[Note: This is not a transcript. It is just my notes of the testimony as fast as I can type them. Spelling errors will be corrected tonight. I will update every fifteen minutes or so, so either check back or refresh the page.] Update: Casey is far and away the best witness for the Government in terms of explaining the complicated financial issues in plain English. He’s clear, direct, defines the terms and makes complete sense. It doesn’t seem like he has an axe to grind or that he’s trying to bury Nacchio. Memo to Government: More witnesses like this please. James Hearty is a good questioner. 2:00 Gregory Casey: James Hearty is questioning He was the Executive VP of wholesale markets. Goes through his background, he has a law degree. Joined Qwest in 1997, with 18 years experience in telecom industry. He worked in the legal , regulatory areas. He was recruited for Qwest by Paul McCartney (not that one.) He said he was told Anschutz and Nacchio were working on a big project and wanted to speak to him. Nacchio hired him to be Sr. VP of wholesale division. Left Qwest at end of 2001 When he left, he reported to Nacchio. He reported to Nacchio at the beginning, until 1999 when Mohebbi was hired as President of the company and he began reporting to him. After the merger, in fall of 2000, he was planning on leaving the company and actually resigned. He changed his mind when the VP of Human Resources, Tom Matthews, asked him around September or October of 2000 to stay for another year. He agreed.
Describes what Qwest was like in 1997 and what the Wholesale division was like. It was very small. It had a large network construction business. There were only 3 to 4 wholesale division employees. The revenues in that division were about $50 million for the year. Qwest was a private company then. Late summer after he joined in 1997, Qwest had its initial public offering. Are you familiar with one-timers? Yes, they referred to non-recurring revenues, sales that occurred one time and wouldn’t be happening again. What’s an IRU: It’s an indefeasible right of use. It’s a property right that a carrier or company could purchase that would create a right to use a Qwest (or other company) network for generally 20 years. Is there another way to sell this kind of right besides using an IRU? Yes, you could lease it on a monthly basis. With an IRU, they pay up front to use the property for 20 years. Structuring the deal as an IRU would affect the revenue because the revenue was booked up front as well. Had the right been leased, it would have been booked on a monthly basis for the life of the lease. Qwest sold the first IRU in 1998. There was discussion about whether it made sense to sell IRU’s. Nacchio’s view was that he would rather be selling recurring revenues. He admonished us that at some time we would have to make our numbers on a recurring basis. Through his time at Qwest, there was never a time when Qwest made its numbers without IRU’s. TheIRU’s were mostly sold by his wholesale division. 85% of IRU’s sold were wholesale IRU’s. From 1999 to the first quarter of 2001, the IRU’s were critical for making the target numbers. They were built into the budget. They were very important. What are Gap fillers? It’s a term used at Qwest in reference toIRU’s. It’s a descriptive term meant to bridge the gap in the budget between the target revenue and the recurring revenue. There were problems relying on gap fillers. I liked IRU’s but every quarter you’d have to go back and start all over again. There was no surety or predictability with IRU’s. Nacchio expressed his concern with them using IRU’s to make their numbers. Did Nacchio promote wholesale division outside company? I think he referred to it but nowhere near the amount he would promote the retail or data side. In the 2000 time frame, it was repeated so often it was axiomatic. Recurring and retail revenue were more valuable than wholesale revenue in terms of what the market valued in Qwest. It was repeated often. In the internal documents, did you separate out recurring from non-recurring revenue? He answers that Nacchio liked to promote data over voice products. IRU’s were reported in the data product but they are not exclusively a data product. They could carry voice product. Doo you think including IRU’s in the data category was misleading? I think to the extent data is viewed as a recurring revenue product, the inclusion of IRU’s in that cagtegory might have been misleading. When he talked to analysts and investors, he was told to steer away from discussing IRU’s by Lee Wolfe, the investor relations person at Qwest. The merger: Announced in June, 1999 and closed June 30, 2000. Do you recall that in that time period there was additional pressure on you and your unit to close on IRU’s to make your numbers so they could have a stock price that was in their collars(?). Otherwise, there was a fear if they didn’t make the numbers the stock price would go down and the Qwest deal would be