asset sales and wireless products and services.Directory services revenues are
generated primarily from selling advertising in the Company's published directories.Switched access services revenues are 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 revenues for 2001 grew by 18.6%,as compared to 2000,primarily due to the impact ofthe Merger.As previously disclosed,the
2001 results include the results of a full twelve months of pre-MergerQwest's business,compared to six months for 2000.In addition,
revenues increased due to greater commercial services revenues drivenby IP and data services and increased optical capacity asset
sales.Volume increases in traditional privatelines,frame relay,DIA,VPN,ISDN,Web hosting and wireless products and services
also contributed to the growth.Data and IP services revenues represented 27%of total revenues for 2001,up from 21%in 2000.The
data and IP services revenues grew by almost 54%,to $5.403 billion in 200l from $3.513 billion in 2000.In addition,DSL customers
grew by almost 74%over 2000 to 448,000.The Company expects the data and IP services businesses to continue to become a greater
portionof overall Company revenues in the future.The increase in revenue was offset by reductions in both commercial and consumer
local voice revenues and intraLATA toll revenues in Qwest's local service area as a result of competition and the current economic
conditions.Total access lines declined by approximately 300,000 or 2%during 2001.
The Company's revenue growth has been and may continue to be negatively affected by the downturn in the economy withinthe
Company's local service area.Additionally,revenue growth will be impacted by the fundamental shift in demand for optical capacity
asset sales as customers shift away from network asset purchases to arrangements satisfying their short-term needs.The Company does
not expect to enter into optical capacity asset sales in 2002 that would result in up-frontrevenue recognition.Also,the Company's
CyberCenters that are currently operational may continue to experience lower than expected utilization as long as the prevailing
economic conditions persist.
Commercial services revenues.Commercial services revenues are derived from sales of IP,data,voice and wireless products and
services providedto wholesale,large business and small business customers.The increase in commercial services revenues for 2001 as
compared to 2000 was $2.682 billion or 31.8%,and was primarilyattributable to the Merger and an increase in optical capacity asset
sales.Approximately $2.0 billion of the increase is attributable to including a full twelvemonths of pre-Merger Qwest's business in
2001,compared to six months in 2000.As part of this Merger impact,during 200l Qwest recognized $1.013 billion in revenues from
optical capacity asset sales versus $468 million in 2000,an increase of ll 6%.These arrangements are typically structured as
indefeasible rights of use,or IRUs.You can find a more complete discussion of the accounting treatment of revenue recognition for
«mmm EDGARpro ©2002.EDGAR Online,Inc.
these optical capacity asset sales in the di-ssion of "Significant Accounting Policies"belo..m Management's Discussion and
Analysis of Financial Conditionand Results of Operations.Additional growth in IP (DSL,DIA,VPN and Internet dial access),Web
hosting and data services also contributed to the increase.
The increase in commercial services revenues was partially offset by a decrease in local voice service revenues sold to businesses as a
result of the slowing economy,competitive losses and technology displacement.Access lines used by small business customers
decreased by 147,000 in 200l over 2000.This reflects the fact that businesses were converting their multiple single access lines to a
lower number of high-speed,high-capacity lines allowingfor the transport of multiple simultaneous telephone calls and transmission of
data at
17
higher rates of speed.On a voice-grade equivalent basis,however,total business access lines grew 31.9%when comparing 2001 to
2000.A voice-grade equivalent is the amount of capacity equal to one telephone call.A voice-grade equivalent basis is the outcome of
measuring all residential and business access lines as if they were converted to single access lines that have the ability to transmit and
receive only one voice transmission at a time.
Consumer services revenues.Consumer services revenues are derived from sales of IP,data,voice and wireless products and services
to the consumer market.The increase in consumer services revenues in 200l over 2000 of $540 million or over 10%was principally
attributable to the impact of the Merger.Approximately $300 million of the increase is attributable to including a full twelve months of
pre-Merger Qwest's business in 2001,compared to six months in 2000.In addition to the Merger,consumer services revenues also
increased due to sales of wireless products and data services.Wireless products and services revenue in 2001 increased by 51%from
$436 million in 2000 to $660 million in 2001.Although average revenue per wireless user decreased from $56.00 in 2000 to $54.00 in
2001,the Company's penetration percentage (Qwest's wireless subscribers dividedby the total number of subscribers in the points-of-
presence the Company covers)grew in the markets it serves from 4.89%in 2000 to 5.73%in 2001.The number of net new wireless
subscribers in 2002,however,is expected to be impacted by the current economic conditions that may slow the rate of growth in
subscribers and wireless revenues.Other factors that contributed to the growth in consumer services revenue were improvedDSL
service revenues and sales of bundled packages such as CustomChoice(SM)and Total Package(SM)(which include the phone line,
calling features and/or wireless services and DSL)to Qwest's consumer customers.The Company's bundled products and services are
sold at prices lower than they could be sold individuallyin exchange for longer-term customer commitments and higher overallper
customer revenue.Partially offsetting these increases were declines in local service revenues from decreasing consumer access lines
and intraLATA toll revenues in Qwest's local service area.These declines were the result of the slowing economy,competitive losses
and technology displacement (for example,where a wireless phone replaces the need for a land-based telephone line).
Directory services revenues.The increase in directory services revenue for 2001 compared to 2000 was $74 million or 4.8%.Of this
increase,$60 million was a result of an increase in advertising rates and higher sales of premium advertisements.In addition,$14
million of the increase was the result of netting a $42 million net increase resulting from changes in the period covered by certain
directories (usually from 12 months to 13 months)against a $28 million net decrease resulting from a directory that was published
once in 2001 as compared to twice in 2000.The period covered by this directory was shortened from 12 months to 11 months (for
2000 only)and the directory was published in both January 2000 and December 2000 (instead of January 2001).
Switched access services revenues.Switched access services revenues are derived from inter-and intrastate switched access from
IXCs.The decrease in switched access services revenues of 16.4%or $211 million for 2001 as compared to 2000 was primarily
attributable to federal access reform that reduced the rates Qwest was able to collect for switched access services.This decrease also
reflects competitive losses that have resulted in a reduction in billable access minutes of use.These decreases were partially offset by
increased interstate subscriber line charges ("SLCs").The Company believes revenues from switched access services will continue to
be negatively impacted by competition and federal and state access reform.Qwest believes that access reform measures will continue
to include increases in other charges,such as SLCs,to partially offset access charge reductions.
EXPENSES
Cost of sales.Cost of sales includes the following costs directly attributable to a product or service:salaries and wages,benefits,
materials and supplies,contracted engineering services,network access costs,computer systems support,and the cost of products sold.
Of the $2.2 billion increase in cost of sales in 2001 over 2000,approximately $l.3 billion is attributable to including a full twelve
months of pre-Merger Qwest's results in 2001,compared to six months in 2000.
18
Cost of sales as a percent of revenue was 36.1%for 2001 and 29.6%for 2000.The increase in cost of sales as a percent of revenue was
principally due to a shift in the product mix to growth products and services with higher initial fixed costs.
The introduction of new product platforms,including Qwest's Internet dial and hosting infrastructure,increased Qwest's cost of sales
without corresponding increases in revenues,as the networks were completed during 2001.In addition,the increase in cost of sales as
mma EDGARpm ©2002.EDGAR Online,Inc.
a percent of revenue was partly attributabo to the greater optical capacity asset sales in 200,versus 2000.The average gross margin
on optical capacity asset sales declined from approximately 50%in 2000 to approximately 48%in 2001 as a result of lower prices.
Operational efficiencies were realized through the consolidation of core operational units that providecommon services and by
leveraging Qwest's purchasing power throughout the Company.Further cost reductions are anticipated in 2002 and thereafter as the
Company's restructuring plan is implemented and Qwest focuses on reducing its facilities costs by negotiating lower rates and by
migrating Qwest services carried on other telecommunications services providers networks onto Qwest's facilities.
Some of these possible savings will be offset by increases in wages and pension expense as a result of the changes associated with the
union contract agreement reached in 2001.You can find additional information regarding employee benefits in Note 7 to the
consolidated financial statements.
Selling,general and administrative ("SG&A")expenses.SG&A expenses include salaries and wages not directly attributable to a
product or service,benefits,sales commissions,bad debt charges,rent for administrative space,advertising,professional service fees,
computer systems support and taxes other than income taxes.
SG&A increased $461 million to $5.231 billion in 2001 from $4.770 billion in 2000.SG&A increased $570 million due to the
inclusion of a full twelve months of pre-Merger Qwest's business in 2001,compared to six months in 2000.Other increases in three
areas also contributed to the overall increase in SG&A.The Company increased its bad debt expense to cover slow-paying and non-
paying customers.Professional fees for Qwest grew during 2001 versus 2000 as a result of the Company's efforts to re-enter the
interLATA long-distance market and the outsourcing of certain functions such as call centers.The Company saw an increase in rent
expense associated primarilywith the opening of seven CyberCenters during 2000.
Partially offsetting the increase in SG&A was an increase in the pension credit (net of other post-retirement benefits)and lower taxes
(other than income taxes).Further offsetting the increase was a reduction in advertising and lower commissions due to changes in the
Company's commission compensation plan.The Company reduced the number of employees by 6,500 during 2001,a portionof which
also impacts cost of sales.
For 2001,results include a pension credit,net of post-retirement expenses,of $343 million ($2l0 million after-tax or $0.13 per diluted
share)compared to $299 million ($182 million after-tax or $0.l4 per diluted share)during 2000.The net pension credit is a function of
the amount of pensioli and post-retirement benefits earned,interest on projected benefit obligations,amortization of costs and credits
from prior benefit changes and the expected return on the assets held in the various plans.The 2000 net pension credit excludes the
effect of a $106 million curtailment gain.The curtailment gain is the benefit associated with the post-Merger termination of retiree
medical benefits for all former US WEST employees who did not meet certain eligibility requirements.The pension credit,net of
post-retirement expenses,was allocated partially to cost of services and the remaining balance to SG&A.The interest component of the
net pension charge accounted for the increase in the net pension credit.The interest cost component decreased $46 million or 4.4%
between periods because of a decrease in interest associated with Moody's AA-rated Corporate Bonds.The Company expects that its
2002 pension credit will be lower than in 200l due to the volatile equity market conditions of 2001 and 2000 and the scheduled
increase in pension benefits required under the union contract.Qwest also expects its post-retirement expenses to increase as a result of
rising health care rates.As a result,Qwest expects its pension credit,net of post-retirement expenses for 2002,to be approximately
$300 million less than in 2001.You can find additional informationon the Company's pension and post-retirement plans in Note 7 to
the consolidated financial statements.Also,for a discussion of the accounting treatment and assumptions
19
regarding pension and post-retirement benefits,see the discussion of "Significant Accounting Policies"below.Absent the net pension
credit,operating income would have been $477 million and $1.524 billion in 2001 and 2000,respectively.
Depreciation expense.Depreciation expense is associated with Qwest's property,plant,equipment,capital leases,capitalized software
and certain intangible assets.The increase in depreciation expense for 2001 compared to 2000 was primarilyattributable to higher
overallproperty,plant and equipment balances resulting from the Company's capital spending program,as well as the impact of the
Merger.In addition,there was an increase in depreciation related to a "catch-up"charge for access lines returned to service as
described below.Qwest continued to invest in its network and service platforms to support re-entry into the long-distance business in
the Company's local service area and to make ongoing service improvements.
During 1999 and 2000,US WEST agreed to sell approximately 800,000 access lines to third-party telecommunications service
providers,including approximately 570,000 access lines to Citizens Communications Company ("Citizens")in nine states.Because
these access lines were classified as "held for sale,"US WEST discontinued recognizing depreciation expense on these assets and
recorded them at the lower of their cost or fair value less estimated cost to sell.
On July 20,2001,Qwest terminated its agreement with Citizens under which the majority of the remaining access lines in eight states
were to have been sold and ceased actively marketing the remaining lines.As a result,the remaining access lines in eight states were
Murma EDGARpro ©2002.EDGAR Online,Inc.
reclassified as being "held for use"as of we 30,2001.The access lines were measured ino..adually at the lower of their (a)carrying
value before they were classified as held for sale,adjusted for any depreciation expense or impairment losses that would have been
recognized had the assets been continuously classified as held for use,or (b)their estimated fair value at June 30,2001.The required
adjustments to the carrying value ofthe individual access lines were included in operating income for 2001.This resulted in a charge
to depreciation of $222 million to "catch-up"the depreciation on these access lines for the period they were held for sale.
Goodwill and other intangible amortization expense.For 2001,amortization expense increased by $705 million over amortization
expense in 2000.The increase was primarily associated with the Merger including the final allocation of the Merger purchase price.
You can find more information regarding the final purchase price allocation in Note l to the consolidated financial statements.The
final purchase price allocation to identifiableintangible assets and goodwillwas $4.1 billion and $30.8 billion,respectively.
Additionally,the carrying value of the Company's investment in KPNQwest was increased to $4.8 billion which created an excess
basis of $4.2 billion over Qwest's proportionate share of KPNQwest's net assets.The excess basis,as reduced from time to time if
necessary to reflect other than temporary declines in market value,will be amortized over a ten-year period.In the second quarter of
2001,Qwest's investment in KPNQwest was reduced by $3.048 billion due to an other than temporary decline in market value.You
can find information regarding the factors considered in the write-down in the discussion regarding "Investments"in "Significant
Accounting Policies"below and in Note 3 to the consolidated financial statements.To comply with Statement of Financial Accounting
Standards ("SFAS")No.142,"Goodwill and Other Intangible Assets,"the Company will cease amortization of its goodwilland certain
other intangibles,each with indefinite lives,on January 1,2002.This should result in an annual decrease in amortization expense of
approximately $900 million in 2002 and the next several years.You can find more informationregarding SFAS No.142 and its impact
on financial results by referringto the discussion of "Significant Accounting Policies"and "New Accounting Standards"below.
Restructuring,Merger-related and other charges.Qwest incurred restructuring,Merger-related and other charges totaling $1.198
billion in 2001 and Merger-related and other charges of $1.752 billion in 2000.During the fourth quarter of2001,the Company
approved a restructuring plan to further reduce its costs and as a result,the data below for restructuring and other charges reflect costs
recognized in that quarter.As the Company incurred substantially all of the Merger-related charges by June 30,2001,the 2001 data
below for
20
Merger-related and other charges reflects costs incurred through June 30,2001,subject to the adjustments described below.A
breakdown of these costs is as follows:
YEAR ENDED DECEMBER 31,
2001 2000
RESTRUCTURING MERGER-RELATED MERGER-RELATED
&OTHER &OTHER &OTHER
CHARGES CHARGES CHARGES
(DOL NM ONS
Contractual settlements and legalcontingencies..............................$129 $115 $734
Severance and employee-related charges........332 187 572
CyberCenter sublease losses and leasehold
write-offs..................................165
Other charges.................................123 147 446
Total restructuring,Merger-related and othercharges....................................$749 $449 $1,752
Restructuring and other charges.During the fourth quarter of 2001,the Company approved a plan to reduce current employee levels in
addition to the Merger-related reductions,consolidate and sublease facilities and abandon certain capital projects,terminate certain
operating leases and recognize certain asset impairments.The Company recorded a restructuring charge of $749 million to cover the
costs associated with these actions as more fully described below.
The Company occupies administrative and network operations buildings under operating leases with varyingterms.Due to the
reduction in employees and the consolidation of operations,the Company expects to terminate 40 operating lease agreements across
the country within the next 12 months.The Company recorded a charge of $129 million related to the termination of these operating
lease agreements.
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In order to streamline the business and coolidate operations to meet lower customer dema.-resulting from the current economic
conditions,the Company identified a net reduction of 11,000 employees and contractors in various functional areas,in addition to
previous reductions in connection with the Merger.The severance charge of $332 million relates to involuntaryseparation costs for
approximately 10,000 employees.The Company expects the remainder of the reduction to be achieved through attrition.As of
December 31,2001,over 4,000 employees had been involuntarilyseparated by the Company and cash severance payments totaling
$32 million had been made relating to these separations.The Company expects the remaining employee separations to be completed
by June 30,2002.
The Company operates 16 Web hosting centers ("CyberCenters")across the country that are subject to various operating leases.Qwest
also has several CyberCenters currently under construction that would require additional capital outlays before they are functional.
Finally,the Company has some CyberCenter facilities under lease where no construction work has begun.As a result of the slowing
economy and the current excess capacity for Web hosting,the Company has suspended its plans to build CyberCenters where
construction had not begun and has halted further construction on those currently under construction.The Company expects to
sublease the majority of the non-operational CyberCenters within the next 12 months at rates less than Qwest's lease rates for the
facilities.The Company recorded a charge of $l12 million for expected sublease losses.In addition,the Company wrote-off$53
million in leasehold improvements at CyberCenters that were partially complete.
Other restructuring charges primarily include asset impairment charges.Asset impairment charges of $51 million relate mainly to the
assets of two development projects.Because both projects were incomplete and abandoned,the fair value of these assets was
determined to be zero.These assets were operated by the Company's network services segment and represented certain equipment and
other assets.The Company also reviewed all internal software projects in process and determined that certain projects with a carrying
value of $68 million would no longer be pursued.Because the projects were incomplete and abandoned,the fair value of such software
was determined to be zero.The abandoned projects included various billing and other system enhancements.
21
Merger-related and other charges.Contractual settlements and legal contingencies for 2001 and 2000 of $115 million and $734
million,respectively,were 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,Qwest reduced its employee and contractor levels by over 14,000 people primarilyby eliminating
duplicate functions.These employees were terminated prior to December 31,2001.Included in the 2001 and 2000 severance and
employee-related charges of $l87 million and $572 million,respectively,were costs associated with payments to employees who
involuntarilyleft the business since the consummation of the Mergerand,for 2000,$102 million in payments that were subject to the
successful completion of the Merger.
Other charges were $147 million and $446 million for 2001 and 2000,respectively.The other charges in 2001 were comprised of $33
million related to abandoned software,$l9 million of asset impairment charges and $95 million of professional fees,re-branding costs
and other costs associated with the Merger.The other charges in 2000 were comprised of a $226 million asset impairment charge for
access lines,$114 million relating to abandoned software,a $106 million post-retirement benefit plan curtailment gain and $212
million of professional fees,re-branding costs and other costs associated with the Merger.The Company considered only those costs
that were incremental and directly related to the Merger to be Merger-related.
After the Merger,the Company evaluated its assets for potential impairment and concluded that the fair value of some of the assets was
below their carrying value.In most cases,the decline in fair value was based upon the Company's differentintent as to the use of those
assets or completion of projects after the Merger.The $l9 million impairment charge in 200l was primarilyassociated with certain
inventoryand equipment acquired before the Merger.Qwest concluded the fair value of these items to be minimal and,therefor,the
Company recorded a charge for the full carrying value of these assets.The Company also evaluated for impairment its dedicated
special-purpose access lines that it leases to CLECs.Given the industry conditions and regulatory changes affecting CLECs in 2000,
and given the fact that these access lines have no alternative use and cannot be sold or re-deployed,the Company concluded that the
net future cash flows from the assets was negative and that sufficient cash flow would not be generated to recover the carrying value of
those assets.Therefore,the Company concluded that the fair value of those assets was minimal and took a $226 million charge in
2000.These assets are operated by the Company's wholesale services segment.
Followingthe Merger,the Company reviewed all internal software projects in process and determined that certain projects that had
been initiated by US WEST should no longer be pursued.Because the projects were incomplete and abandoned,the fair value of such
software was determined to be zero.Capitalized software costs of $33 million and $114 million were written offin 2001 and 2000,
respectively.The abandoned projects included a significant billing system replacement and a customer database system.
Offsetting the 2000 Merger-related costs was a $l06 million post-retirement benefit plan curtailment gain.This gain resulted from the
post-Merger termination of retiree medical benefits for all former US 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.
Emrama EDGARpro ©2002.EDGAR Online,Inc.
The 2001 Merger-related and other charges of $449 million were net of $164 million in reversals of previously recorded Merger
accruals.The reversals were recorded in the fourth quarter of2001 and resulted from favorabledevelopments in the underlying
matters.
As those matters identified as legal contingencies associated with contract settlements and legal contingencies are resolved,any
amounts will be paid at that time.Any differences between amounts accrued and actual payments will be reflected in results of
operations as an adjustment to Merger-related and other charges.
Total other expense --net.Total other expense --net includes interest expense,interest income and other non-operating items such as
investment write-downs,gains and losses on the sales of investments and fixed assets,declines in derivative instrument market values
and the Company's share of income or loss for investments accounted for under the equity method of accounting.Interest expense was
$1.442 billion for 2001,compared to $1.041 billion for 2000.The increase in interest expense was primarilyattributable to
22
increased borrowings required to fund the capital improvements to the Company's network and the repurchase of shares from
BellSouth Corporation ("BellSouth").Also contributing to the increase was the additional impact of the Merger on interest expense.
Partially offsetting the increase in interest expense was an increase in capitalized interest from $104 million in 2000 to $187 million in
2001.The increase in capitalized interest was due to an increase in the Company's capital expenditures.Because of the anticipated
reduction in construction projects as a result of the suspension in the Company's plans to complete additional CyberCenters and the
completion of the build out of the Company's network,Qwest anticipates a reduction in capitalized interest in 2002.
Qwest followsa process of reviewingits portfolio of equity securities on a quarterly basis.The Company evaluates for other than
temporary declines in value when the carrying value of an investment exceeds its fair value.You can find a discussion of the factors
the Company uses to determine the fair value of its equity investments in "Significant Accounting Policies"below and in Note 2 to the
consolidated financial statements.During 2001,Qwest recorded a $3.048 billion write-down of its investment in KPNQwest.In
addition,during 2001,the Company recorded $246 million in other than temporary declines on other equity investments.The $3.294
billion in write-downs during 200l represent non-cash charges against earnings.
The Company currently owns approximately 214 million shares of KPNQwest's common stock,which are valued at $6.10 per share on
the Company's books at December 31,2001.At December 3l,2001,the closing price ofKPNQwest'scommon stock was $7.15.
Subsequent to December 31,2001,the stock price of KPNQwest's common stock declined below its carrying value and on March 28,
2002,the closing price of KPNQwest's common stock was $3.30.In accordance with the Company's policy to reviewthe carrying
value of marketable securities on a quarterly basis for other than temporary declines in value,Qwest will assess the factors it uses to
determine fair value of the KPNQwest common stock,including the difficult financial condition and prospects of KPNQwest and the
rest of the European telecommunications industry,the severity of the decline of the stock price and the near term potential for stock
price recovery,in determining the timing and amount of a furtherwrite-down,which Qwest believes is likely and believes may be
significant in amount.
In late 1999,US WEST incurred a $367 million loss on the sale of 24 million shares of Global Crossing Ltd.("Global Crossing")
common stock.In connection with that sale,US WEST entered into an equity return swap that expired in 2001.The swap was
reflected at market value in the accompanying consolidated financial statements.The market value of the swap declined by $7 million
and $470 million in 2001 and 2000,respectively.The Company also recorded a loss of $447 million in the second quarter of 2000,
when it determined the decline in the value of its remaining investment in Global Crossing common stock was other than temporary.
The Company disposed of its remaining investment in Global Crossing common stock in the third quarter of 2000,resulting in a gain
of $50 million.This gain was included in the gains on sales of equity investments below.
During 2001,the Company completed a sale of approximately 41,000 access lines in Utah and Arizona resulting in proceeds of $94
million and a gain of $51 million.In 2000,Qwest also completed the sale of approximately 20,000 access lines in North Dakota and
South Dakota resulting in proceeds of $l9 million and a gain of $11 million.Qwest recorded net gains of $26 million and $327 million
from warrants and sales of equity investments in 2001 and 2000,respectively.Other expense --net of $112 million and $38 million for
2001 and 2000,respectively,consisted primarily of the Company's share of losses from investments accounted for under the equity
method.In 2001,Qwest recorded a $22 million charge representing its share of KPNQwest's restructuring costs.Finally,in 2000,the
Company recorded a net loss on the sale of fixed assets of $39 million.
Provision for income taxes.The effectivetax rates for 2001 and 2000 were affected by the non-deductible goodwill amortization,
KPNQwest excess basis amortization and foreign losses associated with the Company's investment in KPNQwest.In addition,the
2001 tax rate was affected by the non-deductible KPNQwest investment write-down.Excluding the effect of these items,the effective
tax rates for 2001 and 2000 were 37.7%and 39.4%,respectively.The decrease in 2001 from the 2000 effective tax rate resulted
primarily from permanent differences that were a greater percentage of the Company's pre-tax loss in 2001 as compared to its pre-tax
income in 2000.These permanent differences represent items whose accounting
taxara EDGARpro ©2002.EDGAR Online,Inc.
23
treatment and tax treatment will never be the same (such as an accounting expense that is not deductible for tax purposes).
Extraordinary item --early retirement of debt.In March 2001,Qwest completed a tender offerto buy back certain outstanding debt.In
the tender offer,the Company repurchased approximately $995 million in principal ($l.2 billion in face value)of outstanding debt.As
a result of the repurchase,Qwest incurred a pre-tax charge of $106 million ($65 million after tax)in premium payments.The tender
offer was to retire the bonds because of their high coupon rates and to reduce interest cost to the Company.
NET LOSS
The Company's net loss increased from $81 million in 2000 to $4.023 billion in 2001 principallydue to the write-down of Qwest's
investment in KPNQwest.Other contributing factors were the restructuring charges,depreciation charge to return access lines to
service,higher depreciation driven by the continued investment in the Company's network and an increase in interest expense.The
increased loss was partially offset by a reversal of certain Merger-related costs in 2001.
Diluted losses per share for 2001 and 2000 were $2.42 and $0.06,respectively.The increase in diluted loss per share for 2001 as
compared to 2000 was primarilythe result of the matters described above.The diluted loss per share for 2001 was affected by the
repurchases ofQwest'scommon stock from BellSouth that more than offset the increase in shares outstanding at December 31,2001.
ADJUSTED EBITDA
The Company's adjusted EBITDA increased from $6.9 billion in 2000 to $7.3 billion in 2001 due primarily to the Merger and the
other factors described above under Revenues,Cost of Sales and SG&A expenses.However,adjusted EBITDA declined to 37.3%of
revenues in 2001 from 41.6%in 2000.The decline in adjusted EBITDA as a percentage of revenue resulted mainly from increased
costs related to the introduction of new product platforms (includingdial-up and hosting infrastructure),long-distance re-entry and
shifts in product mix.While the introduction of these product platforms impact margins in the near term,they position the Company
well for revenue growth.See footnote (3)to Selected Financial Data for the definitionof adjusted EBITDA and for a discussion of
certain limitations in considering this measure of the Company's operating performance.
The Company does not view adjusted EBlTDA as an alternative measure of cash flows.Although reported trends in adjusted EBlTDA
are generally consistent with trends in the Company's cash flows,adjusted EBITDA trends exclude cash flows associated with changes
in workingcapital and capital expenditures.You can find additional informationconcerning the Company's cash flows in "Liquidity
and Capital Resources"below.
24
2001 COMPARED WITH 2000 AS REPORTED SEGMENT RESULTS
Set forth below is revenue,operating expenses and adjusted EBITDA informationfor the years ended December 31,2001 and 2000
for the four segments utilized through 2001.Informationfor 2000 has been conformed for certain reclassifications among the segments
made in 2001.You can find more informationon the segments in Note 12 to the consolidated financial statements.
The Merger significantly impacts the comparison ofthe segment results between 2001 and 2000.
YEAR ENDED DECEMBER31,
2001 %OF TOTAL 2000 %OF TOTAL INCREASE/(DECREASE)
(DOLLARS IN MILLIONS)Operating revenues:
Retail services...................$14,941 75.9%$11,837 71.3%$3,104 26.2%
Wholesale services................3,003 15.2%3,083 18.6%(80)(2.6%)
Network services..................110 0.6%132 0.8%(22)(16.7%)
Directory services................1,604 8.1%1,530 9.2%74 4.8%
Other.............................37 0.2%28 0.1%9 32.1%
Total operating
revenues................$19,695 100.0%$16,610 100.0%$3,085 18.6%
Operating expenses:(1)Retail services...................$3,506 28.4%$2,632 27.2%$874 33.2%
Wholesale services................525 4.3%401 4.1%124 30.9%
Network services..................6,914 56.0%4,701 48.5%2,213 47.1%
Directory services................533 4.3%571 5.9%(38)(6.7%)
Other.............................864 7.0%1,388 14.3%(524)(37.8%)
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Total operatingexpenses................$12,342 100.0%$9,693 100.0%$2,649 27.3%
Adjusted EBITDA:(2)Retail services...................$11,435 155.5%$9,205 133.1%$2,230 24.2%
Wholesale services................2,478 33.7%2,682 38.8%(204)(7.6%)
Network services..................(6,804)(92.5%)(4,569)(66.1%)(2,235)(48.9%)Directory services................1,071 14.5%959 13.9%112 11.7%Other.............................(827)(11.2%)(1,360)(19.7%)533 39.2%
Total adjusted EBITDA.....$7,353 100.0%$6,917 100.0%$436 6.3%
(1)Includes only cost of sales and SG&A.
(2)See footnote (3)to Selected Financial Data for the definition of adjusted EBITDA and for a discussion of certain limitations in
considering this measure of the Company's operating performance.
SEGMENT REVENUES
Retail services.Retail services revenues for 2001 grew by $3.104 billion or 26.2%over 2000 primarily due to the inclusion of the full
twelve months of pre-MergerQwest's business in 2001,compared to six months in 2000.Contributing to the increase in retail services
was the impact of additional optical capacity asset sales.In addition,revenues increased due to greater commercial services revenues
from data and IP services.Volume increases in traditional private lines,frame relay,DIA,VPN,ISDN,Web hosting and wireless
products and services also contributed to the growth.In addition,DSL customers grew by almost 74%over 2000 to 448,000.The
increase in revenue was offset by reductions in both commercial and consumer local voice revenues and intraLATA toll revenues in
Qwest's local service area as a result of competition and the
25
current economic conditions.Total access lines,which is a customer's local exchange telephone line,declined by approximately
300,000 or 2%during 2001.
Wholesale services.The decrease in wholesale services revenues of $80 million or 2.6%in 2001 as compared to 2000,was primarily
attributable to federal access reform that reduced the rates Qwest was able to collect for switched access services.This decline also
reflects the impacts of increased competition which has resulted in a reduction in billable access minutes of use and a reduction in
prices.These decreases were partially offset by increased interstate SLCs.
Network services.Network services revenues declined by $22 million or 16.7%in 2001 as compared to 2000 principally because of
lower equipment sales in 2001 versus 2000.
Directory services.The increase in directory services revenue for 200l compared to 2000 was $74 million or 4.8%.Of this increase,
$60 million was a result of an increase in advertising rates and higher sales of premium advertisements.In addition,$14 million of the
increase was the result of netting a $42 million net increase resulting from changes in the period covered by certain directories (usually
from l2 months to 13 months)against a $28 million net decrease resulting from a directory that was published once in 2001 as
compared to twice in 2000.The period covered by this directory was shortened from 12 months to ll months (for 2000 only)and the
directory was published in both January 2000 and December 2000 (instead of January 2001).
SEGMENT OPERATING EXPENSES
Since the Company does not allocate all corporate expenses to the segments,a discussion of segment expenses may not be a complete
discussion of expenses related to the respective segment revenues.
Segment operating expenses for the retail services segment increased by $874 million in 2001 versus 2000 which was primarily
attributable to the inclusion of a full twelve months of pre-MergerQwest's business in 2001,as compared to six months in 2000.The
remaining increase was due to higher cost of sales associated with the sales of data,IP and wireless products and services.
Operating expenses for the wholesale services segment grew by $124 million over 2000.Most of the increase resulted from higher
switched and special access charges associated with providingwholesale service.
The operating expenses for the network services segment increased $2.2 billion in 2001 as compared to 2000.The inclusion of the pre-
Merger Qwest business for the full year 200l results accounted for approximately $l.4 billion of the change.Other contributors to the
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increase in operating expenses were facilÎLleS costs associated with the introduction ofnew utal and hosting product platforms,
expenses relating to the improvement of the quality of local services,and expenses attributable to the Company's efforts to enter the
long-distance business in its local service area.
The directory services segment experienced a decrease in its operating expenses of $38 million year-over-yearprimarilyas a result of
lower employee costs associated with reductions in the number of employees attributable to the Merger.In addition,advertising
expense also declined in 2001 versus 2000 as this segment implemented cost savings initiatives.
The "other"category includes unallocated corporate expenses.The decrease in operating expense from 2000 to 2001 was the result of
the elimination of duplicative corporate functions and the consolidation of business facilities as the result of the Merger.
SEGMENT ADJUSTED EBITDA
Because of the factors described above,adjusted EBITDA collectively increased $436 million year-over-year.See footnote (3)to
Selected Financial Data for the definition of adjusted EBITDA and for a discussion of certain limitations in considering this measure
of the Company's operating performance.
26
UNAUDITED PRO FORMA INFORMATION
Below are certain As Reported results for 2001 and unaudited pro forma results for 2000.The unaudited pro forma financial
informationis not prepared in accordance with GAAP.The unaudited pro forma results give retroactive effect as though the Merger
had occurred as of the beginning of 2000.The unaudited pro forma informationis providedas a complement to the "As Reported"or
GAAP results.In addition,certain reclassifications have been made to prior periods to conform to the current year presentation.The
discussions that follows is a comparison of As Reported 2001 to pro forma 2000.
YEAR ENDED DECEMBER 31,
2001 AS 2000 AS PRO FORMA 2000 PRO
REPORTED REPORTED ADJUSTMENTS FORMA
(DOLLARS IN MILLIONS,EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)Operating revenues:Commercial services.....................................$11,118 $8,436 $2,030 $10,466Consumerservices.......................................5,900 5,360 314 5,674Directoryservices......................................1,604 1,530 --1,530Switchedaccessservices................................1,073 1,284 --1,284
Total operating revenues....................19,695 16,610 2,344
Operating expenses:Cost of sales...........................................7,111 4,923 1,324 6,247Selling,general and administrative.....................5,231 4,770 569 5,339
Adjusted EBITDA(1).....................$7,353 $6,917 $451 $7,368
(1)See footnote (3)to Selected Financial Data for the definitionof adjusted EBITDA and for a discussion of certain limitations in
considering this measure of the Company's operating performance.
REVENUES
Total revenues for 2001 grew by 3.9%,as compared to 2000,mainly due to increases in commercial services revenues.Increases in
optical capacity asset sales as well as increased volume in traditional privatelines,frame relay,DIA,VPN,ISDN,Web hosting and
wireless products and services also contributed to the growth.Data and IP services revenues represented 27%of total revenues for
2001,up from 25%in 2000.The data and IP services revenues grew by 13%,to $5.355 billion in 2001 from $4.725 billion in 2000.
The increase in revenue was offset by reductions in both commercial and consumer local voice revenues,switched access and
intraLATA toll revenues in Qwest's local service area as a result of competition and the current economic conditions.
OPERATING EXPENSES
Cost of sales as a percent of revenue was 36.1%for 2001 and 33.0%for 2000.The change was principally due to costs associated with
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the introduction of a new dial and hosting product platform and growth in data,IP,wireless and network services.Partially offsetting
the increase in cost of sales were decreases in employee-related costs due to the reduction in the overall number of employees and
contractors and other savings generated through cost controls and operational efficiencies since the Merger.Operational efficiencies
were realized through the consolidation of core operational units that providecommon services and by leveraging Qwest's purchasing
power throughout the Company.
SG&A as a percentage of revenue improvedto 26.6%in 2001 compared to 28.2%in 2000.For 2001,SG&A expenses decreased by
$108 million compared to 2000.The decrease was primarilyattributable to a reduction in the number of employees and contractors,an
increase in the pension credit (net of other post-retirement benefits)and lower taxes (other than income taxes).In addition to the
factors described above,the decrease was also attributable to a reduction in advertising and lower commissions due to changes in the
Company's commission compensation plan.
27
Increases in the followingthree areas partially offset the overall decrease in SG&A:bad debt expense to cover slow-paying and non-
paying customers;professional fees due to long-distance re-entry efforts and outsourcing of certain call centers;and rent expenses
associated with opening CyberCenters.
