Qwest Communications International

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QWEST COMMUNICATIONS INTERNATIONAL

Qwest was one of the first companies to build a fiber-optic network for high-speed data communications that forms the backbone of the Internet and provides a key element of electronic commerce. After completing construction of its 18,500-mile national fiber-optic network in 1999, Qwest added 4,300 route miles in Canada and Mexico and continued to build fiber-optic rings in Europe. As of 2001 the company had more than 100,000 miles of fiber capacity and planned to have 12,500 miles installed in Europe by year-end 2001.

Qwest's national fiber-optic network enables it to provide advanced communication services—including data, multimedia, and Internet-based services—on a national and international basis principally to large and mid-size business and government customers. Nationally, the company also offers local and long-distance telephone service.

In 2000 Qwest completed the acquisition of US West, a regional Bell operating company (RBOC). The acquisition gave Qwest 25 million US West local phone customers in 14 western states. Within this 14-state region Qwest offers wireless services, local telecommunications, and related services, and directory services to consumers, businesses, and government entities. Under federal regulations, Qwest was not able to offer long-distance service within the states served by US West. By opening its network to local exchange telephone competitors within the 14-state area and conforming to other federal requirements, Qwest hoped to begin offering long-distance services to customers within the 14-state area.

Qwest's Web hosting services are offered under its CyberCenter program. In March 2000 Qwest entered into an agreement with IBM to open 28 Cyber-Centers, which would host applications, services, and network infrastructures. The first facility under the agreement was opened in Dallas, Texas, in February 2001. At the time Qwest operated a total of 15 U.S. CyberCenters. Internationally, Qwest created a joint venture with KPN, called KPNQwest, to open 18 CyberCenters in Europe. The first center in Europe opened in mid-2000.

ORIGINATES AS SUBSIDIARY OF SOUTHERN PACIFIC, 1988-1995

Qwest Communications International originated as SP Telecom, a subsidiary of the giant railroad company Southern Pacific Transportation Co. SP Telecom was established in San Francisco in 1988 to construct telecommunications lines along Southern Pacific's 15,000 miles of railroad right-of-way. Later in 1988 Southern Pacific was acquired by reclusive Denver billionaire Philip Anschutz, who reorganized SP Telecom as a subsidiary of Anschtutz Corp. In 1992 Anschutz negotiated an easement agreement with Southern Pacific to lay fiber-optic cable along 11,700 miles of its tracks. By 1993 the privately held SP Telecom had annual revenue of more than $50 million and 410 employees. During the early 1990s SP Telecom built fiber-optic linkups for other carriers, sold space on its fiber-optic network, and introduced commercial products.

CHANGES NAME TO QWEST COMMUNICATIONS CORP., 1995-1996

In 1995 SP Telecom changed its named to Qwest Communications Corp. and moved to Anschutz's home city of Denver after it acquired the Dallas-based firm Qwest Communications Corp. Around this time Anschutz sold his interest in Southern Pacific to the Union Pacific Corp. for about $1.6 billion worth of stock, making him Union Pacific's largest shareholder.

Qwest reached an agreement with CSX Transportation Inc. to use its rail corridors to install a high-speed, high-volume, fiber-optic network in May 1995. CSX owned 19,000 miles of track in 20 eastern states. The agreement with CSX enabled Qwest to build a fiber-optic network from coast to coast. Later in 1995 Qwest gained permission to link several Mexican cities, including Mexico City, Monterrey, and Guadalajara, with about 5,000 miles of fiber-optic cable. This network was then linked to U.S. long distance carriers at the U.S.-Mexican border. To generate revenue Qwest negotiated with other long distance providers to buy or lease part of its fiber-optic network.

GOES PUBLIC AS QWEST COMMUNICATIONS INTERNATIONAL, INC., 1997

The company went public as Qwest Communications International, Inc. in 1997. Its initial public offering (IPO) on June 23, 1997, raised $297 million on the sale of 13.5 million shares. Only 14 percent of the company was offered to the public; the rest was held by Philip Anschutz, who became the new company's chairman. Anschutz hired Joesph Nacchio from AT&T to become Qwest's new president and CEO. In its first year as a public company Qwest reported revenue of $697 million.

At the time it went public, Qwest had already negotiated for nearly 90 percent of the rights-of-way it needed to complete its national fiber-optic network. Qwest believed that a ground-based network would be more reliable for the transmission of data than satellite-based networks. The company expected that demand for high-speed networks that could transmit data as well as audio and video would explode over the next five years. Demand would also be fueled by the regional Bell operating companies (RBOCs), who would be able to offer long-distance services under deregulation.

Qwest reached agreements with three companies to lease about half of the capacity of Qwest's network for an investment of about $1 billion. They were Frontier Corp., the fifth-largest long-distance carrier in the United States; WorldCom Inc., the fourth-largest long-distance carrier and the largest Internet access provider with its acquisition of UUNet; and GTE Corp., the largest non-Bell local telephone company. Later in 1997 Qwest acquired Colorado's largest ISP, SuperNet Inc., for $20 million. Qwest also launched the first advertising campaign for its fiber-optic telecommunications network with the tagline, "Ride the light."

EXPANDS LONG-DISTANCE AND INTERNET SERVICES THROUGH ACQUISITIONS, 1998-1999

In March 1998 Qwest announced it would acquire long-distance carrier LCI International Inc. for $4.4 billion. The deal created the fourth-largest long-distance carrier in the United States behind AT&T, MCI Worldcom, and Sprint Corp. The combined companies had about 5,800 employees and revenue of $2.3 billion. The acquisition gave Qwest 2 million long-distance customers and a well-established sales force.