in jeopardy. In July, 2000, his office was in Houston. There was an illness in his wife’s family and they needed to be there. He relocated to Houston in the spring of 2000. He traveled up to Denver as needed. He also had an office in Denver. After the merger, Qwest was larger company. .How did that impact ability to have double digit growth? The ability to sell IRU’s was the same pre- merger as it was post merger. He was issued stock options. After the merger, he exercised and sold his Qwest stock based on the options. $25 million. He had a conversation in July 2000 about his exercising those options. Joe Nacchio said, it wouldn’t look real good if you were selling stock right now, after the merger. He told Joe it was too late, it was already sold. Whenever he had vested options, he sold them on the first opportunity. He sold everything he had. [Note, on cross he said this was because he had gotten burned with worthless options at a prior company he had worked for.] He also sold options in November , 2000 (1.5 million). How were things different after the merger? At ” classic Qwest” there was more sharing of information. As we moved into the merger, there was a partition created where we would get scuttlebutt about other units’ numbers, but mostly we only had our own. Moves on to the budget process for the 2001 budget. It started in 9/2000 and finished early December. There was a top-down approach. They’d be given a target number and then they’d have to go back and figure out how they were going to meet it. Shows him the budget he prepared for wholesale division for Nacchio. He gave it to Kathy Kotchis. Shows him the e-mail introduced yesterday that says, “Attached is 2001 plan that was presented to Nacchio and his senior team.” How was it prepared? Primarily prepared by financial people. They went back and looked at each product line and predicted what it would be for 2001. 2:48 pm. They spend some time on the waterfall charts with the up and down stair steps. I missed that part because we had server troubles. We’re back now. Did you have additional budget meetings with Nacchio in fall 2000? Yes. He recalls a specific one where everyone was made to sign up for their respective targets. “I called it the sign in blood meeting.” He opined that it was a unilateral contract, void for lack of consideration, and that it was a stretch, but he signed it. After that meeting the target for the wholesale division was increased again. I got an email from man named Bromberg in the finance department I had never met saying here is your new revenue target for 2001. The new target $172 million higher. Date of that email was Dec 12, 2001. The final plan was due the next day. That was not a reasonable expectation. He sent off an e-mail in response. The e-mail is admitted into evidence. His response was “Bullsh*t.” He was angry. There was always a lot of contention in the budget process, but in prior years, he felt he had a shot at making the budget numbers. This year was different. It seemed the numbers were piled on without a lot of forethought. 3:00 pm Transitioning to 2001 and recurring revenues. He recalls that several business units were way off in early 2001 in making their numbers. There was a big meeting called by Robin â€“ around the Jan/Feb time frame. There had been a big miss in one of the units, he thinks it was the consumer unit. Nacchio and the usual gang of business unit heads were there. Robin reviewed the finances and we were called on to give a narrative of what was going on in our unit. Without exception, most of the heads said things were going to be tough this year and it would be tough to make the numbers. I think that was because of the way the budget was built and the economy was getting tough. For example, in my unit, wholesale, if the carriers were going out of business, I was going to lose customers. 3:05 pm Was rule of 78’s a problem? The rule of 78’s stated that if you weren’t hitting your recurring revenue numbers by Jan to March, you would have an awfully hard time hitting them for the rest of the year. Nacchio referred to it as the snowball effect. ***** Moves to swap market for IRU’s. It was finite. We were going to come to an end of it. I could see that at end of first quarter and beginning of second quarter. We knew the entire universe of things we could do at that point. First time he reported to Nacchio on his division: April. We had a meeting called a Business Unit Review. It allowed the unit head to talk directly to Joe and report results. They would have first quarter numbers by this time. What was your message to Nacchio at that meeting? The IRU market was drying up, after the second quarter, we felt we were draining the pond, and I couldn’t have any visibility into what IRU’s there would be in the second half of the year. 3:12 pm Discussion of local IRU’s. There was about $675 of risk just for his wholesale division, just for the second half of the year. Recess and new thread coming.