For 2001,results include a pension credit,net of post-retirement expenses,of $343 million ($210 million after-tax or $0.13 per diluted
share)compared to $299 million ($182 million after-tax or $0.14 per diluted share)during 2000.
ADJUSTED EBITDA
Because of the factors described above,adjusted EBITDA declined to 37.3%of revenues in 2001 from 38.9%in 2000.See footnote
(3)to Selected Financial Data for the definitionof adjusted EBITDA and for a discussion of certain limitations in considering this
measure of the Company's operating performance.
28
2000 COMPARED WITH 1999 AS REPORTED RESULTS
The Merger significantly impacts the comparison of the results of operations between 2000 and 1999.The analysis that follows is
based on the As Reported results and is organized by statement of operations line item.
YEAR ENDED DECEMBER 31,
2000 1999 INCREASE (DECREASE)
(DOLLARS IN MILLIONS,EXCEPT PER SHARE AMOUNTS)Operating revenues:
Commercial services..........................$8,436 $5,598 $2,838 50.7%Consumer services............................5,360 4,662 698 15.0%Directory services...........................1,530 1,436 94 6.5%Switched access services.....................1,284 1,486 (202)(13.6%)
Total operating revenues.............13,182 3,428 26.0%
Operating expenses:
Cost of sales..............................4,923 3,725 1,198 32.2%Selling,general and administrative..........4,770 3,753 1,017 27.1%Depreciation.................................2,706 2,367 339 14.3%Goodwill and other intangible amortization...636 --636Merger-related and other charges.............1,752 --1,752
Total operating expenses.............14,787 9,845 4,942 50.2%
Operating income...................3,337 (1,514)(45.4%)
Other expense (income):
Interest expense --net.....................1,041 736 305 41.4%
Investment write-downs.......................447 --447 --
Decline in market value of financialinstruments...............................470 56 414 739.3%Expense related to terminated merger.........--282 (282)(100.0%)Net loss on sales of rural exchanges andfixedassets..............................28 --28 --
(Gain)loss on sale of investments...........(327)367 (694)(189.1%)Other expense (income)--net................38 (6)44 733.3%
Mmana EDGARpm ©2002.EDGAR Online,Inc.
Total other expense --net...........35 18.3%
Income before income taxes and cumulativeeffectofchangeinaccountingprinciple.....126 1,902 (1,776)(93.4%)Provision for income taxes.....................207 800 (593)(74.1%)
(Loss)income before cumulative effect ofchangeinaccountingprinciple...............(81)1,102 (1,183)(107.4%)Cumulative effect of change in accountingprinciple--net of tax................--240 (240)(100.0%)
Net (loss)income....................$(81)$1,342 $(1,423)(106.0%)
Diluted (loss)earnings per share..............$(0.06)$1.52 $(1.58)(103.9%)
Non-GAAP financial information:Adjusted EBITDA(1)...................$6,917 $5,704 $1,213 21.3%
(l)See footnote (3)to Selected Financial Data for the definition of adjusted EBITDA and for a discussion of certain limitations in
considering this measure of the Company's operating performance.
29
REVENUES
Total revenues.Total revenues for 2000 grew by 26.0%,as compared to 1999,primarilydue to the Merger.Although Qwest's
revenues relating to sales of commercial and consumer services and products increased on an as reported basis,much of this increase
was attributable to the inclusion of pre-MergerQwest's businesses in the last six months of 2000.Contributing to the increase was
growth in commercial services revenue drivenby IP and data services including,sales of Internet access,frame relay VPN services,
and optical capacity asset sales.Data and IP services revenues represented over 21%of total revenues for 2000,up from 16%in 1999.
Also contributing to the increase was residential wireless and DSL growth.Wireless revenues grew by 110%in 2000 over 1999 and
DSL revenues grew by over 185%during the same period,primarily due to an increase in customers.In addition,total access lines
increased by 341,000 or 2%with business lines comprising the majority of the change.
Commercial services revenues.Commercial services revenues for 2000 grew by $2.838 billion or 50.7%over 1999.The primary
contributor to this growth was the impact of the Merger.Also contributing to the increase were increases in sales of IP and data
services,particularly DIA,DSL,Web hosting,professional services,dial internet access and traditional private line sales.Local voice
revenues grew as sales of access lines to businesses increased 5.7%year-over-year in 2000.On a voice-grade equivalent basis,the
Company's access lines sold to businesses grew by 30.5%as compared to 1999.This increase was partially attributable to businesses
converting their multiple single access lines to a lower number of high-speed,high-capacity lines allowingfor transport of multiple
simultaneous telephone calls and data transmissions at higher rates of speed.
Consumer services revenues.Consumer services revenues increased in 2000 by 15.0%or $698 million over 1999.This growth was
principally attributable to the impact of the Merger,as well as sales of products like voice messaging,caller ID and call waiting,
wireless products and services and IP services such as Internet access and Web hosting.Wireless subscribers increased by 339,000 in
2000 and the average revenue per wireless customer grew to $56.00 from $55.00 in 1999.Wireless revenues were $436 million in
2000 and $206 million in 1999.
To compete more effectivelyin 2000 with other telecommunication services providers and providebetter value to the Company's
customers,Qwest sold 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 added 730,000 subscribers to its CustomChoice
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 (bundled wireless,wirelineand
Internet services package),exceeded 121,000 at December 31,2000.
Partially offsetting the growth in consumer services revenues was a reduction of $282 million in IntraLATA and consumer long-
distance service voice revenues due to price cuts caused by regulatory rate reductions,a de-emphasis of out-of-regionconsumer long-
distance services and greater competition.
Directory services revenues.Directory services revenues for 2000 increased by $94 million or 6.5%over 1999.Higher advertising
©2002.EDGAR Online,Inc.
rates and an increase in the number of premium advertisements accounted for $66 million or 70%of the increase while $28 million or
30%was due to the publication of a directory two times in 2000 as compared to once in 1999.The period covered by this directory
was shortened from 12 months to ll months (for 2000 only)and the directory was published in both January 2000 and December 2000
(instead of January 2001).
Switched access services revenues.Switched access services revenues declined by $202 million or l 3.6%in 2000 as compared to
1999,primarilydue to rate reductions mandated by the FCC as pait of access reform,as well as rate reductions mandated by state
PUCs.
EXPENSES
Cost of sales.Cost of sales as a percent of revenue was 29.6%for 2000 and 28.3%for 1999.Although the cost of sales percentage
increased modestly year-over-year,total cost of sales rose significantly in 2000 primarilydue to the Merger.Additionally,continued
investments in early life cycle products and services such
30
as Web hosting,wireless and local broadband access and improved customer service resulted in increased costs.These increases in
costs were partially offset by efficiencies gained through the elimination of redundant network capacity and employee positions and an
increase in capitalized salaries and wages associated with greater network construction activities such as work done on various new
data platforms.In addition,cost of sales was also impacted by a reduction in the other post-retirement benefit costs and an increase in
the pension credit in 2000.The pension and post-retirement changes were the result of an increase in the Company's expected return on
plan assets due to higher than expected actual returns on plan assets over the previous 10-15 years.
Selling,general and administrative expenses.SG&A as a percentage of revenue increased slightly to 28.7%in 2000 compared to
28.5%in 1999.The increase in SG&A was due principally to the Merger,as well as increases in bad debts,property taxes,
commissions and professional fees.These increases were partially offset by Merger-related reductions in employees of more than
4,500,other post-employment expense reductions and an increase in the pension credit.
Excluding a gain on curtailment of retiree medical benefits in 2000,Qwest recorded a pension credit,net of post-retirement costs,of
$299 million ($l82 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).The pension credit,net of post-retirement expense,was split
between cost of services and SG&A.See Note 7 to the consolidated financial statements for additional information.
Depreciation expense.Depreciation expense increased 14.3%as compared to 1999 primarilydue to the impact of the Merger,as well
as higher overall property,plant and equipment resulting from continued investment in the Company's network to meet service
demands.Qwest continued to invest in growth areas such as Internet and data services,Web hosting,wireless,and broadband access.
Additional capital investments were also made to improvecustomer service levels.
Goodwilland other intangible amortization expense.All of the goodwill and other intangible amortization expense was associated with
intangible assets that were recorded by the Company as a result of the Merger.The preliminary purchase price allocation to these
assets was $27.9 billion to goodwill and $4.1 billion to identifiedintangibles.The amounts allocated to tradenames and goodwill were
being amortized over 40 years.The remaining intangible assets were being amortized over periods ranging from 3 to 10 years.Because
the above allocation of the purchase price was preliminary,as described in Note I to the consolidated financial statements,it changed
upon the completion of determination of the fair value of the acquired assets and liabilities of Qwest (the acquired entity for accounting
purposes).The principal change was a reduction in the preliminaryvalue assigned to the Company's investment in KPNQwest of $3.l
billion and a corresponding increase in goodwill of $2.9 billion.Subsequent to the finalization of purchase accounting,the average
amortization period for goodwilland intangibles was approximately 25 years.
Merger-related and other charges.Qwest incurred Merger-related and other charges totaling $1.752 billion in 2000 and none in 1999.
A breakdown of these costs is as follows:
YEAR ENDED
DECEMBER 31,
2000
(DOLLARS IN MILLIONS)
Contractual settlements and legal contingencies.............$734
Severance and employee-related charges......................572
Other charges..............................................446
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Total Merger-related and other charges...............$1,752
Contractual settlements and legal contingencies for 2000 of $734 million were incurred to cancel various commitments no longer
deemed necessary as a result of the Merger and to settle various claims related to the Merger.
31
In connection with the Merger,in 2000 the Company reduced its employee and contractor levels by over 4,500 people primarily by
eliminating duplicate functions.Of these,1,078 employees voluntarily left without receiving benefit packages.Included in the 2000
severance and employee-related charges of $572 million were costs associated with payments to employees who involuntarilyleft the
business since the consummation of the Merger and $102 million in payments that were subject to the successful completion of the
Merger.
Other charges of $446 million in 2000 included a $226 million write-off of access lines,terminated software development projects of
$114 million,a post-retirement benefit plan curtailment gain of $106 million and $212 million of professional fees,re-branding costs
and other costs related to the Merger.
After the Merger,the Company evaluated assets for potential impairment and concluded that the fair value of some of the assets was
below their carrying value.In most cases,the decline in fair value was based upon the Company's differentintent as to the use of those
assets or completion of projects after the Merger.The Company also evaluated for impairment its dedicated special-purpose access
lines that it leases to CLECs.Given the industry conditions and regulatory changes affecting CLECs in 2000,and given the fact that
these access lines have no alternative use and cannot be sold or re-deployed,the Company concluded that the net future cash flows
from the assets was negative and that sufficient cash flow would not be generated to recover the carrying value of those assets.
Therefore,the Company concluded that the fair value of those assets was minimal and took a $226 million charge in 2000.The assets
are operated by the Company's wholesale services segment.
Followingthe Merger,the Company 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.Capitalized software costs of $l 14 million were written off in 2000.The abandoned projects included a significant billing
system replacement and a customer database system.
Other charges included professional fees,re-branding costs,relocation costs and other costs related to the integration of US WEST
and Qwest.Although included in Merger-related charges because they were incremental and directly related to the Merger,these costs
were generally not accrued at the date of the Merger.
Offsetting the 2000 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 US 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.
Total other expense --net.Interest expense was $l.041 billion for 2000,compared to $736 million for 1999.Increased interest
expense resulted from higher debt levels incurred as a result of increased capital expenditures,the impact of the Merger and the
acquisition of 39 million shares of Global Crossing common stock in June 1999.Higher interest rates on commercial paper borrowings
also contributed to the increase in interest expense.Partially offsetting this increase was higher capitalized interest in 2000 of $104
million versus $27 million in 1999.The increase in capitalized interest was due to more construction projects in 2000 as compared to
1999.
During 1999,the Company acquired approximately 39 million shares in Global Crossing at a per share price of $62.75 in connection
with the proposed merger of US WEST and Global Crossing.Later that year,US WEST and pre-Merger Qwest announced plans for
the Merger thereby terminating the Global Crossing combination.Upon termination,US WEST incurred a charge of $282 million to
dissolve the proposed merger with Global Crossing.The charge included a cash payment of $l40 million to 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,the Company incurred a $367 million loss on the sale of 24 million shares of Global Crossing common stock.In
connection with that sale,the Company entered into an equity return swap that expired in 2001.The swap was 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
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32
Company also recorded a loss of $447 million in the second quarter of 2000,when it determined the decline in the value of its
remaining investment in Global Crossing common stock was other than temporary.The Company disposed of its remaining investment
in Global Crossing common stock in the third quarter of 2000,recognizing a gain of $50 million,which is included in the $327 million
net gain on equity investments described below.
In 2000,Qwest sold certain non-strategic equity investments resulting in net gains of $327 million.In addition,Qwest completed the
sale of approximately 20,000 access lines in North Dakota and South Dakota in 2000 generating proceeds of $l9 million and a gain of
$ll million.In 2000,the Company also recorded a net loss on the sale of fixed assets of $39 million.
Provision for income taxes.The effectivetax rates for 2000 and 1999 were impacted by the non-deductible goodwill amortization,
KPNQwest excess basis amortization and non-deductible foreign losses associated with the Company's investment in KPNQwest.In
addition,the 1999 effectivetax rate was affected by charges associated with the termination of the Global Crossing merger agreement.
Excluding the impact of these items,the effectivetax rates for 2000 and 1999 were 39.4%and 38.5%,respectively.The increase in
2000 from the 1999 effectivetax rate resulted primarily from fixed,non-deductible ESOP dividends paid out in 1999.
NET (LOSS)INCOME
Net loss before the cumulative effect of the change in accounting for directory revenues of $81 million in 2000 decreased from $l.102
billion in 1999 principallybecause of Merger-related and other charges of $1.752 billion.For additional information on the change in
accounting for directory revenues,see Note 2 to the consolidated financial statements.
Diluted loss per share for 2000 was $0.06 compared to diluted earnings per share of $1.52 for 1999.This change was primarily the
result of Merger-related and other charges of $1.752 billion incurred in 2000.
ADJUSTED EBITDA
The Company's adjusted EBITDA increased to $6.9 billion in 2000 from $5.7 billion in 1999 due primarilyto the Merger and the
other factors described above under Revenues,Cost of Sales and SG&A Expenses.However,adjusted EBITDA declined to 41.6%of
revenues in 2000 from 43.3%in 1999.The Company believes that the decline in adjusted EBITDA as a percentage of revenue reflects
the Company's increased costs resulting fromcontinued investments in early life cycle products and services such as Web hosting,
wireless and local broadband access and improvedcustomer service.
The Company does not viewadjusted EBITDA as an alternative measure of cash flows.Although reported trends in adjusted EBITDA
are generally consistent with trends in the Company's cash flows,adjusted EBITDA trends exclude cash flows associated with changes
in workingcapital and capital expenditures.You can find additional informationconcerning the Company's cash flows in "Liquidity
and Capital Resources"below.
33
2000 COMPARED WITH 1999 AS REPORTED SEGMENT RESULTS
Set forth below is revenue,operating expenses and adjusted EBITDA informationfor the years ended December 31,2000 and 1999
for the four segments utilized through 2000.Informationfor 2000 has been conformed to certain reclassifications among the segments
made in 2001.Since it was impractical to restate the 1999 informationand it does not conform to the presentation for 2000,the
expense and adjusted EBITDA informationmay not be comparable.You can find more informationon the segments in Note 12 to the
consolidated financial statements.
The Merger significantly impacts the comparison of the segment results between 2000 and 1999.
YEAR ENDED DECEMBER 31,
(DOLLARS IN MILLIONS)Operating revenues:Retail services.................$11,837 71.3%$9,022 68.4%$2,815 31.2%
Wholesale services..............3,083 18.6%2,871 21.8%212 7.4%
Network services................132 0.8%242 1.8%(110)(45.5%)Directory services..............1,530 9.2%1,436 10.9%94 6.5%
Other...........................28 0.1%(389)(2.9%)417 107.2%
Total operating
revenues..............$16,610 100.0%$13,182 100.0%$3,428 26.0%
armia EDGARpro ©2002.EDGAR Online,Inc.
Operating expenses:(1)Retail services.................$2,632 27.2%$2,911 38.9%$(279)(9.6%)Wholesale services..............401 4.1%714 9.6%(313)(43.8%)
Network services................4,701 48.5%3,035 40.6%1,666 54.9%Directory services..............571 5.9%695 9.3%(124)(17.8%)
Other...........................1,388 14.3%123 1.6%1,265 1,028.5%
Total operating
expenses..............$9,693 100.0%$7,478 100.0%$2,215 29.6%
Adjusted EBITDA:(2)
Retail services.................$9,205 133.1%$6,111 107.1%$3,094 50.6%
Wholesale services..............2,682 38.8%2,157 37.8%525 24.3%
Network services................(4,569)(66.1%)(2,793)(49.0%)(1,776)(63.6%)
Directory services..............959 13.9%741 13.0%218 29.4%
Other...........................(1,360)(19.7%)(512)(8.9%)(848)(165.6%)
Total adjusted EBITDA...$6,917 100.0%$5,704 100.0%$1,213 21.3%
(1)Includes only cost of sales and selling,general and administrative expenses.
(2)See footnote (3)to Selected Financial Data for the definition of adjusted EBITDA and for a discussion of certain limitations in
considering this measure of the Company's operating performance.
SEGMENT REVENUES
Retail services.Retail services revenues for 2000 grew by $2.815 billion or 31.2%over 1999 primarily as a result of the inclusion of
pre-MergerQwest's business in the last six months of 2000.Other contributors to this growtli were increases in sales of IP and data
services,particularly DIA,DSL,Web hosting,professional services,dial Internet access,traditional private line sales and optical
capacity asset sales.Local voice revenues also grew as sales of business access lines,vertical feature products (like voice messaging,
caller ID and call waiting)and wireless products and services increased.In addition,sales of bundled products and
34
services like CustomChoice (which includes a home phone line and the choice of 20 calling features)and Total Package (bundled
wireless,wirelineand Internet services package)increased in 2000 versus 1999.
Wholesale services.Wholesale services revenues increased by $212 million or 7.4%in 2000 as compared to 1999,primarily due to the
inclusion of pre-MergerQwest's business in the last six months of 2000.This increase was offset somewhat by rate reductions
mandated by the FCC as part of access reform,as well as rate reductions mandated by state PUCs.
Networkservices.Network services decreased by $110 million or 45.5%in 2000 as compared to 1999 principallybecause of lower
equipment sales in 2000 versus 1999.
Directory services revenues.Directory services revenues for 2000 increased by $94 million or 6.5%over 1999.Higher advertising
rates and an increase in the number of premium advertisements accounted for $66 million or 70%of the increase while $28 million or
30%was due to the publication of a directory two times in 2000 as compared to once in 1999.The period covered by this directory
was shortened from 12 months to ll months (for 2000 only)and the directory was accordingly published in both January 2000 and
December 2000 (instead of January 2001).
SEGMENT OPERATING EXPENSES
In addition to the impact of the Merger,the Company also adjusted the methodology it used for the allocation of certain corporate
costs.For the 1999 segment results,these costs were included in the operating expenses of each segment,whereas these amounts were
isolated in the "Other"category for purposes of the 2000 presentation.The 1999 amounts have not been restated to conform to the
2000 presentation because the informationwas not available as a result of systems changes that occurred after the Merger.
Operating expenses for the retail services,wholesale services and directory services segments decreased by $279 million,$313 million
and $124 million,respectively in 2000 as compared to 1999.These decreases were primarilythe result of fewer employees related to
Merger integration efforts and an increase in the pension credit in 2000.Partially offsetting the decreases in the retail and wholesale
segments are increased costs associated with growth in data,IP and wireless sales.Further offsetting the decreases in these three
Wma EDGARpro ©2002.EDGAR Online,Inc.
segments were increased costs for bad debts and commissions paid in 2000.
The operating expenses for the network services segment increased $1.7 billion in 2000 as compared to 1999.This increase is
primarily the result of the inclusion of pre-MergerQwest's business in the last six months of 2000.In addition,costs associated with
customer service improvements and re-entry into the inter-LATA long-distance business contributed to the increase.Partially offsetting
the increase in network services operating expenses was the increased capitalization of salaries and wages associated with more work
being performed on construction projects.
SEGMENT ADJUSTED EBITDA
Because of the factors described above,adjusted EBITDA collectively increased $1.213 billion year-over-year.See footnote (3)to
Selected Financial Data for the definitionof adjusted EBITDA and for a discussion of certain limitations in considering this measure
of the Company's operating performance.
LIQUIDITY AND CAPITAL RESOURCES
The operating,investing and financing activities for 2001 as compared to 2000 and 1999 were significantly impacted by the Merger.
OPERATINGACTIVITIES.Cash providedby operations was $4.034 billion,$3.681 billion and $4.546 billion in 2001,2000 and
1999,respectively.The increase in operating cash flow in 2001 over 2000 was primarily caused by an increase in net income after
adjusting for non-cash expenses such as depreciation,amortization,provisionfor bad debts and investment write-downs.Net income
before non-cash charges was $6.951 billion in 2001 as compared to $6.140 billion in 2000.Included in cash providedby operations
were cash receipts of $969 million and $137 million in 2001 and 2000,respectively,related to contemporaneous optical capacity
35
asset transactions.Partially offsetting this increase in operating cash flow was an increase in accounts receivable of $1.079 billion and
a decrease in accounts payable,accrued expenses and advance billings of $849 million.Accounts receivable increased primarily due to
higher sales resulting from the Merger and an overallslowdown in payments from customers as a result of the weak economic
environment.Qwest anticipates that its 2002 bad debt expense levels will move toward more historical levels of approximately 2.5%of
operating revenues as compared to 3.2%of operating revenues in 2001.Receivables associated with sales to customers in the local
services area will continue to be impacted to the extent it takes longer for the economic recovery to have an affect on this region.The
decline in accounts payable was due to the decrease in property,plant and equipment purchase accruals as capital expenditures in the
fourth quarter of 2001 were lower than the fourthquarter of 2000.
Qwest has built its network outside North America primarily by entering into long-term agreements to acquire optical capacity.Qwest
has also acquired some capacity within North America under similar contracts.Several of the companies (for example,Global
Crossing,Enron Broadband Services,Inc.and 360 networks (USA),Inc.)with which Qwest has entered into such agreements appear
to be in financial difficulty or have filed for bankruptcy protection.Bankruptcy courts have wide discretion and could deny Qwest the
continued benefits of use of the assets under the capacity agreements without relievingQwest of its obligation to make payments or
requiringthe refund of amounts previouslypaid.Qwest believes that it is taking appropriate actions to protect its investments and
maintain on-going use of the acquired capacity.At this time,it is too early to determine what effect the bankruptcies will have with
respect to the acquired capacity or Qwest's ability to use this acquired capacity.
The retail services and wholesale services segments produce significant operating cash flows which are expected to continue to be
sufEcient to cover their operating expenses as well as the operating expenses of the network services segment,which both the retail
services and wholesale services segments utilize.The directory services segment is expected to continue to generate positive operating
cash flows for the foreseeable future.
Because the Company's pension plan was in a surplus position for funding purposes as of December 31,2001,Qwest does not
anticipate a need to make a contribution to the pension plan in 2002.You can fmd additional information on Qwest's pension plan in
Note 7 to the consolidated financial statements.
INVESTING ACTIVITIES.Capital expenditures were $8.543 billion,$6.597 billion and $3.944 billion in 2001,2000 and 1999,
respectively.Capital expenditures have been focused on the modernization and expansion of the Company's global telecommunications
network,expansion of its Internet and data communications,local broadband,and wireless networks,re-entry into the long-distance
business in Qwest's local service area and service improvements.The Company expects capital expenditures of approximately $3.7
billion in 2002 primarily to maintain the existing local network infrastructure,support demand for broadband data and wireless
services,re-enter the long-distance market in the Company's local service area and improveQwest's worldwidenetwork.The Company
estimates the minimum capital required to maintain its business is in the range of $1.5 billion to $2.0 billion.
As a result of the Company's plan to reduce its capital expenditures in 2002,Qwest has undertaken a reviewof the inventories on-hand
amans EDGARpro ©2002.EDGAR Online,Inc.
and work in process.In connection with this review,Qwest will assess the appropriateness of inventory levels and carrying values.At
this time the Company is unable to accurately estimate the impairment,if any,that may result from this review.
The following table sets forththe capital expenditures by segment for the years ended December 31,2001,2000 and 1999.
RETAIL WHOLESALE NETWORK DIRECTORY CONSOLIDATED
SERVICES SERVICES SERVICES SERVICES OTHER TOTAL
(DOLLARS IN MILLIONS)
2001.........................$859 $7 $7,458 $2 $217 $8,543
2000.........................1,033 103 5,207 41 213 6,597
1999.................587 111 3,199 48 (1)3,944
36
The significant amounts required for retail services in 2000 and 2001 related primarilyto the cost of re-entry into the long-distance
business and service improvements.For 2002,capital expenditures for the retail services,wholesale services,network services,
directory services and other segments are expected to be approximately $600 million,$1 million,$2.9 billion,$15 million and $150
million,respectively.
Included in the Company's expenditures for property,plant and equipment are cash expenditures for optical capacity asset purchases.
Purchases of optical capacity allowed the Company to expand the Qwest fiber optic network both domestically and internationally to
enable Qwest to providebroadband communications services to its multi-national enterprise customers.Property,plant and equipment
increased by approximately $988 million and $354 million during the years ended December 31,2001 and 2000,respectively,due to
these purchases.During 2001,$1.078 billion was paid in cash for purchases of optical capacity assets.During 2000,$265 million was
paid in cash for purchases of optical capacity assets.You can find more informationrelating to optical capacity asset sales,including
contemporaneous transactions,in "Revenue Recognition"under "Significant Accounting Policies"below.
During 2001,Qwest sold approximately 41,000 access lines in Utah and Arizona resulting in a gain of $51 million and cash proceeds
of $94 million.In 2000,the Company sold approximately 20,000 access lines in North Dakota and South Dakota resulting in proceeds
of $19 million and a gain of $11 million.
Cash used for investing activities was offset during 2000 by $1.140 billion of proceeds from the Company's 1999 sale of Global
Crossing securities.These cash proceeds resulted from Qwest's monetization of its investment in Global Crossing and do not represent
a source of recurring cash flows.
FINANCING ACTIVITIES.Cash providedby financing activities was $4.692 billion,$1.189 billion and $1.945 billion in 2001,2000
and 1999,respectively.Net borrowings of approximately $5.6 billion and $1.4 billion were incurred in 2001 and 2000,respectively,
principally to fund the Company's capital expenditures described above and to purchase Qwest shares from BellSouth in 2001.The net
proceeds from short-term and long-term borrowings in 1999 of approximately $3.0 billion were,in part,utilized to acquire
approximately $2.5 billion of Global Crossing stock as part of its tender offerfor US WEST.The transaction was not completed and
the shares were subsequently sold in 1999 and 2000.
In January 2001,Qwest repurchased 22.22 million shares of its common stock from BellSouth for $1.0 billion in cash.At December
31,2001,the repurchased shares were available to satisfy the Company's obligations under its employee benefits and options
programs.As part of the transaction,BellSouth committed to acquire $250 million in services from the Company over a five-year
period.The agreement (the "2001 Agreement")providedthat BellSouth would make payment for the services in cash and/or Qwest
common stock.The number of Qwest common shares to be tendered was based upon values contained in that agreement.During 2001,
Qwest providedservices to BellSouth valued at $92 million.BellSouth paid for these services by remitting cash throughout the year of
$18 million and,on December 10,2001,tendering 1.2 million shares of Qwest common stock.The value of the tendered shares at
December 10,2001 of $l5 million was recorded in treasury stock.The $43 million difference between (i)the value of the shares at
December 10,2001 of $l5 million and (ii)the value assigned to the shares under the 2001 agreement of $58 million,was recorded as a
reduction in additional paid-in capital.The unpaid balance of $16 million due from BellSouth remained in the Company's accounts
receivable.
Duringthe first quarter of 2002,the Company received approximately 278,000 shares of Qwest common stock valued at $13 million,
under the 2001 Agreement,from BellSouth in partial satisfaction of the $16 million outstanding accounts receivable.In addition,in
accordance with the 2001 Agreement,Qwest used $l2 million of the $18 million in cash paid by BellSouth affiliates for services in
2001 to purchase approximately 253,000 shares of Qwest common stock at the value assigned to the shares under the 200l Agreement.
©2002.EDGAR Online,Inc.
The 2001 Agreement was cancelled as of January 16,2002,having the effect of eliminating the remaining commitment to purchase
services and terminating the ability of BellSouth to use Qwest common stock to pay for such services.At that time,BellSouth
committed to purchase $350 million in services over four years,payable in cash.In consideration for terminating the 2001 agreement,
Qwest gave BellSouth a non-cash credit of $71 million that will be reflected on the balance sheet as a deposit from BellSouth.The
deposit is expected to offset payments due from BellSouth as Qwest provides services to BellSouth in the future.
37
In March 2001,the Company completed a cash tender to buy back certain outstanding debt.In the tender offer,the Company
repurchased approximately $995 million in principal ($l.2 billion in face value)of outstanding debt.As a result of the repurchase,the
Company incurred $106 million ($65 million after tax)in premium payments.The tender offer was conducted to retire the bonds
because of their high coupon rates and to reduce interest cost to the Company.In connection with the tender offer,the indentures were
amended to eliminate restrictive covenants and certain default provisions.
At December 31,200l Qwest's long-term borrowings and capital lease obligations (other than the current portions)were
approximately $20.2 billion.That portion of the debt that is public debt either assumed by Qwest in the Merger or issued following the
Merger (referred to as "Post-Merger public debt")had an outstanding balance of $19.9 billion at December 31,2001.This Post-
Mergerpublic debt has no financial covenants and contains no cross-default or cross-acceleration provisions.At December 31,2001
Qwest had public debt that was issued by Qwest prior to the Merger (referred to as "Pre-Merger public debt")with an outstanding
balance of $1.4 billion.Of the Pre-Merger public debt,$1.0 billion has no financial covenants as long as Qwest maintains an
investment grade debt rating.If the Company fails to maintain an investment grade rating,the most restrictive covenant that would
apply would be a limitation on the incurrence of debt.The limitations on incurrence of debt would apply if,after application of the
proceeds,the ratio of debt-to-consolidated cash flow available for fixed charges (as defined in the indenture)for the four full quarters
preceding the incurrence would be 5.0-to-1 or higher.Thisportion of the Pre-Merger public debt also contains provisions relating to
acceleration upon an acceleration of other debt obligations in the aggregate in excess of $10 million,including the credit facility and
any of the Post-Merger public debt.The remaining portion of the Pre-Merger public debt (approximately $350 million)has no
financial covenants but does contain provisions relating to acceleration upon an acceleration of debt obligations in the aggregate in
excess of $25 million.
On May 2,2001,Qwest's Board of Directors approved a dividendof five cents per share on the Company's common stock which was
paid to stockholders of record as of the close of business on June l,2001 in satisfaction of any prior statement by Qwest in connection
with or following the Merger regarding the payment or declaration of dividends.As a result,dividends of $83 million were paid on
common stock in 2001 compared to $542 million iri 2000.The decline was due to a change in the dividendpolicy after the Merger.
The Company also paid $1.187 billion in dividends on its common shares in 1999.The Company has made no decision with respect to
the payment of any cash dividends on its common stock in 2002.
RECENT DEVELOPMENTSIMPACTING LIQUIDITYAND CAPITAL RESOURCES.Until February 2002,Qwest maintained
commercial paper programs to finance short-term operating cash needs of the business.As of December 31,2001,the Company had a
$4.0 billion syndicated credit facility available to support its commercial paper programs.There was no balance outstanding on the
syndicated credit facility at December 31,2001.The syndicated credit facility matures on May 3,2002.Qwest could have converted
any borrowed amount into a one-year term loan that would be due in May 2003 providedQwest was not in default under the credit
facility,including compliance with all covenants.The most restrictive financial covenant in the syndicated credit facility at December
31,2001 required the Company to maintain a debt-to-consolidated EBITDA ratio of no more than 3.75-to-l."Consolidated EBITDA"
as defined in the credit facility is a measure of EBITDA that starts with net income and adds back certain items,primarilythose of a
non-cash or a non-operating nature.This syndicated credit facility contains a provisionthat would allow acceleration of the full amount
due upon a default in payment obligations aggregating in excess of $100 million under debt obligations having an aggregate principal
amount in excess of $100 million,including any of the Post-Merger public debt and Pre-Merger public debt.
As a result of reduced demand for its commercial paper,Qwest borrowed the full amount under this facility in February 2002 and used
most of the proceeds to repay commercial paper.After repaying the commercial paper,Qwest had approximately $800 million of
proceeds remaining that the Company expects will be used to pay current maturities under short-term notes,long-term borrowings and
capital lease obligations.At December 31,2001,the Company had approximately $l.6 billion in short-term notes,long-term
borrowings and capital lease obligations maturing over the next 12 months.As a result,Qwest's overall borrowings,net of the excess
unapplied cash,remained unchanged at approximately $25.0 billion after applying the proceeds of the borrowings under the credit
facility.In March 2002,Qwest amended the
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syndicated credit facility and currently expects to convert the balance of the facility as of May 3,2002 into a one-year term loan that
would be due May 2003.As part of the amendment,the Company (i)increased the maximum debt-to-Consolidated EBITDA ratio
from 3.75-to-l to 4.25-to-1 through the quarter ended September 30,2002,decreasing to 4.0-to-l beginning December 31,2002,and
(ii)agreed to use a portionof net proceeds from future sales of assets and capital market transactions,including the issuance of debt
and equity securities,to prepay the bank loan until the outstanding loan is $2.0 billion or less.As a result,Qwest's overall borrowings,
net of the excess unapplied cash,remained unchanged.
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The amount drawn down under the $4 billion syndicated bank facility was initially distributed between two wholly-owned subsidiaries
of Qwest,Qwest Capital Funding,Inc.("QCF")and Qwest Corporation,with $3 billion assigned to QCF and $1 billion assigned to
Qwest Corporation.Followingthe amendment of the syndicated credit facility agreement,Qwest paid $608 million of the proceeds
from Qwest Corporation's March 2002 bond offeringdiscussed below to reduce the total amount outstanding and,as permitted under
the agreement,re-distributed the amounts outstanding between QCF and Qwest Corporation.As of March 31,2002,the syndicated
credit facility had the total amount outstanding of $3.39 billion assigned to QCF and nothing assigned to Qwest Corporation.
In February and March 2002,the credit ratings for Qwest and QCF were lowered one level to BBB by Fitch Ratings ("Fitch")and
Standard and Poor's ("S&P")and two levels to Baa3 by Moody's Investor Service ("Moody's").The ratings for Qwest Corporation
were lowered two levels to BBB+by Fitch,one level to BBB by S&P and two levels to Baa2 by Moody's.These ratings are
investment grade.The commercial paper ratings for Qwest,Qwest Corporation and QCF were also lowered to F-3,P-3 and A-3 by
Fitch,Moody's and S&P,respectively.
The synthetic lease facilities described under "Commitments"below had certain financial covenants,including a maximum debt-to-
Consolidated EBITDA ratio.In March 2002,the Company paid the full amount necessary to acquire all properties subject to the
synthetic lease agreements and terminated these agreements.
The Company is currently in compliance with all fmancial covenants in its credit facility and indentures (including any covenants
suspended while the Company maintains its investment grade credit rating)as of the last measurement date.
On March 7,2002,Qwest Corporation completed the sale of $1.5 billion 10-year bonds with an 8.875%interest rate.Approximately
$608 million of the net proceeds were used to repay a portion of the borrowings under the syndicated credit facility.The remaining net
proceeds will be used to repay short-term obligations and currently maturing long-term borrowings.As a result,Qwest's net debt
outstanding,net of the excess unapplied cash,remained substantially unchanged after applying the proceeds from the bond issuances.
On March 19,2002,the Company announced that it had repurchased through direct exchange transactions approximately $97 million
in face amount of debt issued by QCF and guaranteed by Qwest.In exchange for the debt,the Company issued approximately 9.9
million shares of its common stock out of treasury.