Qwest activated the portion of its fiber network that connected Los Angeles, San Francisco, and New York, giving the company more than 5,400 route-miles of its network in service in April. The company also joined with Cisco Systems Inc. and Nortel to create a new IP backbone network called Internet2 for use by the academic community. Qwest donated $500 million worth of bandwidth to the project.

Expanding into Europe, Qwest acquired EUNet, a European ISP based in Amsterdam with about 60,000 customers, for $154 million. In mid-1998 Qwest announced it would offer long-distance service in Europe. To head its international operations, Qwest snared John McMaster, another AT&T executive. The company planned to build a fiber-optic network in Europe with Dutch telecommunications company KPN.

Qwest began building 10 CyberCenters around the United States to offer a range of Web-hosting and multimedia applications to Internet customers. Four centers opened in 1998 in Los Angeles, New York, San Francisco, and Washington, D.C., with six centers slated for 1999. To boost its CyberCenter program, Qwest acquired Icon CMT, which provided Web hosting and related services, for $185 million.

In December 1998 Microsoft invested $200 million in Qwest, taking a 1.3 percent minority interest in the company. In exchange Qwest would use the Microsoft Windows NT Server OS as the basis of its electronic commerce and other services to be introduced in 1999, including Q-Commerce-Retail, an online storefront service, and the Qwest Business Partner Program, which offered a wide range of Internet services.

In early 1999, Qwest introduced its first Internet services for consumers and small businesses. Qwest introduced DSL service for businesses in 13 markets through Rhythms NetConnections and Covad Communications. Qwest also announced it would offer paging, conferencing, and faxing services from its Web site. In a move to increase its bandwidth, America Online Inc. selected Qwest to provide it with national Internet connectivity services in a deal valued at $13 million.

Qwest gained additional financing with a $1 billion revolving credit facility from a consortium of banks and financial institutions led by Bank of America. In addition, Bell South Corp. agreed to purchase a 10 percent interest in Qwest for $3.5 billion. The funds enabled Qwest to reduce the debt it took on for international expansion and helped the company finance construction of its fiber-optic network. Qwest completed its national fiber-optic network with 18,500 route miles in September 1999. In December it added 4,300 route miles in Canada and Mexico. Qwest's 1999 revenue was $3.92 billion, with net income of $458 million, compared to 1998 revenue of $2.2 billion.

SWALLOWED US WEST IN HOSTILE TAKEOVER, 1999-2000

In mid-1999 Qwest announced hostile takeover bids for US West, a RBOC with local phone customers in 14 Western states, and Frontier Communications, the fifth-largest U.S. long-distance carrier. At the time, US West was already the subject of a $52 billion takeover proposal from Global Crossing Ltd., a Bermuda-based company that was building an undersea fiber-optic network. Wall Street reacted to the announcement by driving Qwest's stock down more than 20 percent. At first, US West rejected Qwest's bid, but following some negotiations Qwest and US West reached an agreement whereby Qwest would acquire US West for an amount estimated between $35 and $80 billion, according to various sources. Qwest's acquisition of US West also had the effect of diluting Bell South's interest in the new company from 10 percent to about 3.5 percent. Qwest subsequently withdrew its offer for Frontier, and Frontier agreed to be acquired by Global Crossing for $10.9 billion.

Qwest's acquisition of US West had to pass several regulatory hurdles, including approval from the U.S. Department of Justice, the Federal Trade Commission, the Federal Communications Commission, and public service commissions in seven of the 14 states served by US West. By July 2000 the merger with US West had received the necessary approvals. In many cases state approval was gained by agreeing to negotiate new service quality standards. The new company dropped the US West name and continued using the Qwest name. Altogether, the merged companies had about 70,000 employees worldwide. Later in the year Qwest announced it would streamline its workforce by cutting about 11,000 employee positions and 1,800 contractor positions by the end of 2001.

With the acquisition of US West complete, Qwest announced it would make quality of service its top priority for the local telephone customers it had gained. Other announced goals included doubling its DSL users from 250,000 to 500,000; doubling the number of wireless users from 800,000 to 1.6 million; and doubling its Web-hosting space, all by the end of 2001. The company also planned to improve access to its network in order to be able to re-enter the long-distance market again in the 14 western states formerly served by US West.

PROFITS DISAPPEAR FOLLOWING THE MERGER, 2000-2001

Following the acquisition of US West, Qwest remained focused on higher-growth markets, including Web hosting, wireless, DSL, and broadband services. For the fourth quarter of 2000 revenue from Internet and data services increased by 40 percent over the previous year, while wireless revenue grew by 90 percent. The company's DSL customer base expanded by more than 130 percent to more than 255,000 subscribers. In September 2000 the company began a national rollout of its DSL service, moving into markets controlled by other RBOCs. At the end of the year president Afshin Mohebbi reiterated the company's mission to become the premier broadband Internet communications company in the world. During the year CEO Joseph Nacchio added the title of chairman, succeeding Philip Anschultz.

Qwest's financial picture for 2000 and 2001 was clouded by one-time charges and non-operating expenses. For the year 2000 Qwest reported revenue of $16.6 billion, well short of the $19 billion the company projected. Operating income was positive at $1.8 billion, but various expenses resulted in the company reporting a net loss of $81 million for the year.

For the first two quarters of 2001, Qwest had quarterly income of approximately $5 billion each quarter and positive operating income of $637 million in the first quarter and $135 million in the second. Non-operating and other expenses resulted in net losses of $46 million in the first quarter and a staggering $3.3 billion in the second. After the first two quarters Qwest claimed it was on track to reach its 2001 revenue target of $21 billion and $8.5 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA). Deteriorating economic conditions in the

third quarter forced Qwest to reduce its 2001 revenue estimate to $20.5 billion while announcing it would cut 4,000 jobs from its workforce of 66,000.