The Company intends to de-lever its balance sheet during 2002 through a number of available options possibly including issuing
equity-based securities,sälling assets or securities associated with those assets,possibly including,without limitation,wireless,access
lines,directories,its applications service providerbusiness and other non-core assets.Qwest expects these issuances and sales could
generate net cash proceeds of $1.5 billion to $2.0 billion.In furtherance of its efforts to de-lever the balance sheet,on February 5,
2002,Qwest filed a shelf registration statement with the SEC covering $2.5 billion of debt and equity securities.Neither the form of
the security nor the timing of the offeringhave been determined.These will be dependent on the effective date ofthe registration and
the then prevailingmarket conditions.
As a result of the recent financing transactions and the amendments to its syndicated credit facility,the Company currently believes
that cash flow from operations and available debt and equity financing will be sufficient to satisfy the Company's anticipated cash
requirements for operations for the next 12 months.
39
COMMITMENTS.As of December 31,2001,the Company had the following future contractual cash obligations:
PAYMENTS DUE BY PERIOD
2 -3 4 -5 AFTER
FUTURE CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
(DOLLARS IN MILLIONS)
Long-term debt and commercial paper.....$24,687 $4,645 $3,292 $2,205 $14,545
Capital lease obligations...............316 161 133 6 16
Operating leases........................3,237 339 649 511 1,738
Unconditional purchase obligations......3,008 1,083 1,395 526 4
Total future contractual cashobligations.........................$31,248 $6,228 $5,469 $3,248 $16,303
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Included in unconditional purchase obligations are agreements with IXCs and third party vendors that require the Company to maintain
minimum monthly and/or annual billings based on usage.Despite current market conditions,Qwest expects that it will meet
substantially all minimum usage commitments based on its projected results for 2002.The minimum usage contracts primarilyrelate to
IP and data services such as Internet dial access,DIA,voice over IP services,traditional private lines,local access and ATM services.
You can find additional information concerning other commitments in Note ll to the consolidated financial statements.
The Company has entered into unconditional purchase obligations to obtain facilities management services from other
telecommunications services companies.Qwest is an authorized distributor for certain equipment manufacturers and periodically sells
such equipment to unrelated parties.During 2001,the Company sold equipment to other telecommunications companies and
contemporaneously entered into unconditional commitments to obtain facilities management services from these companies.The
equipment sold to those companies will not be used exclusively to provideservices to Qwest and these companies may use alternative
equipment or means to providethe required facilities management services to the Company.Revenues recognized from these
equipment sales were $148 million during 2001 and none in 2000.The profit from all these 2001 equipment sales was deferred
because there was no practical manner to separate the equipment sale and facilities management services contracts.The deferred profit
will be amortized over the terms of the service agreements of approximately 4 to 5 years.Specifically,under these facilities
management services obligations,the Company's minimum future cash obligations are approximately $l.3 billion.You can find
additional information concerning these commitments in Note 15 to the consolidated financial statements.
At December 31,2001,the Company had the following future commercial commitments that may result in future cash outflows:
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL 2 -3 4 -5 AFTER
FUTURE COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS 5 YEARS
Lines of credit......................$--$--$--$--$--
Letters of credit.............................49 49
Guarantees....................................228 ------228
Total future commercial commitments...........$277 $49 $--$-$228
Included in the operating lease amounts in the first table and in the guarantees in the second table are amounts relating to structured
finance transactions under which Qwest agreed to lease from unrelated parties certain real estate properties,including corporate
offices,network operations centers and CyberCenters.These are referred to as synthetic lease facilities.These leases,which had lease
terms of six years,were accounted for as operating leases and represent $67 million of the total operating lease payments and all of the
guarantee amounts.In March 2002,the Company paid the full amount necessary to acquire all properties subject to the synthetic lease
agreements and terminated these agreements.The purchase price of all such properties was
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approximately $255 million.As a result of the payments,the loan commitments totaling $382 million were terminated and the
Company is no longer liable for its residual value guarantees of up to $228 million that were only applicable if the leases expired at the
end of their term.
Qwest currently has a distribution agreement with KPNQwest discussed in the Related Party Transaction discussion below.Under the
distribution agreement,Qwest is required to meet certain targets,without obligation,to maintain its status as KPNQwest's exclusive
North American distributor.If Qwest does not meet these thresholds for two consecutive years,Qwest will lose the right to be
KPNQwest's exclusive North American distributor.
As of December 31,2001,Qwest had a remaining unconditional purchase obligation to purchase up to E81 million (or approximately
$72 million based on a conversion rate at December 31,2001)worth of network capacity from KPNQwest through 2002.Although
KPNQwest has announced it believes it is fully funded until it becomes free cash flow positive,European telecommunications
companies in general,and emerging carriers such as KPNQwest in particular,have been experiencing substantial financial difficulty.
Therefore,there can be no assurance that KPNQwest will not require additional funding in order to meet its business objectives.
However,except as described above,Qwest has no furtherobligation to fund KPNQwest.
FINANCIAL POSITION.Total assets increased from $73.5 billion at December 31,2000 to $73.8 billion at December 31,2001.The
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increase was primarilydue to capital expenditures for property,plant and equipment purchased using a combination of cash and
borrowed funds.Partially offsetting the increase in total assets was a decrease in investments primarilydue to the write-downof the
Company's investment in KPNQwest.The Company also adjusted the carrying value of the KPNQwest investment and reclassified the
excess purchase price allocation to goodwill as part of the final Merger purchase price allocation.You can find additional information
regarding the Company's reviewof its KPNQwest investment in 2002 in "Results of Operations --2001 Compared with 2000 As
Reported Results --Expenses --Total other expense-net"in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Qwest's working capital deficit decreased from $4.5 billion at December 31,2000 to $4.2 billion at December 31,2001 primarilydue
to increases in net accounts receivable,inventory,prepaids and other current assets and a decrease in accounts payable and accrued
expenses.Accounts receivable increased by $267 million as a result of higher sales due to the Merger and an overall slowdown in
payments from customers caused by a weak economy.Also contributing to the decrease in the working capital deficit was the decline
in accounts payable and accrued expenses principally due to lower capital expenditures in the fourth quarter of2001 compared to the
fourth quarter of 2000.
The change in working capital was substantially offset by an increase of approximately $1.2 billion in short-term borrowings.The
higher short-term borrowings were used to fmance capital expenditures during the year as part of the Company's efforts to finish the
construction of its network,re-enter the interLATA long-distance business in its local service area,providenew services and improve
service quality.
Stockholders'equity decreased from $41.3 billion in 2000 to $36.7 billion in 2001 as a result of the Company's 2001 net loss of $4.0
billion and the BellSouth share repurchase and exchange of Qwest shares for services of $1.0 billion.See Note 15 to the consolidated
financial statements for additional informationon BellSouth transactions that occurred after December 31,2001 that will impact the
Company's stockholders'equity.For a discussion of Qwest's plans to de-lever its balance sheet,see the discussion of "Financing
Activities"above.
OTHER.On a regular and on-going basis,Qwest reviews and evaluates other businesses and opportunities for business combinations
that would be strategically beneficial.As a result,it may be involvedin negotiations or discušsions that,if they were to result in a
transaction,could have a material effect on Qwest's financial condition (includingshort-term or long-term liquidity)or short-term or
long-term results of operations.
REGULATORYMATTERS.The Company's future operations and financial results will be affected by developments in a number of
federal and state regulatory matters.In addition to Qwest's efforts to offer long-distance service in its local service area,Qwest is
subject to a number of other regulatory matters as described Item 1 of Part I and Note 11 to the consolidated financial statements.
41
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION.Revenues from services are recognized when the services are provided.Payments received in advance
are deferred until the service is provided.Up-frontfees received,primarily activation fees and installation charges,are deferred and
recognized over the longer of the contractual period or the expected customer relationship,generally 2 to 10 years.Expected customer
relationship periods are generally estimated using historical data of actual customer retention patterns.As the telecommunications
market experiences greater competition and customers shift from traditional land-based telephony services to mobile services,the
Company's customer relationship period will likely decline resulting in a faster recognition of the deferred revenue and related costs.
Design,engineering and installation contracts for certain customer premise equipment agreements are accounted for under the
percentage-of-completion method of accounting.The percentage-of-completion method is calculated using either the ratio of total
actual costs incurred to date to the estimated total project costs or actual labor hours to total estimated labor hours for the project.This
percentage is then applied to the estimated total revenue for the project to determine the amount of revenue to be recorded.As the
estimated total costs or total labor hours are revised up or down,the timing of the recognized revenue can be impacted.Revenues can
also be impacted by change orders negotiated during the performance of the contract.
The Company has sold optical capacity on its network primarily to other telecommunications service providers in the form of sales of
specific channels on Qwest's "lit"network or sales of specific dark fiber strands.These sales are typically structured as indefeasible
rights of use,or IRUs,which are the exclusive right to use a specified amount of capacity or fiber for a specified period of time,
usually 20 years or more.Qwest accounts for its sales of optical capacity in accordance with SFAS No.13,"Accounting for Leases"
based on the characteristics of these arrangements.In establishing the terms for the sales,Qwest satisfies the criteria for qualifyingthe
transactions as leases as opposed to service agreements by conveying the right to use specific identifiableproperty for a specific period
of time.As leases,these sales may be accounted for either as sales-type leases or operating leases.
Revenues from a sale of optical capacity that meets the criteria of a sales-type lease are recognized at the time the optical capacity is
delivered to and accepted by the customer.If the requirements for sales-type lease accounting are not met,revenue is recognized
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ratably over the term of the agreement.As a result of an interpretation by the Financial Accounting Standards Board ("FASB")in June
1999 (FIN 43)optical capacity is treated as real property for accounting purposes.Under SFAS No.13,in order to meet the
requirements for sales-type lease accounting for real property,ownership ofthe property must be transferred.Prior to July 2001 when
the FASB's Emerging Issues Task Force ("EITF")providedguidance that transfer of ownership must occur automatically at or before
the end of the lease to qualify as a sales-type lease,Qwest's IRUs included a nominal purchase option at the end of the term.
Commencing July 2001,Qwest modifiedits IRU terms to providefor the automatic transfer of title at the end of the term.
Determination of whether ownership transfers under the IRU agreements is a significant judgment Qwest must make in applying the
accounting principles of SFAS No.13 to determine whether these optical capacity transactions qualify for sales-type lease accounting.
The Company concludes IRUs are sales-type leases for accounting purposes and recognizes revenue at the time delivery and
acceptance of the fiber or capacity takes place so long as:(1)Qwest receives sufficient consideration;(2)(x)Qwest has passed
substantially all risks and rewards of ownership to the fiber or capacity,including responsibility for operation and maintenance cost
and risk of technological or economic obsolescence,to the customer,(y)Qwest does not have substantial continuing involvementwith
the capacity sold,and (z)ownership has passed or will pass by the end of the agreement;and (3)the customer receives a specific fiber
or channel on the Qwest network that only the customer can utilize.During2001 and 2000,the Company recognized revenues from
optical capacity asset sales in the amount of $1.013 billion and $468 million,respectively.This represented approximately 5.l%and
2.8%of total As Reported revenues in 2001 and 2000,respectively.As previously announced,the Company does not plan on any sales
of optical capacity in 2002 that would be treated as sales-type leases and require recognition of revenue up front.In order to meet
continuing demand for optical capacity Qwest may enter into operating leases for fiber or capacity.Qwest will not enter into such
leases involvingroutes with an end-point in a state in Qwest's local service area until Qwest has obtained permission to offer
interLATA services in that state.
42
The Company also enters into agreements to purchase optical capacity from other telecommunications service providers.Purchases of
optical capacity allowed the Company to expand the Qwest fiber optic network both domestically and internationally to enable Qwest
to providebroadband communications services to its multi-national enterprise customers.Several of these carriers have also acquired
optical capacity from Qwest during 2001,principally in the United States,in separate transactions at market rates.These transactions
in which the Company sells and buys capacity from the same third party in the same time period are referred to by the Company as
"contemporaneous transactions."In Qwest's contemporaneous transactions,the Company typically obtains acceptance of the delivered
route from the buyer in the quarter in which revenue is recognized,and generally receives all or a significant portion of the sales
proceeds in cash.The sales price is not subject to refund based on either party's failure to perform under the separate purchase contract.
As such,the Company believes these are separate,legally enforceable cash transactions.However,the Company also applies the more
restrictive "nonmonetary"transaction accounting guidance to these contemporaneous transactions.This guidance is contained in
Accounting Principles Board ("APB")Opinion No.29,"Accounting for Nonmonetary Transactions"and EITF 1ssue 01-02,
"Interpretations of APB OpinionNo.29."Applyingthese standards,exchanges of Qwest optical capacity held for sale in the ordinary
course of business for the counterparty's optical capacity to be used in Qwest's operations are recorded at fair value.Otherwise,the
exchanges are recorded at the lower of historical cost or fair value.Qwest recognizes revenue based on fair value for these
contemporaneous transactions principallybased on the following factors:(1)whether the assets exchanged are dissimilar (assets held
for sale in the ordinary course of business for assets to be used to providetelecommunication services),(2)whether fair value can be
determined within reasonable limits and (3)whether from an accounting perspective,the earnings process is complete.All of the
factors must be met in order to recognize the revenue based on fair value.Assessing whether these criteria have been met is a
significant judgment Qwest must make in applying the accounting standards to determine whether revenue can be recognized based on
fair value.Amounts spent for optical capacity acquired in these contemporaneous transactions are included in property,plant and
equipment.During 2001,of the $1.013 billion in total revenue recognized from optical capacity asset sales,the Company recognized
revenue of $684 million on contract values of $895 million from contemporaneous transactions.
As required,the Company adopted SFAS No.144,"Accounting for the Impairment or Disposal of Long-LivedAssets"on January l,
2002.SFAS No.144 requires that long-livedassets that could be disposed of other than in a cash sale be classified as "held for use."
As a result,the Company will treat its optical capacity asset inventoryas if it was property,plant and equipment and depreciate it over
its estimated useful life.As a result of the adoption of SFAS No.144,Qwest will no longer recognize revenue from optical capacity
asset sales.
Directory revenue is recognized at the time of publication of the directories.Changes in publishing schedules may impact the timing of
the recognition of directory revenue.The amount of directory revenue may also be affected by changes in the number of directories
published and the period covered by directories.
SOFTWARE CAPITALIZATION POLICY.Internally used software,whether purchased or developed,is capitalized and amortized
using the straight-line method over an estimated useful life of 18 months to 5 years.In accordance with Statement of Position ("SOP")
98-1,"Accounting for the Costs of Computer Software Developed or Obtained for Internal Use",the Company capitalizes certain costs
associated with internally developed sofhvare such as payroll costs of employees devoting time to the projects and external direct costs
for materials and services.Costs associated with internally developed software to be used internally are expensed until the point the
project has reached the development stage.Subsequent additions,modifications or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it previouslydid not perform.Software maintenance and trainingcosts
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are expensed in the period in which they are incurred.The capitalization of software requires judgment in determining when a project
has reached the development stage.Further,the recovery of software projects is periodically reviewed and may result in significant
write-offs.
PENSION AND POST-RETIREMENTBENEFITS.Pension and post-retirement health care and life insurance benefits earned by
employees during the year as well as interest on projected benefit obligations are accrued
43
currently.Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service
period of the employees expected to receive benefits.
In computing the pension and post-retirement benefit costs,the Company must make numerous assumptions about such things as
employee mortality and turnover,expected salary and wage increases,discount rates,expected return on plan assets and expected
future cost increases.Two of these items generally have the most significant impact on the level of cost --discount rate and expected
rate of return on plan assets.
The Company sets its discount rate based upon the average interest rate during the month of December for a Moody's AA rated
corporate bond.
The expected rate of return on plan assets is the long-term rate of return Qwest expects to earn on the pension trust's assets.Qwest
establishes its expected rate of return by reviewingthe investment composition of its pension plan assets,obtaining advice from its
actuaries,reviewinghistorical earnings on the pension trust assets and evaluating current and expected market conditions.
To compute its expected return on pension plan assets,the Company applies its expected rate of return to the market-related value of
the pension plan assets.The market-related asset value is a computed value that recognizes changes in fair value of pension plan assets
over a period of time,not to exceed five years.In accordance with SFAS No.87,"Employers'Accounting for Pensions,"the Company
elected to recognize actual returns on its pension plan assets ratably over a five year period when computing its market-related value of
pension plan assets.The election was made in 1987 when SFAS No.87 became effective.This method has the effect of smoothing
market volatility that may be experienced from year to year.As a result,the Company's expected return is not significantly impacted by
the actual return on pension plan assets experienced in the current year.
Changes in any of the assumptions made by the Company in computing the pension and post-retirement benefit costs could have an
impact on various components that comprise these expenses.Factors to be considered include the strength or weakness of the
investment markets,changes in the composition of the employee base,fluctuations in interest rates,significant employee hirings or
downsizings and medical cost trends.Changes in any of these factors could impact cost of sales and SG&A on the statement of
operations as well as the value of the asset or liability on the balance sheet.If the Company's 2001 assumed expected rate of return of
9.4%was 100 basis points lower,the impact wouldhave been to decrease the pension credit,net of post-retirement expenses,by $l39
million in 2001.
INVESTMENTS.The Company reviews its portfolio of equity securities on a quarterly basis to determine whether a decline in value
is other than temporary.Many factors are considered in assessing whether a decline in value is other than temporary,including,as may
be appropriate:
-Earnings trends and asset quality;
-Near term prospects and financial condition of the issuer;
-Financial condition and prospects of the issuer's region and industry;
-The cause and severity of the decline in market price;
-Analysts'recommendations and stock price projections;
-The length of time (generally six to nine months)that market value was less than the carrying value;
-Stock price volatility and near term potential for recovery;and
-Qwest's intent and ability to retain the investment.
If Qwest determines that the decline in value of an equity security is other than temporary,the Company will record a charge on its
statement of operations to reduce the carrying value of the security to its estimated fair value.Changes in market conditions and the
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Company's assessment of those conditions may impact the
44
fair value of the investments on the balance sheet as well as charges to the statement of operations.In 2001,the Company recorded
total losses of $3.294 billion resulting from other than temporary declines in value.
IMPAIRMENT OF LONG-LIVED ASSETS.Long-livedassets such as goodwill,intangibles and property,plant and equipment are
reviewedfor impairment whenever facts and circumstances warrant such a review.Under current standards,the assets must be carried
at historical cost if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without
considering interest.However,if projected cash flows are less than the carrying amount,even by one dollar,the long-livedassets must
be reduced to their estimated fair value.Considerable judgment is required to project such future cash flows and,if required,estimate
the fair value of the impaired long-livedassets.During 2001,Qwest recorded $224 million in asset impairments including the
abandonment of software development projects.These impairments were recorded as part of the restructuring and Merger-related
charges.
As required,the Company must adopt SFAS No.142,"Goodwill and Other Intangible Assets,"on January 1,2002.SFAS No.142
provides a more restrictive fair value test to evaluating goodwill and intangibles for impairment.Upon adoption of SFAS No.142,the
carrying value of goodwill should be evaluated based upon its current fair value as if the purchase price allocation occurred on January
l,2002.Qwest is currently evaluating the impact of adopting the standard and believes the effect of adoption could be a loss from a
change in accounting principle of approximately $20 billion to $30 billion.This change in accounting principle would be reflected as a
reduction in the carrying value of goodwill in 2002.You can find additional information regarding this matter in "New Accounting
Standards"below.
EXIT COSTS AND RESTRUCTURING RESERVES.Periodically,the Company commits to exit certain business activities,eliminate
office or facility locations and/or reduce its number of employees.The charge to record such a decision depends upon various
assumptions,including future severance costs,sublease or disposal costs,contractual termination costs and so forth.Such estimates are
inherently judgmental and may change based upon actual experience.During the fourth quarter of 2001,the Company recorded a $749
million restructuring charge to reduce the current number of employees,consolidate and sublease facilities and abandon certain capital
projects in process,terminate certain operating leases and recognize certain asset impairments.
Due to the estimates and judgements involvedin the application of each of these accounting policies,future changes in these estimates
and market conditions could have a material impact on the Company's financial condition or results of operations.
NEW ACCOUNTING STANDARDS
In June 1998,the FASB issued SFAS No.133,"Accounting for DerivativeInstruments and Hedging Activities."This statement
establishes accounting and reporting standards for derivativeinstruments and hedging activities.SFAS No.133 requires,among other
things,that all derivativeinstruments be recognized at fair value as assets or liabilities in the consolidated balance sheets and changes
in fair value generally be recognized currently in earnings unless specific hedge accounting criteria are met.The adoption of SFASNo.
133 on January l,200l did not have a material impact on Qwest's consolidated financial results.
In September 2000,the FASB issued SFAS No.140,"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."This statement provides accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities.SFAS No.140 requires that after a transfer of financial assets,an entity continues to recognize
the financial and servicing assets it controls and the liabilities it has incurred and does not recognize those financial and servicing
assets when control has been surrendered and the liability has been extinguished.SFAS No.140 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,2001.The adoption of SFAS No.140 did not have a
material impact on Qwest's consolidated fmancial results.
In June 2001,the FASB issued SFAS No.141,"Business Combinations."This pronouncement eliminated the use of the "poolingof
interests"method of accounting for all mergers and acquisitions.As a result,all mergers and acquisitions will be accounted for using
the "purchase"method of accounting.
45
SFAS No.14l is effectivefor all mergers and acquisitions initiated after June 30,2001.Adoption ofthis pronouncement had no
impact on Qwest's consolidated financial statements.
In June 2001,the FASB issued SFAS No.142,"Goodwill and Other Intangible Assets."This statement addresses financial accounting
and reporting for intangible assets (excluding goodwill)acquired individually or with a group of other assets at the time of their
acquisition.It also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition.
Intangible assets (excluding goodwill)acquired outside of a business combination will be initially recorded at their estimated fair
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value.If the intangible asset has a finite useful life,it will be amortized over that life.Intangible assets with an indefinite life are not
amortized.Both types of intangible assets will be reviewed annually for impairment and a loss recorded when the asset's carrying value
exceeds its estimated fair value.The impairment test for intangible assets consists of comparing the fair value of the intangible asset to
its carrying value.Fair value for goodwill and intangible assets is determined based upon discounted cash flows and appraised values.
If the carrying value of the intangible asset exceeds its fair value,an impairment loss is recognized.Goodwill will be treated similar to
an intangible asset with an indefinite life.SFAS No.142 is effectivefor fiscal years beginning after December 15,2001.As required,
the Company will adopt SFAS No.142 effectiveJanuary l,2002.The adoption of SFAS No.142 will reduce Qwest's amortization
expense by approximately $900 million annually,beginning January 1,2002.Because goodwillamortization expense is non-
deductible for tax purposes,the impact on net income should be an increase of approximately $900 million.Upon adoption of SFAS
No.142,the carrying value of goodwillshould be evaluated based upon its current fair value as if the purchase price allocation
occurred on January l,2002.Qwest is currently evaluating the impact of adopting the standard and believes the effect of adoption
could be a loss from a change in accounting principle of approximately $20 billion to $30 billion.This change in accounting principle
would be reflected as a reduction in the carrying value of goodwill in 2002.
In June 2001,the FASB issued SFAS No.143,"Accounting for Asset Retirement Obligations."This statement deals with the costs of
closing facilities and removing assets.SFAS No.143 requires entities to record the fair value of a legal liability for an asset retirement
obligation in the period it is incurred.This cost is initially capitalized and amortized over the remaining life of the underlying asset.
Once the obligation is ultimately settled,any difference between the final cost and the recorded liability is recognized as a gain or loss
on disposition.As required,the Company will adopt SFAS No.143 effectiveJanuary 1,2003.Qwest is currently evaluating the impact
this pronouncement will have on its future consolidated financial results.
In August 2001,the FASB issued SFAS No.144,"Accounting for the Impairment or Disposal of Long-LivedAssets."This
pronouncement addresses how to account for and report impairments or disposals of long-livedassets.Under SFAS No.144,an
impairment loss is to be recorded on long-livedassets being held or used when the carrying amount of the asset is not recoverable from
its expected future undiscounted cash flows.The impairment loss is equal to the difference between the asset's carrying amount and
estimated fair value.In addition,SFAS No.144 requires long-livedassets to be disposed of by other than a sale for cash are to be
accounted for and reported like assets being held and used.Long-livedassets to be disposed of by sale are to be recorded at the lower
of their carrying amount or estimated fair value (less costs to sell)at the time the plan of disposition has been approved and committed
to by the appropriate company management.As required,the Company will adopt SFAS No.144 effective January 1,2002.As a result
of the adoption of SFAS No.144,Qwest will no longer recognize revenues from optical capacity transactions on sales-type leases.
On July 19,2001,the EITF issued its consensus regarding EITF Issue 00-l1,"Meeting the Ownership Transfer Requirements of
FASB Statement No.l 3 for Leases of Real Estate."This EITF is primarily concerned with ownership transfer requirements for
property under a sales-type lease as defined in SFAS No.13.According to the consensus,integral equipment subject to a lease should
be evaluated as real estate under SFAS No.13,as amended by SFAS No.98.In addition,the consensus states that a nominal purchase
option contained in a lease does not satisfy the transfer of ownership criterion in SFAS No.13 for transfers of real property,if the
failure to pay the nominal amount results in ownership not being transferred to the lessee.EITF 00-11 provides,however,that this
criterion will be met in cases involvingintegral equipment or property improvements when the lessor agrees,regardless of whether or
not the lessee pays any amount,to
46
execute and deliverto the lessee all documents (including,if applicable,a bill of sale)that may be required to release the property
from the lease and transfer ownership to the lessee.The consensus on EITF 00-11 applies to leases entered into after July 19,2001 and
to certain leases modified after that date.Qwest believes it is in compliance with the requirements of SFASNo.13 and the EITF
consensus for all relevant sales-type transactions such as optical capacity asset sales entered into after the issuance of the EITF
consensus that it treated as sales-type leases.
RELATED PARTY TRANSACTIONS
During 2001 and 2000,Qwest entered into several transactions in the normal course of business with KPNQwest for the purchase and
sale of optical capacity assets and the provisioningof services such as privateline,Web hosting,IP transit and DIA.The Company
made purchases from KPNQwest of approximately $2l 3 million and $70 million in 2001 and 2000,respectively.Qwest sold products
and services to KPNQwest in the amount of $18 million and $26 million in 2001 and 2000,respectively.At December 31,2001 and
2000,Qwest had a receivable from KPNQwest for these products and services of $8 million and $7 million,respectively.Pricing for
these services was based on what the Company believed to be fair market value at the time the transactions were consummated.The
sales to Qwest were in accordance with the distribution agreement Qwest has with KPNQwest,whereby Qwest is,in certain
circumstances,the exclusive distributor of certain of KPNQwest's services in North America.Qwest owns approximately 47.5%of the
outstanding shares of KPNQwest's common stock.As of December 31,2001,Qwest had a remaining unconditional purchase
obligation to purchase up to E8]million (or $72 million based on a conversion rate at December 31,2001)worth of network capacity
from KPNQwest through 2002.Qwest has no further obligationto fund KPNQwest.
In October 1999,Qwest and Anschutz Digital Media,Inc.("ADMI"),an affiliate of Anschutz Company,formed a joint venture called
urna EDGAnpro ©2002.EDGAR Online,Inc.
Qwest Digital Media,LLC ("QDM")that providedadvanced digital production,post-production and transmission facilities,digital
media storage and distribution services,telephony-based data storage and enhanced services,access and routing services.Qwest
contributed approximately $84.8 million in the form of a promissory note payable over nine years at an annual interest rate of 6%.At
inception,Qwest and ADMI each owned a 50%equity and votinginterest in the joint venture.In June 2000,Qwest acquired an
additional 25%interest in QDM directly from ADMI.Qwest paid approximately $48.2 million for the interest;approximately $4.8
million was paid in cash at closing and the remaining $43.4 million was paid with approximately $1.8 million in interest,on January 2,
2001.Followingthis transaction,Qwest owned a 75%economic interest and 50%votinginterest in QDM and ADMI owned a 25%
economic interest and a 50%votinginterest.
In October 1999,Qwest also agreed to purchase certain telephony-related assets and all of the stock of Precision Systems,Inc,a
telecommunications solutions provider,from ADMI in exchange for a promissory note in the amount of approximately $34 million.
The note bears interest at 6%annually with semi-annual interest payments and annual principal payments due through 2008.
In October 1999,Qwest entered into a long-term Master Services Agreement (the "MSA")with QDM under which QDM agreed to
purchase approximately $l19 million of telecommunication services through October 2008 and Qwest agreed to extend credit to QDM
for the purpose of making payments for the telecommunication services.Each October,QDM would be required to pay Qwest an
amount equal to the difference between certain specified annual commitment levels and the amount of services actually purchased
under the MSA at that time.In October 2001,Qwest agreed to release QDM from its obligation to acquire telecommunications
services from Qwest in exchange for QDM forgivingQwest's $84.8 million promissory note (after givingeffect to a payment by Qwest
of $2.5 million in accrued interest and $1.3 million in principal on the note).Prior to termination of the MSA,Qwest advanced QDM
the amount QDM owed for accrued telecommunications services of $3.8 million and QDM applied the advance to pay Qwest the
amount owing for the services,including interest on amounts past due.Concurrently with terminating the MSA,QDM repaid the $3.8
million advance under the MSA.
47
During 2001,Qwest recorded a charge of $15 million that represented its share of an impairment charge recorded by QDM.In
December 2001,Qwest management made a decision to discontinue fundingQDM,resulting in a charge of $l8 million.In February
2002,a determination was made to discontinue the QDM business.
RISK MANAGEMENT
Qwest is exposed to market risks arising from changes in interest rates.The objective of the Company's interest rate risk management
program is to manage the level and volatility of its interest expense.Qwest may employ derivativefinancial instruments to manage its
interest rate risk exposure.The Company may also employ financial derivativesto hedge foreign currency exposures associated with
particular debt.With the settlement of the Global Crossing derivativein 2001,Qwest no longer holds any derivatives for other than
hedging purposes.
As of December 31,2001 and 2000,approximately $3.6 billion and $2.4 billion,respectively,of floating-rate debt was exposed to
changes in interest rates.This exposure is linked to commercial paper rates and London Interbank Offered Rates ("LIBOR").A
hypothetical increase of one-percentage point in commercial paper rates and LIBOR would increase annual pre-tax interest expense by
$36 million.As of December 31,2001 and 2000,Qwest also had approximately $1.2 billion of long-term fixed rate debt obligations
maturing in the following 12 months.Any new debt obtained to refinance this debt would be exposed to changes in interest rates.A
hypothetical 10%change in the interest rates on this debt would not have had a material effect on the Company's earnings.Qwest had
$20.2 billion and $15.4 billion of long-term fixed rate debt at December 31,2001 and 2000,respectively.A 1%increase in the interest
rates on this debt would result in a decrease in the fair value of these instruments of $1.1 billion and $827 million at December 31,
2001 and 2000,respectively.A decrease of 1%in the interest rates on this debt would result in an increase in the fair value of these
instruments of $1.2 billion and $886 million at December 31,2001 and 2000,respectively.
Upon the completion of the additional purchase of shares of KPNQwest common stock,as described in Note 3 to the consolidated
financial statements,Qwest holds approximately 2l4 million shares of stock in KPNQwest and the restrictions on the marketability of
all shares of KPNQwest the Company owns were eliminated.At December 31,2001 and 2000,the publicly traded Class C stock of
KPNQwest was trading at $7.15 and $18.94 per share,respectively.The carrying value of the Company's KPNQwest investment was
approximately $6.10 per share at December 31,2001.A hypothetical 10%decline in the public trading price of KPNQwest at
December 31,2001 could decrease the value of the Company's investment by approximately $150 million.
Equity investments in other publicly traded companies consisted of the following (dollars in millions):
DECEMBER 31,2001 DECEMBER 31,2000
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
assagia EDGARpro ©2002.EDGAR Online,Inc.
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
$9 $2 $(1)$10 $90 $30 $(62)$58
The estimated potential loss in fair value resulting from a hypothetical 10%decrease in the December 31,2001 prices quoted by stock
exchanges would decrease the fair value of the Company's other marketable equity investments by $1.0 million.
48
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains or incorporates by reference "forward-lookingstatements,"as that term is used in federal securities laws,
about Qwest's financial condition,results of operations and business.These statements include,among others:
-statements concerning the benefits that Qwest expects will result from its business activities and certain transactions Qwest has
completed,such as increased revenues,decreased expenses and avoided expenses and expenditures;and
-statements of Qwest's expectations,beliefs,future plans and strategies,anticipated developments and other matters that are not
historical facts.
These statements may be made expressly in this document or may be incorporated by reference to other documents Qwest will file with
the 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-lookingstatements are subject to numerous assumptions,risks and uncertainties that may cause Qwest's actual results to
be materially different from any future results expressed or implied by the Company in those statements.
Because the statements are subject to risks and uncertainties,actual results may differ materially from those expressed or implied by
the forward-lookingstatements.Qwest cautions you not to place undue reliance on the statements,which speak only as of the date of
this report.
Further,the informationcontained in this document or in a document incorporated or deemed to be incorporated by reference herein is
a statement of Qwest's present intention and is based upon,among other things,the existing regulatory environment,industry
conditions,market conditions and prices,the economy in general and the Company's assumptions.Qwest may change its intentions,at
any time and without notice,based upon any changes in such factors,in the Company's assumptions or otherwise.
RISK FACTORS IMPACTING FORWARD-LOOKING STATEMENTS
In addition to the risk factors set forth in more detail below,the important factors that could prevent Qwest from achieving its stated
goals include,but are not limited to,the following:
-potential fluctuations in quarterly results;
-volatility of Qwest's stock price;
-intense competition in the markets in which Qwest competes;
-changes in demand for Qwest's products and services;
-adverse economic conditions in the markets served by Qwest or by companies in which Qwest has substantial investments;
-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;
-higher than anticipated employee levels,capital expenditures and operating expenses;
-adverse changes in the regulatory or legislative environment affecting Qwest's business;
EOGARpro ©2002.EDGAR Online,Inc.
-adverse developments in commercial disputes or legal proceedings;and
-changes in the outcome of future events from the assumed outcome included by Qwest in its significant accounting policies.
49
The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or
oral forward-lookingstatements that Qwest or persons acting on its behalfmay issue.Qwest does not undertake any obligation to
review or confirm analyst's expectations or estimates or to release publicly any revisions to any forward-lookingstatements to reflect
events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.In addition,Qwest makes no
representation with respect to any materials available on the Internet,including materials available on the Company's website.
OTHER RISK FACTORS
CONTINUED DOWNTURN IN THE ECONOMY IN THE COMPANY'S LOCAL SERVICE AREA COULD
AFFECT ITS OPERATING RESULTS.
The Company's operations in its 14-state local service area of Arizona,Colorado,Idaho,lowa,Minnesota,Montana,Nebraska,New
Mexico,North Dakota,Oregon,South Dakota,Utah,Washington and Wyoming have been impacted by the continuing weakness in
that region's economy.Because customers have less discretionary income,demand for second lines or additional services has declined.
This economic downturn in the Company's local service area has also led to an increased customer disconnection rate,and has resulted
in an increase in both accounts receivable and bad debt.In addition,several of the companies with which the Company does business
appear to be in financial difficulty or have filed for bankruptcy protection,and the Company could be adversely affected by the loss or
reduction of its business with those companies.
The Company anticipates that the economic downturn in its local service area will be deeper and last longer than it had previously
expected.Also,the Company believes that this region's economy lagged the national economy in entering the downturn and may
follow the national economy in recovery by an indeterminate period.This continued economic slowdown will affect demand for the
Company's products and services within its local service region.
ANY ADVERSE OUTCOME OF THE SEC'S CURRENT INFORMAL INQUIRYCOULD HAVE A
NEGATIVE IMPACT ON THE TRADING PRICE OF THE COMPANY'S SECURITIES.
On March 8,2002,the Company received an informalinquiry from the Denver regional office of the SEC requesting voluntary
production of documents.The matters identifiedby the SEC as the focus of the informal inquiryrelate to three areas of the Company's
accounting policies,practices and procedures in 2000 and 2001,including revenue recognition and accounting treatment of:
-sales of optical capacity assets (IRUs),particularly sales to customers from whom the Company agreed to purchase optical capacity
assets;
-the sale of equipment by the Company to customers from which it bought Internet services or to which it contributed equity financing,
including equipment sales to KMC Telecom Holdings,Inc.and Calpoint LLC;and
-Qwest Dex,particularly changes in the production schedules and lives of some directories.
The Company intends to fully respond to this request.
If the SEC takes any formal action against the Company as a result of the informal inquiry,investor confidence could decline and the
trading price of the Company's securities could be adversely affected.Moreover,there can be no assurance that the SEC will agree
with certain of the Company's policies,practices or procedures with respect to one or more of these or other areas of inquiryand,if it
were to disagree,that the Company will not be required to restate earnings for prior periods.Although the Company cannot predict
what policies,practices or procedures,if any,might be subject to any disagreement with the SEC,it does not believe that any resulting
restatement would have a material affect on revenues or adjusted EBITDA,on an as reported or pro forma basis,although it may have
a material affect on net income or earnings per share.The amount of revenue and gross margin attributable to all optical capacity asset
sales (including,but not limited to,the contemporaneous transactions)in 2001 and 2000 is as follows:(l)revenues of $l.013 billion,
or 5.1%
50
of total revenue,in 2001 and $468 million,or 2.8%of total revenue,in 2000 and (2)gross margin of $486 million,which is 6.6%of
adjusted EBITDA in 2001,and $232 million,which is 3.4%of adjusted EBITDA in 2000.On an after-tax basis,the gross margin of
all optical capacity asset sales was approximately $290 million and $140 million in 2001 and 2000,respectively.These amounts would
a EDGARpro ©2002.EDGAR Online,Inc.
be partiallyoffset by the amounts that may be recognized over the lives of the agreements if these optical capacity asset sales had
instead been treated as operating leases.
INCREASEDSCRUTINYOF FINANCIAL DISCLOSURE,PARTICULARLY IN THE TELECOMMUNICATIONSINDUSTRY
IN WHICH THE COMPANY OPERATES,COULD REDUCE INVESTOR CONFIDENCE,AND ANY RESTATEMENTOF
EARNINGS COULD LIMIT THE COMPANY'SABILITY TO ACCESS THE CAPITAL MARKETS AND INCREASE
LITlGATION RISKS.
Congress,the SEC,other regulatory authorities and the media are intensely scrutinizing a number of financial reporting issues and
practices.Although all businesses face uncertainty with respect to how the U.S.financial disclosure regime may be impacted by this
process,particular attention has been focused recently on the telecommunications industry.Recent Congressional hearings,for
example,have related to the telecommunications industry practice of accounting for optical capacity asset sales (IRUs),as well as the
appropriateness and consistency of pro forma fmancial informationdisclosure.
This heightened scrutiny could adversely affect investor confidence and cause the trading price for the Company's securities to decline.
In addition,there can be no assurance that the Company will not have to restate earnings for prior periods as a result of any formal
actions,the SEC's review of the Company's filings or any internal analyses or otherwise.Any such restatement could adversely impact
the Company's ability to access the capital markets or the trading price of its securities.The recent scrutiny regarding financial
reportinghas also resulted in an increase in litigation in the telecommunications industry,including litigation against the Company.
There can be no assurance that any such litigation will not have a material adverse impact on the Company or the trading price of its
securities.
RAPID CHANGES IN TECHNOLOGY AND MARKETS COULD REQUIRE SUBSTANTIAL EXPENDITUREOF FINANCIAL
AND OTHERRESOURCES IN EXCESS OF CONTEMPLATEDLEVELS,AND ANY INABILITY TO RESPOND TO THOSE
CHANGESCOULD REDUCE THE COMPANY'SMARKET SHARE.
The telecommunications industry is experiencing significant technological changes,and the Company's ability to compete depends
upon its ability to develop new products and accelerate the deployment of advanced new services,such as broadband data,wireless
and videoservices.The development and deployment of new products could require substantial expenditure of fmancial and other
resources in excess of contemplated levels.If the Company is not able to develop new products to keep pace with technological
advances,or if such products are not widely accepted by customers,the Company's ability to compete could be adversely affected and
its market share could decline.Any inability to keep up with changes in technology and markets could also adversely affect the trading
price of the Company's securities and its ability to service its debt.
DIFFICULTIES IN COMBINING OPERATIONS AND REALIZING SYNERGIES COULD AFFECT THE
COMPANY'S RESULTS OF OPERATIONS.
The Company continues to expect that the Merger will result in certain long term benefits,including operating efficiencies,cost
savings,synergies and other benefits.Achievingthe benefits of the Merger depends in part upon the integration of the original
businesses of US WEST and Qwest in an efficient manner,which the Company believes will require considerable effort.In addition,
the consolidation of operations has required and will continue to require substantial attention from management.The diversion of
management attention and any difficulties encountered in the integration process could have a material adverse effect on the revenues,
levels of expenses and operating results of the combined company.No assurance can be given that the Company will succeed in
integrating its operations in a timely manner or without encountering significant difficultiesor that the expected operating efficiencies,
cost savings,synergies and other benefits from such integration will be realized.There can be no assurance that such integration efforts
will not have a material
51
adverse effect on the Company's ability to compete or will not materially affect its ability to service its debt or the trading price of its
securities.
THE COMPANY'S ABILITY TO COMPETE WILL DEPEND,IN PART,ON ITS FUTURE ABILITY
TO PROVIDE INTERLATA SERVICES.
In the local service area where the Company provides service as an incumbent local exchange carrier,it generally is not permitted to
provide interLATA services until it satisfies certain regulatory conditions set forth in the Telecommunications Act of 1996 primarily
related to local exchange telephone competition.These restrictions generally prohibit Qwest from providingservice between the
multiple LATAs in its local service area,and between its local service area and the rest of the country,including providingprivateline
service,long distance services originatingin the local service area,and toll-freelong distance services terminating in the local service
area.These restrictions will be lifted on a state-by-state basis following further proceedings in each of the 14 states of the local service
area,and upon the approval of the Federal Communications Commission ("FCC").The Company currently expects to have filed all its
ryggni EDGARpro ©2002.EDGAR Online,Inc.
applications with the FCC for authority to enter the interLATA business in each of the states in its local service area by mid-2002 and
to receive approval of each application within 90 days after filing.However,there can be no assurance that the Company will be in a
position to make these applications to the FCC on its current schedule,or will obtain timely approval of these applications.As a result
of these restrictions on in-region interLATA services,the Company currently is not able to offer a ubiquitous communications solution
to those customers requiring services both in and out of the local service area.Any delay in obtaining necessary FCC approvals may
materially adversely impact the Company's ability to achieve its targeted growth in national accounts requiring these services.Even
after elimination of the interLATA restrictions,the Company's long-distance operations will be subject to various regulatory
constraints,including the requirement that interLATA services be offeredthrough a subsidiary that is structurally separated from its
local exchange company.There can be no assurance that these regulations will not have a material adverse effect on the Company's
ability to compete or will not materially affect its ability to service its debt or the trading price of its securities.
ITEM 7A.QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The informationunder the caption "Risk Management"in "Management's Discussion and Analysis of Financial Condition and Results
of Operations"is incorporated herein by reference.
52
ITEM 8.QWEST CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Qwest Communications International Inc.:
We have audited the accompanying consolidated balance sheets of Qwest Communications International Inc.and subsidiaries as of
December 3 l,200 1 and 2000,and the related consolidated statements of operations,stockholders'equity and cash flows for each of
the three years in the period ended December 31,2001.These consolidated financial statements are the responsibility ofthe Company's
management.Our responsibility is to express an opinionon these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.Those standards require that
we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining,on a test basis,evidence supporting the amounts and disclosures in the financial statements.An audit also
includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall
financial statement presentation.We believe that our audits providea reasonable basis for our opinion.
In our opinion,the financial statements referred to above present fairly,in all material respects,the financial position of Qwest
Communications International Inc.and subsidiaries as of December 31,2001 and 2000,and the results of their operations and their
cash flows for each of the three years in the period ended December 31,2001,in conformity with accounting principles generally
accepted in the United States.
/s/ARTHUR ANDERSEN LLP
Denver,Colorado,
January 29,2002 (except for the matters discussed in Note 15,
as to which the date is March 31,2002).
53
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
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Operating revenues:Commercial services.......................$11,118 $8,436 $5,598
Consumer services.........................................5,900 5,360 4,662Directoryservices........................................1,604 1,530 1,436
Switched access services.........................1,073 1,284 1,486
Total operating revenues...................19,695 16,610 13,182
Operating expenses:
Cost of sales.............................7,111 4,923 3,725
Selling,general and administrative.................5,231 4,770 3,753Depreciation.............................................3,994 2,706 2,367
Goodwill and other intangible amortization................1,341 636
Restructuring,Merger-related and other charges...........1,198 1,752
Total operating expenses..................18,875 14,787 9,845
Operating income................820 1,823 3,337
Other expense (income):
Interest expense --net....................1,442 1,041 736
Investment write-downs...................................3,294 447
Decline in market value of financial instruments..........7 470 56
Expenses related to terminated merger.....................----282
(Gain)loss on sales of rural exchanges and fixed
assets.................................................(51)28
(Gain)loss on sale of investments........................(26)(327)367
Other expense (income)--net.............................112 38 (6)
Total other expense --net..................4,778 1,697 1,435
(Loss)income before income taxes,extraordinary item and
cumulative effect of change in accounting principle.......(3,958)126 1,902
Provision for income taxes.................................--207 800
(Loss)income before extraordinary item and cumulative
effect of change in accounting principle..................(3,958)(81)1,102
Extraordinary item --early retirement of debt,net of
tax....................................................(65)----
Cumulative effect of change in accounting principle,net of
tax................................................----240
Net (loss)income.......................$(4,023)$(81)$1,342
Basic (loss)earnings per share:(Loss)income before extraordinary item and cumulative
effect of change in accounting principle..................$(2.38)$(0.06)$1.26
Extraordinary item --early retirement of debt,net of
tax...................................................(0.04)---
Cumulative effect of change in accounting principle,net of
tax................................................----0.28
Basic (loss)earnings per share......................$(2.42)$(0.06)$1.54
Diluted (loss)earnings per share:
(Loss)income before extraordinary item and cumulative
effect of change in accounting principle...............$(2.38)$(0.06)$1.25
Extraordinary item --early retirement of debt,net of
tax.................................................(0.04)----
Cumulative effect of change in accounting principle,net
of tax...........................................----0.27
Diluted (loss)earnings per share.......................$(2.42)$(0.06)$1.52
Basic weighted average shares outstanding (in 000's)........1 661,133 1,272,088 872,309
Diluted weighted average shares outstanding (in 000's)......1,661,133 1,272,088 880,753
The accompanying notes are an integral part of these consolidated financial statements.
Mmma EDGARpro ©2002.EDGAR Online,Inc.
54
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)ASSETS
Current assets:
Cash and cash equivalents..................$257 $154Accountsreceivable--net...................4,502 4,235Inventoriesandsupplies.................377 275Deferredtaxassets.............--72Prepaidandother................621 463
Total current assets.........................5 757 5,199Property,plant and equipment --net.....................29,977 25,760Goodwillandotherintangibleassets--net.................34,523 32,327Investments--net.....................1,400 8,186Otherassets.................................2,124 2,029
Total assets............................................$73 781 $73,501
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Current borrowings......................................$4,806 $3,645Accountspayable........................................1,529 2,049Accruedexpensesandothercurrentliabilities............3,262 3,589Advancebillingsandcustomerdeposits...................392 393
Total current liabilities.............................9,989 9,676Long-term borrowings......................................20,197 15,421Post-retirement and other post-employment benefitobligations.........................................2,923 2,952Deferredincometaxes.....................................2,194 1,768Deferredcreditsandother..............................1,823 2,380Commitmentsandcontingencies(Note 11)
Stockholders'equity:
Preferred stock-$1.00 par value,200,000,000 sharesauthorized,none issued and outstanding..................----
Common stock-$0.01 par value,5 billion shares authorized,1,687,489,169 and 1,672,218,763 issued,1,663,546,598 and1,672,218,763 outstanding..........................17 17
Additional paid-in capital......................41,801 41,289Treasurystock,at cost..............................(1,041)--
(Accumulated deficit)retained earnings...................(4,082)24Accumulatedothercomprehensiveloss....................(40)(26)
Total stockholders'equity.............................36,655 41 304
Total liabilities and stockholders'equity..................$73,781 $73 501
The accompanying notes are an integral part of these consolidated fmancial statements.
521-28 EDGAApro ©2002.EDGAR Online,Inc.
55
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net (loss)income............................$(4,023)$(81)$1,342
Adjustments to net (loss)income:Depreciation and amortization.......................5,335 3,342 2,367
Non-cash Merger-related and restructuring charges....1,069 1,542 --
Loss on exchanges,investments and derivatives.......3,224 590 423
Provision for bad debts.......................660 484 158
Cumulative effect of change in accountingprinciple--net...................
----(240)
Deferred income taxes................501 219 225Equitymethodlosses......................120 44 --
Loss on early retirement of debt --net..............65
Changes in operating assets and liabilities:
Accounts receivable.................................(1,079)(899)(284)
Inventories,supplies,prepaids and other current
assets...........................................(244)(184)(106)
Accounts payable,accrued expenses and advancebillings..........................................(849)(417)345
Restructuring and Merger-related reserves............(674)(679)--
Other...................................(71)(280)316
Cash provided by operating activities........4,034 3,681 4,546
INVESTING ACTIVITIESExpendituresfor property,plant and equipment............(8,543)(6,597)(3,944)
Cash acquired in connection with the Merger............--407 --
Proceeds from sale of equity securities............--868 --
Proceeds from sale of investment in Global Crossing.......--1,140 --
Proceeds from sale of access lines........................94 19
Investment in equity securities...........................(89)(510)(2,464)
Other......................(85)(121)(54)
Cash used for investing activities...................(8,623)(4,794)(6,462)
FINANCING ACTIVITIES
Proceeds from (repayments of)current borrowings..........1,243 (2,200)1,304
Proceeds from long-term borrowings........................6,937 4,295 2,078
Repayments of long-term borrowings........................(2,553)(655)(336)
Costs relating to the early retirement of debt............(106)--
Proceeds from issuance of common stock..................286 320 102
Repurchase of stock from BellSouth.....................(1,000)----
Dividends paid on common stock..................(83)(542)(1,187)
Other.................(32)(29)(16)
Cash provided by financing activities................4,692 1,189 1,945
CASH AND CASH EQUIVALENTS
Increase.......................103 76 29
Beginning balance..................154 78 49
Ending balance....................$257 $154 $78
The accompanying notes are an integral part of these consolidated fmancial statements.
agggga EDGARpro ©2002.EDGAR Online,Inc.
56
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
COMMON
STOCK AND (ACCUMULATED OTHER
QWEST ADDITIONAL DEFICIT)COMPREHENSIVE
COMMON PAID-IN TREASURY RETAINED INCOME
STOCK CAPITAL STOCK EARNINGS (LOSS)TOTAL
(SHARES IN (DOLLARS IN MILLIONS)
THOUSANDS)
BALANCE,DECEMBER 31,1998...........869,680 $532 $--$223 $755
Net income.........................------1,342 $1,342 1,342
Other comprehensive income,net of
taxes.......................--222 222 222
Total comprehensive income.........--$1,564
Dividends declared on commonstock...........................------(1,188)(1,188)
Common stock issuances.............5,790 124 ----124
BALANCE,DECEMBER 31,1999...........875,470 656 --599 1,255
Net loss..........................------(81)$(81)(81)
Other comprehensive loss,net of
taxes.....................--(248)(248)(248)
Total comprehensive loss...........--$(329)
Issuance of shares in connectionwiththeMerger.................775,175 40,020 --40,020
Dividends declared on commonstock...........................------,(272)(272)
Common stock issuances.............21,574 630 ----630
BALANCE,DECEMBER 31,2000...........1,672,219 41,306 --(2)41,304
Net loss..........................------(4,023)$(4,023)(4,023)
Other comprehensive loss,net of
taxes......................
--(14)(14)(14)
Total comprehensive loss..........-$(4,037)
Dividends declared on common
stock...........................------(83)(83)
Repurchase of stock................(23,943)--(1,041)--(1,041)
Common stock issuances.............15,271 512 ----512
BALANCE,DECEMBER 31,2001...........1,663,547 $41,818 $(1,041)$(4,122)$36,655
The accompanying notes are an integral part of these consolidated financial statements.
57
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,2001,2000 AND 1999
NOTE 1:BUSINESS AND BACKGROUND
Qwest Communications International Inc.("Qwest"or the "Company")provides local telecommunications and related services,
wireless services and directory services in the 14-state local service area of Arizona,Colorado,Idaho,Iowa,Minnesota,Montana,
Nebraska,New Mexico,North Dakota,Oregon,South Dakota,Utah,Washington and Wyoming ("local service area").The Company
provides reliable,scalable and secure broadband data,voice and image communications.The Company provides advanced
communications services and data,multimedia and Internet-based services on a national and global basis.Qwest principallyserves
global and national business and government customers,and residential and small business customers primarilyin its local service
area.Qwest is incorporated under the laws of the State of Delaware.
Mmma EDGARpm ©2002.EDGAR Online,Inc.
On June 30,2000,Qwest completed its awaisition (the "Merger")ofUS WEST,Inc.("O -WEST").US WEST was deemed the
accounting acquirer and its historical fmancial statements have been carried forwardas those of the combined company.In connection
with the Merger,each outstanding share of US WEST common stock was converted into the right to receive 1.72932 shares of Qwest
common stock (and cash in lieu of fractional shares).In addition,all outstanding US WEST stock options were converted into options
to acquire Qwest common stock.All share and per share amounts for 2000 and 1999 have been restated to give retroactive effect to the
exchange ratio.
The Merger has been accounted for as a reverse acquisition under the purchase method of accounting with US WEST being deemed
the accounting acquirer and Qwest (prior to the Merger or "pre-MergerQwest")the acquired entity.The total value of the
consideration was approximately $40.0 billion,which has been allocated to the identifiable tangible and intangible assets and liabilities
of pre-MergerQwest.During the second quarter of2001,Qwest completed the allocation of the purchase price to the acquired net
assets of pre-Merger Qwest and adjustments to the preliminarypurchase price allocation were recorded as follows:
PRELIMINARY FINAL
PURCHASE PURCHASE
PRICE PRICE
ALLOCATION ADJUSTMENTS ALLOCATION
(DOLLARS IN BILLIONS)
Identified intangibles..................$4.1 $--$4.1
Investment in KPNQwest,N.V................7.9 (3.1)4.8
Tangible assets and liabilities,net................0.8 0.3 1.1
Deferred income taxes...............................(0.7)(0.1)(0.8)
Goodwill..................27.9 2.9 30.8
Purchase consideration..................$40.0 $--$40.0
Prior to the Merger,pre-MergerQwest's investment in KPNQwest,N.V.("KPNQwest")had a book value of approximately $552
million.The preliminary purchase price allocation of $7.9 billion was based upon the publicly traded Class C share price at the date of
the Mergerand did not consider restrictions related to the Company's Class B share investment in KPNQwest.The determination of
the fair value of the Class B shares was completed in June 2001 resulting in a final purchase price allocation of $4.8 billion and
required an adjustment to the preliminarypurchase price allocation of $3.1 billion.The excess carrying value of the Company's
investment in KPNQwest over its proportionate share of KPNQwest's net equity will be amortized over 10 years.(See Note 3 for
informationon other adjustments made subsequent to the final purchase price allocation relating to the KPNQwest equity investment.)
At the time of the Merger,pre-MergerQwest had net tangible assets with a book value of approximately $3.0 billion.Work was
completed in June 200l to determine the replacement cost ofthe fiber optic network pursuant to Accounting Principles Board ("APB")
Opinion No.16,"Business Combinations."This work
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
resulted in a reduction of property,plant and equipment of approximately $1.1 billion,which was consistent with the preliminary
purchase price allocation.The reduction in carrying value was principallydue to declining replacement cost for fiber optic network
assets.There were no significant differences between the preliminarypurchase price allocation and the final appraised values for
property,plant and equipment.The remaining reduction in net tangible assets related principallyto increased liabilities associated with
severance costs for pre-MergerQwest employees,costs to terminate redundant contracts,adjustments to the fair value of pre-Merger
Qwest's obligations and transaction costs incurred by Qwest (the legal acquirer)to consummate the Merger.The preliminaryallocation
of purchase price to net tangible assets was adjusted upward by approximately $300 million based upon informationQwest was
actively pursuing and able to obtain subsequent to the preliminarypurchase price allocation.
Qwest recorded deferred income taxes in the purchase price allocation,resulting from adjustments to the Company's tangible assets
and liabilities and from recording the identifiableintangible assets.Because of the tax-free nature of the Merger,there was no
corresponding increase in the tax basis of those assets and liabilities.
The final purchase price allocation resulted in goodwillof approximately $30.8 billion that was amortized on a straight-line basis over
Mrsrassa EDGARpro ©2002.EDGAR Online,Inc.
40 years through December 31,2001.Beg.aning January 1,2002,in accordance with State ,ant of Financial Accounting Standards
("SFAS")No.142,"Goodwill and Other Intangible Assets,"the Company will no longer amortize its goodwill.As required,Qwest is
currently evaluating the impact of adopting the impairment provisions of SFAS No.142 and believes the effect of adoption could be a
loss from a change in accounting principle of approximately $20 billion to $30 billion.This change in accounting principle would be
reflected as a reduction in the carrying value of goodwill.
The followingunaudited pro forma results of operations are presented assuming the Merger had been completed on January 1,2000:
YEAR ENDED
DECEMBER 31,
2000
(DOLLARS IN
MILLIONS,EXCEPT
PER SHARE
AMOUNTS)(UNAUDITED)
Revenues.................$18,954
Net (loss)income.................(531)
Diluted (loss)earnings per share...............$(0.32)
The unaudited pro forma results of operations exclude the long-distance business of pre-Merger Qwest conducted within the US
WEST local service area and the pre-MergerQwest construction activity.The long distance activities were required to be disposed of
prior to consummation of the Merger.The unaudited pro forma amounts are not necessarily indicative of the results that would have
been achieved if the Merger had been consummated on January 1,2000,nor are the results indicative of the expected future results of
Qwest.Pro forma diluted loss per share for the year ended December 31,2000 excludes approximately 130 million incremental shares
attributable to options due to their anti-dilutiveeffect as a result of the pro forma loss for that period.
For the years ended December 31,2001 and 2000,Qwest incurred Merger-related and other charges totaling $449 million and $1.752
billion.The Company considered only those costs that were incremental and directly related to the Merger to be "Merger-related."The
2001 Merger-related charges are separate from and
59
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
differentthan the restructuring and other similar charges recognized in the fourth quarter of 2001 (see Note l 3).A breakdown of these
costs is as follows:
YEAR ENDED
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS)
Contractual settlements and legal contingencies.............$115 $734
Severance and employee-related charges....................187 572
Other charges...............................147 446
Total Merger-related and other charges.....................$449 $1,752
Contractual settlements and legal contingencies of $115 million and $734 million for 2001 and 2000,respectively,were incurred to
cancel various commitments no longer deemed necessary as a result of the Merger and to settle various claims related to the Merger.
ramma EDGARpro ©2002.EDGAR Online,Inc.
In connection with the Merger,Qwest reored employee and contractor levels by over 14,bou people,primarily by eliminating
duplicate functions.These employees were terminated prior to December 31,2001.Included in the 2001 and 2000 severance and
employee-related charges of $l87 million and $572 million,respectively,were costs associated with payments to employees who
involuntarilyleft the business since the consummation of the Merger and,for 2000,$102 million in payments that were subject to the
successful completion of the Merger.
Other charges were $147 million and $446 million for 2001 and 2000,respectively.The other charges in 2001 were comprised of $33
million related to abandoned software,$19 million of asset impairment charges and $95 million of professional fees,re-branding costs
and other costs associated with the Merger.The other charges in 2000 were comprised of a $226 million asset impairment charge for
access lines,$114 million relating to abandoned software,a $106 million post-retirement benefit plan curtailment gain and $212
million of professional fees,re-branding costs and other costs associated with the Merger.The Company considered only those costs
that were incremental and directly related to the Merger to be Merger-related.
After the Merger,the Company evaluated its assets for potential impairment and concluded that the fair value of some of the assets was
below their carrying value.In most cases,the decline in fair value was based upon the Company's differentintent as to the use of those
assets or completion of projects after the Merger.The $19 million impairment charge in 2001 was primarilyassociated with certain
inventoryand equipment acquired before the Merger.Qwest concluded the fair value of these items to be minimal and,therefor,the
Company recorded a charge for the full carrying value of these assets.The Company also evaluated for impairment its dedicated
special-purpose access lines that it leases to Competitive Local Exchange Carriers ("CLECs").Given the industry conditions and
regulatory changes affecting CLECs in 2000,and given the fact that these access lines have no alternative use and cannot be sold or re-
deployed,the Company concluded that the net future cash flows from the assets was negative and that sufficient cash flow would not
be generated to recover the carrying value of those assets.Therefore,the Company concluded that the fair value of those assets was
minimal and took a $226 million charge in 2000.These assets are operated by the Company's wholesale services segment.
Followingthe Merger,the Company 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 software was determined to be zero.
Capitalized software costs of $33 million and $l14 million were written offin 2001 and 2000,respectively.The abandoned projects
included a significant billing system replacement and a customer database system.
60
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Offsetting the 2000 Merger-related costs was a $l06 million post-retirement benefit plan curtailment gain.This gain resulted from the
post-Merger termination of retiree medical benefits for all former US 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.
The 2001 Merger-related and other charges of $449 million were net of $164 million in reversals of previously recorded Merger
accruals.The reversals were recorded in the fourthquarter of2001 and resulted from favorabledevelopments in the underlying
matters.
A summary of Merger-related and other charges follows:
Year ended December 31,2000
JANUARY 1,DECEMBER 31,
2000 2000 2000 2000
BALANCE PROVISION UTILIZATION BALANCE
(DOLLARS IN MILLIONS)
Contractual settlements and legalcontingencies...........................$--$734 $358 $376
Severance and employee-related charges....--572 442 130
Other charges............................--446 429 17
Total Merger-related and othercharges............................$--$1,752 $1,229 $523
©2002.EDGAR Online,Inc.
Year ended December 31,2001
JANUARY 1,DECEMBER 31,
2001 2001 2001 2001 2001
BALANCE PROVISION UTILIZATION REVERSALS BALANCE
(DOLLARS IN MILLIONS)Contractual settlements and legalcontingencies..................$376 $263 $347 $148 $144
Severance and employee-relatedcharges......................130 199 308 12 9
Other charges...............17 151 164 4
Total Merger-related and othercharges....................$523 $613 $819 $164 $153
As those matters identified as legal contingencies associated with contract settlements and legal contingencies are resolved,any
amounts will be paid at that time.Any differences between amounts accrued and actual payments will be reflected in results of
operations as an adjustment to Merger-related and other charges.
In 1999,US WEST and Global Crossing Ltd.("Global Crossing")agreed to terminate their merger agreement.In consideration for
terminating the merger agreement,US WEST paid Global Crossing $140 million in cash and tendered 2,231,076 shares (that US
WEST previously purchased in the open market)of Global Crossing common stock for which US WEST paid $140 million.These
termination payments,together with costs of approximately $2 million,were charged to other expense in 1999.Qwest also agreed to
purchase $140 million in services from Global Crossing over four years at the best commercially available prices offered by Global
Crossing.As of December 3l,2001,Qwest had fully met its purchase commitment under this agreement.
61
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 2:SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation.The accompanying consolidated financial statements include the accounts of the Company and all material
majority-owned subsidiaries.All significant intercompany amounts and transactions have been eliminated.
Use of estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United
States requires the Company to make estimates and assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes.Actual results could differ from those estimates.
Reclassifications.Certain prior year balances have been reclassified to conform to the current year presentation.
Change in accounting principle.Prior to 1999,Qwest Dex,Inc.("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.EffectiveJanuary 1,1999,Dex changed to the "point of publication method"of accounting,under which the Company
recognizes revenues and expenses at the time the directory is published.This change in methodology was made to better align Dex's
revenue and expense recognition with the earnings process and to better reflect the seasonal operating activity of the business.The
change in accounting principleresulted in an increase in net income of $240 million (net of income tax of $l53 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
restated its 1999 quarterly results of operations to give effect to the point of publication method.The restatement increased net income
by $l3 million,or $0.01 per diluted share.
Revenue recognition.Revenues for services are recognized when the services are provided.Payments received in advance are deferred
until the service is provided.Up-front fees received,primarily activation fees and installation charges,are deferred and recognized
over the longer of the contractual period or the expected customer relationship,generally 2 to 10 years.Expected customer relationship
periods are generally estimated using historical data of actual customer retention patterns.
©2002.EDGAR Online,Inc.
Directory revenue is recognized at the tin of publication.Changes in publishing schedules may impact the timing of the recognition
of directory revenue.The amount of directory revenue may also be affected by changes in the number of directories published and the
period covered by certain directories.
Design,engineering and installation contracts for certain customer premise equipment agreements are accounted for under the
percentage-of-completion method of accounting.The percentage-of-completion method is calculated using either the ratio of total
actual costs incurred to date to the estimated total project costs or actual labor hours to total estimated labor hours for the project.This
percentage is then applied to the estimated total revenue for the project to determine the amount of revenue to be recorded.
The Company has sold optical capacity (also referred to as indefeasible rights of use or IRUs)on its network primarilyto other
telecommunications service providersin the form of sales of specific channels on Qwest's "lit"network or sales of specific dark fiber
strands.Revenues from transactions related to sales of optical capacity that meet the criteria of a sales-type lease are recognized at the
time the optical capacity is deliveredto and accepted by the customer.If the requirements for sales-type lease accounting are not met,
revenue is recognized ratably over the term of the agreement.The Company concludes IRUs are sales-type leases for accounting
purposes and recognizes revenue at the time deliveryand acceptance of the fiber or capacity takes place so long as:(1)Qwest receives
sufficient consideration;(2)(x)Qwest has passed substantially all risks and rewards of ownership to the fiber or capacity,including
responsibility for operation and maintenance cost and risk of technological or economic obsolescence,to the customer,(y)Qwest does
not have substantial continuing involvement with the capacity sold,and (z)ownership has passed or will pass
62
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
by the end of the agreement;and (3)the customer receives a specific fiber or channel on the Qwest network that only the customer can
utilize.
When Qwest acquires and sells optical capacity to a company in the same period in separate bash transactions,the Company generally -
applies the guidance in Accounting Principles Board ("ABP")Opinion No.29,"Accounting for Nonmonetary Transactions,"and
Emerging Issues Task Force ("EITF")Issue No.01-02,"Interpretations of APB Opinion No.29,"to those transactions.Qwest
recognizes revenue based on fair value for these contemporaneous transactions principally based on the following factors:(1)whether
the assets exchanged are dissimilar (assets held for sale in the ordinary course of business for assets to be used to provide
telecommunication services),(2)whether fair value can be determined within reasonable limits and (3)whether from an accounting
perspective,the earnings process is complete.
As required,the Company will adopt SFAS No.144,"Accounting for the Impairment or Disposal of Long-LivedAssets,"as of
January 1,2002.SFAS No.144 requires that a long-livedasset to be disposed of other than by sale be classified as held and used until
its disposition.As a result,the Company believes it can no longer recognize revenue from optical capacity asset sales.
The Company routinely sells optical and customer premise equipment.Revenue is recognized upon shipment and acceptance by the
customer when the Company acts as a principal in such transactions.
Advertisingcosts.Costs related to advertising are generally expensed as incurred.Advertisingexpense was $279 million,$470 million
and $308 million in 2001,2000 and 1999,respectively.
Income taxes.The provisionfor income taxes consists of an amount for taxes currently payable and an amount for tax consequences
deferred to future periods.Investment tax credits earned prior to their repeal by the Tax Reform Act of 1986 are amortized as
reductions in income tax expense over the lives of the assets which gave rise to the credits.
Cash and cash equivalents.Cash and cash equivalents include highly liquid investments with original maturities of three months or less
that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates.As a result,the carrying
amount of cash and cash equivalents approximates their fair value.The Company's cash balances may exceed federally insured deposit
limits.However,the Company seeks to maintain cash and cash equivalent balances with financial institutions it deems to be of sound
financial condition.
Bank overdrafts of $267 million and $425 million as of December 31,2001 and 2000,respectively,were included in accounts payable.
Receivables.The Company has agreements with other telecommunications services providerswhereby Qwest agrees to bill and collect
for certain of the other telecommunications providers services rendered to the Company's customers within the local service area.The
Company purchases these accounts receivable from the other telecommunications services providers on a full-recourse basis and
includes these amounts in its accounts receivable balance.The amount of the purchased receivables included in Qwest's December 31,
raggmaEDGARpro ©2002.EDGAR Online,Inc.
2001 and 2000 accounts receivable bala,a were $217 million and $294 million,respecti.-y.The Company has not experienced any
significant losses under the recourse provisions related to these purchased receivables.
Qwest also has billing and collection arrangements with other telecommunications services providers for certain services providedby
the Company to customers outside the local service area.While these amounts are generally billed by the telecommunications services
providers on behalfof Qwest,the Company continues to include the receivables in its accounts receivable balance due to the full
recourse provisions of the billing and collection agreements.
63
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The followingtable presents a breakdown of the Company's accounts receivable balances:
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS)
Trade receivables.........................$2,937 $2,228
Earned and unbilled receivables.....................1,393 1,308
Purchased receivables............................217 294
Other..........................327 706
Total accounts receivable.....................4,874 4,536
Less:allowance for bad debts...........................(372)(301)
Accounts receivable --net.......................
The fair value of accounts receivable balances approximates their carrying value because of their short-term nature.Qwest is exposed
to concentrations of credit risk from customers within its local service area and from other telecommunications providers.Qwest
generally does not require collateral to secure its receivable balances.
Inventories.Inventories held for sale (primarilywireless handsets)are carried at the lower of cost or market on a first-in,first-out basis.
Inventories used internally are carried at average cost,except for significant individual items that are valued based upon specific costs.
Property,plant and equipment.Property,plant and equipment is carried at cost and is depreciated using straight-line group methods.
Generally,under the group method,when an asset is sold or retired,the cost is deducted from property,plant and equipment and
charged to accumulated depreciation without recognition of a gain or loss.Leasehold improvements are amortized over the shorter of
the useful lives of the assets or the lease term.Expenditures for maintenance and repairs are expensed as incurred.The Company
capitalizes interest incurred during the construction phase of its network.Capitalized interest is reported as a cost of the network asset
and a reduction to interest expense.
The Company enters into agreements to obtain optical capacity from other telecommunications services providers.These agreements
are accounted for as either capital leases,operating leases or service agreements depending on the terms of the transaction.Optical
capacity agreements that meet the criteria of a capital lease are included in the Company's property,plant and equipment balances.
Impairment of long-livedassets.Long-livedassets such as goodwill,intangibles and property,plant and equipment are reviewed for
impairment whenever facts and circumstances warrant such a review.Under current standards,the assets must be carried at historical
cost if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering
interest.However,if projected cash flows are less than the carrying amount,even by one dollar,the long-livedassets must be reduced
to their estimated fair value.
EffectiveJanuary l,2002,the Company must adopt SFAS No.142.SFAS No.142 provides a more restrictive fair value test to
evaluating goodwill and intangibles for impairment.Upon adoption of SFAS No.142,the carrying value of goodwillwill be evaluated
based upon its current fair value as if the purchase price allocation occurred on January l,2002.Qwest is currently evaluating the
Mast-a EDGARpro ©2002.EDGAR Online,Inc.
impact of adopting the standard and believes the effect of adoption could be a loss from a change in accounting principle of
approximately $20 billion to $30 billion.This change in accounting principle would be reflected as a reduction in the carrying value of
goodwill in 2002.
64
QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Customer acquisition costs.The Company defers the initial direct cost of obtaining a customer to the extent of customer revenue
generated from installation fees.Deferred customer acquisition costs are amortized over the expected life of the customer relationship.
Intangibles.Intangible assets arising from business combinations were initially recorded at fair value and are amortized on a straight-
line basis over their estimated useful lives.The components of intangibles were as follows:
DECEMBER 31,
ESTIMATED LIFE 2001 2000
(DOLLARS IN MILLIONS)
Goodwill......................40 yea-re $30,774 $27,923
Product technology....................10 years 2,200 2,200
Customer lists.......................10 years 1,200 1,200
Assembled workforce.....................3 years 100 100
Tradename...........................40 years 600 600
Other.....................18 months to 40 years 1,705 950
36,579 32,973
Less:accumulated amortization.............(2,056)(646)
Goodwill and other intangible
assets --net..............$34,523 $32,327
Giventhe deterioration in the market for telecommunications services,the Company reviewed its goodwillfor impairment at
December 31,2001.Current standards require use of undiscounted cash flows,without consideration of interest,for impairment tests.
Based upon those standards and using the Company's long-range plan,no impairment was recognized at December 31,2001.Effective
January 1,2002,goodwillwill periodicallybe evaluated for impairment under SFAS No.142.SFAS No.142 applies a more restrictive
fair value test for impairment.The Company is currently evaluating the impact of this new pronouncement on its intangible assets.
Qwest believes the effect of adoption could be a loss from a change in accounting principle of approximately $20 billion to $30 billion.
This change in accounting principle would be reflected as a reduction in the carrying value of goodwillin 2002.Also,under SFAS No.
142,goodwill and certain intangibles will no longer be amortized beginning January 1,2002.The decrease in amortization expense in
2002 will be approximately $900 million.
Computer software.Internally used software,whether purchased or developed,is capitalized and amortized using the straight-line
method over an estimated useful life of 18 months to 5 years.In accordance with Statement of Position ("SOP")98-1,"Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use,"the Company capitalizes certain costs associated with
internally developed software such as payroll costs of employees devotingtime to the projects and external direct costs for materials
and services.Costs associated with internally developed software to be used internally is expensed until the point the project has
reached the development stage.Subsequent additions,modifications or upgrades to internal-use software are capitalized only to the
extent that they allow the software to performa task it previouslydid not perform.Software maintenance and training costs are
expensed in the period in which they are incurred.Unamortized computer software costs of $1.799 billion and $1.173 billion as of
December 2001 and 2000,respectively,which are net of $578 million and $498 million of accumulated amortization,respectively,are
included in intangibles and property,plant and equipment.Amortization of capitalized computer software costs totaled $425 million,
$308 million and $193 million in 2001,2000 and 1999,respectively and was included with depreciation in the accompanying
statements of operations.During 2001 and 2000,$l01 million and $114 million,respectively,of capitalized computer software costs
were written-offbecause several projects were abandoned,includinga significant billing system replacement project and a
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
customer database system project in 2000.The charges were recorded with the restructuring,Merger-related and other charges.
Investments.Investments where the Company exercises significant influence but does not control the investee are accounted for under
the equity method of accounting.Under the equity method,investments are stated at initial cost and are adjusted for contributions,
distributions and the Company's share of income or losses.The Company's share of investee income or losses are recorded one month
in arrears.
Equity investments where the Company cannot exercise significant influence over the investee are carried at cost or,if the security is
publicly traded,at fair market value.Realized gains and losses on securities are determined on the specific identification method and
are included in current earnings.For publicly traded securities,unrealized gains or losses,net of tax,are included in other
comprehensive income.
The Company reviews its portfolio of equity securitíes on a quarterly basis to determine whether a decline in value is other than
temporary.Many factors are considered in assessing whether a decline in value is other than temporary,including,as may be
appropnate:
-Earnings trends and asset quality;
-Near term prospects and fmancial condition of the issuer;
-Financial condition and prospects of the issuer's region and industry;
-The cause and severity of the decline in market price;
-Analysts recommendations and stock price projections;
-The length of time (generally six to nine months)that market value was less than the carrying value;
-Stock price volatility and near term potential for recovery;and
-Qwest's intent and ability to retain the investment.
If Qwest determines that the decline in value of an equity security is other than temporary,the Company will record a charge on its
statement of operations to reduce the carrying value of the security to its estimated fair value.
Accrued expenses and other current liabilities.Accrued expenses and other current liabilities consisted of the following:
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS)
Accrued interest...................................$462 $318
Employee compensation...................................319 463
Accrual for Merger-related and other charges................153 523
Restructuring reserve and other charges....................541 --
Accrued property and other taxes........................446 462
Property,plant and equipment accruals.....................255 401
Accrued facilities costs................................200 394
Current deferred tax liability...........................71 --
Other...........................................815 1,028
Total accrued expenses and other current liabilities........$3,262 $3,589
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The fair value of accounts payable,accrued expenses and other current liabilities approximates their carrying amount because of their
short-term nature.
Pension and post-retirement benefits.Pension and post-retirement health care and life insurance benefits earned by employees during
the year as well as interest on projected benefit obligations are accrued currently.Prior service costs and credits resulting from changes
in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits.
In computing the pension and post-retirement benefit costs,the Company must make numerous assumptions about such things as
employee mortality and turnover,expected salary and wage increases,discount rates,expected return on plan assets and expected
future cost increases.Two of these items generally have a significant impact on the level of cost --discount rate and expected rate of
return on plan assets.
The expected rate of return on plan assets is the long-term rate of return the Company expects to earn on the pension trust's assets.
Qwest establishes its expected rate of return by reviewingthe investment composition of its pension plan assets,obtaining advice from
its actuaries,reviewinghistorical earnings on the pension trust assets and evaluating current and expected market conditions.
Annually,the Company sets its discount rate primarilybased upon the average interest rate during the month of December for a
Moody's AA rated corporate bond.
To compute its expected return on pension plan assets,the Company applies its expected rate of return to the market-related value of
the pension plan assets.The market-related asset value is a computed value that recognizes changes in fair value of pension plan assets
over a period of time,not to exceed five years.In accordance with SFAS No.87,"Employers'Accounting for Pensions,"the Company
elected to recognize actual returns on its pension plan assets ratably over a five-yearperiod When computing its market-related value of
pension plan assets.The election was made in 1987 when SFAS No.87 became effective.This method has the effect of smoothing
market volatility that may be experienced from year to year.As a result,the Company's expected return is not significantly impacted by
the actual return on pension plan assets experienced in the current year.
Derivativeinstruments.The Company occasionally enters into derivativefinancial instruments.The objective of the Company's
interest rate risk management program is to manage the level and volatility of its interest expense.The Company may also employ
financial derivativesto hedge foreign currency exposures associated with particular debt.This objective was achieved in 2001 through
the type of debt issued and a cross-currency swap that converted foreign-denominated debt to U.S.dollar-denominated debt.
Under a cross-currency swap,the Company agrees with another party to exchange U.S.dollars for foreign currency based on a notional
amount,at specified intervals over a defined term.The Company designed its cross-currency swaps as hedges of its borrowings and
these swaps were effectiveduring 2001.The cross-currency swaps were carried at fair value on the balance sheet with changes in fair
value included in other comprehensive income.All cross-currency swaps expired in November 2001.
The Company also entered into equity swaps to modify its risk exposure to changes in the market price of the Global Crossing
common stock previously owned by the Company.Under these equity swaps,the Company agreed with another party to exchange
payments based on a notional amount at specific intervals over a defined term.In exchange for making payments based upon an
interest rate index,the Company received (rendered)payments based upon increases (decreases)in the market price of Global
Crossing common stock.Qwest sold its remaining shares of Global Crossing in 2000;however,the equity swaps matured in increments
through August 2001.These swaps were carried at fair value with changes in fair value included in income.
The following table summarizes the terms of outstanding cross-currency and equity swaps at December 31,2000.There were none
outstanding at December 31,2001.Cross-currency swaps were tied to the Swiss
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Franc and had a liability of $40 million at December 31,2000.Amounts received on the equity swaps were tied to changes in the
market price of Global Crossing common shares and paid rates were tied to one-and three-month London Interbank OfferedRates
("LIBOR").Equity collars had also been entered into in conjunction with the equity swaps to limit the magnitude of any gains or losses
on the equity swaps.The Swiss Franc borrowings and the equity swaps matured in 2001.
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DECEMBER 31,2000
WEIGHTED
AVERAGE RATE
NOTIONAL ---------------
AMOUNT MATURITIES RECEIVE PAY
(DOLLARS IN MILLIONS)
Cross-currency...................$133 2001 --6.51%Equity...................$761 2001 --7.17%
The Company was exposed to but realized no losses from non-performance by counter-parties on these derivatives.
At December 31,2001,deferred credits of $7 million and deferred charges of $48 million on closed forward contracts were included
as part of the carrying value of the underlying debt.The deferred credits and charges are recognized as yield adjustments over the life
of the debt that matures at various dates through 2043.
Stock options.Stock incentive plans are accounted for using the intrinsic value method under which no compensation expense is
recognized for options granted to employees with a strike price that equals or exceeds the value of the underlying security on the
measurement date.
Comprehensive income.Comprehensive income included the following components:
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
Unrealized gains (losses)on available-for-sale marketable
securities,net of reclassification adjustments...........$32 $(397)$366
Foreign currency translation losses........................(33)(7)--
Income tax (provision)benefit related to items of othercomprehensiveincome.................................(13)156 (144)
Other comprehensive (loss)income......................$(14)$(248)$222
Embedded in net unrealized gains and losses on available-for-sale marketable securities are reclassification adjustments.
Reclassification adjustments are comprised of amounts that have been removed from comprehensive income and recognized in income
or loss from operations in the consolidated statement of operations during the periods cited below.
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
Reversal of unrealized net gains (losses)on investments
sold during the period.................................$2 $292 $(454)
Other than temporary losses charged to income...............(59)(480)--
Income tax benefit related to items reclassified into
income...................................................22 66 176
Total reclassification adjustments.........................$(35)$(122)$(278)
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Earnings per share.The following reflects the computation of diluted shares outstanding for 2001,2000,and 1999.Diluted shares
outstanding for the years ended December 31,2001 and 2000 exclude approximately 104 million and 130 million incremental shares,
respectively,related to stock options solely because their effect was anti-dilutive.
YEAR ENDED DECEMBER 31,
2001 2000 1999
(SHARES IN THOUSANDS)
Basic weighted average shares.....................1,661,133 1,272,088 872,309
Stock options............----8,444
Diluted weighted average shares.....................1,661,133 1,272,088 880,753
Exit costs and restructuring reserves.Periodically,the Company commits to exit certain business activities,eliminate officeor facility
locations and/or reduce its number of employees.The charge to record such a decision depends upon various assumptions,including
future severance costs,sublease or disposal costs,contractual termination costs and so forth.Such estimates are inherently judgmental
and may change based upon actual experience.
New accounting standards.In June 1998,the Financial Accounting Standards Board ("FASB")issued SFAS No.133,"Accounting for
DerivativeInstruments and Hedging Activities."This statement establishes accounting and reporting standards for derivative
instruments and hedging activities.SFAS No.133 requires,among other things,that all derivativeinstruments be recognized at fair
value as assets or liabilities in the consolidated balance sheets and changes in fair value generally be recognized currently in earnings
unless specific hedge accounting criteria are met.The adoption of SFAS No.133 on January 1,2001 did not have a material impact on
Qwest's consolidated financial results.
In September 2000,the FASB issued SFAS No.140,"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."This statement provides accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities.SFAS No.140 requires that after a transfer of financial assets,an entity continues to recognize
the financial and servicing assets it controls and the liabilities it has incurred and does not recognize those fmancial and servicing
assets when control has been surrendered and the liability has been extinguished.SFAS No.140 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,2001.The adoption of SFAS No.140 did not have a
material impact on Qwest's consolidated financial results.
In June 2001,the FASB issued SFAS No.141,"Business Combinations."This pronouncement eliminated the use of the "poolingof
interests"method of accounting for all mergers and acquisitions.As a result,all mergers and acquisitions will be accounted for using
the "purchase"method of accounting.SFAS No.141 is effectivefor all mergers and acquisitions initiated after June 30,2001.
Adoption of this pronouncement had no impact on Qwest's consolidated financial results.
In June 2001,the FASB issued SFAS No.142,"Goodwill and Other Intangible Assets."This statement addresses financial accounting
and reporting for intangible assets (excluding goodwill)acquired individuallyor with a group of other assets at the time of their
acquisition.It also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition.
Intangible assets (excluding goodwill)acquired outside of a business combination will be initially recorded at their estimated fair
value.If the intangible asset has a finite useful life,it will be amortized over that life.Intangible assets with an indefinite life are not
amortized.Both types of intangible assets will be reviewed annually for impairment and a loss recorded when the asset's carrying value
exceeds its estimated fair value.The impairment test for intangible assets consists of comparing the fair value of the intangible asset to
its carrying value.Fair value for goodwill and intangible assets is determined based upon discounted cash flows and appraised values.
If the carrying
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
value of the intangible asset exceeds its fair value,an impairment loss is recognized.Goodwill will be treated similar to an intangible
asset with an indefinitelife.As required,the Company will adopt SFAS No.142 effectiveJanuary 1,2002.The adoption of SFAS No.
142 will reduce Qwest's amortization expense by approximately $900 million annually,beginning January 1,2002.Because goodwill
amortization expense is non-deductible for tax purposes,the impact on net income should be an increase of approximately $900
million.Upon adoption of SFAS No.142,the carrying value of goodwill will be evaluated based upon its current fair value as if the
purchase price allocation occurred on January 1,2002.Qwest is currently evaluating the impact of adopting the standard and believes
the effect of adoption could be a loss from a change in accounting principle of approximately $20 billion to $30 billion.This change in
accounting principlewould be reflected as a reduction in the carrying value of goodwill in 2002.
In June 2001,the FASB issued SFAS No.143,"Accounting for Asset Retirement Obligations."This statement deals with the costs of
closing facilities and removing assets.SFAS No.143 requires entities to record the fair value of a legal liability for an asset retirement
obligation in the period it is incurred.This cost is initially capitalized and amortized over the remaining life of the underlying asset.
Once the obligation is ultimately settled,any difference between the final cost and the recorded liability is recognized as a gain or loss
on disposition.As required,the Company will adopt SFAS No.143 effectiveJanuary l,2003.Qwest is currently evaluating the impact
this pronouncement will have on its future consolidated financial results.
In August 2001,the FASB issued SFAS No.144,"Accounting for the Impairment or Disposal of Long-LivedAssets."This
pronouncement addresses how to account for and report impairments or disposals of long-livedassets.Under SFAS No.144,an
impairment loss is to be recorded on long-livedassets being held or used when the carrying amount of the asset is not recoverable from
its expected future undiscounted cash flows.The impairment loss is equal to the difference between the asset's carrying amount and
estimated fair value.In addition,SFAS No.144 requires long-livedassets to be disposed of by other than a sale for cash to be
accounted for and reported like assets being held and used.Long-livedassets to be disposed of by sale are to be recorded at the lower
of their carrying amount or estimated fair value (less costs to sell)at the time the plan of disposition has been approved and committed
to by the appropriate company management.SFAS No.144 is effectivefor fiscal years beginning after December 15,2001.As a result
of the adoption of SFAS No.144,Qwest will no longer recognize revenues from optical capacity asset sales under sales-type leases.
On July 19,2001,the EITF issued its consensus regarding EITF Issue 00-11,"Meeting the Ownership Transfer Requirements of
FASB Statement No.13 for Leases of Real Estate."This issue is primarily concerned with ownership transfer requirements for a sales-
type lease of property under SFAS No.13.According to the consensus,integral equipment subject to a lease should be evaluated as
real estate under SFAS No.13,as amended by SFAS No.98.In addition,the consensus states that a nominal purchase option
contained in a lease does not satisfy the transfer of ownership criterion in SFAS No.13 for transfers of real property,if the failureto
pay the nominal amount results in ownership not being transferred to the lessee.EITF 00-11 provides,however,that this criterion will
be met in cases involvingintegral equipment or property improvements when the lessor agrees,regardless of whether or not the lessee
pays any amount,to execute and deliverto the lessee all documents (including,if applicable,a bill of sale)that may be required to
release the property from the lease and transfer ownership to the lessee.The consensus on EITF 00-11 applies to leases entered into
after July 19,200l and to certain leases modifiedafter that date.Qwest believes it is in compliance with the requirements of SFAS No.
13 and the EITF consensus for IRU transactions entered into after the issuance of the EITF consensus that it treated as sales-type
leases.
NOTE 3:INVESTMENTS
Investment in KPNQwest.In April 1999,Qwest and KPN Telecom B.V.("KPN")formed KPNQwest,a joint venture to create a pan-
European Internet Protocol ("IP")-based fiber optic network,linked to Qwest's network in North America,for data and multimedia
services.Qwest and KPN each initially
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
owned 50%of KPNQwest.On November12,1999,KPNQwest consummated an initial public offering("KPNQwest's IPO")whereby
50.6 million shares of common stock were issued to the public generating approximately $1.0 billion in proceeds.As a result of
KPNQwest's IPO,the public owns approximately 11%of KPNQwest's shares and the remainder were owned equally by Qwest and
KPN.
On November 30,2001,Qwest purchased approximately 14 million additional shares of KPNQwest common stock,and Anschutz
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Company,Qwest's principal stockholder,purchased approximately 6 million shares,from KPN for $4.58 per share.Qwest now owns
approximately 47.5%of the votingpower of the KPNQwest stock and its principal shareholder owns approximately l.5%.As part of
the transaction,KPN granted Qwest an option that expired on March 31,2002,to purchase some or all of KPN's shares in KPNQwest
at fair value on the date of exercise.In addition,all restrictions on the transfer of shares were removed from Qwest's shares but KPN's
shares are still subject to restrictions through 2004.Qwest will continue to account for its proportionate share of KPNQwest's
operations under the equity method of accounting and,because it is no longer a corporate joint venture,will begin recognizing deferred
taxes on its proportionate share of KPNQwest's operations as discussed in Note 8.
The Company's investment in KPNQwest was approximately $1.3 billion at December 31,2001.Qwest's investment exceeded its
proportionate share of KPNQwest's net assets by $840 million at December 31,2001.The excess basis was being amortized over 10
years.In connection with its adoption of SFAS No.142,Qwest will no longer amortize this excess basis beginning in 2002.
Below are the summarized financial results for KPNQwest as of and for the years ended December 31,2001 and 2000 and as of and
for the nine months ended December 31,1999:
DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
Total assets......................$3,201 $2,717 $2,575
Total debt.........................1,364 731 779
Other liabilities.........................868 775 391
Total liabilities.............................$2,232 $1,506 $1,170
Revenue.........................................,$722 $425 $199
Loss from operations...................................(222)(201)(76)
Net loss...................................(237)(128)(62)
Qwest's share of KPNQwest's losses......................$(95)$(34)$--
The Company currently owns approximately 214 million shares of KPNQwest's common stock,which are valued at $6.10 per share on
the Company's books at December 31,2001.At December 31,2001,the closing price of KPNQwest's common stock was $7.15.
Subsequent to December 31,2001,the stock price of KPNQwest's common stock declined significantly below Qwest's carrying value.
In accordance with the Company's policy to review the carrying value of marketable securities on a quarterly basis for other than
temporary declines in value,Qwest will assess the factors it uses to determine fair value of the KPNQwest common stock,including
the difficult financial condition and prospects of KPNQwest and the rest of the European telecommunications industry,the severity of
the decline of the stock price and the near term potential for stock price recovery,in determining the timing and amount of a further
write-down,which Qwest believes is likely and believes may be significant in amount.You can find additional informationabout
Qwest's application of factors used to determine the write-downof the carrying value of KPNQwest's common stock in Note 2 to the
consolidated financial statements.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Investment in Qwest Digital Media,LLC.In October 1999,Qwest and Anschutz Digital Media,Inc.("ADMl"),an affiliate of
Anschutz Company,formed a joint venture called Qwest Digital Media,LLC ("QDM")that providedadvanced digital production,
post-production and transmission facilities,digital media storage and distribution services,telephony-based data storage and enhanced
services,access and routing services.Qwest contributed approximately $84.8 million in the form of a promissory note payable over
nine years at an annual interest rate of 6%.At inception,Qwest and ADMI each owned a 50%equity and votinginterest in the joint
venture.In June 2000,Qwest acquired an additional 25%interest in QDM directly from ADMI.Qwest paid approximately $48.2
million for the interest;approximately $4.8 million in cash was paid at closing and the remaining $43.4 million was paid,with
approximately $1.8 million in interest,on January 2,2001.Followingthis transaction,Qwest owned a 75%economic interest and 50%
votinginterest in QDM and ADMI owned a 25%economic interest and a 50%votinginterest.During 2001 and 2000,the Company
made additional capital contributions of approximately $ll million and $21 million,respectively.
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In October 1999,Qwest also agreed to purchase certain telephony-related assets and all of the stock of Precision Systems,Inc.,a
telecommunications solutions provider,from ADMI in exchange for a promissory note in the amount of approximately $34 million.
The note bears interest at 6%annually with semi-annual interest payments and annual principal payments due through 2008.
In October 1999,Qwest entered into a long-term Master Services Agreement (the "MSA")with QDM under which QDM agreed to
purchase approximately $l 19 million of telecommunication services through October 2008 and Qwest agreed to extend credit to QDM
for the purpose of making payments for the telecommunication services.Each October,QDM would be required to pay Qwest an
amount equal to the difference between certain specified annual commitment levels and the amount of services actually purchased
under the MSA at that time.In October 2001,Qwest agreed to release QDM from its obligation to acquire telecommunications
services from Qwest in exchange for QDM forgiving Qwest's $84.8 million promissory note (after givingeffect to a payment by Qwest
of $2.5 million in accrued interest and $l.3 million in principal on the note).Prior to termination of the MSA,Qwest advanced QDM
the amount QDM owed for accrued telecommunications services of $3.8 million and QDM applied the advance to pay Qwest the
amount owing for the services,including interest on amounts past due.Concurrently with terminating the MSA,QDM repaid the $3.8
million advance under the MSA.
During2001,Qwest recorded a charge of $15 million that represented its share of an impairment charge recorded by QDM.In
December 2001,Qwest management made a decision to discontinue funding QDM,resulting in a charge of $18 million.In February
2002,a determination was made to discontinue the QDM business.
Below are the summarized unaudited financial results for QDM as of and for the years ended December 31,2001 and 2000 and as of
and for the three months ended December 31,1999:
DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
Total assets.......$40 $50 $80
Total debt..........................10 --5
Other liabilities..................................7 10 6
Total liabilities.....................................$17 $10 $11
Revenue............................................$13 $4 $3
Loss from operations.................................(36)(70)(6)
Net loss............................................(34)(65)(5)
Qwest's share of QDM's losses...........................$(25)$(10)$--
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Investment write-downs.The following is a summary of the investment write-downs recorded during 2001 and 2000.There were no
investment write-downs during 1999.
YEAR ENDED
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS)
KPNQwest investment....................................$3,048 $--
QDM investment............................................33 --
Other investment losses.....................................213 447
Total investment write-downs.........................$3,294 $447
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The Company reviews its portfolio of equity securities on a quarterly basis.See Note 2 for the factors considered in assessing whether
a decline in value is other than temporary.
KPNQwest Write-down.The carrying value of pre-Merger Qwest's investment in KPNQwest was $552 million.On June 30,2000,
Qwest's preliminary estimate of the value of its investment in KPNQwest was $7.9 billion.This preliminary estimate was based upon
the closing price of $39.625 of KPNQwest's publicly traded Class C shares on June 30,2000.Qwest's ownership in KPNQwest was
held in Class B shares.These Class B shares were subject to restrictions on marketability through 2004 unlike the Class C shares.
Work was performed during 2000 and 2001 to determine the fair value of the Class B shares as of June 30,2000.The work did not
consider events and circumstances occurring after June 30,2000.
The work was completed in June 2001,and indicated a fair value for the Company's investment in KPNQwest of $4.8 billion or
$23.775 per Class B share.Accordingly,the carrying value of the KPNQwest investment was adjusted,in accordance with APB
Opinion No.16,to equal the $4.8 billion fair value.
At June 30,2001,Qwest evaluated its investment in KPNQwest and concluded that the decline in fair value from $4.8 billion was
other than temporary.Factors considered in reaching this conclusion included the following,among others:
l.KPNQwest's stock price had fallen and remained below $23.775 per share from March 2001.The period of time the market price
was below the Company's carrying value and the severity of the decline indicated that the decline had become other than temporary.
2.Analysts had released new recommendations during the second quarter of their stock price targets for KPNQwest that showed a
significant decline from the first quarter.
3.The European telecom sector had experienced a severe deterioration during the second quarter,including numerous bankruptcies,
making the near term prospects of KPNQwest's stock recovery less certain at June 30,2001.
As a result of the evaluation of Qwest's investment in KPNQwest,the Company concluded that the fair value of its investment at June
30,2001 was $1.3 billion and took a charge of $3.048 billion to reduce the carrying value to the estimated fair value of $6.67 per Class
B share.
QDM write-down.During 2001,Qwest recorded a charge of $15 million that represented its share of an impairment charge recorded
by QDM.In December 2001,Qwest management made a decision to abandon its investment in QDM and discontinue funding,
resulting in a charge of $18 million.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Publicly traded equity security write-downs other than KPNQwest.The Company's equity investments in publicly traded companies
other than KPNQwest consisted of the following:
DECEMBER 31,2001 DECEMBER 31,2000
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
(DOLLARS IN MILLIONS)
$9 $2 $(1)$10 $90 $30 $(62)$58
Included in the portfolio of publicly traded securities was an investment in Lucent common stock with a cost basis of $40.2 million at
December 31,2000.At June 30,2001,Qwest evaluated its investment in Lucent and concluded that the decline in fair value below its
carrying value was other than temporary.Factors considered in reaching this conclusion included the following:
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l.The period oftime Lucent's stock price was below Qwest's carrying amount per share.
2.The magnitude by which Lucent did not meet analysts'first quarter 2001 earnings estimates.
3.A decline in the number of analysts with buy recommendations.
4.The announced termination of merger discussions with a large European telecommunications equipment manufacturer.
As a result of the evaluation of the Company's investment in Lucent,Qwest concluded that the fair value of the investment at June 30,
2001 was $4.2 million and took a charge of $36 million to reduce the investment from its carrying value to its fair value.
In addition to Lucent,charges totaling $23 million were recorded during 200l relating to other than temporary declines in market value
of the Company's portfolio of publicly traded marketable securities.In 2000,the Company recorded a charge of $447 million relating
to a decline in the value of its investment in Global Crossing that was considered other than temporary.
Other equity security write-downs.During 2001,the Company periodically reviewed its portfolio of investments in non-publiclytraded
equity securities for possible impairment of value.As a result of these reviews,Qwest recorded net charges throughout 200l of $l54
million relating to an impairment of value associated with investments in non-public companies.The carrying value of these
investments at December 31,2001 was $ll million.
Decline in market value of derivatives.On August 22,2001,Qwest settled derivativecontracts associated with its previously-owned
equity investment in Global Crossing.These derivatives were recorded at market value with any change in market value taken
immediately to income.Due to a decline in the market value of the derivatives,the Company recorded charges of $7 million,$470
million and $56 million for 2001,2000 and 1999,respectively.
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QWEST COMMUNICATIONS INTERNATIONAL'INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 4:PROPERTY,PLANT AND EQUIPMENT
The components of property,plant and equipment were as follows:
DECEMBER 31,
DEPRECIABLE ---------------------
LIVES 2001 2000
(DOLLARS IN MILLIONS)
Land and buildings................................30-38 years $4,779 $3,473
Communications equipment........................2-14 years 22,111 18,319
Other network equipment..........................8-57 years 22,599 19,450
General purpose computers and other................3-11 years 4,268 3,755
Construction in progress.......................--1,342 3,498
55,099 48,495
Less:accumulated depreciation..................(25,122)(22,735)
Property,plant and equipment --net..............$29,977 $25,760
Capitalized interest.Interest related to qualifyingconstruction projects is capitalized and included in the depreciable basis of the
related asset.For additional informationon interest capitalized,see Note 5.
Assets held for sale.During2000 and 1999,US WEST agreed to sell approximately 800,000 access lines to third-party
telecommunications services providers,including approximately 570,000 access lines to Citizens Communications Company
("Citizens")in nine states.Because these access lines were "held for sale,"US WEST discontinued recognizing depreciation expense
on these assets and recorded them at the lower of their cost or fair value,less estimated cost to sell.
usma EDGARµro ©2002.EDGAR Online,Inc.
On July 20,2001,Qwest terminated its agreement with Citizens under which the majority of the remaining access lines in eight states
were to have been sold and ceased actively marketing the remaining lines.As a result,the remaining access lines were reclassified as
being "held for use"as of June 30,2001.The access lines were measured individuallyat the lower of their (a)carrying value before
they were classified as held for sale,adjusted for any depreciation (amortization)expense or impairment losses that would have been
recognized had the assets been continuously classified as held for use,or (b)their fair value at June 30,2001.The required adjustments
to the carrying value of the individualaccess lines were included in operating income for 2001.This resulted in a charge to
depreciation of $222 million to "catch-up"the depreciation on these access lines for the period they were held for sale.
In 2001,Qwest sold approximately 41,000 access lines in Utah and Arizona resulting in $94 million in proceeds and a gain of $51
million.In 2000,Qwest also completed the sale of approximately 20,000 access lines in North Dakota and South Dakota resulting in
proceeds of $19 million and a gain of $11 million.
As of December 31,2000,Qwest identifiedapproximately $500 million of bandwidth capacity on its existing network that was held
for sale to telecommunications providersand others.In connection with the Merger,this capacity was recorded at fair value,less
estimated cost to complete and sell.As of January 1,2002,all capacity had been reclassified as "held for sale or use"pursuant to the
adoption of SFAS No.144.
Qwest has built its network outside North America primarilyby entering into long-term agreements to acquire optical capacity.Qwest
has also acquired some capacity within North America under similar contracts.Several of the companies (for example,Global
Crossing,Enron Broadband Services,Inc.and 360networks (USA),Inc.)from which Qwest has acquired capacity appear to be in
financial difficulty or have filed for bankruptcy protection.Bankruptcy courts have wide discretion and could deny Qwest the
continued benefits of use of the assets under the capacity agreements without relievingQwest of its obligation to make payments or
requiringthe refund of amounts previouslypaid.Qwest believes that it is taking appropriate
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
actions to protect its investments and maintain on-going use of the acquired capacity.At this time,it is too early to determine what
affect the bankruptcies will have with respect to the acquired capacity or Qwest's ability to use this acquired capacity.
NOTE 5:BORROWINGS
CURRENT BORROWINGS
Current borrowings consisted of:
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS)
Commercial paper..........................................$3,165 $2,106
Short-term notes and current portion of long-term
borrowings..............................................1,480 1,388
Current portion of capital lease obligations................161 151
Total current borrowings...............................$4,806 $3,645
The weighted average interest rate on commercial paper was 2.98%and 7.33%at December 31,2001 and 2000,respectively.
At December 31,2001,Qwest maintained commercial paper programs to finance the short-term operating cash needs of the business.
As of December 31,2001,the Company had a $4.0 billion syndicated credit facility to support its commercial paper programs.The
syndicated credit facility matures on May 3,2002.As of December 31,2001,there was no outstanding balance.Qwest has the option
to convert any borrowed amount into a one-year term loan that would be due in May 2003 providedQwest is not in default of the
Rusmas EDGAftpro ©2002.EDGAR Online,Inc.
credit facility,including compliance with all covenants at March 31,2002.The syndicated credit facility agreement requires Qwest to
pay a quarterly fee based upon the Company's long-term debt agency ratings.The facility fee on the total credit facility available
ranged from 0.07%to 0.08%annually.The facility also contained financial covenants,the most restrictive of which was a requirement
to maintain a debt-to-consolidated EBITDA ratio of not more than 3.75-to-1."Consolidated EBITDA"as defined in the credit facility
is a measure of EBITDA that starts with the Company's net income and adds back certain items,primarilythose of a non-cash or a non-
operating nature.You can find additional informationconcerning borrowings against the syndicated credit facility after December 31,
2001 in Note 15 to the consolidated financial statements.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
LONG-TERM BORROWINGS
Long-term borrowings consisted principallyof debentures and medium-term notes with the following interest rates and maturities at
December 31:
MATURITIES
-TOTAL TOTAL
INTEREST RATES 2003 2004 2005 2006 THEREAFTER 2001 2000
(DOLLARS IN MILLIONS)
Up to 5%.....................$50 $--$--$--$--$50 $150
Above 5%to 6%...............24 1,366 41 --389 1,820 571
Above 6%to 7%...............43 --915 --5,481 6,439 5,213
Above 7%to 8%...............1,060 749 --1,249 8,399 11,457 8,005
Above 8%to 9%...............--------265 265 623
Above 9%to 10%..............--------·11 11 473
Above 10%to 11%.............------------162
$1,177 $2,115 $956 $1,249 $14,545 20,042 15,197
Capital leases.............155 224
Total..............$20,197 $15,421
The Company's borrowings have a fair value of $24.5 billion and $18.4 billion at December 31,2001 and 2000,respectively.The fair
values of the Company's borrowings are based on quoted market prices where available or,if not available,based on discounting future
cash flows using current interest rates.With the exception of approximately $1.1 billion in debt held by Qwest (the parent company),
the Company's long-term borrowings were held in three wholly-ownedsubsidiaries,Qwest Corporation,Qwest Communications
Corporation and Qwest Capital Funding,Inc.("QCF").The borrowings of QCF are guaranteed by the parent company,Qwest.For
information concerning the Company's borrowingactivities after December 31,2001,see Note 15.
The portion of debt that is public debt either assumed by Qwest in the Merger or issued following the Merger (referred to as "Post-
Merger public debt")had an outstanding balance of $19.9 billion at December 31,2001.This Post-Merger public debt has no financial
covenants and contains no cross-default or cross-acceleration provisions.At December 31,2001 Qwest had public debt that was issued
by Qwest prior to the Merger(referred to as "Pre-Merger public debt")with an outstanding balance of $l.4 billion.Of the Pre-Merger
public debt,$1.0 billion has no financial covenants as long as Qwest maintains an investment grade debt rating.If the Company fails to
maintain an investment grade rating,the most restrictive covenant that would apply would be a limitation on the incurrence of debt.
The limitations on incurrence of debt would apply if,after application of the proceeds,the ratio of debt to consolidated cash flow
available for fixed charges (as defined in the indenture)for the four full quarters preceding the incurrence would be 5.0-to-1 or higher.
This portion of the Pre-Merger public debt contains provisions relating to acceleration upon an acceleration of debt obligations in the
aggregate in excess of $10 million,including the syndicated credit facility and any of the Post-Merger public debt.The remaining
portion of the Pre-Merger public debt (approximately $350 million)has no financial covenants but does contain provisions relating to
acceleration upon an acceleration of debt obligations in the aggregate in excess of $25 million.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The following table shows the amount of gross interest cost,capitalized interest and cash interest paid during 2001,2000 and 1999.
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
Gross interest expense...................$1,629 $1,145 $763
Capitalized interest......................(187)(104)(27)
Net interest expense.....................$1,442 $1,041 $736
Cash interest paid....................
In March 2001,the Company completed a cash tender to buy back certain outstanding debt.In the tender offer,the Company
repurchased approximately $995 million in principal ($1.2 billion in face value)of outstanding debt.As a result of the repurchase,the
Company incurred $106 million ($65 million after tax)in premium payments.The tender offerwas conducted to retire the bonds
because of their high coupon rates and to reduce interest cost to the Company.In connection with this tender offer,the indentures were
amended to eliminate restrictive covenants and certain default provisions.See Note 15 for subsequent events concerning debt ratings.
The Company is currently in compliance with all financial covenants in its credit facility and indentures (including any covenants
suspended while the Company maintains its investment grade credit rating)as of the last measurement date.
NOTE 6:LEASE ARRANGEMENTS
Operating leases.Certain office facilities,real estate and equipment are subject to operating leases.The Company also has easement
agreements with railroads and public transportation authorities that are accounted for as operating leases.
During2001,the Company entered into an operating lease arrangement ("synthetic lease")under which the Company had the option to
purchase the leased real estate properties at any time during the lease term.This synthetic lease facility had a capacity of approximately
$305 million,although only approximately $177 million had been utilized at December 31,2001.This synthetic lease,in combination
with approximately $77 million of previouslyexisting synthetic leases,had certain financial covenants.The total debt held by these
lessors related to the property leased to Qwest was $254 million at December 31,2001.See Note 15 for additional informationon the
termination of the synthetic lease facilities.
Rent expense,net of sublease rentals,under these operating and synthetic leases was $696 million,$528 million and $269 million
during 2001,2000 and 1999,respectively.
Capital leases.The Company leases certain office facilities and equipment under various capital lease arrangements.Assets acquired
through capital leases during 2001,2000 and 1999 were $1.282 billion,$678 million and $113 million,respectively.Assets recorded
under capitalized lease agreements included in property,plant and equipment consisted of $2.283 billion and $1.182 billion of cost less
accumulated amortization of $392 million and $276 million at December 31,2001 and 2000,respectively.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Future minimum payments under capital leases and non-cancelable operating leases as of December 31,2001 were as follows:
CAPITAL OPERATING
LEASES LEASES
(DOLLARS IN MILLIONS)
2002...........................$193 $339
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2003.................................................111 311
2004............................42 338
2005.............................3 277
2006...............................3 234
2007 and thereafter........................20 1,738
Total minimum payments.............................372 $3,237
Less:amount representing interest..................(56)
Present value of minimum payments..................316
Less:current portion.....................(161)
Long-term portion.....................$155
Minimum operating lease payments have not been reduced by minimum sublease rentals of $110 million due in the future under non-
cancelable subleases.They also do not include contingent rentals for the synthetic leases.In 2001,2000 and 1999,contingent rentals
representing the difference between the fixed and variable rental payments were not material.
Capital lease obligations are included in current and long-term borrowings on the Company's balance sheet.
NOTE 7:EMPLOYEE BENEFITS
PENSION,POST-RETIREMENT AND OTHER POST-EMPLOYMENT BENEFITS
Qwest has a noncontributory defined benefit pension plan (the "Pension Plan")for substantially all management and occupational
(union)employees.Post-retirement healthcare and life insurance plans providemedical,dental,vision and life insurance benefits for
certain retirees.The Company also provides post-employment benefits for certain former employees.
In conjunction with the Merger,the Company made the following changes to its employee benefit plans for management employees
only.EffectiveSeptember 7,2000,employees were not eligible to receive retiree medical and life benefits unless they had either at
least 20 years of service by December 31,2000 or would be service pension eligible by December 31,2003.The elimination of the
retiree medical benefits decreased the other post-employment benefits expense for 2000 by approximately $17 million.In addition,the
elimination was accounted for as a plan curtailment,resulting in a gain of approximately $106 million.This gain was recorded as an
offset to Merger-related costs.Employees who retained the benefits will begin paying contributions in 2004 except for those
employees who retired prior to September 7,2000.
Pension benefits for management employees prior to January 1,2001 were based upon their salary and years of service while
occupational employee benefits were generally based upon job classification and years of service.
Qwest also modifiedthe Pension Plan benefits,effectiveJanuary 1,2001,for all formerUS WEST management employees who did
not have 20 years of service by December 31,2000,or who would not be
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
service pension eligible by December 31,2003.For employees who did not meet these criteria,no additional years of service will be
credited under the defined lump sum formula for years worked after December 31,2000.These employee's pension benefits will only
be adjusted for changes in the employee's future compensation level.Future benefits will equal 3%of pay,plus a return as defined in
the Pension Plan.The minimum return an employee can earn on their account in a givenyear is based upon the Treasury Rate and the
employee's account balance at the beginning of the year.All management employees,other than those who remain eligible under the
previous formulas,will be eligible to participate in the 3%-of-pay plan.The impact of these changes on the pension credit for 2001 was
an increase of approximately $10 million.
EffectiveAugust l 1,2000,the Pension Plan was amended to provideadditional pension benefits to plan participants who were
involuntarily separated from the Company as a result of the Merger between August l 1,2000,and June 30,2001.Under the
numa EDGARpro ©2002.EDGAR Online,Inc.
restructuring plan,this amendment was extended to cover additional employees who involuntarilyseparate from the Company.The
amount of the benefit is based on pay and years of service and ranges from a minimum of four months up to a maximum of one year of
an employee's base pay.For 2001 and 2000,the amounts of additional benefits paid were $154 million and $27 million,respectively.
Pension and post-retirement costs are recognized over the period in which the employee renders services and becomes eligible to
receive benefits as determined by using the projected unit credit method.Qwest's funding policy is to make contributions with the
objectiveof accumulating sufficient assets to pay all benefits when due.No pension funding was required in 2001,2000 or 1999.The
Company did not make any contributions to the post-retirement healthcare benefit plan in 2001.In 2000 and 1999,Qwest made
contributions to the post-retirement healthcare benefit plan of $l6 million and $18 million,respectively.
The components of the pension credit and post-retirement benefit cost (credit)were as follows:
PENSION CREDIT POST-RETIREMENT BENEFIT COST
YEAR ENDED DECEMBER 31,YEAR ENDED DECEMBER 31,
2001 2000 1999 2001 2000 1999
(DOLLARS IN MILLIONS)
Service cost.........................$187 $182 $203 $29 $49 $70
Interest cost........................686 702 658 307 337 326
Expected return on plan assets.......(1,101)(1,068)(935)(224)(271)(229)
Amortization of transition asset.....(79)(79)(79)
Amortization of prior service cost...--2 2 (4)12 20
Plan curtailment.....................--------(106)
Recognized net actuarial gain........(53)(58)--(91)(107)(28)
Net (credit)cost included in
income..........................$(360)$(319)$(151)$17 $(86)$159
To compute its expected return on pension plan assets,the Company applies its expected rate of return to the market-related value of
the pension plan assets.The market-related asset value is a computed value that recognizes changes in fair value of plan assets over a
period of time,not to exceed five years.In accordance with SFAS No.87,"Employers'Accounting for Pensions,"the Company
elected to recognize actual returns on its plan assets ratably over a five year period when computing its market-related value of plan
assets.The election was made in 1987 when SFAS No.87 became effective.This method has the effect of smoothing market volatility
that may be experienced from year to year.As a result,the Company's expected return is not significantly impacted by the actual return
on plan assets experienced in the current year.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Followingis a reconciliation of the benefit obligation for the pension and post-retirement plans:
PENSION POST-RETIREMENT
YEAR ENDED YEAR ENDED
DECEMBER 31,DECEMBER 31,
2001 2000 2001 2000
(DOLLARS IN MILLIONS)
Benefit obligation accrued at beginning of year...$9,470 $8,877 $4,500 $4,344
Service cost............................187 182 29 49
Interest cost..........................686 702 307 337
Actuarial loss..................................652 513 136 301
Plan amendments..................................------(169)
Special termination benefits......................154 27 ----
Plan curtailment..............................------(106)
Benefits paid...........................(1,524)(831)(272)(256)
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Benefit obligation accrued at end of year.........$9,625 $9,470 $4,700 $4,500
Followingis a reconciliation of the change in the fair value of plan assets for the pension and post-retirement plans:
PENSION POST-RETIREMENT
YEAR ENDED YEAR ENDED
DECEMBER 31,DECEMBER 31,
2001 2000 2001 2000
(DOLLARS IN MILLIONS)
Fair value of plan assets at beginning of year...$13,594 $14,593 $2,407 $2,886
Actual loss on plan assets...................(851)(78)(148)(68)
Net employer withdrawals.............
----(40)(245)
Section 420 transfer..................(98)(90)98 90
Benefits paid.....................(1,524)(831)(272)(256)
Fair value of plan assets at year end............$11,121 $13,594 $2,045 $2,407
In December 2001 and 2000,under provisions of Section 420 of the Internal Revenue Code,$98 million and $90 million,respectively,
of pension assets were transferred fromthe pension plan to the post-retirement benefit plan to pay for current year retiree health care
benefits.In 2001 and 2000,$33 million and $300 million,respectively,of Life Insurance and Welfare Trust assets were transferred to
the Company to pay for employee welfare benefits.
The following table represents the funded status of the pension and post-retirement plans:
PENSION POST-RETIREMENT
YEAR ENDED YEAR ENDED
DECEMBER 31,DECEMBER 31,
2001 2000 2001 2000
(DOLLARS IN MILLIONS)
Funded (unfunded)status.........................$1,496 $4,124 $(2,655)$(2,093)
Unrecognized net actuarial gain..................(265)(2,922)(132)(730)
Unamortized prior service benefit.............----(53)(58)
Balance of unrecognized transition asset.........(229)(308)----
Prepaid benefit (accrued cost)...................$1 002 $894 $(2,840)$(2,881)
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QWEST COMMUNICATIONSINTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The actuarial assumptions used to compute the pension credit and post-retirement benefit cost are based upon informationavailable as
of the beginning of the respective year and are as follows:
PENSION CREDIT POST-RETIREMENT BENEFITS COST
YEAR ENDED DECEMBER 31,YEAR ENDED DECEMBER 31,
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2001 2000 1999 2001 2000 1999
Weighted average discount rate.......7.75%8.00%6.75%7.75%8.00%6.75%Weighted average rate of compensation
increase...........................4.65%4.65%4.65%N/A N/A N/AExpectedlong-term rate of return onplanassets........................9.40%9.40%8.80%9.40%9.40%8.80%
Initial healthcare cost trend rate...N/A N/A N/A 7.00%8.00%8.00%
Ultimate healthcare cost trend
rate.............................N/A N/A N/A 5.00%5.00%5.00%
Year ultimate trend rate isreached.........................N/A N/A N/A 2011 2011 2011
The actuarial assumptions used to compute the funded (unfunded)status for the plans are based upon information available as of the
end of the respective year and are as follows:
PENSION POST-RETIREMENT
YEAR ENDED YEAR ENDED
DECEMBER 31,DECEMBER 31,
2001 2000 2001 2000
Weighted average discount rate.................7.25%7.75%7.25%7.75%
Weighted average rate of compensation
increase.....................................4.65%4.65%N/A N/A
Initial healthcare cost trend rate.............N/A N/A 8.25%7.00%
Ultimate healthcare cost trend rate............N/A N/A 5.00%5.00%
Year ultimate trend rate is reached............N/A N/A 2007 2011
A one percent change in the assumed healthcare cost trend rate would have had the following effects in 2001:
ONE PERCENT CHANGE
INCREASE DECREASE
Effect on the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost
(statement of operations)................................$19 $(17)
Effect on accumulated post-retirement benefit obligation
(balance sheet)..............................$262 $(225)
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%wage increase in 2001,a 5%wage increase in 2002,a 6%pension increase in 2002,and a 10%pension
increase in 2003.The appropriate changes were reflected in the pension and post-retirement benefit computations.
OTHER BENEFIT PLANS
401(k)plan.The Company currently sponsors two defined contribution benefit plans covering substantially all management and
occupational (union)employees.Under these plans,employees may contribute a percentage of their annual compensation to the plans
up to certain maximums,as defined by the plans and by the Internal Revenue Service.The Company matches a percentage of
employee contributions in Company stock.Expenses incurred in connection with the Company's 401(k)plans were $99 million,$113
million and $93 million for 2001,2000 and 1999,respectively.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
Deferred compensation plans.The Company sponsors several deferred compensation plans for its current and former Boards of
Directors and a select group of management and highly compensated employees,certain of which are open to new participants.
Participants in these plans may,at their discretion,invest their deferred compensation in various investment choices including
Company stock.
The deferred compensation obligation of the Company is recorded on the balance sheet in "Deferred Credits and Other."Company
shares owned inside the plans are treated as treasury stock and are recorded at cost in Stockholders'Equity.Investment earnings,
administrative expenses,changes in investment values and increases or decreases in the deferred compensation liability resulting from
changes in the phantom investment values are recorded in the Company's income.The deferred compensation liability as of December
3l,2001 and 2000 was $64 million and $74 million,respectively.The values of the deferred compensation plans'assets were $34
million and $67 million at the end of 2001 and 2000,respectively.
NOTE 8:INCOME TAXES
The components of the provisionfor income taxes are as follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
FEDERAL :
Current........................................$(501)$(23)$530
Deferred..........................487 196 156
(14)173 686
STATE AND LOCAL:
Current.....................................--11 45
Deferred..........................................14 23 69
14 34 114
Provision for income taxes.............................$--$207 $800
Qwest received $574 million in net income tax refunds in 2001 and made net payments of income taxes of $115 million and $472
million in 2000 and 1999,respectively.
The effectivetax rate differs from the statutory tax rate as follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
(IN PERCENT)
Federal statutory tax rate.............................(35.0)%35.0%35.0%
State income taxes --net of federal effect................(3.5)%3.4%3.5%
Non-deductible KPNQwest investment writedown...............30.0%----
Non-deductible goodwill amortization.......................7.4%107.4%--
Non-deductible Merger-related charges......................2.0%46.2%5.7%
KPNQwest loss..............................................0.8%10.7%--
ESOP dividend.........................................--(9.4)%(0.9)%
Other..........................(1.7)%(29.0)%(1.2)%
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Effective tax rate.................--%164.3%42.1%
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QWEST COMMUN1CATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
The components of the net deferred tax liability were as follows:
DECEMBER 31,
2001 2000
(DOLLARS IN MILLIONS)
Property,plant and equipment.....................$2,868 $1,677
Intangible assets.................................1,248 1,447
State deferred taxes-net of federal effect..................607 406
Revenue recognition........................835 447
Other......................234 135
Deferred tax liabilities...................5,792 4,112
Net operating loss carryforward............................2,173 933
Post-retirement benefits-net of pension....................'.592 717
State deferred taxes-net of federal effect..................369 243
Provision for bad debts................................137 111
Other.............................................243 412
Deferred tax assets..................................3,514 2,416
Valuation allowance.................................(13)--
Net deferred tax liability...............................$2,265 $1,696
As of December 31,2001,Qwest had a net operating loss carryforwardof $6.2 billion that will expire between 2003 and 2021.Unused
net operating losses generated by pre-MergerQwest are subject to special rules in the Internal Revenue Code ("IRC").IRC section 382
limits the amount of income that may be offset each year by unused net operating losses arising prior to a merger.The annual limitation
is based upon the value of the acquired company at the time of the merger times the federal long-term tax-exempt rate in effect at that
date.Any unused limitation may be carried forwardand added to the next year's limitation.This limitation will not impact Qwest's
ability to utilize its net operating losses against future taxable income.The Company believes it is more likely than not that future
taxable income will be sufficient to fully recover the existing net deferred tax asset associated with the net operating loss carryforward.
Prior to the purchase of the additional equity interest in KPNQwest in November 2001,the Company's investment in KPNQwest was
deemed a foreigncorporate joint venture.As a result,Qwest previouslydid not record deferred income taxes related to its investment
in KPNQwest.The amount of unrecorded deferred income taxes prior to the additional stock purchase was $305 million.The
temporary difference would become taxable upon the sale of KPNQwest or if earnings were repatriated into the United States.With
the purchase of the additional 14 million shares of KPNQwest in November2001,the Company's investment in KPNQwest is no
longer considered a corporate joint venture.Therefore,deferred taxes will be recognized prospectively on the Company's portion of all
future undistributed earnings and losses of KPNQwest.Because the current benefit will only become realizable upon the occurrence of
the events described above,the Company recorded a valuation allowance against these losses of $13 million for the year ended
December 31,2001.
The Company had unamortized investment tax credits of $135 million and $l54 million as of December 31,2001 and 2000,
respectively.In addition,the Company recorded a deferred tax asset associated with the exercise of employee stock options of $204
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million and $189 million in 2001 and 2000,respectively.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 9:STOCKHOLDERS'EQUITY
Common stock ($0.01 par value).In connection with the Merger,shares outstanding have been adjusted to renect the conversion rate
of 1.72932 Qwest shares for every US WEST share.
Preferred stock.Under the Company's charter,the Board of Directors has the authority,without shareholder approval,to (1)create one
or more classes or series within a class of preferred stock,(2)issue shares of preferred stock in such class or series up to the maximum
number of shares of the relevant class or series of preferred stock authorized,and (3)determine the preferences,rights,privileges and
restrictions of any such class or series,including the dividend rights,votingrights,the rights and terms of redemption,the rights and
terms of conversion,liquidation preferences,the number of shares constituting any such class or series and the designation of such
class or series.One of the effects of authorized but unissued and unreserved shares of capital stock may be to render more difficult or
discourage an attempt by a potential acquirer to obtain control of the Company by means of a merger,tender offer,proxy contest or
otherwise,and thereby protect the continuity of the Company's management.The issuance of such shares of capital stock may have the
effect of delaying,deferring or preventing a change in control of the Company without any further action by the shareholders of the
Company.The Company has no present intention to adopt a shareholder rights plan,but could do so without shareholder approval at
any future time.
As of December 31,2001,there were no shares of preferred stock issued and outstanding.
Treasury stock.In January of 2001,Qwest repurchased 22.22 million shares of its common stock from BellSouth Corporation
("BellSouth")for $1.0 billion in cash.The repurchased shares were available to satisfy the Company's obligations under its employee
benefits and options programs at December 31,2001.As part of the transaction,BellSouth committed to acquire $250 million in
services from the Company over a five-yearperiod.The agreement provides that BellSouth will make payment for the services in cash
and/or Qwest common stock.The number of shares tendered was based upon values contained in the agreement.During2001,Qwest
providedservices to BellSouth valued at $92 million.BellSouth paid for these services by remitting cash throughout the year of $18
million and,on December 10,2001,tendering 1.2 million shares of Qwest common stock.The value of the tendered shares at
December 10,2001 of $15 million was recorded in treasury stock.The $43 million difference between (i)the value of the shares at
December 10,200l of $15 million and (ii)the value assigned to the shares under the agreement of $58 million,was recorded as a
reduction to additional paid-in capital.The unpaid balance of $16 million was recorded in the Company's accounts receivable.See
Note 15 for subsequent events.
Rabbi trusts established for two of the Company's deferred compensation plans include investments in the Company's stock.These
504,000 shares with a cost of $26 million at December 31,2001,were accounted for as treasury stock.
Dividends.The Company declared dividends of $0.05,$0.31 and $l.36 per share of common stock during 2001,2000 and 1999,
respectively.
Stock options.Prior to the Merger,US WEST adopted stock plans under which the Company could grant awards in the formof stock
options,stock appreciation rights,restricted stock and phantom units,as well as substitute stock options and restricted stock awards.In
connection with the Merger,all outstanding options prior to the Merger announcement vested.Options granted after that date and prior
to June 30,2000 continue to vest according to the vesting requirements in the plan.
On June 23,1997,Qwest adopted the Equity Incentive Plan,which was amended and restated on June 1,1998.This plan permits the
grant of non-qualifiedstock options,incentive stock options,stock appreciation rights,restricted stock,stock units and other stock
grants.The maximum number of shares of common stock that may be issued under the Equity Incentive Plan at any time pursuant to
awards is equal to 10%of the aggregate number of common shares issued and outstanding.Issued and outstanding shares are
determined as
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
of the close of trading on the New York Stock Exchange on the preceding trading day.As of December 31,2001,the maximum
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number of options available for grant was 166 million with 104 million options outstanding and 62 million options available for grant.
Approximately 104 million shares of common stock were reserved for issuance at December 31,2001.
The sub-committee of the Compensation Committee of the Board of Directors determines the exercise price for each option.However,
stock options must have an exercise price that is at least equal to the fair market value of the common stock on the date the stock
option is granted,subject to certain restrictions.Stock option awards generally vest in equal increments over the vesting period ofthe
granted option (either a four-orfive-yearperiod),and awards granted under the Equity Incentive Plan will immediately vest upon any
change in control of the Company,as defmed,unless providedotherwise by the Compensation Committee at the time of grant.Options
granted in 2001,2000 and 1999 have terms ranging from six to ten years.
On October 31,2001,the Company announced a voluntary stock option exchange offer.Under the terms of the offer and subject to
certain restrictions,Qwest employees could exchange all or a portion of their stock options with an exercise price of $35 or more.The
offer was available only to Qwest full-time,non-union employees (excluding 15 senior executives),for options granted by Qwest or U
S WEST.Options surrendered by an employee were cancelled and new options will be issued no earlier than six months and one day
after the termination of the option exchange offer on a share-for-share basis.The exercise price on the new options will equal the
closing market price on the day the new options are granted.The options will vest ratably over a four-year period commencing on the
new option grant date.At the expiration of the exchange offer,10,748 employees had exchanged stock options for approximately 29
million shares.
Summarized below is the activity of the US WEST plan prior to the Merger,pre-MergerQwest (acquired entity for accounting
purposes)plan prior to the Merger and the combined Qwest plan subsequent to the Merger:
US WEST PLAN QWEST EQUITY INCENTIVE PLAN
NUMBER OF NUMBER OF
SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE(IN THOUSANDS)EXERCISE PRICE (IN THOUSANDS)EXERCISE PRICE
Outstanding December 31,1998 ......41,551
Granted..........................21,736 31.20 35,262 31.69Exercised........................(5,205)18.62 (13,827)9.68
Canceled or expired..............(2,056)23.38 (12,826)17.12
Outstanding December 31,1999......56,026 25.52 68,911 21.48Granted..........................10,830 41.20 41,698 45.52
Exercised........................(7,586)18.80 (20,834)16.21Canceledorexpired..............(6,822)36.27 (12,145)34.65
US WEST options converted uponMerger..........................52,448 $29.64 52,448 29.64
Outstanding December 31,2000......130,078 32.19Granted..........................38,477 24.83
Exercised........................(14,102)20.36Tenderedforcancellation........(29,040)43.52Canceledorexpired..............(21,362)37.01
Outstanding December 31,2001......104,051
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Options to purchase 53.9 million,52.7 million and 22.7 million shares of Qwest common stock at weighted average exercise prices of
$26.55,$24.33 and $19.94 were exercisable at December 31,2001,2000 and 1999,respectively.
The outstanding options at December 31,2001 have the following characteristics (shares in thousands):
OUTSTANDING OPTIONS
-------------------------------------------EXERCISEABLEOPTIONS
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
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RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS)EXERCISE PRICE EXERCISEABLE EXERCISE PRICE
O 3 0 6 9 $14.12 13,066 $11.55
$19.01 -$29.00.........24,427 6.80 25.59 15,005 24.56
$29.01 -$35.00.........25,013 7.01 31.44 13,769 30.74
$35.01 -$42.00.........16,771 6.83 39.15 10,197 39.28
$42.01 -$49.00.........5,750 7.69 46.67 1,484 46.65
$49.01 -$60.00.........1,080 6.45 50.87 362 50.75
Total................104,051 6.94 $27.19 53,883
Had the Company accounted for employee stock option grants under the fair value method prescribed by SFAS No.123,"Accounting
for Stock-Based Compensation,"the pro forma results would have been as follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS,EXCEPT PER
SHARE AMOUNTS)
Net (loss)income:
As reported.............................................$(4,023)$(81)$1,342
Pro forma...............................................(4,282)(167)1,293
(Loss)earnings per share:
As reported --basic....................................(2.42)(0.06)1.54
As reported --diluted..................................(2.42)(0.06)1.52
Pro forma --basic......................................(2.58)(0.13)1.48
Pro forma --diluted.......................,............(2.58)(0.13)1.47
Followingare the weighted average assumptions used with the Black-Scholes option-pricingmodel to estimate the fair value of options
granted during 2001,2000 and 1999:
YEAR ENDED DECEMBER 31,
2001 2000 1999
Risk-free interest rate...............................4.2%6.0%5.6%
Expected dividend yield............................0.1%1.0%--
Expected option life (years).........................5.5 4.7 4.0
Expected stock price volatility.......................64.0%52.6%57.0%
Weighted average grant date fair value.....................$15.58 $23.03 $27.87
Restricted stock.In 2001,2000 and 1999,the Company granted 650,000 shares,447,321 shares and 952,248 shares of restricted stock
under the Equity Incentive Plan with weighted-average grant date fair values of $16.81,$46.60 and $32.03 per share,respectively.
Compensation expense of $4 million,$15 million and $ll million was recognized for restricted stock grants in 2001,2000 and 1999,
respectively.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Employee stock purchase plan.In October 1998,pre-MergerQwest (the acquired entity for accounting purposes)instituted an
Employee Stock Purchase Plan ("ESPP").The Company is authorized to issue approximately 7.0 million shares of Qwest common
stock to eligible employees.Under the terms of the ESPP,eligible employees may authorize payroll deductions of up to 15%of their
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base compensation,as defined,to purchase Qwest common stock at a price of 85%of the fair market value of the Qwest common
stock on the last trading day of the month in which the Qwest common stock is purchased.Shares purchased prior to the Merger were
253,766 in 2000 and 443,242 in 1999.Shares purchased subsequent to the merger were 1,951,756 in 2001 and 349,868 in 2000.
Growth share plan.Pre-Merger Qwest (the acquired entity for accounting purposes)had a Growth Share Plan for certain of its
employees and directors.A "Growth Share"was a unit of value based on the increase in value of Qwest over a specified measurement
period.Upon vesting,settlement of each Growth Share was made in Qwest common stock.All Growth Share grants were made based
on a beginning Qwest value that was greater than or equal to the fair value of Qwest at the grant date.
Prior to the Merger,Qwest recognized approximately $3.5 million and $6 million of expense for the Growth Share Plan in 2000 and
1999,respectively.Subsequent to the Merger,the Company recognized $3.5 million of expense in 2000 and $12 million of expense in
2001 related to the Growth Share Plan.
The following table summarizes the activity of the number of shares of Qwest common stock allocated for the settlement of
outstanding Growth Shares:
NUMBER OF SHARES
December 31,1998 outstanding balance..............559,954
1999 settlements...............(37,516)
December 31,1999 outstanding balance...............522,438
2000 settlements....................(165,715)
December 31,2000 outstanding balance..............356,723
2001 settlements....................(356,723)
December 31,2001 outstanding balance......................--
Due to the change in control as a result of the Merger,all Growth Shares were vested at December 31,2000 and approximately $29
million was included in other long-term liabilities related to outstanding Growth Shares.In the first quarter of2001,the Company
issued approximately 357,000 shares of Qwest common stock in settlement of all remaining vested Growth Shares.
NOTE 10:OPTICAL CAPACITY ASSET SALES AND PURCHASES
The Company sold optical capacity assets on its network to other telecommunications services providers in the form of either sales of
dark fiber strands or sales of specific channels on Qwest's "lit"network.These arrangements are typically structured as indefeasible
rights of use,or IRUs,which are the exclusive right to use a specified amount of capacity or fiberfor a specified period of time,
usually 20 years or more.Revenues from sales of either type that meet the criteria of a sales-type lease were recognized at the time of
deliveryto and acceptance by the customer.During the years ended December 31,2001 and 2000,the Company recognized revenue of
$1.013 billion and $468 million,respectively,related to optical capacity asset sales.Total future cash payments to be received by the
Company under these agreements are $212 million in 2002 and $40 million in 2003.
The Company also entered into agreements to purchase optical capacity assets and network facilities from other telecommunications
services providers.These purchases allow the Company to expand its fiber
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
optic network both domestically and internationally.Property,plant and equipment increased by approximately $988 million and $354
million during the years ended December 31,2001 and 2000,respectively,due to these purchases.In some cases,Qwest enters into
two transactions that occur at the same time:one to sell IRUs to companies and a second to acquire optical capacity from such
companies.These arrangements are referred to as "contemporaneous transactions."Although cash is generally exchanged in
contemporaneous transactions and the Company believes they are separate legally enforceable transactions,the Company has also
applied APB Opinion No.29 and EITF Issue No.01-02.Accordingly,exchanges of optical capacity held for sale in the ordinary
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course of business for capacity to be used in Qwest's operations are recorded at fair value if the criteria in these standards are met.
Otherwise,these exchanges are recorded at the lower of historical cost or fair value.
A summary of the above transactions follows:
AVERAGE GROSS
REVENUES MARGIN %
2001 2000 2001 2000
(DOLLARS IN MILLIONS)
Capacity sales treated as non-contemporaneous.....$329 $199 57%49%
Capacity sales treated as contemporaneous.........684 269 43%50%
Total.....................$1,013 $468 48%50%
CASH RECEIVED CASH PAID FOR
FROM OPTICAL PURCHASED
CAPACITY ASSET OPTICAL CAPACITY
SALES ASSETS
2001 2000 2001 2000
(DQLLARS IN MILLIONS)
Capacity transactions treated asnon-contemporaneous.................................$414 $117 $215 $132
Capacity transactions treated as contemporaneous......969 137 863 133
Cash received from optical capacity sales is included in cash providedby operating activities.Cash expended for the purchase of
optical capacity assets is included in investing activities.
NOTE 11:COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Minimumusage requirements and other commitments.Qwest has agreements with IXCsand third party vendors that require the
Company to maintain minimum monthly and/or annual billings based on usage.The Company also has certain agreements with third
party vendors that require payments that are unconditional.The minimum usage contracts primarilyrelate to IP and data services such
as dial-up Internet access,dedicated Internet access,voice over IP services,traditional privatelines,local access and asynchronous
transfer mode services.Qwest believes it will meet substantially all minimum usage commitments.In the unlikely event that
requirements have not been met,Qwest will record the appropriate charges.The Company has reflected in its financial statements the
financial impact of all current,unmet minimum usage requirements.
The Company has entered into unconditional purchase obligations to obtain facilities management services from other
telecommunications services companies.Qwest is an authorized distributor for certain equipment manufacturers and routinely sells
such equipment to unrelated parties.During2001,the Company sold equipment to other telecommunications companies and
contemporaneously entered into unconditional
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
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commitments to obtain facilities management services from these companies.The equipment sold to those companies will not be used
exclusively to provide services to Qwest and these companies may use alternative equipment or means to provide the required facilities
management services to the Company.Revenues recognized from these equipment sales were $l48 million during 2001 and none
during 2000.The profit from all these 2001 equipment sales was deferred because there was no practical manner to separate the
equipment sale and facilities management services contracts.The deferred profit will be amortized over the terms of the service
agreements of approximately 4 to 5 years.Specifically,under these facilities management services obligations,the Company's
minimum future cash obligations are approximately $1.3 billion.
At December 31,2001,the total amount of future cash commitments to be paid over the next five years under minimum usage and
unconditional purchase requirement agreements is approximately $3.0 billion.
Letters of credit.The Company maintains letter of credit arrangements with various financial institutions for up to $77 million.At
December 31,2001,the amount of letters of credit outstanding was $49 million.
KPNQwest.As of December 31,2001,Qwest had a remaining unconditional purchase obligation to purchase up to E81 million (or
$72 million based on a conversion rate at December 31,2001)worth of network capacity from KPNQwest through 2002.Qwest has no
further obligation to fund KPNQwest.
CONTINGENCIES
Litigation.In April 1999,CSX Transportation,Inc.("CSXT")filed a complaint in federal district court in Jacksonville,Florida against
Qwest seeking damages for an alleged breach of a 1995 contract.CSXT's complaint principallyinvolves claims for alleged breaches of
an agreement that granted Qwest the right to install conduit for a fiber optic network along CSXT's rights-of-way.The Company has
asserted counterclaims against CSXT alleging that CSXT fraudulently induced a 1999 settlement agreement regarding defense and
indemnity obligations between the parties,and alleging that CSXT breached the 1995 agreement.Trial is scheduled to commence in
May 2002.
In January 2001,an amended purported class action complaint was filed in Denver District Court against Qwest and certain current
and former officers and directors on behalfof stockholders of US WEST.The complaint alleges that Qwest has a duty to pay a
quarterly dividendto US WEST stockholders of record as of June 30,2000.Plaintiffsfurther claim that the defendants attempted to
avoidpaying the dividendby changing the record date from June 30,2000 to July 10,2000.In June 2000,the court denied the
plaintiffs'motion for a temporary restraining order attempting to prevent the closing of the Merger.In October 2001,Qwest's motion to
dismiss the complaint was denied in part.The court deferred ruling on the remainder of the motion pending discovery.
On July 23,2001,Qwest filed a demand for arbitration against Citizens alleging that it breached Agreements for Purchase and Sale of
Telephone Exchanges dated as of June 16,1999,between Citizens and US WEST Communications,Inc.,with respect to the purchase
and sale of exchanges in Arizona,Colorado,Idaho,Iowa,Minnesota,Montana,Nebraska and Wyoming.The demand for arbitration
was filed after Citizens failed to close the exchange sales in violation of the terms of the purchase agreements.Citizens,in turn,filed a
demand for arbitration alleging counter claims against Qwest in connection with the sale of those same exchanges,as well as
exchanges located in North Dakota that Qwest did sell to Citizens.In the arbitration,Qwest seeks a determination that Citizens
breached the agreements and,as a result,Qwest is entitled to draw down on a series of letters of credit Citizens providedin connection
with the transactions and other damages.Citizens seeks a determination that Qwest breached the agreements and,as a result,Citizens is
entitled to damages.This arbitration is still at a preliminary stage.
In August 2001,Qwest filed a complaint in state court in Colorado and an arbitration demand against Touch America,Inc.("Touch
America").In response,also in August 2001,Touch America filed a complaint against Qwest in federal district court in Montana and
removed Qwest's state court complaint to federal
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
district court in Colorado.Touch America has also filed answers and counterclaims in the arbitration and the Colorado lawsuit.Touch
America's complaint in Montana was dismissed on November 5,2001,and Touch America's motion for reconsideration was denied on
December 17,2001.The disputes between Qwest and Touch America relate to various billing,reimbursement and other commercial
disputes arising under agreements entered into for the sale of Qwest's interLATA (local access and transport area)business in its local
service area to Touch America on June 30,2000.Touch America also asserts that Qwest has violated state and federal antitrust laws,
the Telecommunications Act of 1996 (the "Act")and Qwest's Federal Communications Commission tariff.Each party seeks damages
against the other for amounts billed and unpaid and for other disputes.Discovery has begun in the arbitration,and the parties have
tentatively scheduled the arbitration hearing for September 23,2002.The court case is in a preliminary stage,discovery has not begun
Maasmsa EDGARpro ©2002.EDGAR Online,Inc.
and no trial date has been set.Touch America also asserts that we violatedthe Act (including claims relating to Qwest's sale of IRUs
violatingthe Act)and its tariffs,and has filed related complaints at the FCC.
From July 27,2001 to October l,2001,seven purported class action complaints were filed in federal district court in Colorado against
Qwest,its Chairman and ChiefExecutive Officer,Joseph P.Nacchio,and its ChiefFinancial Officer,Robin R.Szeliga on behalf of
purchasers of Qwest's publicly traded stock between March 22,2001 and July 23,2001.One of the seven complaints has been
voluntarily dismissed.The remaining six complaints,which have been consolidated,allege,among other things,that Qwest,Mr.
Nacchio and Ms.Szeliga made material false statements regarding the results of operations for the quarter ended March 31,200l in
violationof sections 10(b)and 20(a)of the Securities Exchange Act of 1934 ("Exchange Act")and that,during the above period,the
individual defendants sold shares of Qwest's common stock.On December 3,2001,a Consolidated Amended Class Action Complaint
("Consolidated Complaint")was filed in federal district court in Colorado against Qwest,Joseph P.Nacchio,Robin R.Szeliga,and
several other former and present officers and/or directors of the Company on behalfof purchasers of Qwest's publicly traded stock
between October 24,2000 and October 30,2001.This Consolidated Complaint supersedes the six purported class action complaints
filed between July 27,2001 and October l,2001.The Consolidated Complaint alleges,among other things,that during the class
period,Qwest and certain of the individualdefendants made material false statements regarding the results of operations in violation of
sections 10(b)and 20(a)of the Exchange Act and that during the class period,the individual defendants sold shares of Qwest's
common stock in violationof section 20A of the Exchange Act.The Consolidated Complaint alleges that Qwest's financial results
during the class period and statements regarding those results were false and misleading due to the alleged
(i)overstatement of revenue,(ii)understatement of costs,(iii)manipulation of employee benefits in order to increase profitability,and
(iv)misstatement of certain assets and liabilities.The Consolidated Complaint seeks unspecified compensatory damages and other
relief.On January 15,2002,Qwest and the individualdefendants filed a motion to dismiss,which is pending before the court.
On October 22,2001,a derivativelawsuit was filed in federal district court in Colorado,naming as defendants each of the members of
the Qwest Board of Directors,and naming Qwest as a nominal defendant.The derivativecomplaint is based upon the allegations made
in the class actions described in the preceding paragraph,and alleges that the Board members intentionally or negligently breached
their fiduciaryduties to Qwest by failing to oversee implementation of securities laws that prohibitinsider trading.The derivative
complaint also alleges that the Board members breached their fiduciary duties to Qwest by causing or permitting Qwest to commit
alleged securities violations,thus (i)causing Qwest to be sued for such violations,and (ii)subjecting Qwest to adverse publicity,
increasing Qwest's cost of raising capital and impairing earnings.The derivativecomplaint further alleges that certain directors sold
shares between April 26,2001 and May 15,2001 using non-public company information.In December 2001,the derivativelawsuit
was stayed,pending resolution of the Consolidated Complaint.See Note 15 for subsequent events.
From time to time the Company receives complaints and becomes subject to investigations regarding "slamming"(the practice of
changing long-distance carriers without the customer's consent),"cramming"
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(the practice of charging a consumer for goods or services that the consumer has not authorized or ordered),and other matters.In
December 2001,an administrative law judge recommended to the CaliforniaPublic Utilities Commission that Qwest be assessed a $38
million penalty for alleged slamming and cramming violations.That recommendation was appealed by Qwest to the full California
Public Utilities Commission on January 4,2002 and the Company is awaiting the decision on appeal.The Company has received other
complaints regarding slamming and cramming,both in and outside its local service area,and may become subject to other
investigations in the future.Such complaints or investigations have resulted or could result in further legal action and the imposition of
fines and other penalties or damage awards.Although such complaints and actions are not anticipated to have a material adverse effect
on the Company,they could indirectly impact the timing of the Company's Section 271 approval to sell long-distance services in the
Company's local service area.
ThroughDecember 2001,several purported class actions have been filed in various courts against Qwest on behalfof landowners in
Alabama,California,Colorado,Georgia,Illinois,Indiana,Kansas,Louisiana,Mississippi,Missouri,North Carolina,Oregon,South
Carolina,Tennessee and Texas.The complaints challenge Qwest's right to install its fiber optic cable network in railroad rights-of-way
and in California,Colorado,Illinois,South Carolina and Texas,also challenge the Company's right to install fiber optic cable in utility
and pipeline rights-of-way.In Alabama,the complaint challenges Qwest's right to install fiber optic cable in any right-of-way,
including public highways.The complaints allege that the railroads,utilities and pipeline companies own a limited property right-of-
way that did not include the right to permit the Company to install its fiber optic cable network on the plaintiffs'property.The Indiana
action purports to be on behalfof a national class of landowners adjacent to railroad rights-of-way over which the Company's network
passes.The Alabama,California,Colorado,Georgia,Kansas,Louisiana,Mississippi,Missouri,NorthCarolina,Oregon,South
Carolina,Tennessee and Texas actions purportto be on behalfof a class of such landowners in those states,respectively.The Illinois
action purports to be on behalfof landowners adjacent to railroad rights-of-way over which Qwest's network passes in Illinois,Iowa,
Kentucky,Michigan,Minnesota,Nebraska,Ohio and Wisconsin.The complaints seek damages on theories of trespass and unjust
nu-a EDGARpro ©2002.EDGAR Online,Inc.
enrichment,as well as punitivedamages.
Qwest has also been named as a defendant in various other litigation matters.The Company intends to vigorously defend these
outstanding claims and the outstanding claims specifically described above.
Intellectual property.Qwest frequently receives offers to take licenses for patent and other intellectual rights,including rights held by
competitors in the telecommunications industry,in exchange for royalties or other substantial consideration.Qwest also regularly is the
subject of allegations that its products or services infringeupon various intellectual property rights,and receives demands that it
discontinue the alleged infringement.The Company normally investigates such offers and allegations and responds appropriately,
including defending itself vigorously when appropriate.There can be no assurance that,if one or more of these allegations proved to
have merit and involvedsignificant rights,damages or royalties,this would not have a material adverse effect on Qwest.
Regulatory matters.Qwest has pending regulatory actions in local regulatory jurisdictions which call for price decreases,refunds or
both.These actions are generally routine and incidental to Qwest's business.
The Company has providedfor certain of the above matters in its consolidated financial statements as of December 31,2001.Although
the ultimate resolution of these claims is uncertain,Qwest does not expect any material adverse impacts as a result of the resolution of
these matters.
NOTE 12:SEGMENT INFORMATION
Qwest operates in four segments:retail services,wholesale services,network services and directory services.The retail services
segment provides local telephone and data services,long-distance voice and data
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -'(CONTINUED)
services and wireless services.The wholesale services segment provides exchange access services that connect customers to the
facilities of IXCs and interconnection to the Qwest telecommunications network to CLECs.The network services segment provides
access to the Qwest telecommunications network,including Qwest's information technologies,primarilyto the Company's retail
services and wholesale services segments.The directory services segment publishes White and Yellow Pages telephone directories and
provideInternet-based directory services and database marketing services.Qwest provides its services to residential and business
customers both inside and outside its local service area.
Following is a breakout of the Company's segments.The accounting principles used are the same as those used in the consolidated
financial statements.The "other"category includes unallocated corporate expenses and revenues.Qwest internally tracks,separately,
only the assets of its Directory Services segment with all remaining assets included as a reconciling item.The "Reconciling Items"
category also includes other adjustments.The 1999 amounts have not been restated to conform with the 2001 and 2000 presentation
because the information was not available as a result of systems changes that occurred after the Merger.
TOTAL
COMMUNICATIONS
RETAIL WHOLESALE NETWORK AND RELATED DIRECTORY RECONCILING CONSOLIDATED
SERVICES SERVICES SERVICES SERVICES SERVICES OTHER ITEMS TOTAL
(DOLLARS IN MILLIONS)
2001External revenues.........$14,941 $3,003 $110 $18,054 $1,604 $37 $--$19,695
Adjusted EBITDA(1)........11,435 2,478 (6,804)7,109 1,071 (827)--7,353
Assets....................--------1,875 --71,906 73,781
Capital Expenditures......859 7 7,458 8,324 2 217 --8,543
2000External revenues.........11,837 3,083 132 15,052 1,530 28 --16,610
Adjusted EBITDA(1)........9,205 2,682 (4,569)7,318 959 (1,360)--6,917
Assets....................--------1,392 --72,109 73,501
Capital Expenditures......1,033 103 5,207 6,343 41 213 --6,597
1999External revenues.........9,022 2,871 242 12,135 1,436 --(389)13,182
Adjusted EBITDA(1)........6,111 2,157 (2,793)5,475 741 (512)--5,704
Assets....................--------819 --22,453 23,272
Capital Expenditures......587 111 3,199 3,897 48 (1)--3,944
(l)Adjusted EBITDA does not include non-recurring and non-operating items,which for the relevant periods includes restructuring
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charges,Merger-related and other charges,asset write-offs and impairments,gains/losses on the sale of investments and fixed assets,
gains/losses on sales of rural exchanges,changes in the market values of investments,certain legal charges,Separation charges and
certain regulatory rate refunds.The Company uses adjusted EBITDA as a measure ofits operating performance.The Company
believes that adjusted EBITDA is important to investors in the Company's debt and equity securities and to analysts that cover these
securities because it is one measure of the income generated that is available to service debt.Adjusted EBITDA does not represent
cash flow for the periods presented and should not be considered as an alternative to cash flows as a source of liquidity.Moreover,the
items excluded from the calculation of adjusted EBITDA are significant components in understanding and assessing the Company's
financial performance.Qwest's definition of adjusted EBITDA is not necessarily comparable with EBITDA or adjusted EBITDA as
used by other companies or with similar concepts used in Qwest's debt instruments.Adjusted EBITDA is reported as a complement to
the financial results in accordance with GAAP and is presented to provideinvestors additional information concerning the Company's
operations.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
A reconciliation from Segment adjusted EBITDA to pre-tax income follows:
YEAR ENDED DECEMBER 31,
2001 2000 1999
(DOLLARS IN MILLIONS)
Segment adjusted EBITDA....................$7,353 $6,917 $5,704
Less:Depreciation and amortization............................5,335 3,342 2,367
Restructuring,Merger-related and other charges...........1,198 1,752 --
Other expense --net..........................4,778 1,697 1,435
(Loss)income before income taxes,extraordinary item and
cumulative effect of change in accounting principle.....$(3,958)$126 $1,902
Beginning in 2002,the Company expects to change its segment reporting to reflect the way Qwest intends to manage its operations in
2002.The new segments will be:(1)business services,(2)consumer services,(3)wholesale services,
(4)directory services and (5)network services.The business services segment provides IP,data,voice and wireless products and
services to retail and small business customers.The consumer services segment provides IP,data,voice and wireless products and
services to the consumer market.The wholesale services segment provides exchange access services that connect customers to the
facilities of IXCs and interconnection to the Qwest telecommunications network to CLECs as well as IP,data,voice and wireless
products and services to wholesale customers.The network and directory services segments will remain the same as under the previous
segment reporting.
NOTE 13:RESTRUCTURING
Duringthe fourth quarter of2001,the Company approved a plan to furtherreduce current employee levels,consolidate and sublease
facilities and abandon certain capital projects,terminate certain operating leases and recognize certain asset impairments.The
Company recorded a restructuring charge of $749 million to cover the costs associated with these actions.The restructuring charge is
comprised of the following:
YEAR ENDED
DECEMBER 31,2001
(DOLLARS IN MILLIONS)
Severance and employee-related charges......................$332CyberCentersubleaselossesandleaseholdwrite-offs........165
Contractual settlements and legal contingencies............129
Other charges.....................123
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Total restructuring charge......................$749
In order to streamline the business and consolidate operations to meet lower customer demand resulting from the current economic
conditions,the Company identified a net reduction of 11,000 employees and contractors in various functional areas,in addition to
previous reductions in connection with the Merger.The severance charge of $332 million relates to involuntaryseparation costs for
approximately 10,000 employees.The Company expects the remainder of the reduction to be achieved through attrition.As of
December 31,2001,over 4,000 employees had been involuntarilyseparated by the Company and cash severance payments totaling
$32 million had been made relating to these separations.The Company expects the remaining employee separations to be completed
by June 30,2002.
The Company operates 16 Web hosting centers ("CyberCenters")across the country that are subject to various operating leases.Qwest
also has several CyberCenters currently under construction that would require
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
additional capital outlays before they are functional.Finally,the Company has some CyberCenter facilities under lease where no
construction work has begun.As a result of the slowing economy and current excess capacity for Web hosting services,the Company
has suspended its plans to build CyberCenters where construction had not begun and has halted furtherconstruction on those currently
under construction.The Company expects to sublease the majority of the non-operational CyberCenters within the next 12 months at
rates less than Qwest's lease rates for the facilities.The Company recorded a charge of $112 million for expected sublease losses.In
addition,the Company wrote off $53 million of leasehold improvements at CyberCenters that were partially complete.
The Company occupies administrative and network operations buildings under operating leases with varyingterms.Due to the
reduction in employees and consolidation of operations,the Company expects to terminate 40 operating lease agreements across the
country within the next 12 months.The Company recorded a charge of $129 million related to the termination of these operating lease
agreements.
Other restructuring charges primarily includes asset impairments.Asset impairment charges of $51 million relate mainly to the assets
of two development projects.Because both projects were incomplete and abandoned,the fair value of such assets was determined to be
zero.These assets were operated by the Company's network services segment and represented certain equipment and other assets.The
Company also reviewed all internal software projects in process and determined that certain projects with a carrying value of $68
million would no longer be pursued.Because the projects were incomplete and abandoned,the fair value of such software was
determined to be zero.The abandoned projects included various billing and other system enhancements.
A summary ofthe liabilities recorded from these restructuring costs at December 31,2001,is as follows:
JANUARY 1,DECEMBER 31,
2001 2001 2001 2001
BALANCE PROVISION UTILIZATION BALANCE
(DOLLARS IN MILLIONS)
Severance and employee-related charges....$--$332 $32 $300
CyberCenter sublease losses and leasehold
write-offs............................--165 55 110
Contractual settlements and legalcontingencies...........................--129 2 127
Other charges.............................--4 --4
Total accrued costs............--630 89 541
Asset impairments............--119 119 --
Total restructuring charge..............$--$749 $208 $541
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NOTE 14:RELATED-PARTY TRANSACTIONS
During 2001 and 2000,Qwest entered into several transactions in the normal course of business with KPNQwest for the purchase and
sale of optical capacity assets and the provisioningof services such as privateline,Web hosting,Internet protocol transit and dedicated
Internet access.The Company made purchases from KPNQwest of approximately $213 million and $70 million in 2001 and 2000,
respectively.Qwest sold products and services to KPNQwest in the amount of $18 million and $26 million in 2001 and 2000,
respectively.At December 31,2001 and 2000,Qwest had a receivable from KPNQwest for these products and services of $8 million
and $7 million,respectively.Pricing for these services was based on what the Company believed to be fair market value at the time the
transactions were consummated.The sales to Qwest were in accordance with the distribution agreement Qwest has with KPNQwest,
whereby Qwest is,in certain circumstances,the exclusive distributor of certain of KPNQwest's services in North America.Qwest owns
approximately 47.5%of the outstanding shares of KPNQwest's common stock.As of December 31,2001,
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Qwest had a remaining unconditional purchase obligation to purchase up to E8 l million (or $72 million based on a conversion rate at
December 31,2001)worth of network capacity from KPNQwest through 2002.Qwest has no furtherobligation to fund KPNQwest.
In October 1999,Qwest and ADMI,an affiliate of Anschutz Company,formed a joint venture called QDM that providedadvanced
digital production,post-production and transmission facilities,digital media storage and distribution services,telephony-based data
storage and enhanced services,access and routing services.Qwest contributed approximately $84.8 million in the form of a promissory
note payable over nine years at an annual interest rate of 6%.At inception,Qwest and ADMI each owned a 50%equity and voting
interest in the joint venture.In June 2000,Qwest acquired an additional 25%interest in QDM directly from ADMl.Qwest paid
approximately $48.2 million for the interest;approximately $4.8 million was paid in cash at closing and the remaining $43.4 million
was paid with approximately $1.8 million in interest,on January 2,2001.Followingthis transaction,Qwest owned a 75%economic
interest and 50%votinginterest in QDM and ADMI owned a 25%economic interest and a 50%votinginterest.
In October 1999,Qwest also agreed to purchase certain telephony-related assets and all of the stock of Precision Systems,Inc.,a
telecommunications solutions provider,from ADMI in exchange for a promissory note in the amount of approximately $34 million.
The note bears interest at 6%annually with semi-annual interest payments and annual principal payments due through 2008.
In October 1999,Qwest entered into a long-term Master Services Agreement (the "MSA")with QDM under which QDM agreed to
purchase approximately $119 million of telecommunication services through October 2008 and Qwest agreed to extend credit to QDM
for the purpose of making payments for the telecommunication services.Each October,QDM would be required to pay Qwest an
amount equal to the difference between certain specified annual commitment levels and the amount of services actually purchased
under the MSA at that time.In October 2001,Qwest agreed to release QDM from its obligation to acquire telecommunications
services from Qwest in exchange for QDM forgivingQwest's $84.8 million promissory note (aftergivingeffect to a payment by Qwest
of $2.5 million in accrued interest and $1.3 million in principal on the note).Prior to termination of the MSA,Qwest advanced QDM
the amount QDM owed for accrued telecommunications services of $3.8 million and QDM applied the advance to pay Qwest the
amount owing for the services,including interest on amounts past due.Concurrently with terminating the MSA,QDM repaid the $3.8
million advance under the MSA.
During2001,Qwest recorded a charge of $15 million that represented its share of an impairment charge recorded by QDM.In
December 2001,Qwest management made a decision to discontinue funding QDM,resulting in a charge of $l8 million.In February
2002,a determination was made to discontinue the QDM business.
NOTE 15:SUBSEQUENTEVENTS
BELLSOUTH STOCK TRANSACTIONS
Qwest entered into an agreement with BellSouth in 2001 under which BellSouth committed to acquire services from Qwest over a five-
year period (the "2001 Agreement").The 2001 Agreement providedthat BellSouth may make payment for the services in Qwest
common stock based upon values contained in the agreement.Duringthe first quarter 2002,the Company received approximately
278,000 shares of Qwest common stock valued at $13 million from BellSouth in partial satisfaction of the outstanding $16 million
accounts receivable outstanding at December 31,2001.In addition,in accordance with the 2001 agreement,Qwest used $12 million of
the $l8 million in cash paid by BellSouth affiliatesfor services in 2001 to purchase approximately 253,000 shares of Qwest common
stock at the value assigned to the shares under the 200l Agreement.The 2001 Agreement was cancelled as of January 16,2002,having
the effect of eliminating the remaining commitment to purchase services and the ability to use Qwest common stock to pay for such
usura EDGARpro ©2002.EDGAR Online,Inc.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
services.At that time,BellSouth committed to purchase from Qwest $350 million in services over fouryears payable in cash.In
consideration for terminating the 2001 agreement,Qwest gave BellSouth a non-cash credit of $71 million that will be reflected on the
balance sheet as a deposit from BellSouth.The deposit is expected to offset payments due from BellSouth as Qwest provides services
to BellSouth in the future.
BORROWINGS,COMMITMENTS AND OTHER DEBT-RELATED MATTERS
Until February 2002,Qwest maintained commercial paper programs to finance short-term operating cash needs of the business.As of
December 31,2001,the Company had a $4.0 billion syndicated credit facility available to support its commercial paper programs.
There was no balance outstanding on the syndicated credit facility at December 31,2001.The syndicated credit facility matures on
May 3,2002.Qwest could have converted any borrowed amount into a one-year term loan that would be due in May 2003 provided
Qwest was not in default under the credit facility,including compliance with all covenants.The most restrictive fmancial covenant in
the syndicated credit facility at December 31,2001 required the Company to maintain a debt-to-Consolidated EBITDA ratio of no
more than 3.75-10-1."Consolidated EBITDA"as defined in the credit facility is a measure of EBITDA that starts with the Company's
net income and adds back certain items,primarily those of a non-cash or a non-operating nature.This syndicated credit facility
contains a provisionthat would allow acceleration of the full amount due upon a default in payment obligations aggregating in excess
of $l00 million under debt obligations havingan aggregate principal amount in excess of $l00 million,including any of the Post-
Merger public debt and Pre-Merger public debt.
As a result of reduced demand for its commercial paper,Qwest borrowed the full amount under this facility in February 2002 and used
most of the proceeds to repay commercial paper.After repaying the commercial paper,Qwest had approximately $800 million of
proceeds remaining that the Company expects will be used to pay current maturities under short-term notes,long-term borrowings and
capital lease obligations.At December 31,2001,the Company had approximately $l.6 billion in short-term notes,long-term
borrowings and capital lease obligations maturing over the next 12 months.As a result,Qwest's overall borrowings,net of the excess
unapplied cash,remained unchanged at approximately $25.0 billion after applying the proceeds of the borrowings under the credit
facility.In March 2002,Qwest amended the syndicated credit facility and currently expects to convert the balance of the facility as of
May 3,2002 into a one-year term loan that would be due May 2003.As part of the amendment,the Company (i)increased the
maximum debt-to-Consolidated EBITDA ratio from
3.75-to-1 to 4.25-to-l through the quarter ended September 30,2002,decreasing to 4.0-to-1 beginning December 31,2002,and (ii)
agreed to use a portionof net proceeds fromfuture sales of assets and capital market transactions,including the issuance of debt and
equity securities,to prepay the bank loan until the outstanding loan is $2.0 billion or less.As a result,Qwest's overallborrowings,net
of the excess unapplied cash,remained unchanged.
The amount drawn down under the $4 billion syndicated bank facility was initially distributed between two wholly-ownedsubsidiaries
of Qwest,Qwest Capital Funding ,Inc.("QCF")and Qwest Corporation,with $3 billion assigned to QCF and $1 billion assigned to
Qwest Corporation.Followingthe amendment of the syndicated credit facility agreement,Qwest paid $608 million of the proceeds
from Qwest Corporation's March 2002 bond offeringdiscussed below to reduce the total amount outstanding and,as permitted under
the agreement,re-distributed the amounts outstanding between QCF and Qwest Corporation.As of March 31,2002,the syndicated
credit facility had the total amount outstanding of $3.39 billion assigned to QCF and nothing assigned to Qwest Corporation.
In March 2002,the Company paid the full amount necessary to acquire all properties subject to its synthetic lease agreements and
terminated these agreements.The purchase price of all such properties was approximately $255 million.As a result of the purchase,
the loan commitments totaling $382 million were terminated and the Company is no longer liable for its residual value guarantees of
up to $228 million that were only applicable if the leases expired at the end of their term.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
In March 2002,Qwest Corporation issued $1.5 billion in bonds with a ten-year maturity and an 8.875%interest rate.Approximately
$608 million of the net proceeds were used to repay a portionof the Qwest Corporation borrowings under the syndicated credit
facility.The remaining proceeds from the sale of the bonds will be used to repay short-term obligations and currently maturing long-
term borrowings.As a result,Qwest's net debt outstanding,net of excess unapplied cash,remained substantially unchanged after
applying the proceeds from the bond issuance.
Wrarata EDGARpro ©2002.EDGAR Online,Inc.
In February and March 2002,the credit ratings for Qwest and QCF were lowered one level to BBB by Fitch Ratings ("Fitch")and
Standard and Poor's ("S&P")and two levels to Baa3 by Moody's Investor Service ("Moody's").The ratings for Qwest Corporation
were lowered two levels to BBB+by Fitch,one level to BBB by S&P and two levels to Baa2 by Moody's.These ratings are
investment grade.The commercial paper ratings for Qwest,Qwest Corporation and QCF were also lowered to F-3,P-3 and A-3 by
Fitch,Moody's and S&P,respectively.
During 2002,Qwest repurchased through direct exchange transactions approximately $97 million in face amount of debt issued by and
guaranteed by Qwest.In exchange for the debt,Qwest issued approximately 9.9 million shares of its common stock out of treasury.
CONTINGENCY MATTERS
On February 14,2002,the Minnesota Department of Commerce filed a formal complaint against Qwest with the Minnesota Public
Utilities Commission alleging that Qwest,in contravention of federal and state law,failed to file interconnection agreements with the
Minnesota PUC relating to certain of its wholesale customers,and thereby allegedly discriminating against other CLECs.The
complaint seeks civil penalties related to such alleged violations between $50 million and $200 million.This proceeding is at an early
stage.Other states in the local service area are looking into similar matters and further proceedings may ensue in those states.
On February 19 and February 25,2002,two purported class action complaints were filed in federal district court in Colorado against
Qwest,Joseph P.Nacchio and Robin R.Szeliga.These complaints purport to be filed on behalfof purchasers of Qwest's publicly
traded stock between April 19,2000 and February 13,2002.The complaints allege,among other things,that during the class period,
Qwest and the individualdefendants made material false statements regarding the results of operations in violationof sections 10(b)
and 20(a)of the Securities Exchange Act of 1934 (the "Exchange Act")and that Qwest's financial results during the class period and
statements regarding those results were false and misleading due to the alleged failure to disclose fourtransactions between Qwest and
KMC Telecom Holdings,Inc.("KMC").The complaints seek unspecified compensatory damages and other relief.On February 27,
2002,lead plaintiffs in the consolidated securities action,which is described in Note 11 to the consolidated financial statements,
moved to consolidate these complaints with the consolidated securities action.
On March 13,2002,a purported class action complaint was filed in federal district court in Colorado on behalfof purchasers of
Qwest's publiclytraded stock between April 19,2000 and February 13,2002.In addition to the defendants named in the actions filed
on February 19,2002 and February 25,2002,this complaint names as defendants Afshin Mohebbi and Robert S.Woodruff.The
complaint alleges generally the same facts as the two purported class actions filed on February 19 and 25,2002,and like those actions,
alleges that during the class period,Qwest and the individual defendants made material false statements regarding the results of
operations in violationof sections 10(b)and 20(a)of the Exchange Act and that Qwest's financial results during the class period and
statements regarding those results were false and misleading due to the alleged failure to disclose fourtransactions between Qwest and
KMC.In addition,the complaint alleges that Qwest's financial results were misleading because of the alleged failure to disclose
unspecified transactions with Calpoint LLC ("Calpoint")that were similar in nature to the transactions alleged involvingKMC.The
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
complaint also alleges that Messrs.Nacchio and Woodruff and Ms.Szeliga sold shares of Qwest's common stock in violationof
section 10(b)of the Exchange Act.
In March 2002,lead plaintiffs in the consolidated securities action filed a motion for leave to file a Second Amended Consolidated
Complaint that seeks to:add new claims;extend the putative class period so that it begins on April 19,2000 and ends on February 14,
2002;and add Lewis O.Wilks,a former Qwest officer,and others as defendants.In March 2002,the defendants filed oppositions to
plaintiffs'motion for leave to file a Second Amended Consolidated Complaint.The court has not ruled on the motion.
In March 2002,three putative class action suits were filed in federal district court in Colorado on behalfof all participants and
beneficiaries of the Qwest Savings and Investment Plan (the "Plan")since March 7,1999,and name as defendants Qwest,Qwest's
directors and the administrators and directors of the Plan.The suits,which are brought under the Employee Retirement Income
Security Act ("ERISA")and seek restitution and other relief,allege that the defendants breached fiduciary duties to the Plan members
due to the percentage of the investment of the Plan's assets in Qwest stock and purportedly failing to provideaccurate information
about the Company's financial condition and the risks associated with investing in Qwest's stock.No other action has taken place with
respect to these suits.
In March 2002,plaintiffsin the derivativelawsuit described in Note ll served defendants with a first amended derivativecomplaint.
The amended derivativecomplaint adds allegations relating to the disclosures of Qwest's financial results from April 2000 through
uansa EDGAnpro ©2002.EDGAR Online,Inc.
February 2002.
The Company has providedfor certain of the above matters in its consolidated financial statements.Although the ultimate resolution of
these claims is uncertain,Qwest does not expect any material adverse impacts as a result of the resolution of these matters.
SEC INQUIRY
On March 8,2002,the Company received a request from the Denver regional officeof the SEC to voluntarilyparticipate in an
informalinquiryinto certain of its accounting practices.The accounting practices include accounting for contemporaneous transactions
in which the Company may have sold an optical capacity asset to a counter-party at or about the same time it acquired capacity from
the counter-party,sales of equipment to counter-parties from which the Company will acquire facilities management services and
directory publication revenues.The Company intends to cooperate fully with the SEC inquiry.
Contemporaneous capacity transactions.The Company enters into transactions with communication service providers under which
they sell optical capacity to these providers.At or about the same time Qwest enters into these transactions,the Company may commit
to acquire optical capacity from these customers.
The agreements for the sale of the capacity are separate legal agreements that are enforceable regardless of performance under the
purchase contract.It is the Company's policy that prior to recognizing revenue on these sales transactions,the Company obtains
acceptance of the delivered route from the buyer and generally receives all or a significant portion (at least 25%)of the sales proceeds
in cash.The Company has the ability to retain the cash received regardless of the buyer's performance under the purchase contract.As
such,the Company believes these are legally enforceable,cash transactions.In addition,the Company generally applies the more
restrictive requirement of APB Opinion No.29 to these contemporaneous transactions.APB Opinion No.29,as affirmedby EITF
Issue No.01-02,sets forth guidance that an exchange of a product or property held for sale in the ordinary course of business for a
productive asset not held for sale in the ordinary course of business does not fall within the modifications to the basic principle of
Opinion29 (even if they are in the same line of business)and should be recorded at fair value.Therefore,the Company recognizes
revenue for the fair value of these optical capacity asset sales,and records the fair value of the optical capacity assets acquired in
property,plant and equipment.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
Beginning with its IPO in 1997,Qwest has consistently disclosed that a substantial portion of its fiber optic network is being
constructed for sale in the ordinary course of business.Qwest has only recognized revenue for the exchange of optical capacity held for
sale in the ordinary course of business for optical capacity it will need to providevoice,data and video transportation services in the
future.
In 1999,Qwest announced that it was committed to build or acquire a worldwidenetwork.To implement this strategy,the Company
formed KPNQwest,a joint venture with KPN,to build a Pan-European network.Concurrently,Qwest began acquiring capacity from
differententities to develop its Asian,South American and Latin American networks.Prior to the acquisition of this capacity,Qwest
had no owned or leased capacity in these markets.The acquisition of the capacity in the above contemporaneous transactions was the
implementation of this strategy.In total,Qwest acquired approximately $591 million in international capacity from these
telecommunications providers in lieu of constructing similar capacity.The acquired capacity is in various stages of utilization.Certain
acquired capacity that has been put into operation and utilization thus far has ranged up to one-third of the acquired capacity.Other
capacity has not yet been put into operation because the Company has not yet received a telecommunications license in the target
markets or because a significant customer base has not yet developed in those markets.The Company intends to put into operation all
capacity acquired in these contemporaneous transactions.
The Company also purchased $397 million of domestic dark fiber and other related equipment and services.The acquired dark fiber
routes are routes that Qwest had not constructed when designing its own global fiberoptic broadband network and metropolitan area
network fiber rings or routes needed for restoration purposes.At the time the dark fiberwas acquired,Qwest had formal and informal
commitments from various significant customers to carry traffic along those acquired routes.
APB Opinion No.29 provides the accounting for a nonmonetary transaction should not be based on the fair values of the assets
transferred unless those fair values are determinable within reasonable limits.The guidance in APB Opinion No.29 for determining
fair value includes reference to estimated realizable values in cash transactions of the same or similar assets,quoted market prices,
independent appraisals,estimated fair values of assets or services received in exchange,and other available evidence.Further,if one of
the parties in a nonmonetary transaction could have elected to receive cash instead of the nonmonetary asset,the amount of cash that
could have been received may be evidence of the fair value of the nonmonetary assets exchanged.
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The Company believes it had an enforceable right to receive cash for the sales transaction independent of the purchase transaction and
this is the best evidence of fair value.Regardless,Qwest had entered into numerous cash transactions for the same or similar optical
capacity in 2000 and 2001.
Although the Company believes the accounting criteria used is consistent with the accounting criteria specified for the sale or exchange
of optical capacity,there is no certainty that the SEC will agree with the Company's application of these criteria to specific
transactions.The amount of revenue and gross margin attributable to all optical capacity asset sales in 200l and 2000 is as follows:(1)
revenues of $1.013 billion,or 5.1%of total revenue,in 2001 and $468 million,or 2.8%of total revenue,in 2000 and (2)gross margin
of $486 million,which is 6.6%of adjusted EBITDA in 2001,and $232 million,which is 3.4%of adjusted EBITDA in 2000.On an
after-tax basis,the gross margin of all optical capacity asset sales was approximately $290 million and $l40 million in 2001 and 2000,
respectively.These amounts would be partially offset by the amounts that may be recognized over the lives of the agreements if these
optical capacity asset sales had instead been treated as operating leases.
Equipment sales.The Company is an authorized distributor of,and periodically sells,certain telecommunications equipment.In certain
of those transactions,the Company has also contracted to acquire facilities management services from the purchaser.These services
are in markets where the Company did not have owned facilities and its decision to acquire these services was based upon a buy-
versus-build analysis.These
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
services were needed to build out the Company's Internet platforms and to facilitate its entry into the managed wavelength services
market.The term of the facilities management agreements are generally five years.
KMC Telecom Holdings,Inc.Qwest has sold equipment to KMC,which is an established CI'EC with a diverse customer base.KMC
could have procured the equipment directly from the manufacturers or from other distributors using various financing alternatives
available to them.At the time of the sales,title to the equipment and substantially all risks and rewards of ownership (such as
technological and economic obsolescence,physical damage and performance risk)related to the equipment passed to KMC.
Subsequent to the Merger and during 2001,Qwest sold equipment to KMC for $148 million in cash.
At or about the same times as equipment sales to KMC,Qwest entered into an unconditional commitment to purchase facilities
management services from KMC.KMC is responsible for providingthe services required under the facilities management agreement
in whatever way it deems appropriate and has the economic risk associated with the cost of providingthose services.Further,KMC
must meet the service level commitments under the facilities management agreement.Conversely,the agreement does not convey to
Qwest the right to use specific assets of KMC nor does it limit KMC's ability to use any of its equipment or network to serve its
remaining customers.The cost of the facilities management services was comparable to similar services either acquired by Qwest from
other providers or charged by Qwest to its customers.This commitment is included in unconditional purchase obligations disclosed in
Note 11.Because there was no practical manner by which to separate the terms of the equipment sales and facilities management
services contracts,the profit from the equipment sales was deferred.The deferred profit will be amortized ratably over the terms of the
service agreements of approximately 4-5 years.
Calpoint LLC.During 2001,Qwest contracted to sell equipment to Calpoint in exchange for total cash consideration of approximately
$300 million.At the time of the transaction,Qwest was not an authorized distributor of the equipment sold to Calpoint.However,
because of its buying-power,Qwest was able to obtain a significant discount from the manufacturer acting on behalfof Calpoint.
Because Qwest acted as an agent rather than a principalin this transaction,the proceeds received from Calpoint in excess of the
purchase price of the equipment were deferred and no revenues were recognized on the sales transaction.
Qwest has entered into an unconditional commitment to purchase facilities management services from Calpoint.Calpoint is responsible
for providingthe services required under the facilities management agreement in whatever way it deems appropriate and has the
economic risk associated with the cost of providingthose services.The agreement does not convey to Qwest the right to use specific
assets of Calpoint nor does it limit Calpoint's ability to use any of its equipment or network to serve its remaining customers.This
commitment is included in unconditional purchase obligations disclosed in Note l l.
Although there can be no assurance that the SEC will agree with the Company's application of generally accepted accounting
principles,Qwest believes it has appropriately reported and disclosed these transactions with KMC and Calpoint.
Directory publishing revenues.EffectiveJanuary 1999,Dex changed its method of recognizing directory publishing revenue to the
point of publication method.Under the point of publication method of accounting,revenues are recognized when the directories are
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published.The amount of revenue recognized upon publication of a directory depends on the service life of that directory.The lives of
Qwest's directories generally vary between 11 to 13 months.
In 2000,the Company shortened the service life of one of its directories to ll months,resulting in the directory being published in
both January and December of 2000.This resulted in the Company recording an additional $28 million of revenue in 2000 relating to
this directory.
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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
In 2001,the Company extended to 13 months or shortened to 11 months the service lives of certain ofits directories,resulting in 2001
revenues being $42 million higher than if the service lives of the directories had not been extended or shortened.
The Company considers various factors in establishing the timing and length of its directories.These factors include financial
considerations,the cost of printingthe directory,timing of the sales-effort or canvas to sell advertising in the directories,expected
price increases and the desire of its customers.
Althoughthere can be no assurance that the SEC will agree with the Company's application of generally accepted accounting
principles,Qwest believes it has appropriately reported its directory revenues.
NOTE 16:QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(DOLLARS IN MILLIONS,EXCEPT PER SHARE AMOUNTS)
2001Revenues................................................$5,051 $5,222 $4,766 $4,656
Gross margin............................................3,255 3,372 3,069 2,888
Net income (loss)before extraordinary item andcumulativeeffectofchangeinaccountingprinciple...19 (3,306)(142)(529)
Net loss................................................(46)(1)(3,306)(2)(142)(529)(3)
Net income (loss)per share (before extraordinary item
and cumulative effect of change in accountingprinciple):Basic.................................................0.01 (1.99)(0.09)(0.32)
Diluted...............................................0.01 (1.99)(0.09)(0.32)
2000Revenues................................................$3,377 $3,450 $4,765 $5,018
Gross margin............................................2,512 2,620 3,207 3,348
Net income (loss)before extraordinary item andcumulativeeffectofchangeinaccountingprinciple...404 (121)(248)(116)
Net income (loss).......................................404 (121)(4)(248)(5)(116)(6)
Net income (loss)per share (before extraordinary item
and cumulative effect of change in accountingprinciple):Basic.................................................0.46 (0.14)(0.15)(0.07)
Diluted...............................................0.45 (0.14)(0.15)(0.07)
(1)Includes an after-tax charge of $128 million for Merger-related and other charges.
(2)Includes a charge of $3.048 billion for an other than temporary decline in the value of KPNQwest,and an after-tax charge of $254
million for Merger-related and other charges.
(3)Includes an after-tax charge for restructuring of $459 million.
(4)Includes an after-tax a charge of $l78 million for Merger-related and other charges and an after-tax charge of $390 million decline
in the market value of financial instruments.
Neunsa EDGARpro ©2002.EDGAR Online,Inc.
(5)Includes an after-tax charge of $628 billion for Merger-related and other charges.
(6)Includes an after-tax charge of $254 million for Merger-related and other charges and an after-tax charge of $126 million decline in
the market value of financial instruments.
102
ITEM 8A.KPNQWEST CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Qwest owns greater than 20%but less than 50%of KPNQwest and accounts for KPNQwest by the equity method of accounting.SEC
Rule 3-09 for Regulation S-X requires Qwest to include or incorporate by reference KPNQwest's 200l consolidated financial
statements in this annual report if KPNQwest is considered a significant subsidiary according to tests included in Rule 3-09.We have
determined that KPNQwest is considered a significant subsidiary according to the tests included in Rule 3-09.
Therefore,Qwest expects to file an amendment to this Annual Report on Form 10-K to incorporate by reference the audited
consolidated balance sheets of KPNQwest N.V.and Subsidiaries as of December 31,2001 and 2000 and the related consolidated
statements of operations,shareholders'equity and comprehensive income and cash flows for the years ended December 3l,2001 and
2000 and for the nine months ended December 31,1999.Qwest expects to file the amendment on or before June 30,2002,the date by
which KPNQwest must file its Annual Report on Form 20-F for the year ended December 31,2001.
103
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Company has 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 informationrequired by Items 10,l 1,12 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 definitiveproxy statement for its annual meeting of stockholders to be filed with the SEC on or about
April 8,2002.
PART IV
ITEM 14.FINANCIAL STATEMENT SCHEDULES,REPORTS ON FORM 8-K AND EXHIBITS
(a)Documents filed as part of this report:
PAGE
(1)Report of Independent Public Accountants................53
Financial Statements covered by the Report of IndependentPublicAccountants:
Consolidated Statements of Operations for the years endedDecember31,2001,2000 and 1999.......................54
Consolidated Balance Sheets as of December 31,2001 and
2000..................................................55
Consolidated Statements of Cash Flows for the years ended
December 31,2001,2000 and 1999.......................56ConsolidatedStatementsofStockholders'Equity for the
years ended December 31,2001,2000 and 1999 ...........57
Notes to the Consolidated Financial Statements............58
nrama EDGARpro ©2002.EDGAR Online,Inc.
(b)ReponsonForn8-K:
Qwest filed the followingreports on Form 8-K during the fourth quarter of 2001:
(1)On October 31,2001,Qwest filed a report on Form 8-K regarding its third quarter 2001 results of operations.
(2)On December 14,2001,Qwest filed a report on Form 8-K regarding financial guidance.
104
(c)Exhibits required by Item 601 of Regulation S-K:
Exhibits identified in parentheses below are on file with the Commission and are incorporated herein by reference.All other exhibits
are providedas part of this electronic submission.
EXHIBIT
NUMBER DESCRIPTION
(2 1)Separation Agreement,dated June 5,1998,between US WEST,
Inc.(renamed "Mediaone Group,Inc.")("MediaOne Group")and
USW-C,Inc (renamed US WEST,Inc.)("US WEST"),(incorporated by reference to US 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 US WEST dated June 12,1998 (incorporated by reference
to US WEST's Annual Report on Form 10-K/A for the year
ended December 31,1998,File No.1-14087).
(3.1)Amended and Restated Certificate of Incorporation of Qwest
(incorporated by reference to Qwest's Registration Statement
on Form S-4/A,File No.333-81149,filed September 17,
1999).
(3.2)Amended and Restated Bylaws of Qwest (incorporated by
reference to Qwest's Annual Report on Form 10-K 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
EDGARpro ©2002.EDGAR Online,Inc.
trustee,providing for the issuance of Senior DebtSecurities,including Resolutions of the Pricing CommitteeoftheBoardofDirectorsestablishingthetermsofthe7.25%Senior Notes due June 15,2007 (incorporated byreferencetoExhibit4(c)in LCI's Current Report on Form8-K,dated June 23,1997).(4.8)Registration Rights Agreement,dated August 20,1999,between US WEST Capital Funding,Inc.,US WEST,Inc.,J.P.Morgan Securities,Inc.and Merrill Lynch,Pierce,Fenner &Smith Incorporated (incorporated by reference to US WEST'sFormS-4 Registration Statement,File No.333-92523,filedDecember10,1999).
105
EXHIBIT
NUMBER DESCRIPTION
(4 9)Indenture,dated as of June 29 1998,by and among US WESTCapitalFunding,Inc.,US WEST,Inc.,and The FirstNationalBankofChicago(now known as Bank One TrustCompany,National Association),as Trustee (incorporated byreferencetoUSWEST's current Report on Form 8-K,datedNovember18,1998,File No.1-14087).(4.10)First Supplemental Indenture,dated as of June 30,2000,byandamongUSWESTCapitalFunding,Inc.,US WEST,Inc.,Qwest Communications International Inc.,and Bank One TrustCompany,as Trustee (incorporated by reference to Qwest'squarterlyreportonForm10-Q for the quarter ended June 30,2000).(4.11)First Supplemental Indenture,dated as of February 16,2001,to the Indenture dated as of January 29,1998 with BankersTrustCompany(including form of Qwest's 8.29%Senior
Discount Notes due 2008 and 8.29%Series B Senior DiscountNotesdue2008asanexhibitthereto)(incorporated by
reference to Qwest's quarterly report on Form 10-Q for thequarterendedMarch31,2001).(4.12)First Supplemental Indenture,dated as of February 16,2001,
to the Indenture dated as of October 15,1997 with BankersTrustCompany(including form of Qwest's 9.47%SeniorDiscountNotesdue2007and9.47%Series B Senior DiscountNotesdue2007asanexhibitthereto)(incorporated byreferencetoQwest's quarterly report on Form 10-Q for thequarterendedMarch31,2001).(4.13)First Supplemental Indenture,dated as of February 16,2001,to the Indenture dated as of August 28,1997 with Bankers
Trust Company (including form of Qwest's 10 7/8%Series BSeniorDiscountNotesdue2007asanexhibitthereto)(incorporated by reference to Qwest's quarterly report onForm10-Q for the quarter ended March 31,2001).(10.1)**Growth Share Plan,as amended,effective October 1,1996.*
(10.2)Equity Incentive Plan,as amended (incorporated by referencefromExhibitAtoQwest's definitive proxy statement onSchedule14A,filed March 17,2000).*
(10.3)Qwest Communications International Inc.Employee StockPurchasePlan.(incorporated by reference to Qwest's 2001ProxyStatementfortheAnnualMeetingofStockholders).*
(10.4)Qwest Communications International Inc.DeferredCompensationPlan(incorporated by reference to Qwest'sAnnualReportonForm10-K for the year ended December 31,1998).*(10.5)****Equity Compensation Plan for Non-Employee Directors.*
(10.6)Qwest Communications International Inc.,DeferredCompensationPlanforNonemployeeDirectors,effective as of
urma EDGARpro ©2002.EDGAR Online,Inc.
July 1,2000 (incorporated by reference to Qwest's AnnualReportonForm10-K for the year ended December 31,2000).*(10.7)Qwest Communications International Inc.401-K Plan(incorporated by reference to Qwest's Annual Report on Form10-K for the year ended December 31,1998).*10.8 Employment Agreement dated October 24,2001 with Joseph P.Nacchio.*(10.9)****Growth Share Plan Agreement with Joseph P.Nacchio,effective January 1,1997,and Amendment thereto.*(10.10)****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 for the year ended December 31,2000).*
106
EXHIBIT
NUMBER DESCRIPTION
10.12 Employment Agreement dated January 1,2002 with AfshinMohebbi.*
(10.13)Registration Rights Agreement,dated as of April 18,1999,with Anschutz Company and Anschutz Family Investment CompanyLLC(incorporated by reference to Qwest's Current Report onForm8-K/A,filed April 28,1999).(10.14)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).(10.15)Registration Rights Agreement,dated as of April 19,1999,with BellSouth Enterprises,Inc.(incorporated by referencetoQwest's Current Report on Form 8-K/A,filed April 28,1999).(10.16)Securities Purchase Agreement dated January 16,2001 withBellSouthCorporation(incorporated by reference to Qwest'sAnnualReportonForm10-K for the year ended December 31,2000).(10.17)Employee Matters Agreement between MediaOne Group and USWEST,dated June 5,1998 (incorporated by reference to USWEST's Current Report on Form 8-K/A,dated June 26,1998,File No.1-14087).(10.18)Tax Sharing Agreement between MediaOne Group and US WEST,dated June 5,1998 (incorporated by reference to US WEST'sCurrentReportonForm8-K/A,dated June 26,1998,File No.1-14087).(10.19)Purchase Agreement,dated July 3,2000,among Qwest CapitalFunding,Inc.,Qwest Communications International Inc.andSalomonSmithBarneyInc.(incorporated by reference toQwest's quarterly report on Form 10-Q for the quarter endedJune30,2000).(10.20)Purchase Agreement,dated August 16,2000,among QwestCapitalFunding,Inc.,Qwest Communications InternationalInc.,Salomon Smith Barney Inc.and Lehman Brothers Inc.asRepresentativesoftheseveralinitialpurchaserslistedtherein(incorporated by reference to Qwest's quarterlyreportonForm10-Q for the quarter ended September 30,2000).(10.21)Purchase Agreement,dated February 7,2001,among QwestCapitalFunding,Inc.,Qwest Communications InternationalInc.,Banc of America Securities LLC and Chase SecuritiesInc.as Representatives of the several initial purchaserslistedtherein(incorporated by reference to Qwest's AnnualReportonForm10-K for the year ended December 31,2000).
MÅEraraEDGARpm ©2002.EDGAR Online,Inc.
(10.22)Form of Agreement for Purchase and Sale of TelephoneExchanges,dated as of June 16,1999,between Citizens
Utilities Company and US WEST Communications,Inc.(incorporated by reference to US WEST's Current Report onForm8-K,dated June 17,1999,File No.1-14087).(10.23)364-Day $4.0 billion credit Agreement,dated as of May 4,2001,among Qwest Capital Funding,Inc.,Qwest Corporation,Qwest Communications International Inc.,the banks listedthereinandBankofAmerica,N.A.,as administrative agent(incorporated by reference to Qwest's quarterly report on
Form 10-Q for the quarter ended March 31,2001).(10.24)Purchase Agreement,dated July 25,2001,among Qwest CapitalFunding,Inc.,Qwest Communications International Inc.,Lehman Brothers Inc.and Merrill Lynch &Co.,Inc.asRepresentativesoftheseveralinitialpurchaserslistedtherein.
107
EXHIBIT
GUMBER DESCRIPTION
(10 25)Registration Rights Agreement,dated July 30,2001,amongQwestCapitalFunding,Inc.,Qwest CommunicationsInternationalInc.,Lehman Brothers Inc.and Merrill Lynch &Co.,Inc.as Representatives of the several initialpurchaserslistedtherein.(10.26)Amended and Restated Credit Agreement,dated as of March 12,2002,among Qwest Capital Funding,Inc.,Qwest Corporation,Qwest Communications International Inc.and the banks listedtherein(incorporated by reference to Qwest's current Report
on Form 8-K,dated March 18,2002,File No.1-15577).12 Calculation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of Qwest Communications International Inc.
23 Consent of Arthur Andersen LLP.
24 Power of Attorney.
99 Confirmation of Arthur Andersen LLP representations.
()Previously filed.
*Executive Compensation Plans and Arrangements.
**Incorporated by reference in Form S-1 as declared effectiveon June 23,1997 (File No.333-25391).
***Incorporated by reference to exhibit 4.1 in Form S-4 as declared effectiveon January 5,1998 (File No.333-42847).
****Incorporated by reference in Qwest's Form 10-K for the year ended December 3l,1997.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934,the registrant has duly caused this report
to be signed on its behalf by the undersigned,thereunto duly authorized,in the City of Denver,State of Colorado,on March 31,2002.
QWEST COMMUNICATIONS INTERNATIONAL
INC.,
A DELAWARE CORPORATION
urma EDGAnpro ©2002.EDGAR Online,Inc.
By:/s/ROBIN R.SZELIGA
Robin R.Szeliga
Executive Vice President --Finance
and
Chief Financial Officer(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the followingpersons on
behalfof the registrant and in the capacities indicated on the 31st day of March,2002.
SIGNATURE TITLES
*Director,Chairman of the Board
Philip F.Anschutz
/s/JOSEPH P.NACCHIO Director,Chairman and Chief Executive Officer
-----------------------------------(Principal Executive Officer)Joseph P.Nacchio
*.Director
*Director
*Director
Hank Brown
*Director
Thomas J.Donohue
*Director
*Director
Cannon Y.Harvey
*Director
Peter S.Hellman
109
SIG ULTURE TITLES
EOGARpro ©2002.EDGAR Online,Inc.
*Director
Vinod Khosla
*Director
Marilyn C.Nelson
*Director
Frank Popoff
*Director
Craig D.Slater
*Director
W.Thomas Stephens
*By:/s/YASH A.RANA
Yash A.Rana
As Attorney-In-Fact
110
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
(2.1)Separation Agreement,dated June 5,1998,between US WEST,Inc.(renamed "MediaOne Group,Inc.")("MediaOne Group")andUSW-C,Inc (renamed US WEST,Inc.)("US WEST"),(incorporated by reference to US WEST's Current Report onForm8-K/A dated June 26,1998,File No.1-14087).(2.2)Amendment to the Separation Agreement between MediaOne GroupandUSWESTdatedJune12,1998 (incorporated by referencetoUSWEST's Annual Report on Form 10-K/A for the yearendedDecember31,1998,File No.1-14087).(3.1)Amended and Restated Certificate of Incorporation of Qwest(incorporated by reference to Qwest's Registration Statement
on Form S-4/A,File No.333-81149,filed September 17,1999).(3.2)Amended and Restated Bylaws of Qwest (incorporated byreferencetoQwest's Annual Report on Form 10-K for the yearendedDecember31,2000).(4.1)***Indenture,dated as of October 15,1997,with Bankers TrustCompany(including form of Qwest's 9.47%Senior DiscountNotesdue2007and9.47%Series B Senior Discount Notes due2007asanexhibitthereto).(4.2)****Indenture dated,as of August 28,1997,with Bankers TrustCompany(including form of Qwest's 10 7/8%Series B SeniorDiscountNotesdue2007asanexhibitthereto).(4.3)****Indenture dated as of January 29,1998 with Bankers TrustCompany(including form of Qwest's 8.29%Senior DiscountNotesdue2008and8.29%Series B Senior Discount Notes due2008asanexhibitthereto).
Ernma EDGARpro ©2002.EDGAR Online,Inc.
(4.4)Indenture,dated as of November 4,1998,with Bankers TrustCompany(including form of Qwest's 7.50%Senior DiscountNotesdue2008and7.50%Series B Senior Discount Notes due2008asanexhibitthereto)(incorporated by reference toQwest'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 TrustCompany(including form of Qwest's 7.25%Senior DiscountNotesdue2008and7.25%Series B Senior Discount Notes due2008asanexhibitthereto)(incorporated by reference toQwest's Registration Statement on Form S-4,File No.333-71603,filed February 2,1999).(4.6)Registration Agreement,dated November 27,1998,withSalomonBrothersInc.relating to Qwest's 7.25%SeniorDiscountNotesdue2008(incorporated by reference toQwest'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 LCIInternational,Inc.and First Trust National Association,astrustee,providing for the issuance of Senior DebtSecurities,including Resolutions of the Pricing CommitteeoftheBoardofDirectorsestablishingthetermsofthe7.25%Senior Notes due June 15,2007 (incorporated byreferencetoExhibit4(c)in LCI's Current Report on Form8-K,dated June 23,1997).(4.8)Registration Rights Agreement,dated August 20,1999,between US WEST Capital Funding,Inc.,US WEST,Inc.,J.P.Morgan Securities,Inc.and Merrill Lynch,Pierce,Fenner &Smith Incorporated (incorporated by reference to US WEST'sFormS-4 Registration Statement,File No.333-92523,filedDecember10,1999).
EXHIBIT
NUMBER DESCRIPTION
(4.9)Indenture,dated as of June 29,1998,by and among US WESTCapitalFunding,Inc.,US WEST,Inc.,and The FirstNationalBankofChicago(now known as Bank One TrustCompany,National Association),as Trustee (incorporated byreferencetoUSWEST's Current Report on Form 8-K,datedNovember18,1998,File No.1-14087).(4.10)First Supplemental Indenture,dated as of June 30,2000,byandamongUSWESTCapitalFunding,Inc.,US WEST,Inc.,Qwest Communications International Inc.,and Bank One TrustCompany,as Trustee (incorporated by reference to Qwest'squarterlyreportonForm10-Q for the quarter ended June 30,2000).(4.11)First Supplemental Indenture,dated as of February 16,2001,
to the Indenture dated as of January 29,1998 with BankersTrustCompany(including form of Qwest's 8.29%SeniorDiscountNotesdue2008and8.29%Series B Senior DiscountNotesdue2008asanexhibitthereto)(incorporated byreferencetoQwest's quarterly report on Form 10-Q for thequarterendedMarch31,2001).(4.12)First Supplemental Indenture,dated as of February 16,2001,to the Indenture dated as of October 15,1997 with BankersTrustCompany(including form of Qwest's 9.47%SeniorDiscountNotesdue2007and9.47%Series B Senior DiscountNotesdue2007asanexhibitthereto)(incorporated byreferencetoQwest's quarterly report on Form 10-Q for thequarterendedMarch31,2001).(4.13)First Supplemental Indenture,dated as of February 16,2001,to the Indenture dated as of August 28,1997 with BankersTrustCompany(including form of Qwest's 10 7/8%Series B
&EDGARpro ©2002.EDGAR Online,Inc.
Senior Discount Notes due 2007 as an exhibit thereto)(incorporated by reference to Qwest's quarterly report on
Form 10-Q for the quarter ended March 31,2001).(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 onSchedule14A,filed March 17,2000).*
(10.3)Qwest Communications International Inc.Employee Stock
Purchase Plan.(incorporated by reference to Qwest's 2001ProxyStatementfortheAnnualMeetingofStockholders).*
(10.4)Qwest Communications International Inc.DeferredCompensationPlan(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.,DeferredCompensationPlanforNonemployeeDirectors,effective as ofJuly1,2000 (incorporated by reference to Qwest's AnnualReportonForm10-K for the year ended December 31,2000).*
(10.7)Qwest Communications International Inc.401-K Plan(incorporated by reference to Qwest's Annual Report on Form10-K for the year ended December 31,1998).*
10.8 Employment Agreement dated October 24,2001 with Joseph P.Nacchio.*
(10.9)****Growth Share Plan Agreement with Joseph P.Nacchio,
effective January 1,1997,and Amendment thereto.*(10.10)****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 for the year ended December 31,2000).*
EXHIBIT
NUMBER DESCRIPTION
10.12 Employment Agreement dated January 1,2002 with AfshinMohebbi.*
(10.13)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).(10.14)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).(10.15)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).(10.16)Securities Purchase Agreement dated January 16,2001 withBellSouthCorporation(incorporated by reference to Qwest's
Annual Report on Form 10-K for the year ended December 31,2000).(10.17)Employee Matters Agreement between MediaOne Group and US
WEST,dated June 5,1998 (incorporated by reference to USWEST's Current Report on Form 8-K/A,dated June 26,1998,
File No.1-14087).(10.18)Tax Sharing Agreement between MediaOne Group and US WEST,
dated June 5,1998 (incorporated by reference to US WEST'sCurrentReportonForm8-K/A,dated June 26,1998,File No.1-14087).(10.19)Purchase Agreement,dated July 3,2000,among Qwest CapitalFunding,Inc.,Qwest Communications International Inc.andSalomonSmithBarneyInc.(incorporated by reference to
muura EDGARpro ©2002.EDGAR Online,Inc.
Qwest's quarterly report on Form 10-Q for the quarter endedJune30,2000).(10.20)Purchase Agreement,dated August 16,2000,among QwestCapitalFunding,Inc.,Qwest Communications InternationalInc.,Salomon Smith Barney Inc.and Lehman Brothers Inc.asRepresentativesoftheseveralinitialpurchaserslistedtherein(incorporated by reference to Qwest's quarterlyreportonForm10-Q for the quarter ended September 30,2000).(10.21)Purchase Agreement,dated February 7,2001,among QwestCapitalFunding,Inc.,Qwest Communications InternationalInc.,Banc of America Securities LLC and Chase SecuritiesInc.as Representatives of the several initial purchaserslistedtherein(incorporated by reference to Qwest's AnnualReportonForm10-K for the year ended December 31,2000).(10.22)Form of Agreement for Purchase and Sale of TelephoneExchanges,dated as of June 16,1999,between CitizensUtilitiesCompanyandUSWESTCommunications,Inc.(incorporated by reference to US WEST's Current Report onForm8-K,dated June 17,1999,File No.1-14087).(10.23)364-Day $4.0 billion credit Agreement,dated as of May 4,2001,among Qwest Capital Funding,Inc.,Qwest Corporation,Qwest Communications International Inc.,the banks listedthereinandBankofAmerica,N.A.,as administrative agent(incorporated by reference to Qwest's quarterly report onForm10-Q for the quarter ended March 31,2001).(10.24)Purchase Agreement,dated July 25,2001,among Qwest CapitalFunding,Inc.,Qwest Communications International Inc.,Lehman Brothers Inc.and Merrill Lynch &Co.,Inc.asRepresentativesoftheseveralinitialpurchaserslistedtherein.
EXHIBIT
NUMBER DESCRIPTION
(10.25)Registration Rights Agreement,dated July 30,2001,amongQwestCapitalFunding,Inc.,Qwest CommunicationsInternationalInc.,Lehman Brothers Inc.and Merrill Lynch &Co.,Inc.as Representatives of the several initialpurchaserslistedtherein.(10.26)Amended and Restated Credit Agreement,dated as of March 12,2002,among Qwest Capital Funding,Inc.,Qwest Corporation,Qwest Communications International Inc.and the banks listedtherein(incorporated by reference to Qwest's Current Report
on Form 8-K,dated March 18,2002,File No.1-15577).12 Calculation of Ratio of Earnings to Fixed Charges.21 Subsidiaries of Qwest Communications International Inc.23 Consent of Arthur Andersen LLP.24 Power of Attorney.
99 Confirmation of Arthur Andersen LLP representations.
()Previously filed.
*Executive Compensation Plans and Arrangements.
**Incorporated by reference in Form S-1 as declared effectiveon June 23,1997 (File No.333-25391).
***Incorporated by reference to exhibit 4.1 in Form S-4 as declared effectiveon January 5,1998 (File No.333-42847).
****Incorporated by reference in Qwest's Form 10-K for the year ended December 3l,1997.
Maarrara EDOMtpro ©2002.EDGAR Online,Inc.
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT(the "Agreement")is made and entered into as of the 24th day of October,2001 by and
between Qwest Communications International Inc.,a Delaware corporation (the "Company"),and Joseph P.Nacchio (the
"Executive").
WHEREAS,the Company and the Executive mutually desire to agree upon the terms of the Executive's continued employment with
the Company and,in addition,to agree as to certain benefits of said employment.
NOW,THEREFORE,in consideration of the mutual promises and agreements set forth below,the Company and the Executive hereby
agree as follows:
1.TERM OF EMPLOYMENT:Subject to the terms of this Agreement,the Company hereby employs the Executive,and the
Executive hereby accepts such employment,for the period beginning on the date hereof and ending at the close of business on
December 31,2005,unless terminated earlier as providedherein (the "Term").Portions of this Agreement that by their terms provide
or imply that they survivethe end of the Term shall survive the end of the Term.
2.POSITION AND DUTIES:
a.Duringthe Term,the Executive shall serve as Chairman and Chief Executive Officer of the Company and shall have such duties,
responsibilities,and authority as are customarily required of and givento a Chairman and ChiefExecutive OfEcer and such other
duties and responsibilities commensurate with such position as the Board of Directors of the Company (the "Board")shall determine
from time to time.Such duties,responsibilities,and authority shall include,without limitation,responsibility for the management,
operation,strategic direction,and overallconduct of the business of the Company.The Executive shall perform his duties and
responsibilities at the Company's offices in New Jersey;provided,however,that the Executive may,at the direction of the Board,be
required to performsuch duties and responsibilities up to four (4)days per week at the headquarters offices of the Company in Denver,
Colorado.The Executive shall travel as reasonably required to perform his duties and responsibilities,providedthat any such travel
days shall reduce the number of days per week that the Executive will be required to work at the headquarters office in Denver,
Colorado.For purposes of this Agreement,the term "employment"shall include the Executive's service to the Company in any
capacity during the Term;providedthe foregoing shall not change the positions to be held by the Executive.
b.Duringthe Term,while the Executive is employed by the Company,the Company shall use its best efforts to include the Executive
in the Board's slate of nominees for election as directors at each annual meeting of the Company's shareholders and shall
recommend to the shareholders that the Executive be elected as a director of the Company.
c.Duringthe Term,the Executive shall devote substantially his full business time,energy,and ability to the business of the Company.
The Executive shall report directly to the Board and shall perform his duties subject to the overallpolicies and directions of the Board.
During the Term,all other employees of the Company shall report to the Executive and not directly to the Board.
d.The Executive may (i)with express authorization of the Board,serve as a director or trustee of other for profit corporations or
businesses which are not in competition with the business of the Company or the telecommunications business of any of its
subsidiaries,or,to his knowledge,any other affiliateof the Company,present or future,providedthat,if a directorship is approved and
the Board later determines that the directorship would be with a competitive entity,it shall notify the Executive in writing and the
Executive shall have a reasonable period of time to resign such directorship,(ii)serve on civic or charitable boards or committees,(iii)
deliver lectures,fulfill speaking engagements,or teach at educational institutions (and retain any fees therefrom),and (iv)manage
personal investments;provided,however,that the Executive may not engage in any of the activities described in this Paragraph 2(d)to
the extent such activities materially interfere with the performance of the Executive's duties and responsibilities to the Company.As
used in this Agreement,the term "affiliate"of the Company means any company controlled by,controlling,or under common control
with the Company,whether through stock ownership or otherwise.
e.Without the prior express authorization of the Board,the Executive shall not,directly or indirectly,during the Term (i)render
services of a business,professional,or commercial nature to any other person or firm,whether for compensation or otherwise,or (ii)
engage in any activity competitive with the business of the Company or the telecommunications business of any of its subsidiaries,
present or future,or,to his knowledge,of any other afHliate of the Company,present or future,whether alone,as a partner,or as an
ofncer,director,employee,member or holder (directly or indirectly,such as by means of a trust or option arrangement).The Executive
may be an investor,shareholder,joint venturer,or partner (hereinafter referred to as "Investor");provided,however,that his status as
an Investor shall not (i)pose a conflict of interest,(ii)require the Executive's active involvementin the management or operation of
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such Investment (recognizing that the Executive shall be permitted to monitorand oversee the Investment),or (iii)materially interferewiththeperformanceoftheExecutive's duties and obligations hereunder.For the purposes of clause (i)of the proviso to the precedingsentence,the Executive shall not be deemed to be subject to a conflict of interest merely by reason of the ownership of less than three
percent (3%)of (i)the outstanding stock of any entity whose stock is traded on an established stock exchange or on the NationalAssociationofSecuritiesDealersAutomatedQuotationSystemor(ii)the outstanding stock,partnership interests or other form ofequityinterestofanyventurefund,investment pool or similar investment vehicle that shall solicit investments on a "blind pool"basis.
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3.COMPENSATIONAND BENEFITS:During the Term,while the Executive is employed by the Company,the Company shallcompensatetheExecutiveforhisservicesassetforthinthisParagraph3.The Executive recognizes that during the Term of theAgreement,the Company reserves the right to change from time to time the terms and benefits of any welfare,pension,or fringebenefitplanoftheCompany,including the right to change any service provider,so long as such changes are also generally applicable
to all executives of the Company;provided,however,that the Executive's minimum level of compensation and benefits as set forth in
this Paragraph 3 will be preserved in the event of any such change.
a.SALARY:Beginning January 1,2002,the Company shall pay the Executive a base salary at an annual rate of One Million Five
Hundred Thousand Dollars and No Cents ($1,500,000.00).Such salary shall be earned and shall be payable in periodic installments in
accordance with the Company's payroll practices.Amounts payable shall be reduced by standard withholding and other authorized
deductions.The Board will review the Executive's salary at least annually and may increase (but not reduce)the Executive's annual
base salary in its sole discretion.Once increased such base salary shall not be reduced.The base salary as so increased shall thereafter
be treated as the Executive's base salary hereunder.Prior to January 1,2002,the Executive's base salary shall continue to be paid at itsexistingrate.
b.BONUS:The Executive shall be eligible to receive a bonus in accordance with the Company's bonus plans,as in effect from time to
time.Beginning January 1,2002,the Executive's target bonus payment shall be 250%of his base salary.The bonus,if any,shall be
paid in the same form and manner and at or around the same time as such bonus payments are made to other senior executives of the
Company.The foregoingshall not limit the Board in its sole discretion from giving Executive other bonuses.Prior to January 1,2002,
the Executive's target bonus payment shall remain at its existing level.
c.SAVINGS AND RETIREMENTPLANS:The Executive shall be entitled to participate in all savings and retirement plans
applicable generally to other senior executives of the Company,in accordance with the terms of such plans,as may be amended from
time to time.
d.WELFARE BENEFIT PLANS:The Executive and/or his family (includingClass 2 dependents),as the case may be,shall beeligibletoparticipateinandshallreceiveallbenefitsundertheCompany's welfare benefit plans and programs applicable generally to
other senior executives of the Company (collectively,as amended from time to time,the "Company Plans"),in accordance with the
terms of the Company Plans.
e.VACATION:The Executive shall be entitled to paid vacation at a rate of twenty-five(25)days per calendar year during the Term in
accordance with the plans,policies,and programs as in effect generally with respect to other senior executives of the Company,including the limitations,if any,on the carry-over of accrued but unused vacation time.
f.TRAVEL:The Executive shall be entitled to fly first-class or business class,or to use the Company's aircraft when available and
appropriate,for business travel,including travel between the business offices of the Company.The Company shall also pay the
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airfare of the Executive's family members with respect to travel,at reasonable frequencies,between the headquarters office of the
Company in Denver,Colorado and the Executive's residence in New Jersey and shall,to the extent this payment shall constitute
income to the Executive,pay the Executive an amount such that the Executive shall have no after tax cost for the deemed income and
this gross up payment;providedthat family members shall utilize available advance ticketing programs to the extent feasible in making
such travel arrangements.
g.BUSINESS CLUB MEMBERSHIPS:The Company shall pay the initiation fees and membership dues for the Executive at business
clubs in the vicinity of the business offices of the Company approved by the Board from time to time to the same extent that the
Company pays such fees and dues with respect to comparable business club memberships of other senior executives of the Company.
To the extent the Company is not required to treat such fees and dues as income to the Executive it shall not do so and,to the extent it
must treat such amounts as income to the Executive,it shall pay the Executive an amount such that the Executive shall have no after
tax cost for the deemed income and this gross up payment.
h.EXPENSES:The Company shall reimburse the Executive for reasonable expenses for parking at the business offices of the
Company,cellular telephone usage,entertainment,travel,meals,lodging,and similar items incurred in the conduct of the Company's
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business,including meals and lodging of the Executive when performinghis duties and responsibilities at the headquarters office of theCompanyinDenver,Colorado when he is not resident in the vicinity of such business office.Such expenses shall be reimbursed inaccordancewiththeCompany's expense reimbursement policies and guidelines.The Company shall also reimburse the Executive forreasonableattorney's fees and charges incurred in connection with the preparation and execution of this Agreement.
i.RELOCATION:If the Executive relocates to the vicinity of the headquarters office of the Company in Denver,Colorado at any timepriortotheterminationoftheTermandpriortohisreceiptfromtheCompanyofwrittennoticeofterminationornon-renewal pursuant
to Paragraphs 4(a),4(b),or 4(f),the Company and the Executive shall discuss the types and amounts of relocation expenses of theExecutivethatwillbepaidorreimbursedbytheCompany.
j.INDEMNIFICATION:To the fullest extent permitted by the indemnification provisions of the articles of incorporation and bylawsoftheCompanyineffectasofthedateofthisAgreementandtheindemnificationprovisionsofthecorporationstatuteofthejurisdictionoftheCompany's incorporation in effect from time to time (collectively,the "Indemnification Provisions"),and in each
case subject to the conditions thereof,the Company shall,with regard to his past and future service,(i)indemnify the Executive,as adirectorandofficeroftheCompanyorasubsidiaryoftheCompanyoratrusteeorfiduciaryofanemployeebenefitplanofthe
Company or a subsidiary of the Company,or,if the Executive shall be serving in such capacity at the Company's written request,as adirectororofficerofanyothercorporation(other than a subsidiary of the Company)or as a trustee or fiduciary of an employee benefit
plan not sponsored by the Company or a
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subsidiary of the Company,against all liabilities and reasonable expenses that may be incurred by the Executive in any threatened,
pending,or completed action,suit or proceeding,whether civil,criminal or administrative,or investigative and whether formal orinformal,because the Executive is or was a director or officer of the Company,a director or officerof such other corporation or a
trustee or fiduciary of such employee benefit plan,and against which the Executive may be indemnified by the Company,and (ii)payfororreimbursethereasonableexpensesincurredbytheExecutiveinthedefenseofanyproceedingtowhichtheExecutiveisaparty
because the Executive is or was a director or officer of the Company,a director or officer of such other corporation or a trustee orfiduciaryofsuchemployeebenefitplan.The rights of the Executive under the IndemnificationProvisions shall survivethe terminationoftheemploymentoftheExecutivebytheCompany.
4.TERMINATION:The Executive's employment with the Company during the Term may be terminated by the Company or theExecutiveonlyunderthecircumstancesdescribedinthisParagraph4,and subject to the provisions of Paragraph 5.
a.DEATH OR DISABILITY:The Executive's employment hereunder shall terminate automatically upon the Executive's death.If theDisabilityoftheExecutivehasoccurred(pursuant to the definitionof Disability set forth below),it may give to the Executive written
notice of its intention to terminate the Executive's employment.In such event,the Executive's employment with the Company shall
terminate effectiveon the 10th day after receipt of such notice by the Executive (the "Disability EffectiveDate"),providedthat,within
the 10-day period after such receipt,the Executive shall not have returned to full-time performance of the Executive's material duties.For purposes of this Agreement,"Disability"shall mean any physical or mental condition which prevents the Executive,for a period of
180 consecutive days,from performingand carrying out his material duties and responsibilities with the Company.
b.CAUSE:The Company may immediately terminate this Agreement for "Cause"by giving written notice to the Executive.Any one
or more of the following events shall constitute "Cause":
(1)any willful misconduct with respect to the Company which is materially detrimental to the Company and its subsidiaries in the
aggregate,including but not limited to theft or dishonesty (other than good faith expense account disputes);
(2)conviction of (or pleading nolo contendere to)a felony (other than (A)a traffic violationthat is in most jurisdictionsnot classified
as a felony and (B)a felony resulting from vicarious (rather than direct)liability arising out of his position as an officer or director of
the Company);
(3)failure or refusal to attempt to follow the written directions of the Board within a reasonable period after receivingwritten notice;
or
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(4)gross continuous nonfeasance with regard to the Executive's duties,taken as a whole,which materially continue after a written
notice thereofis given to the Executive.
c.OTHER THAN DEATH OR DISABILITY OR CAUSE:The Company may terminate the Executive's employment for any reason
other than Death,Disability,or Cause,subject to the provisions of Paragraph 5(c).
d.TERMINATION BY EXECUTIVE FOR GOOD REASON:The Executive may terminate his employment for Good Reason upon
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